What principle of Islamic finance ensures that financial transactions are ethical?

The principle of asset-backed financing is core to Islamic finance as it mandates that all financial transactions must be supported by tangible assets or services. This principle ensures that investments and transactions are grounded in real economic activity, promoting ethical behavior by linking financial gain to actual assets rather than speculative or excessive risk-taking practices, which can lead to unforeseen losses and market instability.

By requiring that financial transactions involve an underlying asset, this principle discourages practices such as excessive leverage or creating money through debt alone, which can lead to unethical financial behavior. This approach maintains transparency, reduces the potential for exploitation, and enhances accountability in financial dealings, aligning with Islamic ethical standards.

The other concepts, while relevant in various financial contexts, do not inherently ensure ethical transactions in the same way. For instance, debt creation and interest accumulation are often seen as contrary to Islamic finance principles due to the potential for exploitation and the focus on profit from lending alone. Risk avoidance may focus on minimizing exposure to loss but doesn't address the foundational ethical considerations tied to honest, asset-based engagement in commerce. Thus, asset-backed financing stands out as the principle that fundamentally supports ethical financial transactions in Islamic finance.