IMU252

ISLAMIC INVESTMENT

Topic 1:
The Basic Concept of
Islamic Investment

Prepared By:
Ustazah Noor Hasyimah Bt. Sulaiman
UiTMCTKD/ 2021

1
 At the end of topics, students should
be able to:

 Explain the meaning and

objectives of Islamic investment.
Learning  Elaborate the criteria and sources
Outcomes of Islamic investment.
 Identify the differences between
Islamic and Conventional
investment.

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Contents
1.1 Introduction

1.2 Definition of Investment

1.3 Objectives of Islamic

Investment

1.4 Criteria of Islamic

Investment

1.5 Sources of Investment

1.6 Differences in Islamic and

Conventional Investment

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 Investor:
1.1  A person or an organization that buys
shares or pays money into a bank in
Introduction order to receive a profit.

Investment:
 The current commitment of resources
in order to achieve later benefits.
 Present commitment of money for
the purpose of receiving more money
later – invest amount of money then
your capital will increase.

Finance:
 Commercial or government activity
of managing money, debt, credit and
investment

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3
Islamic Worldview and Investment
Hablumminallah
Transcendental accountability to Allah SWT
Hablumminan-nass Social accountability to the society

Khalifah
Individuals as trustees or vicegerents

Falah
Success in this world and in the hereafter

Tazkiyah
Economic goals beyond purely wealth maximization

Taklif
Personal accountability

Adalah
Justice in relationships, contracts, and activities

Maslahah
Public interest is more important than
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personal interest
Cont…

Modern Islamic financial products and

services are developed using 2 different
approaches:
By identifying the existing
By involving the application of
conventional products and services
various Shariah principles to
that are generally acceptable to
facilitate the origination and
Islam, and modifying, removing any
innovation of new products and
prohibited elements that are able to
services.
comply with Shariah principles.

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1.2 Definition
Investment:

 An asset or item that is

purchased with the hope that it
will generate income or
appreciate in the future. In an
economic sense, an investment
is the purchase of goods that are
not consumed today but are
used in the future to create
wealth.

 In finance, an investment is a
monetary asset purchased with
the idea that the asset will
provide income in the future or
appreciate and be sold at a
higher price.

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 Cont…

Islamic Investment:

 Islamic Investment is an investment in financial services and

investment products that adhere to Islamic principles.

 Islamic Investment can be defined as: A joint pool in which the

investors contribute their money for the purpose of its
investment to earn permissible (halal) profits in strict
conformity with the Islamic law.

 Narrated by Abdullah ibn Masud r.a., the Prophet Muhammad

(PBUH) said: ‘Seeking halal earning is a duty after the duty.’

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 Cont…
 The Islamic financial system broadly refers to financial
market transactions, operations and services that comply
with Islamic rules, principles and codes of practices.

 The Islamic financial services industry comprise Islamic

banking, Islamic insurance and Islamic capital market.

 In other words, working to earn a halal living is itself a

religious obligation second in importance after the
primary religious obligations like prayers, fasting and hajj.

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The primary objective of investment:
To increase the rate of return and to
reduce the risk.

The other objectives are: 1.3 Objectives

of Investment
a) Halal Income: An investment objective
for a client seeking a portfolio producing
current income while recognizing and
accepting market and issuer risks inherent
in investments of this type. Portfolios for
those individuals seeking income above the
market average carry higher risks and can
be more volatile than the general market.

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Cont…
b) Growth:
 An investment objective for a client seeking both higher returns from
capital appreciation and some current income by investing the
portfolio primarily in growth equities which produce little or no
current income, and in income-producing investments of all grades,
while recognizing and accepting the increased risks associated with
investments of this type.
 A portfolio may perform differently from the market as whole or
similar investments. Some investments are more volatile than others,
which can lead to substantial and rapid changes in gains or losses in
the value of the account.
 Capital growth is most closely associated with the purchase of common
stock, particularly growth securities, which offer low yields but a
considerable opportunity for an increase in value. For this reason,
common stock ranks among the most speculative of investments as the
return depends on what will happen in an unpredictable future. Blue-
chip stocks can potentially offer the best of all worlds by possessing
reasonable safety, modest income, and potential for capital growth
generated by long-term increases in corporate revenues and earnings
as the company matures. Common stock is rarely able to provide the
safety and income generation of government bonds.

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Cont…

c) Safety:

 There is truth to the axiom that there is no such thing as a

completely safe and secure investment.
 However, we can get close to ultimate safety for our
investment funds through the purchase of government-issued
securities in stable economic systems or through the
purchase of corporate bonds issued by large, stable
companies.
 Such securities are arguably the best means of preserving
principal while receiving a specified rate of return.
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 Cont…
d) Marketability/Liquidity:
 Many of the investments we have
discussed are reasonably illiquid, which
means they cannot be immediately sold
and easily converted into cash. Achieving
a degree of liquidity, however, requires
the sacrifice of a certain level of income
or potential for capital gains.
 Common stock is often considered the
most liquid of investments because it
can be sold within a day or two.
 Bonds are also marketable, but some
bonds are highly illiquid or non-tradable
with a fixed term.
 Similarly, money market instruments
may only be redeemable at the precise
date at which the fixed term ends. If an
investor seeks liquidity, money market
assets and non-tradable bonds are not
likely to be held in their portfolio. 13
 e) Tax And Zakat
Considerations

Before making the investment,

investors should also take into
consideration the provisions of
income tax, capital gain tax and
wealth tax to minimize his tax
burden and avail all tax
exemptions available to him.

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https://twitter.com/icm_bursa/status/1339482898978623488
 1.4 Criteria of Islamic Investment
 Investment must be in ethical sectors (profits are not
from prohibited activities, and non-Islamic financial
institutions.

 Investment of property and wealth must be result from

a partnership between the investor and the user of
capital in which rewards and risks are share.

 Investment must be considered the philosophy of

Islamic business (e.g: social justice, equitability, and
fairness as well as practicality of transaction.

 The major prohibited elements are riba (interest),

gharar (uncertainty), maisir (gambling), non-halal
(prohibited) food and drinks and immoral activities.
When a transaction have a prohibited elements, it’s
must first be removed for it to be Shariah-compliant.

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1.5 Sources of
Islamic
Investment

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 1.5.1 Al-Quran
Literally means reading or recitation. Technically, means the book containing the
speech of God revealed to Prophet Muhammad through the Angel of Gabriel in
Arabic and transmitted to us by continuous testimony (tawaatur).

Al-Quran is the most authoritative guide for Muslims and a proof of the prophecy
of Prophet

Muhammad PBUH. The Quran consists of 114 surah and 30 juzu’.

The first revelation was surah al-‘Alaq: 1-5 which means: “Read in the name of
your Lord Who created, created mankind from something which clings, read! And
your Lord is the most Noble, Who taught by pen, taught mankind what he did not
know.”

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18
19
History of Compilation
 The history shows that during the time of the Prophet Muhammad
PBUH, he himself and many companions have memorized the Quran.
The text of the Quran was preserved not only in memories, but also
in inscriptions on such available materials such as flat stones, woods
and bones.
 Initially, the first Caliph Abu Bakr, collected the Quran soon after the
battle of Yamamah which led to the death of at least seventy of the
memorizers (huffaz) of the Qur’an. Zayd bin Thabit was appointed
on the task of compiling the text. But several versions and readings
of this edition soon crept into use.
 Hence, the third Caliph Uthman Ibn Affan once again utilized the
services of Zayd to verify the accuracy of the text and compiled it in
a single volume.
 All the remaining variations were then destroyed. As the result, only
one version authentic text has remaining in use to this day.

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Cont.. Quranic Proven Regarding to Investment

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 Cont…Quranic
Proven Regarding
to Investment
Allah SWT says:
“O you who have believed! Do not devour one
another’s property by unlawful ways; but do
business with mutual consent’’.
(An-Nisa: 29)

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 Cont… Quranic Proven
Regarding to Investment

Allah SWT says:

"Go forth, whether light
or heavy, and strive with
your wealth and your
lives in the cause of Allah
. That is better for you, if
you only knew".
(At-Taubah: 41)

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Cont…Quranic Proven Regarding to Investment

Allah SWT says:

"The believers are only those who, when Allah is mentioned,

their hearts become fearful, and when His verses are recited to
them, it increases them in faith; and upon their Lord they rely -
The ones who establish prayer, and from what We have
provided them, they spend. Those are the believers, truly. For
them are degrees [of high position] with their Lord and
forgiveness and noble provision".
(Al-Anfal: 2-4).

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Cont…Quranic Proven Regarding to Investment

“O you who believe! Intoxicants and gambling (dedication

of) stones, and (divination by) arrows, are an abomination –
of satan’s handiwork: eschew such (abomination), that you
may prosper”.
(Al-Maidah: 90)

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 Cont…Quranic Proven Regarding to Investment

ِّ َّ ‫ُح ِّر َم ْت عَلَ ْي ُ ُُك الْ َم ْيتَ ُة َوادلَّ ُم َول َ ْح ُم الْ ِّخ ِّزني ِّر َو َما ُأ ِّه َّل ِّلغ ْ َِّْي‬
‫اَّلل ِّب ِّه َوالْ ُم ْن َخ ِّنقَ ُة َوالْ َم ْوقُو َذ ُة َوالْ ُم َ ََت ِّدي َ ُة‬
‫الس ُب ُع ا ََّّل َما َذكَّ ْي ُ ُْت َو َما ُذب َِّح عَ ََل النُّ ُص ِّب َو َأن ت َ ْس تَ ْق ِّس ُموا ِِّب ْ َْل ْز ََّل ِّم ۚ َذَٰ ِّل ُ ُْك‬ َّ َ َ ‫َوالنَّ ِّطي َح ُة َو َما َأ‬
‫َك‬
‫ِّف ْسقٌ ۗ الْ َي ْو َم ي َ ِّئ َس َّ ِّاَّل َين َك ِ َف ُروا ِّمن ِّدي ِّن ُ ُْك فَ ََل َ َْتشَ ْو ُ ُْه َواخْشَ ْو ِّن ۚ الْ َي ْو َم َأ ْكَلْ ُت لَ ُ ُْك ِّدينَ ُ ُْك‬
‫يت لَ ُ ُُك ْاَّل ْس ََل َم ِّدينًا ۚ فَ َم ِّن ْاض ُط َّر ِِّف َم ْخ َم َص ٍة غَ ْ َْي ُمتَ َجا ِّن ٍف‬ ُ ‫َو َأتْ َم ْم ُت عَلَ ْي ُ ُْك ِّن ْع َم ِِّت َو َر ِّض‬
ِ 5:3 - ‫اَّلل غَ ُف ٌور َّر ِّح ٌمي‬ َ َّ ‫َِّّل ْ ٍْث ۙ فَا َّن‬
ِ ِ
“Forbidden to you (food) are dead meat, blood, the flesh of swine, and that
on which has been invoked other than Allah’s name, that which has been
killed by strangling, or by a violent blow, or by a headlong fall, or by being
gored to death, that which has been eaten by a wild animal, unless you are
able to slaughter it (in due form), and that which is sacrificed on stone
altars’’.
(Al-Maidah: 3)
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 1.5.2 Sunnah

Sunnah literally means a clear path or a beaten track. It also means

normative practice or an established course of conduct.

Technically, it refers to all that narrated from the Prophet

Muhammad PBUH, his act, his saying and his tacit approval.

There are 3 kinds of Sunnah:

a. Qaul or ‘saying’ of the prophet PBUH or al-hadith which has a
bearing on a religious question.
b. Fi’l represents ‘action’ or ‘practice’ of the prophet PBUH.
c. Taqrir or a ‘silent approval’ of the prophet SAW of the action or
practice of another.

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Sunnatic Proven
Regarding to
Investment

Rasulullah SAW said:

"Seeking halal earning
is a duty after duty".

(Narrated by al-Bukhari)

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The Prophet SAW said:
"The flesh and body that is raised on
unlawful sustenance shall not enter
Paradise. Hell is more deserving to the
flesh that grows on one's body out of Cont…
unlawful sustenance".
(Narrated by Ahmad)

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30
 Cont…
“Verily Allah s.w.t. curses intoxicants, those who squeeze
grapes to produce, those who buy the grape juice for making
the drinkers, suppliers of intoxicants, bearers of intoxicants,
those who pour intoxicants into cups for drinkers, sellers of
intoxicants, those who buy them and those who spend the
money earned from the sale of intoxicants.
(Narrated by al-Hakim and Ibnu Hibban)

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 Cont… Sunnatic Proven Regarding to Investment

“Verily, Allah s.w.t. determines the climate of

economic affluence and gloom. I do not want to take
any action to fix the prices because I do not want,
later in the hereafter, any among you to demand for
the return of your property and blood from me because
of my tyranny (in fixing the prices)’’.

(Narrated by Tirmizi)

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 1.5.3 Ijtihad
a) Ijma’ (Consensus Of Opinions)

a) Definition:

 Ijma’ is an Arabic word which has two meanings:

determination and resolution.

 Literally means to determine and to agree upon

something. Technically, it is defined as the consensus of
mujtahid (independent jurists) from the ummah of
Muhammad SAW after his death, in a determined period
upon a rule of Islamic law (hukm shar’i).

33
 Examples Of Ijma’ In Islamic Financial Activities:

 Muslim jurists have reached Ijma’ among them upon conducting

Ijtihad on the permissibility of the Mudarabah contract. It has
also been established that the companions of the Prophet
Muhammad (SAW) such as Umar, Uthman, Ali, Abdullah Ibn
Mas`ud, Abdullah Ibn Umar, Ubaydullah Ibn Umar and A`ishah
have placed the property of orphans under the Mudarabah
contract with no objections from other companions.

 The majority of jurist viewed that bai’ muzayadah is permissible

by Shariah. Bai` muzayadah is the offering of goods for sale in a
market by a seller with a few interested buyers who compete to
offer the highest price. This process ends with the seller selling
the goods to the highest bidder (SAC, 2007, p. 29-30).
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Cont…
 The majority of jurist viewed that bai` `urbun is not
permissible as it contained elements of gharar, gambling
and unlawful acquisition of property. They also discussed
the prohibition of bai` `urbun by the Prophet s.a.w.
(SAC, 2007, p. 36).

 The majority of Islamic jurists were of the view that

qabadh represented a valid condition in the transaction
of ribawi goods if the said goods have similar `illah riba,
such as similarity in type (sale and purchase of gold with
gold) or difference in type (sale and purchase of gold
with silver). The transaction should meet the conditions
of the `aqd ceremony whereby goods are handed over
and payment is made on the spot (SAC, 2007, p. 116).

35
 a) Definition:

Qiyas literally means measuring or

ascertaining the length, weight,
b) or quality of something.
Qiyas
(Analogical
Deductions) Technically, Qiyas is the extension of
the Shariah value from an original
case to a new case, because the
latter has the same effective cause
as the former.

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 The Application Of Qiyas In Islamic
Financial Transaction:

 The imposition of ta`widh or syart jaza’i according to Arab

terminology is a penalty agreed upon by the `aqd parties as
compensation that can rightfully be claimed by the creditor when the
debtor fails or is late in meeting his obligation to pay back the loan.
 The delay in paying off a debt can be compared with ghasb
(usurpation) of valuable property. This is because of the similarity of
`illah between the two, that is obstructing the use of property and
exploiting it in a tyrannical way.
 According to the Syafi`i and Hanbali Mazhab, in the case of ghasb,
the usurper has the benefit of using the property that he has seized
and therefore must pay compensation to the owner. In the case of a
delayed payment of debt, the creditor stands to lose because he is
deprived of the opportunity of using the funds for other trading
purposes, which he could if the debt is settled within the stipulated
time frame. Therefore, this loss should be compensated by the
debtor based on qiyas (SAC, 2007, p. 126-127).
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Cont…
 The Quran forbids the sale and purchase of goods at
the time of Friday prayer (specifically after the last
call for prayer) as stated in Surah al-Jumuah, verse 9:
“O you who believe (Muslims)! When the call is
proclaimed for the Salât (prayer) on Friday come to
the remembrance of Allâh and leave off business
that is better for you if you did but know”.

By qiyas, this prohibition is generalized and

extended to all kinds of transactions since the
same 'illah (abandonment of prayer) is available in
both cases.

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 Cont…

The Quran declares the use of wine to be haram (al-

Ma’idah, 5:90) because it is an intoxicant. However, drugs
were not mention but Rasulullah saw said ‘every intoxicant
is khamr so every intoxicant is haram’’. Since these drugs
are highly intoxicant, they are declared to be haram.
39
 a) Definition

Istihsan literally means to deem

something preferable, or to
approve. It is a derivation of
hasuna which means being good
c) Istihsan or beautiful.

In its juristic sense, istihsan is a

method of exercising personal
opinion in order to avoid any
rigidity and unfairness that
might result from the literal
enforcement of the existing law.

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The Application Of Istihsan In Islamic
Financial Transaction

 Istihsan is applied to the contract of salam. Bai Salam

is an Islamic contract in which full payment is made in
advance for specific goods (often agricultural products)
to be delivered at a future date. In principle, based on
analogy (qiyas), the salam contract is not permissible
since it involves the deferred exchange of underlying
goods which belong to the class of ribawi items (items
in which riba arises upon delay of exchange hand to
hand). However, salam was made an exception due to
the need of people, at various times, to transact based
on paying down the price (capital) immediately, whilst
delaying receipt or taking delivery of the underlying
goods to a future date.

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Cont…
 Analogy requires that the manufacturing contract
with advance payment be prohibited based on analogy
- however this is made permissible according to ijma.

 Istisna’: This is a sale on what is not in existence, it

also falls under the category of bai’ al-Ma’adum like
in salam. Istisna` refers to a contract which a seller
sells to a purchaser an asset which is yet to be
constructed, built or manufactured according to agreed
specifications and delivered on an agreed specified
future date at an agreed pre-determined price. It is
considered allowed due to the consensus of its
permissibility since from the period of the
Companions.

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 Definition:
Istishab is an Islamic term used in the
jurisprudence to denote the principle of the
presumption of continuity.

d) Istishab
Istishab refers to the maintenance of the
(Presumption Of previous hukm as long as there is no other
Continuity) dalil that can change that particular hukm.

Istishab validated by Shafi'is, Hanbalis,

Zahiris and Shi’ah Imamiyah. Hanafis, Malikis
and Mutakallimun not consider it as a proof.
The differences appeared because the
existence of a fact in the past is no proof of
its continued existence.

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The Application Of Istishab In Islamic
Financial Transaction:

 A person claims he lent another an amount of money and

demands repayment. But there is no material proof of this
debt. Istishab will consider the other person free from debt as
there is no tangible proof of his liability in the first place.

 E-commerce transaction (Imam Shafi’e requires ijab and qabul

in one sitting) as long as not contrary to syara’.

 The application to terminate property will not be accepted

until evidence is submitted supporting these statements.

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e) Maslahah Mursalah (Public Interest)

Definition:

 Literally maslahah or masalih means benefit or

interest. Maslahah mursalah may be defined literally
as the acquisition of benefit (manfaah) or the
repulsion of injury (mudharrah).

 Technically it is defined by al-Ghazali as “a

consideration to secure a benefit or prevent harm in
which harmonious with the objectives (maqasid) of
the Shariah” or “the preservation of the purposes of
Islamic law in the settlement of legal issues”.

45
The Application Of Maslahah In Islamic
Financial Transaction:

 Maslahah is also a strong argument for permitting mixed

companies (a mixed company is one where its core activities
are permitted by Shariah, although there are some other
activities that may contain a small extent of prohibited
elements). It is further strengthened by arguments pertaining to
the existence of the `umum balwa, fasad al-zaman, `urf, asalib
iqtisodiyyah situations and the recognised rights of non-Muslims
(SAC, 2007, p. 150).

 To ensure trust and confidence in the capital market, the

Securities Commission Malaysia regulates the capital market
based on the principles of transparency and proportionality to
commensurate with the risks posed. SC’s actively update and
enforce our regulations and securities laws to ensure that the
capital market operates in a fair and orderly manner as well as
to reduce systemic risks such as Capital Markets and Services
Act 2007, Securities Commission Malaysia Act 1993, Securities
Industry (Central Depositories) Act 1991 (SC, n.d)
46
Cont…

 Business contracts
through modern
telecommunication.
 Payment by
instalment such as
house financing.
 Warranty on
purchased goods.
 Introduction and the
use of currency in
trading.

47
f) Sadd al-Dhara’i (Blocking the Means to an
Evil)

 Literally, zari’ah (plural zarai’k) means to obtain a

certain end. Sadd means to block.

 Technically, Sadd al-zarai’k means blocking the

means to evil. Sadd al-zarai’k is used when a
lawful means is expected to produce an unlawful
result. The concept of Sadd al-zarai’k is founded
on the idea of prevention of evil before it
materializes.

48
 The Application Of Sadd al-Zarai’k In
Islamic Financial Transaction:

 Someone who sells grapes to a person who processes them to

make wine. According to the Maliki Mazhab, such sale is
prohibited because every act of buying and selling that results in
prohibited issues is prohibited by law.

 Company activities classified under this method are activities

whose benefits are disputed by the Islamic jurists and may give
rise to detrimental acts or aspersion if they are not controlled. One
such activity is the manufacturing and marketing of condoms. The
condom itself initially does not give rise to any problem if used in a
permissible way. But studies showed that condoms are used for
immoral activities and can give rise to aspersions, such as
promiscuity which is prohibited. Hence, such activities must be
controlled by adopting the sadd zari`ah method.
49
g) Urf (Customary Practice)
 Literally, ‘urf originates from the Arabic word ‘arafa
means know, familiar or custom. ‘Urf and ‘adah are
synonymous and majority of ulama have used both.
‘Adah means repetition or recurrent practice. ‘Adah
can be used both individual and group, whereas ‘urf
does not refer to personal habit but it can be practiced
by many people.

 Technically, ‘urf means as recurring practices which

are acceptable to people of sound nature. Some
practice which are practiced by some people or
society and they become accustomed to doing it
(Mahyuddin Khalid, 2011).
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 The Application Of ‘Urf In
Islamic Financial Transaction:

 The price of an item accords to the present

currency known by both parties even if it not
mentioned in the contract. For example, in
Malaysia, upon selling an item, the price of the
item is payable by the present currency (RM)
known by both parties even if it not mentioned.

 Sale and purchase agreement such as what to

include in buying a house or a car.

 Payment of deposit.

51
h) Qawa’id Fiqhiyyah
 Literally: Legal maxims are general rules which apply to all
related particular – They are group of questions of
jurisprudence under certain general rules, each one of which
embraces many questions. Qawaid is the plural of qa’idah,
which is derived from the three-letter root Q-’-D, who’s the
meaning core meanings are ‘permanence’ and ‘stability’.
 The linguistic meaning of qawaid is ‘foundation’ or ‘supports’,
whether tangible, like the foundations of a building, or
intangible, like fundamentals of Islam or the rules of
grammar.

 Technically: Mustafa al-Zarqa – The general fiqh principles

which are presented in a simple format consisting of the
general rules of Shari’ah in a field related to it. The function
of legal maxims is to facilitate the understanding of how
problems and principles could be used to deduce the many
rules of fiqh. 52
Cont…

Five major legal maxims:

i. Matter are determined according to intentions.

ii. Hardship begets facility.

iii. Harm should not be inflicted nor reciprocated.

iv. Certainty (yaqin) cannot be removed by doubt.

v. Customary practice as a basis of judgements.

53
Matters Are Determined According To
Intentions (Al-‘umur bi maqasidiha).

 This maxim originated from a famous hadis whereby the

Prophet (p.b.u.h) was reported to have said:

 “Deeds are judged by intentions and every person is judged

according to his intention” (Al-Bukhari)

 This maxim suggests that an act or words of a person has to

be interpreted according to his intention in saying the words
or doing the act – words and acts serve only as manifestation
of the intention. According to this maxim, only human acts
that originate and stem from the doer’s intention are
considered – Thus actions not arising from the doer’s
intention are not regarded.

54
Cont…

 An example of the application of this maxim

in modern financial transaction:

i. The imposition of ta’widh. Ta’widh is the

compensation paid by the bank’s
DEFAULTING CUSTOMERS who
intentionally or negligently refused to pay
their obligations towards the bank. Thus,
imposition of ta’widh was allowed based on
preventing intentional default by customer.

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Hardship Begets Facility (Al-Mashaqqatu
Tujlab at-Taysir)

 This legal maxim means, difficulty is to be

accompanied by easiness. Thus, in times of
urgency, laxity must be shown – It becomes
necessary to lighten people’s burden and to
disregard general rules in certain exceptional
circumstances if their application were to result
in injury and hardship.

 Another similar maxim: “Necessity renders

prohibited things permissible” carries same
meaning.
56
 Cont…
The application of this maxim in modern financial transaction:

 The permission to deal with conventional banks for the Muslim

minority living in non-Muslim countries. In this case, they might be
allowed to temporarily use conventional banking due to the
compelling need whereby no Islamic financial facilities are available
for products like residential financing.

 The SAC (2007), at its 2nd meeting on 21 August 1996, when

discussing the issue of a benchmark for haram elements in a mixed
company, resolved that the situation categorised as `umum balwa
needs to be considered in determining the status of a mixed company.
The purpose of such an excuse is to facilitate the carrying out of daily
activities. Without such an allowance, the maslahah of the public will
be affected especially in an economic field that involves the control of
mal and trade as well as social stability (p.123)

57
Harm Should Not Be Inflicted Nor Reciprocated
(La Darara Wa La Dirar)

 Basically, these maxims mean injurious or harmful acts must be

avoided and prevented in all cases. The maxim was found in hadis:
 “La darara Wa La Dirar”
 (Muwatta’ Malik)


 La Darara (No harm should be inflicted) – That it is not permissible to

cause or inflict injury or harm another person without a valid reason.

 Wa La Dirar – It is also not permissible to cause injury in return for

an injury caused to you without a proper legal channel. Injury or
harm cannot be removed by another similar harm.

58
Cont…

The applications of La Darara Wa La Dirar in modern

financial transaction:

 If a rich person refused to pay zakat, you should not

rob the person to take your right from him.

 Muslim investors should not invest in weapons

factories or entertainment companies. The product of
weapons factories destroys human life, and the
products of entertainment companies frequently harm
people’s adherence to religious values.

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 What Is Certain Cannot Be Removed
By Doubt (Al-Yaqin La Yuzalu Bi Ash-
Shakk)

 This legal maxim is pertinent in solving

the cases of doubt. The principle states
that a rule or situation which has been
settled by certainty could not be removed
by mere doubt.

 A settles rule is presumed to exist, until it

is changed by a certain evidence to prove
otherwise- Mere doubt could never
change a rule which was established by
certain evidence.

60
Cont…

Application of the maxim in Islamic Finance:

If a capital provider (rabb al-mal) accuses the

bank (mudarib) of negligence or misconduct,
the burden of proof is on the accuser. That is
because the transaction is a trusted based
relationship. The capital provider only
provided capital after determining that the
mudarib was trustworthy. This determination
cannot be overridden by mere suspicion.

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62
Customary Practices as a Basis of
Judgments (Al-’Adatu Muhakkamatun)

 This legal maxim rules that customary practice of society in

terms of their words and actions are acknowledged and
recognized by the Shari’ah in the absence of textual
injunctions, provided they have fulfilled the following
requirements:

i. The custom must not violate a divine text of the Quran and
Sunah or any Shari’ah principles.
ii. The custom must be consistently applied and prevailing in
the society
iii. The custom must have been in effect at the time the activity
or transaction was carried out
iv. The two contracting parties must not have agreed to a
condition contrary to the customary practice. If they have
agreed to the contrary, then the customary practice is not
recognized.
63
 Cont…
Application of the maxim in Islamic Finance:

 In case a person authorises another to sell

something on his behalf without laying
down conditions as to sale price and unit
of currency, the agent will be treated to be
bound by conventional rules of charging a
reasonable price and prevalent currency.
Thus, in this and similar cases the detail
understood by common usage would not
need to be mentioned.

64
1.6 Differences Between Islamic
and Conventional Investment
a) Area Of Investment

b) Regulations

c) Nature Of Assets Backing An

Instrument
d) Extent Of Contractual
Conditions
e) Relationship Between Investors
And Issuers
f) Risk Taking
65
 (a) Area Of Investment:

 Islamic Investment:
Shariah law and principles strictly require that
investments activities must free from usury
(riba), gambling (maysir) and ambiguity (gharar).
Investing in commodities like liquor and tobacco
is also not allowed. The ban on interest in all
1.6 economic activities is explicitly defined and
remains uncompromisable in Islamic principles,
as it is divinely forbidden by Allah. Businesses
Differences should avoid sinful products and services in their
portfolios, earn profits fairly and moderately and
Between must avoid resorting to misleading marketing of
products or services offered to consumers.
Islamic and
Conventional  Conventional Investment:
Investment A conventional market allows and, in fact, invites
investors to invest in any sector that pleases
them. This might include just about any kind of
business or industry, including conventional
financial services based on interest speculation
and/or gambling, and food and beverage
companies with core business interests in pork
products or alcohol.

66
 Cont… Differences Between
Islamic and Conventional
Investment

(b) Regulations:

 Islamic Investment: Governed

and control by divine laws
(Shariah) sourced from the
Qur’an, Hadeeths and Ijma
(Consensus of Scholars).
Coherent policies and
regulations are usually drawn
from divine laws as mentioned.
Unfair business dealings like an
exaggerated advertisements and
promo, cheating in products and
prices, abnormal profiting,
hoarding, private monopoly and
deceits have been outlawed by
Shariah.

 Conventional Investment: Man

made law.
67
 Cont… Differences Between Islamic and
Conventional Investment

(c ) Nature Of Assets Backing An Instrument:

 Islamic Investment: Not consider money as an instrument

of trade or commodity. As such, it does not have intrinsic
value, but a mere medium of exchange. Therefore, the
use of money as commodity is prohibited by Shariah
especially where make gains without effort or any form
of risk. Islamic Finance are basically financial instruments
essentially supported by assets of different forms
especially the tangible ones.

 Conventional: Conventional financial instruments are

mere paper assets. The value of such assets are based on
their intrinsic value usually determined by the
availability of information, issuers performance and
ratings, targeted returns and the extent of trade-ability
of a given instruments. In conventional normally they
deal mainly on intangible assets, that is, not backed by
tangible assets or commodities and other assets of
physical existence and substance. Under this condition,
the value of an instrument is normally a function of the
future economic benefits it attracts.
68
Cont… Differences Between Islamic and Conventional
Investment

(d) Extent Of Contractual Conditions:

 Islamic Investment: Embody several fundamental

principles as enshrined by Shariah. These principles
include provisions that Islamic investment must be from
Gharar (i.e., uncertainty). Transactions conditioned
around the occurrence or non-occurrence of uncertain
events is prohibited. Such uncertainties also cover
transactions beclouded with enormous ambiguity
especially those that could potentially lead to disputes
and change of terms are considered voidable.

 Conventional Investment: Apart from the basic

elements of a valid contract as contain in the common
English laws such as offer, acceptance and the payment
of considerations etc. The conventional investment
activities have limited contractual rules and principles.
69
70
 Cont… Differences Between Islamic and
Conventional Investment

(e) Relationship Between Investors And Issuers:

 Islamic Investment: The relationship between

investors and issuers as a mutually beneficial
relationship in form of either joint venture,
partnership or a buyer and seller just to mention
few. A case in point here is in Musharakah
financing, the financier and his client are
technically deemed as partners while in
Murabaha, the parties are seen as seller
(financier) and the buyer (client) form of
arrangement as against the lender and borrower
perspectives in conventional finance.

 Conventional Investment: The relationship

subsisting between instruments’ investors and
issuers as that of borrowers and lenders. For
instance, if an institution issues a 10-year bond
through the capital market, he becomes the
borrower. An investor who subscribed to and
acquire the bond issued is seen as the lender.
71
Cont… Differences Between Islamic and Conventional
Investment
(f) Risk Taking:

 Islamic Investment: Built essentially of

risk sharing arrangements. The instruments
are built with fairness having in mind that
whoever is entitle to returns, he/she must
equally partake in sharing the risk
associated with such returns.

 Conventional Investment: The financiers

or investors do not share the associated
risk of the investment. This risk aversion is
premised on the belief that a borrower
must produce returns to cover for the
principal and interests without any
contemplation of risk to his investment.
The conventional arrangement entirely
transfers the risk to the client or borrower.
72
Thank
you

73