In an economy with real goods and services, money and financial assets in the form of promises to pay (i.e., debts), exchange can be divided into the following six categories: 

Goods for money

Goods for debt 

Goods for goods 

Debt for money 

Debt for debt

Money for money

Categorizations are rarely all-inclusive or completely free from overlapping. This is especially true of our age in which innovative ‘assets’ abound. However, the above will do as a first abstraction and newer kinds of assets can easily be accommodated in one category or other.

Without going into details, it can be seen that Islam left the first two to the free interaction of the parties concerned. Supply and demand will determine the prices in the real markets, be the prices paid in cash or prices to be paid in future as in case of credit sales. Although, there are rules for this market but the market itself is essentially free. 

As regards the third case, exchange of goods for goods, i.e. barter, Islam seems to have adopted a three-pronged approach: encourage mediation by money, subject exchange of similar commodities to the rule of simultaneity and equality in exchange and leave it to the convenience of the people in the rest of the cases. 

These three markets (goods for money, goods for debt and goods for goods) taken together, in which commodities are exchanged for one another or sold against cash or credit, constitute the real sector of an economy. Islamic Law seeks to rid these markets of corrupt practices. Riba, qimar (gambling), ghaban (fraud), ikrah (coercion), bay‘ al-mudtarr, (exploitation of need) ihtikar (hoarding), najsh (raising prices by making false bids), gharar (hazard) and jahl mufdi ila al-niza‘ (lack of information leading to dispute) are sought to be kept out in order to ensure fairness and promote welfare. Obviously, the same applies to the remaining three markets which, taken together, are characterized as financial markets. In these markets money and promises to pay money, debts, are the objects of exchange, sale and purchase. Financial markets also include stocks or shares of business enterprises, even though one could point out their hybrid nature. The important point to note is that these markets have certain peculiarities, which make them more vulnerable to corrupt practices than the real markets. We, therefore, find that Islamic Law has more stringent rules governing financial markets than those governing real markets.

Regarding exchange of money for money it has to be in equal quantities, if it is the same currency. If the currencies are different the quantities can be different but the exchange must be simultaneous. An exchange of debt for debt must also be in equal quantity. The same applies to an exchange of debt for money. 

The reason the financial markets, in which money and debts are traded, have more constraints attached to them than the real markets, seems to be that information deficit is larger and more widespread in this market. It is much more difficult to ascertain the quality of debts than it is with respect to commodities. Money suffers from the same weakness, especially money that does not have any intrinsic value, i.e. non-commodity money. Ensuring fairness in financial markets requires minimizing the chances of harm to either party in conducting a transaction, which invariably involves information deficit and/or uncertainty. 

In principle, there are two things that could be done in this regard: increasing information, reducing uncertainty and blocking transactions that are likely to do more harm than good because of irreducible uncertainty and unavailable information. 

The juristic term for the situation characterizing most financial markets, uncertainty and information deficit, is gharar. It so happens that gharar is much more widespread in the financial markets than in the commodity markets. And very often the gharar involved is quite large. Islamic law has dealt with gharar in a pragmatic way, allowing deals with amounts of gharar small enough to make it probable that advantages of allowing the deal are greater than the resulting harm, and disallowing deals involving large amounts of gharar. That we find whole categories of transactions in the financial markets blocked is because the gain (in efficiency?) from allowing these transactions is little whereas the loss (in fairness?) from allowing them is great. Also, some of the blocked transactions in the financial market seem to be directed at preventing riba, i.e., the transaction could be a means to extracting an excess over and above the sum lent. The condition of simultaneity in exchange of one currency for another and of equality in exchange of debt for debt, fall in this category.  

Conclusions

It is time briefly to recapitulate what we have discussed in this chapter. Islam makes man’s relation with God guide man’s relations with others and with all that is there in environment. That is what would guarantee human felicity in life on earth as well as success in life hereafter. This guidance comprises morality as well as laws. The individuals with their moral orientations and voluntary actions as well as the state with its power to supervise and coerce, both have a role. Part of the Islamic guidance relates to economic life including finance. What is sought in the financial system is justice and equity. Prohibition of riba/interest is part of Islamic guidance designed to play a key role in ensuring a just and equitable financial system.