Introduction to Shari'ah and Islamic

Banking and Finance

Essentials of Islamic Banking and Finance

IQRA University Gulshan Campus. MBA, Fall, 2011
IRSHAD AHMAD AIJAZ/ TALHA SALEEM KAPADIA
irshad786@gmail.com / talhasaleemkapadia@gmail.com

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Contents of the lecture

 Introduction to Shari'ah:
– Scope of Shari'ah rulings;
– Sources of Shari'ah;
– Role of Fiqh and Fuqahaa;
 Principles of Islamic Economics;
– Basic Concepts and philosophy of Islamic economics;
 Four basic prohibitions in financial system of Islam:
– General prohibitions;
– Riba (interest);
– Gharar (uncertainty);
– Violation of Islamic Law of contract;

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Introduction to Shari'ah

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Introduction

 What do we mean when we say ISLAMIC?

 ISLMIAC means according to ISLAM;
 When we say according to Islam we mean in conformity with
Shari'ah (‫;(ﺷﺮﻳﻌﺖ‬
 Again the same comes to us, what is Shari'ah (‫?(ﺷﺮﻳﻌﺖ‬
 Is Shari’ah (‫ (ﺷﺮﻳﻌﺖ‬a set of rules and laws set out by religion?
 Let us see what is it!

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Introduction

 Shari’ah is not only a religious 'Law' as it supersedes Law in its

inclusion substance and form both;
 It deals with social and economic problem both;
 It give concept of another world that comes after this world – the
day of judgment;
 So Shari’ah is “a system consisting of laws and rules for religious,
political, social, domestic and private aspects of life of individuals
and groups”;
 Every individual is responsible for balancing between all these
aspects in manners required and guided by Shari’ah;
 The rules and guidelines of Shari'ah are:
– Commandments of Allah (SWT) revealed by Him upon His messenger
Holy Prophet (Sallallahu Alayhi Wa Sallam) as:
 Recited Wahee – the nobel Qura'n; or
 Un-recited Wahee – the Sunnah;
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Islamic rules and guidlines

 The regulations of the Shari'ah are of two types:

– Regulations on worships and ritual duties;
 This type is known as 'Ibaadat' or 'Huqooqullah' (rights of Allah);
 This type of rules and guidelines deal with 'Man-to-God' relations;
 It explain the ways and methods of 'I'badaat' (worships) and beliefs;
 This type is, up to some extent, a personal matter between God and a
person;
– Regulations on juridical, social and political nature;
 This type is known as 'Muaamlaat' or 'Hoqooqul Ibaad' (human dealings);
 This type deals with 'Man-to-Man' relations;
 Under this type many relationships are covered namely social, political and
economic;
 This type defines rules for each type of relationship;
 This type of rules are of common nature and not specific to each and every
person;

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Sources of Shari'ah

 As we discussed the rules and guidelines of Shari'ah are

Commandments of Allah (SWT) revealed by Him upon His
messenger Holy Prophet (Sallallahu Alayhi Wa Sallam) as Recited
Wahee – the nobel Qura'n or Un-recited Wahee – the Sunnah;
 Therefore, the sources of Shari'ah are simply very clear and easy to
understand;
 Source of law means 'a definite means for extracting principles and
guidelines';
 There are two types of sources of Shari'ah:
– Primary Sources;
– Secondary / derived Sources;

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Sources of Shari'ah

 Primary source means a source of laws and rules that is used for
extraction of laws as the first source;
 There are two sources falls in under this type:
– Qur’an - The book of Allah:
 Qura'n gives main beliefs, principles and wide-ranging directives of Allah.
Allah (SWT) said: "Verily, this Qur'an guides to that which is best, and gives
glad tidings to the believers who do good that theirs will be a great reward."
(17: 9);
 Rulings derived explicitly from Qur’an are Frad (obligatory) and its
refutation is 'Kufr';

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Sources of Shari'ah

Sunnah or Hadees:
 Sunnah includes Sayings, Practices, No-objection (Silent Approvals) of the
holy Prophet (SAWS) and practices of four caliphs and other companions of
holy Prophet (SAWS);
 Both these sources are primary and main sources of rulings and
guidelines of Shari'ah;

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Sources of Shari'ah

 Derived /secondary Sources:

– Ijmaa' – consensus of Fuqahaa;
 Scholarly consensus means the agreement of a group of Muslim scholars on
a specific issue;
 The condition is that all such scholars or majority of them have to agree to
the ruling;
 Ijmaa’ prefers a meaning or explanation of primary sources on other
possible meanings;
► Example of Ijmaa' is consensus of Ulema on prohibition of banking interest;

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Sources of Shari'ah

 Derived /secondary Sources:

– Qiyaas – The analogy;
 Qiyas is 'finding a reason of a ruling by method of analogy';
 Application of Qiyas means 'searching a solution for a new issue that is not
discussed in Quran and Sunnah';
 The reason or cause of an existing Islamic rule becomes basis for a ruling
for new issue;
► For example, drugs have been deemed impermissible through an analogy from
the prohibition of alcohol in the Qur'an. This ruling is based on underlying
cause of “intoxication”;

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Sources of Shari'ah

 Every Islamic rule is derived from these sources;

 Whenever a rule is declared 'Islamic' it will be either derived from
Qura'n, Sunnah, Ijmaa' or Qiyass;
 Every rule need not be extracted from Qura'an or Hadees;
 This is one of the very common mistakes nowadays;
 Islamic banking and its all details are not extracted from Qura'n or
Sunnah only. This system is based use of all sources of Shari'ah;

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Role of Fiqh and Fuqahaa

 Sometimes it is misunderstood what is Fiqh and role of Fuqahaa';

 This is important to understand the contribution of Fuqahaa';
 The primary sources of Shari'ah, Quar'an and Sunnah, did not
consist of legal rulings only, there are rules and guidelines, stories
of previous nations, mention of circumstances of the day of
judgment and many more;
 Also rulings about one thing are mentioned dispersedly and
revealed over a period of time;
 Therefore it was difficult for a common man to go through the
whole book or collection of rulings to conclude a decision about a
particular situation;
 The contribution of Fuqahaa' is compilation and grading of ruling
on a particular issue thereby making it easy for a common man to
follow Islamic teachings;
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Role of Fiqh and Fuqahaa

 For example rulings about prayers are mentioned over a period of

time and dispersedly in many places;
 Fuqahaa' have compiled all the rulings belong to prayers and
categorized them in Fard, Wajib, Sunnat and Mustahab;
 This help general people to do what they need easily and as
required by Shari'ah;

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Principles of Islamic Economics

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Principles of Islamic Economics

 ISLAMIC ECONOMIC MODEL

– ISLAMIC ECONOMIC MODEL is based on two underlying principles:
 IMPORTANCE OF ECONOMIC GOALS:
► Economic activities of man are lawful and sometimes they become obligatory
and necessary;
► However economic activity is not the basic problem of human being;

► Therefore economic progress is not the be-all and end-all of human existence;

 REAL NATURE OF WEALTH AND PROPERTY:

► Islam has a different viewpoint about the four Basic Economic Problems:

► Determination of Priorities:

 Adherence to commandment of ALLAH should be the top priority;

► Allocation of Resources (Land, Labor, Capital, Entrepreneur):
 No remuneration to Capital as it is rewarded under entrepreneur;

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Principles of Islamic Economics

► Distribution of Income:
 Both wealth creators and non creators have right in wealth. (Zakat, Sadaqaat, etc. etc.
are for non creators);
► Development:
 Only through Halal (permissible) ways and for Halal purposes;
– Wealth creation and distribution:
 Islam suggest a good mechanism of Distribution of Wealth;
 The purpose is to establish a practicable Economic system under which
everyone benefits;
 Islam accepts the following economic laws thing within a certain limits:
► Laws of demand and supply;

► Motive of personal profit;

► Market forces;

► Natural relation of employer and employee;

► Profit and loss distribution;

► Asset based system rather than speculation and document based system;

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Principles of Islamic Economics

– Wealth creation and distribution:

 Distribution of wealth:
► Enabling every one to get what is rightfully due to him;

► Elementary level of deserving wealth are factors of production;

► Secondary level of deserving wealth are poor and deserving people who did not
contribute in creation of wealth;
 Eradicating the Concentration of Wealth
► Prohibition of:

 Hoarding,
 Interest;
 Gambling;
 Invalid speculation;
 Uqood-e-Fasidah (invalid contracts), and
 Gharar (excessive uncertainty);

► Encouragement of Sadaqah, Laws of Inheritance, Mehar etc.

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Basic prohibitions in financial system
of Islam

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Basic prohibitions

 Islam prohibits some economic activities and allow all other

activities that beyond these prohibited activities;
 We can categorize these activities in four basic types:
– General prohibitions;
– Riba (interest);
– Gharar (uncertainty);
– Violation of Islamic Law of contract;

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General prohibitions

 This type include all economic activities that involve in any things
which is declared disallowed in Islam;
 For example business of alcohol, pork and film industry is not
allowed in Islam;
 Therefore any involvement in such businesses fall under general
prohibitions;
 This type is easily understandable for all;

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Interest – Riba

 Riba means:
– Any excess compensation over and above the principal which is without due
consideration. It is in fact a premium paid to the lender in return for his
waiting as a condition for the loan;
 It is an impermissible activity in Islam;
 In the words of Prophet (SAW):
– 'Every loan that draws any premium is Riba';

– [Hadith is reported by Hazrat Harith ibn Abi Usamah in his Musnad. (See Supreme Court Judgment December 23, 1999)]

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Types of Interest

 Explicit Interest:
– Main type of interest which is clear and easy to understand for everyone;
– Lending and borrowing on interest is simple example of it;
– Banking interest is also an example of it.
 Implicit Interest
– A type of interest that has both possibilities of being interest or not;
– It is not always surely interest but becomes if it is pre-agreed and
common in practice.
– Examples:
 Premium charged against delaying or rescheduling;
 Rebate on early payment;

 Discount offered on payables in case of early settlement.

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Gharar – excessive uncertainty

 Gharar is a comprehensive Arabic word which has a comprehensive

meaning;
 A near translation of Gharar may be 'uncertainty' or 'ambiguity';
 Selling a commodity/goods/thing without clear specification is
sale with element of Gharar;
 It has been narrated from Abu Hurayrah (RA), that He (SAW) said:
– 'The Messenger of God (S) forbade the ‘sale of the pebble’ [sale of an
object chosen or determined by the throwing of a pebble], and the sale
of al-Gharar'. [Sahih Muslim];

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Violation of Islamic law of contract

 Islam has clearly explained certain rules and laws for each type of
economic and financial contract;
 The contracts made in violation of these laws of contract are called
Uqood-e-Fasidah (invalid contracts);
 A detail discussion on the topic will come in coming lectures;

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Summary

 Islamic financial system revolves around these basic prohibitions;

 All financial policies, monetary systems and other practices should
follow these rules;
 A system that follows these guidelines is Islamic or 'Shari'ah
compliant' system;

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Questions?

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