Ahmad Lutfi Abdull Mutalip, Partner
Azmi & Associates
Apr 2011
In Islam, money is not a commodity and cannot be traded for profits. It is just a medium of exchange and it stores value. Money, therefore, must be invested in projects and ventures for the generation of activities, for the benefit of mankind and in the process, for profit.
This is precisely why Islamic finance praises and encourages the application of finance in the financing of real economic activities. The returns should be earned by active involvement and participation in the business risks of investment and not the returns on lending or financing.
Islamic banks would apply the same criteria in evaluating projects to invest in, namely, the entrepreneur's ability and the profit potential of the project. This is the reason why murabahah (cost plus financing) as an Islamic transaction is considered less risky compared to mudarabah (profit-sharing) and musharakah (partnership). A true form of Islamic financing or investment structure should have that element of sharing of profit and loss.
