Before becoming a Prophet, Muhammad s.a.w was a merchant in Mecca and Khadijah His Wife, was a rich businesswoman during her time. Thus, Islam takes high regard in the pursuit of business. Islam teaches business conducts. As firms can be viewed as a set of contracts, it entails the relationship the firm has with suppliers, customers, creditors and relevant authorities. As a result, firms are inclined to minimising the contracting cost and achieve efficient corporate governance. Henceforth, it is paramount for Islamic firms to exercise responsible accounting (economic and social) reflecting the business practices.
One of the Islamic financial instruments that advocate profit-and-loss sharing (PLS) paradigm is Mudharabah
It is a two-party contract between the capital providers (Rabbul Mal) and entrepreneur (Mudarib). Profits are shared between two parties at an agreed ratio while losses are borne by the capital provider. Contracts as such are honoured in Islam.
A clear distinction between Islamic finance and conventional finance is the prohibition of Riba (interest), Gharar (uncertainty) and Maisir (gambling).
The Quran Prohibited Riba almost eight times in different verses and a revelation that severely condemned riba is Chapter 2 Verse 275:
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah . But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.