A Glance on Islamic FinanceAbdul Samad

AlHuda Centre of Islamic Banking & Economics (CIBE)

Rulings In Islam These 5 primary objectives followed by Shariah can be

observed though the Al Ahkam (rulings) upon which Fiqh (Islamic Jurisprudence) rotate around. The

rulings are categorized as follows: a. Wajib (obligatory) e. Haram (unlawful)

b. Mustahab (recommended) (Sunnat) c. Mubah (permissible)

d. Makruh (disliked)

Rulings Wajib- An obligatory action or something that shall be

performed. Anyone who left it is liable to gain the punishment of Allah s.w.t. in the Here after as well as a legal punishment in

this world. Haram- An unlawful action or the one that shall not be

performed and is strictly prohibited. Anyone who engages in it is liable to gain the punishment of Allah s.w.t. in the Here after

as well as a legal punishment in this world. Mustahab- A recommended action or something that should be

performed. Mubah- A permissible action or something that is neither

encouraged nor discouraged. Makruh- A disliked action or something which is abominable

and should be avoided but not in strictly prohibitory terms.

Islam and Shariah

Islam

Aqidah(Faith & Belief)

Shariah(Practices & Activities)

Akhlaq(Morality & Ethics)

IBADAT(Man to God Worship)

Muamalat(Man to Man Activities)

Political Activities Economic Activities Social Activities

Islamic Financial Activities

Human Financial Needs

Fulfillment of Financial Needs

Own Capital Others’ Capital

Equity Financing Debt Financing

External (Equity & Debt) FinancingEquity Financing Debt Financing

Uqud al-Ishtirak

(Contracts of Profit Sharing )

Uqud al-Muawadhat

(Deferred Contracts of Exchange)

Al-Mudarabah

(Trustee Profit Sharing)

Al-Bai’ Bithaman (Mu)Ajil (Deferred Installment Sale)

Al-Musharakah (Joint Venture Profit Sharing)

Bai’ al-Murabaha

(Cost Plus Profit Sale)

Others Al-Ijarah (Leasing)

Bai’ al-Salam (Commodity Sale)

Bai’ al-Istisna’ (Sale on Order)

Equity Market Debt Market

Why Islamic Finance? The body which is promoted by Hiram sources is

bound to hellfire. On the Day of Judgment, a person will not be

moved from the place where he stands until he is asked about the sources of his income and the way

he spent it. Purifying the needs of life (food, drink, clothes house etc) is one of the most important reason for

the acceptance of prayers by Allah.

Main Objective of Islamic Finance

The main objective of Islamic finance is to clean the income of Muslims from Muhurramat.

Most Important Islamic Teaching Related To Business

1. Elimination of Interest (Riba) 2. The prohibition of uncertainty (Gharar)3. The prohibition of Gambling (Qimar)4. The precipitation of games of chance (Maser)5. Honesty and Fair Trade (Ghishsh and Khilabah)6. Spending in the Good Cause7. Buy Back 8. Two Mutually Conditional Contract9. Entitlement to profit depends on liability for risk

Interest Interest, Usury, or Riba is forbidden in almost all

major religions of the world e.g.

Judaism

Christianity

Islam

Riba in Quran God has permitted trade and forbidden interest….”

(The Cow – Sura Al-Baqara 2:275)

O believers, fear Allah, and give up what is still due

to your from the interest (usury), IF [indeed] you are true believers[!!!]. If you do not do so, then take Notice of War from Allah and his Messenger.

But, if you repent, you can have your principal. Neither should you commit injustice, nor should you be subjected to it.”

(The Cow – Sura Al-Baqara 2:278-9)

Riba in Quran (Related in context to 2:278)The only reward of those Who make War upon Allah & his Messenger, and strive

after corruption in the land, will be that they will be

1. Killed

2. Or, Crucified,

3. Or, have their Hands and Feet on alternate sides Cutoff,

4. Or, will be Expelled out of the land.

Such will be their degradation in the world, and

in the hereafter, theirs will be an terrible doom.”

(Quran: The Table Spread - Al-Maida Chapter 5: Verse 33)

Riba in HadithThe Prophet cursed

the receiver and

the payer of interest,

the one who records it and

the witnesses to the transaction

and said: “They are all alike (in guilt).”

(Sources: Jabir Ibn Abdullah, Muslim, Tirmidhi, Musnad Ahmed

Riba in Hadith

The Prophet said: “Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own

mother.”

(Sources: Aby Hurayrah, Ibn Majah)

RIBA RIBA

Riba-Al-Fadl Riba-Al-Nasiyah

Sarfi Sood Tijarti Sood

Simple Sood

Compound Sood

Simple Sood

Compound Sood

The prohibition of uncertainty (Gharar)

There are strict rules in Islamic finance against transactions that are highly uncertain or may cause

any injustice or dishonesty against any of the parties. 

The concept of Gharar has been broadly defined by the scholars in two ways.

First, Gharar implies uncertainty. Second, it implies dishonesty.

Classical Examples of Gharar Selling goods that the seller is unable to deliver Selling known or unknown goods against an unknown price, such as

selling the contents of a sealed box   Selling goods without proper description, such as shop owner

selling clothes with unspecified sizes   Selling goods without specifying the price, such as selling at the

'going price'   Making a contract conditional on an unknown event, such as when

my friend arrives if the time is not specified   Selling goods on the basis of false description Selling goods without allowing the buyer the properly examine the

goods

The Prophet (pbuh) prohibited the pebble sale and the Gharar sale.

Qimar Qimar includes every form of gain or money, the achievement of which depends purely on luck and

chance. All Lotteries and Prize schemes based purely on luck

come under this prohibition. O ye who believe! Intoxicants and gambling,

sacrificing to stones, and (divination by) arrows, are an abomination, of Satan’s handiwork…..: (5:90-91) He who played Qimar has disobeyed Allah and His

Messenger.” (Ibn Majah )

Honesty and Fair Trade (Ghishsh and Khilabah)

Thus Manipulations and Mismanagement like Hoardings Black marketing

Cheating Profiteering

Short weighting

Hiding the defective quality of the goods are prohibited in Islamic Financial System.

The prophet (PBUH) said: the truthful honest merchants are with the prophets in the Day of Judgment.

Spending in the Good Cause The Islamic economic approach is one, which

is directed towards the achievement and actualization of justice in human relations.

The result of this effort is falah or success and salvation, and hayah tayyibah or good life in

this world and the hereafter. So Islamic banks don’t permute to establish

any relation with commodities, services and individuals whose moral practices are doubtful

Some people spend Allah’s wealth (i.e. Muslim’s Wealth) in an unjust manner, such people will be put in the (Hell)

fire on the day of resurrection” (Bukhari and Ahmad)

Buy Back

The financier sells an asset to the customer on a deferred-payment basis, and then the asset is

immediately repurchased by the financier for cash at a discount.

Two Mutually Conditional Contracts

Two mutually contingent contract have been prohibited by the holy Prophet (PBUH).

The sale of two items in such a way that one who intends to purchase goods is obliged to purchase

the other also at any given price. One sale transaction with tow prices.

Combining sale and lending in one contract.

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