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Islamic Finance is based on interpretations from the Qur'an. Its two central tenets are no interest can be earned on loans and socially responsible investing. The key difference from a financial perspective is the no-interest rule since the Islamic socially responsible investing paradigm is not much different from what other religions do.
Quran, the holy book of Islam, forbids Riba (or interest). The book has the 4 key verses upon which the no-interest principle is based. Many of the differences in Islamic finance (especially Islamic banking) revolve around this no interest principle.
For example, Islamic banks must take equity positions in homes rather than taking a traditional mortgage. Others examples include essentially profit sharing plans, leasing, and repurchase plans. These allow the financial institution to make money while satisfying the no-interest principle.
The second difference between Islamic finance and traditional finance is the emphasis on socially responsible investing. While in the Western financial tradition there are many investors who invest in "socially responsible" means, socially responsible investing is not as wide spread as it is within the Islamic tradition.
Islam takes a holistic view of the person. Thus someone who is good does good things. This includes investing responsibly to assure that the money does not go for "bad" purposes. These "bad" purposes include the usual subjects such as drugs, weapons, alcohol, pornography, and of course terrorism. Again this is really no different from traditional socially responsible investing.
Today there are many financial institutions, even in the Western world, offering financial services and products in accordance with the rules of the Islamic finance. For example, legal changes introduced by Chancellor Gordon Brown in 2003, have enabled British banks and building societies to offer so-called Muslim mortgages for house purchase.
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"Islamic finance"