Developing Modern Islamic Financial System Via Ijtihad

Developing Modern Islamic Financial System via
Ijitihad: an overview
DEVELOPING MODERN ISLAMIC FINANCIAL SYSTEM VIA

IJTIHAD: AN OVERVIEW
Assoc. Prof. Dr. Mohd Daud Bakar (IIUM)
Abstract
Commercial transactions particularly in banking and finance matters

belong to the area of law that is unfixed. As such, they are constantly
developing from one generation to another to meet the needs of a
society at particular point in time. Changes are unavoidable and Islamic
law does not resist to whatever changes taking place on this earth. On
the contrary, Islamic law, being the last Divine revelation ought to
respond to these changes to sustain the relevancy of Islamic law
throughout the centuries. The article seeks to explore the nature of
Islamic sources of law and the historical evolution of techniques and
principles of law which led to the establishment of four major surviving
schools of law in Islam. More importantly, the article will also examine
the instrument of ijtihad to measure its potentiality and viability to
respond constructively to the changing needs of the modern financial
system.
1.0 INTRODUCTION
Islamic law is a Divine revealed law. It starts from given or self-evident premises
which constitute the sources of Islamic law. Islamic law as a Divine revealed law is
best represented by the term "Shari'ah". The 'Shari'ah, the Arabic term for Islamic
system of life, literally means path or way to a watering place in the desert. Since
many Arabs who lived during the time of the Prophet (SA W) were desert dwellers
and/or were influenced by the ways of desert, water and direction leading to water
place were essential to their life.
In the same vein, Allah Almighty, the Lawgiver, sees the Shari'ah as essential to
Muslim life. The Shari'ah, as the divinely ordained blueprint for human conduct, is a
self contained system, all comprehensive and all embracing. It encompasses all
© Centre for Research and Training. All rights reserved Page 1of 18
aspects of human life, on the individual as well as collective levels in matters of faith,
worship and human relation in personal and public rights. All avenues of life, whether
political, economic, or any other, fall within its sphere of jurisdiction. To this effect,
the Shari'ah has been described by a leading Western scholar as "the epitome of
Islamic thought, the most typical manifestation of the Islamic way of life, the core and
kernel of Islam itself',
Having said this, it is to be noted that Islamic law is not given to man 'ready-made',
Islamic law needs human involvement as to interpret the sources given by the
Lawgiver. The divinity of the Shari 'ah is confined merely to the sources of law which
act as the raw-materials for the qualified jurists to understand, interpret and extend
their applications, as the case may be. Therefore, it is correct to describe the
development of Islamic law as a source-based development. Generally speaking,
source denotes the place or the basis from which a rule or a legal argumentation is
taken. In the case of Islamic law, both the Qur'an and the Sunnah of the Prophet are
the ultimate sources and both of these sources are clearly textual in character.
Above all, they are sacred texts because they are the product of Divine inspiration.
For this very reason, Islamic law historically developed through the text-oriented
approach in the sense that Muslim jurists are guided not by intuition but by textual
evidence prescribed by both the Qur'an and the Sunnah. Therefore, Islamic law
becomes conceptual knowledge rather that intuitive perception. Strictly speaking, it
is not the law which is interpreted, but rather the sources of law. The law as a
topically-organised finished product consisting of precisely-worded is the result of
juristic interpretation; it stands at the end, not at the beginning, of the interpretative
process.
This interpretative process is known as ijtihad. The main player of ijtihad is the -jurist
who endeavours to derive or formulate a rule of law on the basis of evidence found in
the sources. The end product of this process is known as fiqh, the Islamic positive
law, which differs significantly from the Shari 'ah. While the Shari 'ah is the divine
law, fiqh is the product of human understanding. Kamal Faruki has rightly pointed out
that "the difference between Shari 'ah and fiqh is between the divine law as it is and
the divine law as human beings understand it'. Fiqh has now become the legacy of
Islamic law which covers almost all areas of law pertaining to "the Islamic way of life",
Fiqh which literally means intelligence, is a result of an independent exercise of

intelligence in deciding a point of law. A man may be very learned, 'alim, but to be a
faqih or jurist he must have the quality of independent judgment.
Although fiqh depends heavily on the skills of ijtihad which is human in character.
Muslim jurists are not free to speak of Islamic fiqh or Islamic positive law as rooted in
a positivist conception of law. That is to say that the human judgment which has been
described as determinative of Islamic substantive law is not a judgment made within
a humanly established frame of reference; it does not proceed from a human sense
of equity, or from a perception of previous human judgments. On the contrary, the
human judgment which we are concerned with is an exclusively exegetical judgment.
Although no qualified jurist would presume to claim exegetical finality for a rule
constructed by him, he would insist that the rule is normative for himself and his
followers in the same guilds of law by virtue of the intended objectivity of his scholarly
endeavours, namely the exposition of non-positive law of Allah. He would insist, in
other words, that his point of departure in the formulation of all rules is divine
revelation.
2.0 THE LEGACY OF ISLAMIC FIQH AND VARIOUS GUILDS OF ISLAMIC

LAW (MADHHAB)
Although Muslim scholars and jurists agree that they are bound by the Shari 'ah, the
interpretations of its requirements have differed historically according to various
sectarian and schools of law and, in modern times, also according to differing views
of how the Shari 'ah be applied in the changed circumstances of present-day
societies. The history of Islamic law begins with the revelation of the Qur'an, which
contains legal principles and injunctions dealing with such subjects as ritual,
marriage, divorce, succession, commercial transactions and penal laws. The Qur'an
was revealed to the Prophet Muhammad (PBUH) gradually over a period of twenty-
three years. An overview of the Quranic regulations reveals the following three
principles of legislation; removal of hardship; gradual introduction of law and
safeguard of rights and fairness. The Qur'an, in most cases provides general
principles applicable to many areas of law such as the verses pertaining to an
obligation to fulfil the contracts and obligation (al- Ma'idah (5): I) and to the distinction
between trade and rib a (al-Baqarah (2): 275) respectively. Occasionally, the Qur'an
lays down specific and detailed rulings to govern specific cases of law such as in the
case of illustrating the shares of inheritors (al-Nisa' (4): 11-12) and the list of women
whom a person cannot marry (al-Nisa'(4): 23).
The Prophet Muhammad (PBUH), on the other hand, not only acted as the head of
state in Medina, but also as arbiter and judge. The Sunnah refers to the sayings,
deeds and tacit approval of the Prophet Muhammad (PBUH) insofar as they are
related to legislation purposes. The Sunnah, unlike the Qur'an, offers relatively more
specific cases and rulings apart from the general principles. As for the general
principles, the Sunnah provides, inter alia, the maxim that the benefit is in proportion
to liability or detriment (al-kharaj hi al-daman). The Sunnah is full of cases because
the Sunnah, like an English case, deals with particular fact situation by recording an
answer given to a specific question or a remedy provided for specific grievance. It
usually relates that a person had such a question, or problem, or grievance, or
dispute, and went to the Prophet (PBUH), who gave such an answer or rules for such
a remedy. The Sunnah, therefore, to some extent, is the case law. For example, the
case of two Companions who wanted to mutually exchange their respective dates
with each other was brought to the attention of the Prophet (PBUH). As the
exchange involved two different kinds and different amount of dates, the Prophet
(PBUH) instructed that the transaction be ceased because the transaction is
tantamount to riba. Instead, the prophet instructed the owner of the lower grade of
date to sell his date in the market first and only after that could he buy the better
dates from another party. The above case indicates that the Prophet (PBUH)
discouraged barter trading as it may likely lead to fraud and injustice. Also, the case
highlights the principle of riba particularly riba a/-fad/ i.e. riba by an excess which
takes place when two similar usurious items are exchanged for one another with
different counter values.
The above illustration of the nature of both the Qur'an and the Sunnah gives an
impression that they are always open for human interpretation and legal reasoning.
Hence, the application of Islamic law demands that revelation must be understood
and this understanding requires ijtihad by the mujtahids. The exercise of one's
individual judgment in the derivation of a judicial decision in the interpretation of

Islamic principles and fundamentals, although defined by authoritative texts and
governing rules, can produce agreement only insofar as general principles and broad
outlines are concerned. As there are many ways and methods of understanding both
the Qur‘an and the Sunnah, the disagreement is inevitable in Islamic law and these
varieties are well documented in the legacy of Islamic law particularly in the writings
of all major schools of Islamic law.
From the middle of the eight-century, a number of juristic scholars emerged whose
independent interpretations of the general principles and specific cases of both the
Qur'an and the Sunnah stimulated the development of separate legal schools in
Islam. Islamic jurisprudence became a highly technical process and disputes about
methods and judicial opinions crystallized into various legal schools designated by
the names of the founding scholars. The differences in their legal though were mostly
due to the various ways in which the Qur 'an and the Sunnah were interpreted in
relation to the local customary law and the quality of legal reasoning in extending the
principles to unprecedented cases. Therefore, there were several legal systems
called madhahib (plural of madhhab), corresponding to different methods of
conducting jurisprudence, usually differed with regard tot he details of practical
application.
The oldest legal school is the one that followed the Iraqi tradition and was called
"Hanafi" after its founder Abu Hanifa died in 767 A.D. Although, the school was
named after a prominent local jurist, Abu Hanifah, its followers actually often showed
greater deference to the views of two of his disciples, Abu Yusuf 9d. 798) and al-
Shaybani 9d. 805). The Hanafi school is known for its endorsement of reason and
logic as legitimate sources in the application of rules to the practical questions of life.
Abu Hanifah's unusual ability to broaden the juristic practice with the use of analogy
and juristic preference allowed Hanafi jurists to carry out meticulous investigation of
legal sources to formulate their juridical decisions. Relatively speaking, the Hanafi
school of law has been the most flexible and workable school in the area of
commercial transactions. In terms of geographical distribution of this school of law, it
came to predominate in most territories of the defunct Ottoman government
particularly in the eastern Mediterranean simply because this school of law was the
official madhhab of the ruling government. As the major sunni population in the
Indian subcontinent are Hanafis, the Hanafi school fo law is by far the largest school
of law.
The next school in order of time is the Maliki which originated in Medina and was
named after the prominent legal scholar and traditionist Malik b. Anas (d. 795). Those
who adhered to the rulings of Malik b. Anas were known as Malikis. In his legal
formulations Malik relied heavily upon the well-established practice of the early
associates of the Prophet Muhammad (s.a.w) in Medina. Although in his legal
doctrines he was bound by the practice of the Medinese, he also used analogical
deduction in cases not treated in the Quranic verses nor in the Sunnah of the
Prophet (PBUH) to arrive at a rule. Maliki -jurists regard "juristic preference" and
"public interest" as valid sources of juridical decisions. The adherents of the Maliki
school tend to be concentrated today in the western portions of the Muslim world,
particularly in North and West Africa, although one does find them in other parts of
the Arab world including the Hejaz and Kuwait.
The third major surviving school is called the Shafi'i school of law. This school was
named after Muhammad b. ldris al-Shafi'i (d. 820). The Shafi'i school was the result
of a synthesis conducted by a single scholar who was thoroughly familiar and well
versed with the doctrines of both the Maliki and Hanafi schools of law. from the Maliki
school of law, he elevated the Sunnah of the Prophet (PBUH) to the status of a
source of law coexist and coequal with the Qur 'an. He articulated the view which
subsequently found wide-spread acceptance, that the Sunnah of the Prophet
explained the meaning of the Qur 'an. From the Hanafi school of law, he accepted
the role of independent sound judgment and used it as a tool for analogical inference
in his legal theory. AI-Shafi'i's contribution lies in his magnificent synthesis of legal
theory in Islamic jurisprudence. To the best of the writer's knowledge, the legal
theory developed by al Shafi'i is the best for areas of law which are fixed such as
devotional matters and the like because al-Shafi'i and his school of law was never
involved in areas of law which are flexible and worldly- oriented as in the case the
Hanafi school of law. The distribution of members of the Shafi'i school tends to
couespond to patterns of major trade routes, with Shafi'i communities mostly
concentrated in coastal areas. One finds large numbers of the Shafi'is in East Africa.
Yemen. Ceylon. Malaysia and Indonesia.
The last of the four schools is the Hanbali school. It was named after its founder.
Ahmad b. Hanbal (d. 855) who complied a work on the Sunnah that became the
source for juridical decisions of the Hanbalis. His juridical decisions are part of his
monumental work on traditions that contains more than forty-thousand reports on
various topics, not necessarily all legal. This compilation has become the source for
juridical decisions undertaken by later Hanbali jurists. Generally speaking, the
Hanbali school leaned more on the tradition than science of law The Hanbali school
has dwindled in size to such a point that its adherents are scarcely found outside
central Saudi Arabia. However, the widely appreciated originality and intellectual
distinction of some of its medieval jurists has allowed it to retain an influence entirely
out of proportion to its number.
Interestingly, the Muslims attribute an equal value to all these four surviving schools.
The differences are of a secondary nature. They are in the domain of the application
of law (branches of law) and not in the principle of the law (roots of law). It is
important to note that these four schools are in agreement on all points vital to Islam.
They acknowledge the authority of the Qur ‘an and the Sunnah as the ultimate
sources of law in Islam. As a matter of fact, with the development of the classical
schools of Islamic law, the study and discourse on the principles of law (usul al-fiqh)
started to articulate in the Muslim world be it in the mosques or Islamic inns of courts
or universities or colleges as the case may be. !jtihad, as a technical term, originates
from this area of discipline. Therefore, it is worth presenting an overall illustration
and raison d'etre of usul al-fiqh before we proceed to discuss the centrality of ijtihad
in developing modem Islamic financial system.
3.0 SOURCES AND PRINCIPLES OF LAW AS DOCUMENTED IN ISLAMIC

LEGAL THEORY
The main and prime sources of law in Islamic legal theory are the Qur 'an and the
Sunnah. Ultimately, the study of Islamic legal theory (usul al-fiqh) is concerned with
establishing a science of proofs of the Islamic derivation of substantive legag
principles. The end product of this process is fiqh which determines the legal rulings
and assigns them to one of five categories of rulings such as obligatory,
recommended, prohibited, disapproved and permissible. While fiqh concerns itself
only with whether an individual deed is lawful or not, usul al-fiqh or Islamic legal
theory is concerned with legal theories, principles in the interpretation of legal texts,
methods of reasoning and of deduction the aim of which is to provide the legitimate
bases and proofs for the legal rulings. The study of Islamic legal theory has been one
of the major preoccupations of Muslim jurists over the centuries and continues to be
so today.
The first root of the fiqh is the Qur'an. In the prevailing view, it is to be treated as the
eternal and uncreated word of Allah, part of his essence. Muslim jurists developed an
Muslim jurists developed an elaborate methodology to interpret the Qur'an and in
fact, the legal significance of the Qur'an cannot be properly understood without an
appreciation of this methodology. Muslim jurists themselves have differed over the
legal significance of many specific lines of the Qur'an.
The second root of Islamic jurisprudence and a source coequal with the Qur 'an is
the Sunnah. It is generally accepted among Muslims not only that the Prophet was a
perfect human being and thus worthy of emulation, but also that he enjoyed divine
inspiration and thus could make no error in matters of religion or Shari 'ah law. The
documented part of the Sunnah is termed as hadith (tradition). The literature of
hadith is very extensive and covers a much wider range of topics than the legal
verses in the Qur 'an. Therefore, it has supplied the Islamic rationale for a major part
of Shari ' ah law.
The role of legal reasoning is certainly needed in issues and cases where textual
evidence is absent. It is worth mentioning that except for a relatively limited number
of cases where the Qur'an and the Sunnah offer already-formulated legal judgments,
the great majority of branch cases (furu’) are derived through legal reasoning. This is
justified simply because written texts are limited but the incidents of daily life are
unlimited and it is impossible for something infinite to be enclosed by something
finite. Ijtihad in most cases relies on the faculty of mind, namely ra'y (a considered
opinion). Ra'y has flexible and dynamic nature. It decides the cases in the light of the
spirit, wisdom and justice of Islam. It is a well-considered and balanced opinion of a

person who aspired to reach at a correct decision. To this considered opinion, all the
following subsidiary sources subscribe which include qiyas (analogical reasoning),
preference), maslahah mursalah (unrestricted public interest) and ‘urf (customary
practice).
The above subsidiary sources are all discussed in Islamic legal theory as the bases
of law finding in cases not covered (textually) by the legal texts. Generally speaking,
all of arrives at after thinking, contemplation and genuine search for the truth in a
case where indications are lacking or conflicting. In Islamic law, a tentatively
constructed rule has the full force of a bona fide rule of law provided the
interpretation or reasoning upon which it is based is diligent and conscientious. In
other words, a considered opinion by a competent scholar is binding in matters of
law.
Relatively speaking, among all subsidiary sources, qiyas or analogical reasoning is

the most important and workable instrument, the reason being that qiyas, broadly
speaking, is a legal method for extending the law beyond what is stated in the
authoritative legal sources or an extension of a precedent and not the establishment
of a fresh ruling by itself. The importance of qiyas or analogical reasoning is more
obvious in commercial issues since this has the support from one of the established
maxims that is "the principle in mu'ama/ah (Islamic law of transactions) is
ratiocination and analogy" i.e., a/-as/ fi a/- mu'amalah al-ta'lil wa al-qiyas. In linguistic
sense, ta'lil (ratiocination) means causation, or search for the causes and it refers to
the logical relationship between the case and effect. To apply qiyas, it is necessary to
draw a parallel or find similarity between what is mentioned in legal texts and a new
problem. The common link between them, namely similarity, is known as 'illah or
ratio decidendi. This is known through the process of ratiocination which is of high
level of scrutinization. Once it is known that both cases, the original and the
assimilated share the same 'illah, the ratio decidendi. the judgment of the original
case is extended to the assimilated. As a result, the new problem carries the same
ruling as does the original. The form of argument of the normal qiyas is as follows:
A has the properties X, Y,

B has the properties X, y
A has the rule J
X, Y, …. Are relevant properties in inducing J
Therefore, B must have the rule J
A case in point pertains to a special contract called daman which was prevalent in
Damascus in the time of Ibn Taymiyyah (7th/13th Century). The contract deals with
the lease of orchards but different from the conventional lease contract of ground
because the
lessee is also a partner to the lessor by virtue of musaqat contract (partnership in

fruit- tree). In other words, the daman contract is a combination of musaqat
(partnership in fruit-trees) and ijarah (lease of ground). The landowners of
Damascus were more interested to rent not only the ground but also the trees for a
fixed period an this practice was deemed in conflict with the principles of ijarah
(lease) in Islamic law. Therefore some scholars have raised their objection towards
the practice. Ibn Taymiyyah, however, was of the view that the contract of daman is
lawful and valid by virtue of different types of qiyas, inter alia, qiyas al-tard. As a
basis of his analogy, Ibn Taymiyyah referred to a Quranic verse (65:6) according to
which the wet-nurses have to get compensation for suckling a child. By making
recourse to this verse, Ibn Taymiyyah attempted to refute the prevailing opinion that
usufruct as an essential element of the contract of hire (ijarah) has to be understood
in a narrow sense, namely using a thing without reducing its substance. Owing to
this restrictive definition of usufruct it is not possible to rent an orchard, because the
contract of rent just aims at consuming the fruits. From the fact, that in the Quranic
verse the consumption of milk obviously forms part of the contract and that this
element occurs also in other admissible contracts such as 'ariya (loan of property
without any charge) and waqf (endowment), Ibn Taymiyyah drew the legal inference,
that the contract of ijarah may include the consumption of parts of the object, a
practice which is compatible to the original ruling in the Qur'an in the case of hiring or
employing a woman for suckling purposes under the contract of ijarah (hire).
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In commercial issues as in other delicate issues, an accurate understanding

difference between 'illah (ratio decidendi) and hikmah (philosophy and objective of
Islamic law) is inevitable because commercial issues have always close ties with
moral and philosophical considerations. In Islamic law, the judgment should be based
on the illah (ratio decidendi) rather than on hikmah (the philosophy and the aim of the
law). The ratio decidendi, among other requirements, must be an evident attribute
(wasf zahir). Hidden considerations such as intention, consent, good will, etc., are not
to be considered as 'illah since they are not ascertainable. In other words, the 'illah
must be definite and perceptible. The 'illah for a valid contract, for example, is the
offer and acceptance (ijab
wa qabul) rather than the buyer and seller's actual consent, simple because consent
is imperceptible. Since the offer and acceptance are evident (zahir), they are more
accurately considered as the 'illah for the legitimacy of a contract.
Apart from these sources, the practitioner should look at another principle of legal
techniques that is istihsan or juristic preference. Broadly speaking, istihsan takes
place when a jurist takes a decision in a certain case different from that on which
similar cases have been decided on the basis of its precedent for a reason which is
stronger and more appealing that the one found in similar cases and which requires
the departure from those cases. An interesting example is the case of the cultivation
of land by force. Imam Ahmad b. Hanbal (the founder of the Hanbali school of law),
is reported to have said that should someone acquire another's land by force and
cultivate it accordingly, the produce upon harvesting, on the basis of analogy, should
go to the cultivator. However, he departed from, and disagreed with, this logical
consequence and instead, adhered to istihsan to the effect that the produce should
belong to the owner of the land and the owner of the land is bound to pay all
necessary expenses of the cultivation to the cultivator.
Islamic law is also attached to the principle of maslahah (public interest) in terms of
law and order. Maslahah, as a principle of law, according to one scholar, is to argue
that good is lawful and that lawful must be good. The type of maslahah which attracts
the attention most is the so-called maslahah mursalah (unrestricted public interest); it
neither expressly conforms to nor contradicts the textual sources of Islamic law. The
usefulness of this principle is beyond doubt since contemporary commercial issues
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are nor textually covered by both the Qur'an and the Sunnah. The requirement for
Sale and Purchase Agreements is no doubt is mas1ahah based innovation which is
in line with the general objectives of Islamic law. The same may said with regard to
the practice of the warranty system as this would be parallel to the broad principles
and aims of Islamic law.
Apart from istihsan and maslahah, custom and public usage are also appealing and
significant in commercial transactions. The term custom generally means 'that which
a people or a section thereof have been accustomed to doing". Custom enjoys a
significant place in Islamic law particularly in the area of commercial activities to the
effect that one of the legal maxims has clearly stated that "a matter recognised as
customary amongst merchants is regarded as if agreed between them". Above all,
custom in Islamic law, is binding and could be appealed to in settlement of disputes.
Therefore, if a merchant sold a commodity to a purchaser without agreements as to
the time or manner of payment and if was customary for merchants to obtain the
price by weekly instalments, then the contract of sale should be interpreted according
to this particular custom. The principle of custom applies to almost every aspects of
Islamic commercial law as the daily transactions are closely related to what is
common and comfortable to the society. It includes, among other issues, aspects of
delivery, damage and defect, conclusion of a contract, termination and revocation of
a contract and the like.
4.0 IJTIHAD AS A TOOL IN DEVELOPING ISLAMIC FINANCIAL

SYSTEM
As mentioned elsewhere, the texts are limited while the incidents of daily life
particularly in the area of commercial transactions are unlimited and it is impossible
for something infinite to be enclosed by something finite. Therefore, ijtihad should be
everlasting for if it is discontinued, the application of the rules of Shari 'ah to human
acts would be impossible. Ijtihad is necessary in cases where the texts are absent
and the new unprecedented cases are lacking of and awaiting for some kinds of
Islamic rulings. Equally, ijtihad is necessary in cases where the texts are available
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because even though these given texts and premises are humanly conceived,
Muslim jurists have to strive to express what they perceive to be Allah's law since the
Shari'ah was not given to man ready-made as in the case of modem acts and
enactments.
The opposite of ijtihad is taqlid, a term which implies the unquestioning acceptance of
a given doctrine. Literally, taqlid means to wear a necklace or something around the
neck. The literal meaning conveys a sense of submissive following and
subordination. As a term in Islamic jurisprudence, it refers to someone who has
memorized the doctrine of the schools and has understood it in detail but was
incapable of mastering the methodology that the founder of that school applied in
order to reach his legal decision. Unlike ijtihad, taqlid is not a progressive and
dynamic instrument since it is merely an imitation of others without any
comprehension and apprehension. Therefore, one may safely conclude that taqlid is
unsatisfactory in meeting the needs of a modern society, and in fact, is not a source
nor a principle of law at all, rather it is against the basic sources of Islamic law.
Now, the question arises of how ijtihad could contribute in meeting the needs and
circumstances of the modem society particularly in the area of commercial dealing
and transactions. Ijtihad undoubtedly is a central term for the survival and continuity
of Islamic law in the modem ages" Ijtihad is to make use of all one's ability under the
guidance of broad principles of Islamic law in the search for the legal status. In a
more clear term, one leading Muslim jurist, al-Amidi, defines ijtihad as "the total
expenditure of effort in the search for an opinion as to any legal rule in such a
manner that the individual sense (within himself) an inability to expand further effort"
As for developing Islamic financial system, the task of i]"tihad; it is respectfully

submitted, is not confined merely to searching for a legal status. Instead, ijtihad is
viewed as a dynamic tool to invent new products not necessarily based on the old
precedents and concepts which were well documented in the legacy of Islamic fiqh.
Having said this, it is advisable to learn from the past legacy to provide solutions to
the modern financial problems where possible. As qiyas (analogy) has been the
most workable instrument to maintain the continuation of the Shari'ah law, a special
consideration should be devoted to examining the central part of qiyas that is 'illah or
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ratio decidendi. It is the ratio which makes qiyas workable throughout centuries.
However. it is the ratio that is difficult to find from the texts as the ratio is neither
found explicitly in the texts nor in the rule of law prescribed by the texts. It is the ratio
of ijtihad to develop the rules for finding the ratio of a case. For example, in the case
of induction which is one type of various kinds of qiyas (analogy), the ratio is to be
found by observing the common rule for a number of cases. The form of argument is:
A, B, C, D, ... are cases which have the common characteristic X and the rule J; all
cases which have the characteristic X must have the rule J; S has the characteristic
X: therefore S has (must have) the rule J.
A concrete example of induction from Islamic law is the case of riba (interest). The
Prophet (PBUH) was said to have prohibited the exchange of gold for gold, silver for
silver, date for date, wheat for wheat, salt for salt, and barley for barley unless they
were equal in quantities and delivered immediately. The jurists agreed that the
above prohibition is not due to their particular species rather to a specific cause or
ratio. As all items in the Prophetic tradition have the common characteristic X (the
ratio) and therefore subscribe to the rule J (the prohibition of exchange of two similar
ribawi or usurious items unless hand to hand and of equal amount). Subsequently,
by way of extension, all cases, which have the characteristic X, must have the rule J.
The finding of a ratio of any of previous cases would help the modern practitioners to
develop similar product in line with that ratio or may develop another product which
departs from the ratio in question as in the case of illegitimate cases of law. For
example, the scholars in the past have expressed their objection on sale transaction
which is devoid of possession on the part the owner or seller because possession
reflects the ownership and the ability to deliver. The possession was said to be the
ratio of a valid sale transaction- ljtihad would examine as to what extent the above
matter i.e. possession, qualifies to be a valid ratio. Obviously, upon a thorough
investigation, it may reveal that possession is not the sole requirement to render the
sale transaction valid or otherwise. It is rather the ability to deliver the subject matter
at a stipulated time which would constitute the genuine ratio or effective cause for a
valid sale transaction. This conclusion is supported by many precedents in the
legacy itself apart from some views expressed by many leading jurists in the Hanbali
school of law. This conclusion may significantly help the practice of buying and
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selling shares where the possession of the shares normally takes place after a few
days of the said transaction.
Istihsan (juristic preference), on the other hand, is deemed a legitimate tool for
developing new products which are viable and feasible in modern financial system.
Istihsan, as explained earlier, is to depart from the precedent for a reason which is
stronger and more appealing. A good example is the departure from fiqhi murabahah
(classical cost-plus-sale) to financial murabahah (modem cost-plus-sale). Under the
former practice, the item or commodity to be sold is already owned and possessed
by the orosDective seller. However, modern Islamic financial institutions cannot
afford to follow this model as this may potentially create the problem of storage due
to uncertainty in terms of demand and supply. While under the classical practice of
murabahah, the supply precedes demand, the modem practice of rnurabahah
presupposes that the demand should precede supply, otherwise the financier will be
exposed to commodities left unsold. Obviously, this departure is well justified as the
function of the bank or the financier has changed drastically from the classical
practice of murabahah which was commonly effected in the market.
Also, equally important is the role of both public interest and customary practice in
the society. Both are closely related because the common practice of a particular
society denotes that the practice is of public interest to the society at large. The
writer has argued elsewhere that the idea of making takaful (Islamic insurance)
mandatory is very much Islamic as this practice is deemed to satisfactorily serve the
best interest of the Muslim community in the modem world. Also, the practice of
having a policy on insurance has been customarily accepted by the society.
Therefore, to promote the Islamic investment as well as to satisfy the public interest
of the Muslim society at large in the case of damage or disaster and the like, it is
respectfully submitted that takaful policy irrespective of whether it is for family takaful
or general takaful may be made permissible if not mandatory .In line with this
suggestion, the writer has also proposed that the insurance industry in Malaysia be
allowed to have a dual insurance system as in the case of banking system which
allows both the conventional and Islamic bankings to operate on a parallel basis.
Finally, ijtihad is, and should, not be limited to the level reached by the previous
Muslim scholars. Instead, modem Muslim jurists are encouraged to exercise their
18
independent legal reasoning to formulate new ideas and alternatives for the survival
of Islamic financial system in the contemporary world. One interesting development is
the creation of Islamic liquidity particularly in Islamic capital market. The writer has
argued in his paper on Islamic liquidity that Islamic law has already endorsed on the
idea of having the liquidity by converting the assets into cash or cash equivalent to
meet one's financial obligation. However, modem Muslim jurists are given the
discretion within the Muslim jurists are given the discretion within the Shari'ah
parameter to adjust the modus operandi of having the liquidity based on the modem
financial structure. Assuming that the asset intended to be converted into cash by
virtue of securitisation is a commercial aircraft, the Special Purpose Vehicle (SPV)
could effect the purchase of the aircraft through for example, bay 'al-waf' (conditional
sale) in which case the seller will be given a discretion to repurchase the aircraft at
an agreed price within an agreed time frame. Pending the repurchase, the SPV has
ownership, title and usage of the aircraft whilst the seller has usage of purchase
consideration paid by the spy. In order to generate income from the aircraft to pay
agreed profit margin to the investors, for example, via mudarabah securities, the spy
may lease the aircraft to other users or the seller himself.
5.0 CONCLUSION
Ijtihad is an everlasting tool for Islamic dynamism in all areas and aspects of life.
Jjtihad performed by a highly qualified jurist is able to provide better alternatives to
the Islamic financial system. In order too achieve that, ijtihad should be given all the
encouragement as to lead the Islamic financial system to a more viable and feasible
environment in the near and far future. However, it should be equally cautioned that
the liberal approach of undertaking the task of ijtihad would damage the integrity and
viability of Islamic financial system both locally and abroad. Governed by the broad
objectives of the Shari'ah and its primary principles on commercial transactions, a
highly trained and skilled jurist will be able, it is respectfully submitted, to translate
and transform the legacy of Islamic law to a practical reality.
18
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1. AI-Duraini, Fathi, al-Manahij al-Usuliyyahfi al-Ijtihad hi al-Ray 'fi al- Tahsri ' al-
Islami, Damascus, 1980.
2. Faruki, Kamal, Islamic Jurisprudence, Karachi, 1962
3. Mayer, Ann Elizabeth, "Shari 'ah ", in the Encyclopedia of Religion, Mac Milan
Publishing Company, New York and London, volume 7, 1987.
4. Mas'ud, Khalid, "Islamic Law", in the Muslim Almanac, ed. Azim A. Nanji,
Gale Research Inco, 1996. Mohd Daud Bakar.
5. "AI-Suyulah. The Islamic Concept of Liquidity", paper presented at the

International Islamic Capital Market Conference, Organised by the Securities
Commission, Kuala Lumpur, 15-16th. July 1997.
………………"Islamic Commercial Law for Bankers", paper presented at the

Workshop
on Interest-Free Banking Products, organised by EON Finance Bhd., Subang,
20th October 1996.
……………..."Making" Takaful Mandatory -From objectives of Shari'ah

(Maqasid al-Shari'ah) Perspective", paper presented at Labuan International
Summit on Takaful (Insurance), organised by BIMB Institute of Research and
Training Sdn. Bhd. Labuan, 19-20th June 1997.
6. Sachedina, Abdulaziz, "Law. Societv and Governance in Islam". in the Muslim

Almanac, ed. Azim A. Nanji, Gale Research Inca, 1996.
7. Schacht, An Introduction to Islamic Law,Oxfard University Press, 1964.
18
8. Weiss, Bernard, "The Primacy of Revelation in Classical Islamic Legal

Theoryas Expounded by Sayf al-Din al-A midi ", Staudia Islamica, val. 59,
1984.
……………., " Interpretation in Islamic Law: The Theory of Ijtihad", American

Journal of
Comparative Law, vol. 206,1978.
9. Al-Zuhayli, Usul al-Fiqh al-Islami, Dar al-Fikr, Damascus, 1986.
18

Developing Modern Islamic Financial System Via Ijtihad

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Developing Modern Islamic Financial System Via Ijtihad

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Developing Modern Islamic Financial System via

DEVELOPING MODERN ISLAMIC FINANCIAL SYSTEM VIA

Assoc. Prof. Dr. Mohd Daud Bakar (IIUM)

Commercial transactions particularly in banking and finance matters

Fiqh which literally means intelligence, is a result of an independent exercise of

2.0 THE LEGACY OF ISLAMIC FIQH AND VARIOUS GUILDS OF ISLAMIC

individual judgment in the derivation of a judicial decision in the interpretation of

3.0 SOURCES AND PRINCIPLES OF LAW AS DOCUMENTED IN ISLAMIC

spirit, wisdom and justice of Islam. It is a well-considered and balanced opinion of a

Relatively speaking, among all subsidiary sources, qiyas or analogical reasoning is

A has the properties X, Y,

Therefore, B must have the rule J

lessee is also a partner to the lessor by virtue of musaqat contract (partnership in

In commercial issues as in other delicate issues, an accurate understanding

4.0 IJTIHAD AS A TOOL IN DEVELOPING ISLAMIC FINANCIAL

As for developing Islamic financial system, the task of i]"tihad; it is respectfully

2. Faruki, Kamal, Islamic Jurisprudence, Karachi, 1962

5. "AI-Suyulah. The Islamic Concept of Liquidity", paper presented at the

………………"Islamic Commercial Law for Bankers", paper presented at the

……………..."Making" Takaful Mandatory -From objectives of Shari'ah

6. Sachedina, Abdulaziz, "Law. Societv and Governance in Islam". in the Muslim

7. Schacht, An Introduction to Islamic Law,Oxfard University Press, 1964.

8. Weiss, Bernard, "The Primacy of Revelation in Classical Islamic Legal

……………., " Interpretation in Islamic Law: The Theory of Ijtihad", American

9. Al-Zuhayli, Usul al-Fiqh al-Islami, Dar al-Fikr, Damascus, 1986.

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