Shariah Principles in Islamic

Finance

Assoc. Prof. Dr. Mohamad Akram Laldin

Executive Director, ISRA

Page  1
 PRESENTATION OUTLINE

 Shari’ah

 Shariah vs Fiqh

 Dynamism of Shariah

 Objectives of Shariah

 Islamic Law of Contract

 Understanding Qawaid Fiqhiah

(Islamic Legal Maxim)

(2)Page  2
 WHAT IS SHARIAH?

Literally means ‘path to watering place’

Technically, a path to tread for guidance in this world
/ Commands, prohibitions, values prescribed by Allah
for His slaves either through Al-Quran or As-Sunnah
(the teachings of the Prophet Muhammad s.a.w.)
Normally, the Sharī’ah is described as ‘Islamic Law’.
But the boundaries of Sharī’ah extend beyond the
limited horizons of law.
Sharī’ah is a set of norms, values and laws that go to
make up the Islamic way of life .
According to one observer, the Sharī’ah is the
“epitome of Islamic thought, the most typical
manifestation of the Islamic way of life, the core and
kernel of Islam itself” .

(3)Page  3
 ISLAM & Components of Shariah

I`tiqadiyah `Amaliyah Akhlaqiah

(Belief) (Dealings) (Morality)

Ibadah Muamalah
(Human with Creator) (Human with human)

Economics Family Law Criminal Law Politics

Issues in Islamic finance

(4)Page  4
Approach in Deriving Hukm Syar’I (Islamic Legal Ruling)

Ibadah (Worship) Muamalah (Dealings)

 Fixed
 Determined by God
 Original Ruling is prohibited
unless there is a valid justification
that explains its permissibility
 Otherwise, it is considered bidaah
(innovation)
 Combnation of fixed and
flexibility
 Based on premise:
‫األصل في األشياء االباحة‬
“The original ruling is permissible”
 Unless there is a clear and valid
justification that suggest
otherwise
 Understanding the ‘illat
(rationale) and maslahah

Page  5 (5)
 Characteristics of Shari`ah

Revelation
from Allah

Emphasis on
Universality of
general
Shariah
principle

Serves as raw
material to guide
human race

(6)Page  6
 Two Vital Sciences in Shari’ah

• Literally : comprehension or understanding

• Technically: the science of understanding the
Fiqh derived rules obtained from their particular
sources or the exercise of intelligence (ijtihad) in
deciding a point of law from its sources

• Literally: basis of fiqh or also called source of

Usul Islamic law

• Technically: the science to derive legal rules

Fiqh
from its sources. Knowledge of the rule of
interpretation.
• It results into the Dynamism of the Shari’ah

7 Page  7
 Characteristics of Fiqh
• Humanly acquired through the process of ijtihad
(legal reasoning).
• A result of deduction and analysis of the Shari`ah
sources
• Detailed rulings of any related issues
• Flexibility and subject to change and modification
in many instances

(8)Page  8
Components of Fiqh
F
i
q
h

a
l
-
Fiqh
M Ahwal Etc.
Shakhsiyyah (family matters)
Ahkam al-Qada’ (administra-tion
Ahkam al-Siyasah (political of justice)
matters)
Fiqh al-Ibadat (worship)
u Fiqh al-Jinayat (criminal)
`
a
m
a
l
a
t

(
c
Page  9
o
(9)
 Rulings of Fiqh

Sunnat Mubah Makruh Haram

Wajib
(Recomanded (Permissible (Undesirable (Prohibited
(Compulsory)
) ) ) )

Page  10 (10)
 Differences between Shariah & Fiqh

Shari`ah Fiqh

Divine Humanly acquired through the

process of ijtihad.

Comprehensive teaching Detailed rulings of any related

(general principles for general issues
application)

Raw material which is not Flexibility and subject to

subject to change change and modification in
many instances

(11)
Page  11
 12

Sources
Exercise Pluralism Dynamism
of
of Ijtihad of Fatwa of Shari’ah
Shari’ah

Page  12 (12)
 Sources of Shari’ah

Secondary Sources: Primary Sources:

 Ijma` (consensus) 1. Qur'an
 Qiyas (analogy)
 Istihsan (juristic
2. Sunnah
 sayings
preference)
 (sunnah qawliyyah)
`Urf (customary practice)
  practices
Maslahah (public interest)
 (sunnah fi`liyyah)
Istishab (presumption of
 tacit approvals
continuity)
 (sunnah taqririyyah)
Etc.

Page  13 (13)
 Primary Sources
1. Al Quran
• Divine revelation (book) that contains the basic rules
of law - comprehensive
2. Sunnah
• The tradition of the Prophet (in the form of saying, practices & tacit
approval) that explains & extends the Quranic injunctions
3. Ijma’
• The unanimous decision of the Muslim scholars (no dissenting opinion)
4. Qiyas
• Analogical deduction/ legal reasoning (ratio decidendi ) of a ruling
• Comparison of a case not covered by the text with a case covered by the
text on account of their common Shari'ah value (‘illah/cause) in order to
apply the law of the one to the other

(14)
Page  14
 Secondary Sources
1. Juristic preference (Istihsan)
• a method of exercising personal opinion in order to avoid rigidity and unfairness which might result from the
literal enforcement of the existing law.

2. Presumption of continuity (Istishab)

• Istishab means the remaining of the facts or rules of law which has been proven in the past are presumed to
remain in the absence of any evidence /decision to the contrary.

3. Custom (Urf)
• the general practices of the people that does not contrary to the Shariah principles.

4. Consideration of public interest (Masalih al-Mursalah)

• Maslahah is the consideration which secures a benefit or prevents harm but is, in the meantime, harmonious
with the aim and objective of the Shari`ah.

5. Blocking the means (Sadd al-Dharai’)

6. Practice of the people of al-Madinah (‘Amal ahl al-Madinah).

(15)
Page  15
 Ijtihad
 A process of a systematic reasoning to reveal the rule of law

 Making use of all one’s ability in the search for the legal status based on sources of
Islamic law

 Ijtihad - door to divergent opinions

 the scholars may derived to different ruling on the same issue due to differences of
methodoly / sources utilised in the process of ijtihad

 Opinions of scholars (ijtihad) are represented in the forms of :

 fatwas (legal opinion of Jurist)
 Qada’ (judicial judgment of court); and
 Fiqh (academy writings of jurist and scholars)

 This renders Islamic law (fiqh, fatwa & qada’ ) ‘plural’

(16)
Page  16
 Formulation Of Legal Rulings
Shari’ah (Quran & Sunnah) Primary Sources

Decisive texts Non-Decisive texts

Undergo interpretation
Applied directly as (ijtihad)
legal rulings according to recognised
(hukm shari`i) Methodology
(usul al fiqh)

Legal rulings (hukm fiqhi) Secondary Sources

ISLAMIC LAW

Page  17
Ijtihad of a Scholar

Ijtihad is the best and The mujtahid (scholars)

systematic effort in the must preserve professional
search for an opinion
for the legal rule integrity & diligence
and adopts a systematic
standards of interpretation
(usul fiqh)

The process
should be void of
any negligence and
non-professional
conduct of
mujtahid

Page  18
The Result of a Scholar’s Ijtihad

The result of the

exercise of
opinion is always
“right” with
respect to ijtihad
‫إذا حكم الحاكم فاجتهد ثم‬
‫أصاب فله أجران وإذا حكم‬
‫فاجتهد ثم أخطأ فله أجرا‬
“ If a judge makes the
right decision through
ijtihad, he shall be
doubly compensated.
However, if he err, he
shall be compensated
A scholar can be once”.
‘right’ in his
professional
conduct as a
scholar without
necessarily being
‘right’ in his
conclusions.

Page  19
Factors for Divergence

Necessity

Public Interest

The Factors of New Ruling / Departure from Strict Ruling

Juristic Preference

Sadd Al Zara’i’

Page  20
Pluralism of Fatwa

Pluralism relates Pluralism of

to differences and Fatwas has been
disagreements in an integral
branches of law element in the
(furu’) instead of development of
principles of law Islamic Law vis-à-
(usul) vis ijtihad

On the contrary, it
The very basic
has to be
premise of Islamic
constructed from
Law (i.e. fiqh) is
raw materials
that it is not given
which are given
ready made.
and revealed.

Page  21
Result of Pluralism of Fatwa

Offers wider choice

to different
segments of the
society in different
time or place
Leads to
divergent
opinions which
are not
reconcilable and
tolerable

Page  22
RESULTS OF PLURALISM OF FATWA

Harmonization
• Yes, should work towards it but not easy
and not all time possible. Some
differences are inevitable.

Standardization
• Possible: Basic concepts and frameworks
• Not possible: Specific practices,
operation and structures
Page  23
MAQASID OF SHARIAH

• The benefits or
interests which are
deemed necessary
from Syariah
• Objectives and perspectives to
wisdom (hikmah) protect and
as prescribed by
Shariah in all its
preserve the five
rulings to protect basic essentials
and preserve the
benefits and
interests
(maslahah) of
society

Page  24
 ‫وما ارسلناك إال رحمة للعالمين‬
“And We have sent you (O Muhammad) not but a mercy to the
whole universe” (Al-Ambiya:107)

Alleviate Hardship Eliminate Prejudice

Justice

Maqasid as-Shariah (The Objectives of Shariah)

Religion
Wealth
Intelect
Life Posterity

Preservation and Promotion

Page  25 (25)
 Application of Maqasid Shari’ah in Islamic Finance
 In Islamic banking activities, especially, in financial transactions, to
ensure consistency of form and substance in the following matters:

‘Aqad Legal Documentation

Financial Reporting Maqasid Al Shari’ah

This is to ensure that the system is ‘Islamic’ and not merely Shari’ah
compliant.
 Realization of CSR by IFIs and preserving rights of consumer.
 To avoid imitating conventional products and dealing with debts, hence
promoting profit-sharing products for more shared prosperity.
 Enhancing retail products development for the benefit of larger
consumer.

(26)
Page  26
 MAQASID PARADIGM
Satisfying
financial
operation

Fulfilling Shariah
legal Compliance
documen- is Only
tation About

Focus on
Form of
Contract
(27)
Page  27
 MAQASID PARADIGM
Compliance
in FORM &
SUBSTANCE

Instead,
Ethical Shariah
Operation Compliance
Requires

Socially
responsible
activities
(28)
Page  28
Highest Objectives of Shariah: The Aim

Islamic finance is to open up new horizons for business,

commerce and banking and uphold social justice

Progress towards genuine operation and distance from

conventional practices.

Islamic finance will be ‘the option’ and not merely an ‘alternative’

to the conventional system; a socially responsible finance system.

Islamic finance should assist in the development of Islamic

economics as a whole

Page  29
 Development of Rulings in Transactions

AL-QURAN
Islamic law of contract starts with Quranic verses which contains
both rudimentary elements of several types of nominate contracts
& certain contractual maxims {40 verses on 12 types of contract
(exclude contract of marriage)}

AL-SUNNAH
Al-Sunnah supplement the Quranic groundwork &
expand the application of general injunctions

IJTIHAD OF MUSLIM JURISTS

The law (general principles) were later developed
by jurists using the mechanism of usul al-fiqh

Page  30 (30)
 Development of Rulings In Transactions
 The Quran gives mostly very general principles and rules on contracts
and commercial transactions, e.g.:
– the basis of wealth transfer is contract by mutual consent; al Nisa’ (4:29)
– the need to fulfill contractual obligation; al Maidah (5:1)
– the prohibition of riba (usury), gambling and cheating in contract
 The Prophet further supplements the general principles and rules laid
down in the Quran, sometimes by giving more details, e.g.:

(31)
Page  31
 Cont’d…
– further emphasis on full consent and satisfaction by the parties, while giving
examples of situations where consent may be defective (e.g. mistake,
defective product, lack of understanding due to infancy or insanity, under
duress, etc.)
 Prohibition of fraud, cheating and manipulation
 Encouragement of honesty, transparency and disclosure
 Explaining further on the prohibition of riba and its types

(32)
Page  32
Cont’d…
 Approving certain existing commercial and trade practices in the
society at the time (e.g. partnership contracts, advance payment sale
or salam)
 The scope and application of this branch of law is extendable to new
cases and situations which ensures the dynamic development of
Islamic law and fiqh al mu`amalat itself.
 This dynamism contributes to further development of Islamic
instruments in the financial system as evidenced today.

Page  33 (33)
 In Essence, Transaction under Islamic Law
Emphasizes on the following:

Avoidance of Batil
Justice to both
(unfairness,
seller and buyer
deception &
(full satisfaction)
uncertainty)

Seller needs
Prevention
to be more
from disputes
vigilant

Page  34 (34)
 FUNDAMENTALS OF CONTRACT
(AQAD) IN ISLAMIC LAW

Page  35 (35)
Theory Of Contract In Islamic Finance

Any transfer of wealth or property has to be made through a valid contract

or `aqad
Underlying rule : all contracts are deemed permissible except when there is
contravention of any established principles of Islamic law
The parameter : Avoidance of any contravention of the established
principles and prohibitions in Islamic law

The Quran says:

“O you who believe! Eat not up your property among yourselves unjustly
except it be a trade amongst you, by mutual consent…” (4:29)

Page  36 (36)
 Any transfer of wealth or property has to be
made through a valid contract or `aqad

Divine Sources Mutual Consent

(Quran & Sunnah) (Redho)

Page  37 (37)
 Definition of a contract in Islam
• Contract in Islamic law is termed as `aqd or `uqud
(plural)
• `Aqd literally means: bond or knot
• `Aqd legally means: the linking of offer and acceptance,
resulting in legal effects on the subject matter of the
contract.
• In Islamic law, `aqd includes both bilateral as well as
unilateral contracts

(38)
Page  38
 PILLARS OF CONTRACT

Contractual expression or sighah, i.e. offer and

acceptance (ijab wa qabul)

Parties to the contract (`aqidan)

i.e. offerer or and offeree

Subject matter of the contract (mahall al ‘aqd)

i.e. the goods and the price/consideration

Page  39
Contractual Expression

Clear &
Unambiguous

Unity of
Conformity contractual
between Offer - session may
Acceptance be actual/
Offer and constructive
Acceptance
made in 1
contractual
session

Page  40
Parties to Contract

Fully
competent to
enter &
execute
contract
Observe
Understand
impediments
contract’s
to legal
implication
competency
Possess legal
power/authority
to conclude the
contract

Page  41
Subject Matter of Contract

In existence or
capable to be
delivered

Known to the
A valuable item
parties

Legally
recognized
material

Page  42
In Summary:

ESSENTIAL CONDITIONS OF
A VALID CONTRACT

CONTRACTUAL CONTRACTING SUBJECT

EXPRESSION (Sighah) PARTIES MATTER
(Aqidan) (Mahall al `aqd)

Offer Acceptance Offeror Offeree Goods/ Price/

asset consideration
• Clear • Of full contractual capacity
• Consensus ad idem (ahliyyah al-ada’ al-kamilah) • Something of value
• Corresponding offer • Legal authority to contract • Ascertainable
• As owner & in possession • Legal
& acceptance
of asset
• legal representative
(agent, guardian etc.)

Page  43 (43)
 Conditions in Contract
• Conditions in contract can be classified into two main categories:
▫ The Shari' Conditions - these are the conditions set by the lawgiver
which must be fulfilled by any contract which includes all the
conditions stated earlier for the pillars of contract.

▫ Additional conditions - these are the conditions agreed by the

parties involved in the contract.

(44)
Page  44
 Conditions in Contract (cont’d…)
• The additional conditions can be any conditions as long as these
conditions are not contravening the objectives of the said contract.
• For instance, the selling and buying contract with the condition that the
seller will have full right to utilize the contracting item after the contract is
concluded.
• This condition contravenes the objective of the buying and selling
contract which is the complete transfer of ownership including the
usufruct.
• Profit guaranteeing in Mudhrabah (profit sharing) contract
• Lost is borne by one party in Mushrakah (profit-loss sharing) contract

(45)
Page  45
 Al-Zulm/
Riba (Usury) Qimar
(Gambling)

Shariah Parameter Gharar

in the Theory of (Uncertainty)
Contract
(‫م‬X‫لتحري‬XX‫بابا‬X‫س‬X‫)ا‬

Islamic Contract

Page  46 (46)
In Summary:

GENERAL PRINCIPLES OF ISLAMIC TRANSACTIONS

CONTRACT (AL-AQD) AS BASIS OF

TRANSACTIONS

Mutual consent Lawful Contractual

( al-taradi ) AVOID Objective

Riba Gharar Maysir Other prohibitions

(Usury) (Uncertainty) (Gambling) Eg: liquor, pork

Page  47 (47)
Riba (Usury)

Literally A surplus of
means excess, commodity or
increase, an excess in
expansion, return without
growth counter value

Riba was made

forbidden in
12 Quranic
the 8th or 9th
verses dealing
year after the
with Riba
Hijrah (flight
from Makkah

Page  48
 Categories of Riba
1. Riba al-Qard
(Riba in Loan)
• Applies to loan or to any debt
regardless of the cause of that
debt be it because of a loan
contract or because of any
transaction like a price that has
not been paid yet by the buyer in
a sale contract
• Also known as Riba al-Quran
Page  49
2. Riba al-Buyu’
( Riba in Exchange)
• Applies to sale transactions in certain
commodities
• It has two types:
1. Riba al nasi’ah (delay in paying or
delivery of one or the two sold items);
and
2. Riba al fadl (exchanging one ribawi
commodity for the same commodity
but unequal in amount.
• Also known as Riba as-Sunnah
(49)
 Prohibition of Riba (in Exchange)

Sunnah of the Prophet s.a.w.:

“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates,
salt for salt - like for like, equal for equal, and hand-to-hand (spot); if the
commodities differ, then you may sell as you wish, provided that the exchange is
hand to hand or spot transaction

Interpretative Efforts

Application

Currency
Riba (Usury)
Same denomination :
• At par Same type:
• Spot • At par
Different denomination: • spot
• Spot Different type:
• spot

Page  50 (50)
Examples
• In loan transactions, riba
will occur in:
▫ There is excess or surplus over
and above the loan capital
▫ Determination of surplus in
relation to time
▫ Stipulation of surplus in loan
agreement
Page  51
• In debt securities/bonds
issuance, riba can occur in:
• All interest based lending activities
(conventional bonds)
• Fixed return on deposits in
conventional banking (designated
account for receivable of the bonds)
• In the secondary trading of debt
securities (if the transaction is not
spot & if there is discounting) -
according to global standard
(51)
 Gharar
 Literally: Deceit, fraud, uncertainty, danger, peril, or hazard that might
lead to destruction or loss
 Technically: uncertainty and/or ignorance of one/both
parties in a contract over the substance or attributes
of the object of sale, or doubt over its existence and
availability at the time of contract

Rationale for prohibition:

 To ensure full consent and satisfaction of the parties in a contract
 Gharar in commercial contracts may lead to injustice, exploitation and/or
enmity among contracting parties

(52)
Page  52
 Types of Gharar

1 2

Gharar yasir Gharar Fahish

(minor or slight) (major or excessive)

Tolerated and will not Not tolerated and may

invalidate a contract result in contract
e.g. Bay salam (forward voidability
sale) e.g. Bay ma’dum (sale of
inexistence object)

(53)
Page  53
 Gharar Is Tolerable
Exceptional Contract
Charitable Contract
(e.g. salam, istisna)
(e.g. hibah, takaful)

Gharar is tolerable!
No Issue of Gharar!
Why?
Why?
1. Public needs
(hajiyat and It is a unilateral
maslahah) contract and hence
2. Gharar is trivial does not lead to
with stipulated dispute
conditions

(54)
Page  54
 Understanding Islamic Legal Maxims (‫لفقهية‬XX‫عد ا‬X‫لقوا‬XX‫)ا‬
• Islamic legal maxims are general Fiqh principles which are presented in a
simple format consisting of the general rules of Shari’ah in a particular field
related to it.
▫ E.g: Majallat al-Ahkam al-Adliyyyah (The Mejelle)
▫ Codification of shariah principles in the form of standard provisions
/guidelines

 These legal maxims are used in the formation of Islamic law as principles to
deduce many rules of Fiqh. E.g. The original ruling is permissibility

(55)
Page  55
 ‫اليقين ال يزول‬
‫األمور بمقاصدها‬
Matters are determined by“ ‫بالشك‬
”intention What is certain cannot be“
”removed by doubt

5 Major
‫ال ضرر وال ضرار‬ ‫المشقة تجلب‬
Harm shall not be inflicted“ Maxims
”nor reciprocated
‫التيسير‬
”Hardship Begets Facility“

‫العادة محكمة‬
What is certain cannot be“
”removed by doubt

(56)
56Page  56
 Islamic Maxim Description
‫الع=برة ف=ي العقود للمقاص=د وال=معان=ي ال‬
‫األمور بمقاصدها‬ ‫لأللفاظ والمباني‬
Matters are“
“In contracts, effect is given to
determined by intention and its meaning and not
intention
words and forms”
- In the event of difference between
implicit and explicit intention,
judgement based on intention to the
extent that it may be established
Any ruling whose implementation
‫المشقة تجلب التيسير‬ causes hardship to a person or the
action is unable to be performed by a
Hardship Begets“ particular person for a specific
”Facility acceptable reason, then there are
alternatives to overcome the
hardships.
Examples of Application
If 2 persons conclude a contract
apparently of a loan but in
consideration for which a specific
rental is provided for, the contract
would be regarded as a contract of
hire as its real meaning indicates
not a loan as the wording would
suggest.
Basic ruling for ijarah, a person
cannot cancel the contract unless
it is agreed by both contracting
parties. However such ruling is
exempted if the lessee has to
travel for a valid reason and hence
not occupying the premise.

Page  57
(57)
 Islamic Maxim Description
Any doubt that occurs when
‫اليقين ال يزول بالشك‬ certainty prevails will have no
power to remove the certainty.
What is certain“ Likewise, if something has not been
cannot be removed established with certainty, it will
”by doubt remain so until proven otherwise.
‫العادة محكمة‬ Custom in this maxim means the
“Custom is practices of the people whether
Arbitrary” they are the general practices of the
people or the practices of certain
group of people.
Any dispute arises on a particular
transaction, the normal practice in
that particular transaction should
be the arbitrator to resolve the
dispute.
(58)
Page  58
Examples of Application
If a person has taken a loan from
another person and is in doubt
whether he is still in debt, he is
considered to be in debt until
there is proof to show otherwise.
The custom that involves
transactions is the sale of
offering and accepting or bay` al-
ta`ati, which is normally
concluded without the utterance
of offer and acceptance.
 ‫يتحمل الضرر الخاص لدفع‬ ‫الضرر االشد يزال بالضرر‬
‫ضرر عام‬ ‫االخف‬
“To repel a public harm a private “Severe damage is avoided by a
damage is preferred” lighter damage“

‫الضرر يدفع بقدر اإلمكان‬

‫الضرر يزال‬ “Harm is repelled as far as
“Harm is put to an end” possible”

‫ال ضرر وال ضرار‬

“Do not Inflict Harm nor reciprocate harm”

‫الضرر ال يكون قديما‬ ‫درء المفاسد مقدم‬

“Harm must not be ‫الضرر ال يزال بمثله‬ ‫على جلب المصالح‬
sustained” “Harm cannot put to an end “The repealing of harm is
to by its like” preferred to the
attainments of benefits”

(59)
Page  59
 Islamic Maxim Description
Any potential harm to the society
has to be prevented as much as
‫الضرر يدفع بقدر‬ possible. This resembles the
proverb ‘prevention is better than
‫اإلمكان‬ cure’. It is easier to prevent
Harm is repelled as something from happening rather
far as possible than treating it when it has already
happened.
Examples of Application
Dumping toxic waste as a form
of externalising a firm’s cost to
society must be averted, such
that it must not even be
considered as an option for cost-
minimising strategy.

Any harm must be stopped or If a firm is found disposing its

abolished. It is obligatory to remove harmful waste (toxic) in a
the harm and try to rectify the residential area, such an act must
damage be stopped. If the public suffers
‫الضرر يزال‬ health problems as a result of
Harm is put to an such an act, the firm must take
end the responsibility and pay
compensation accordingly.

Page  60 (60)
 Islamic Maxim Description Examples of Application

In an attempt to remove harm or In avoiding risky investments

‫الضرر ال يزال‬ damage, it must not invoke another which may harm the shareholders’
‫بمثله‬ type of harm either in the same
degree of harm or worse.
fund, managers must not instead
invest in illegitimate activities
Harm cannot put to (based on Sharī’ah viewpoint),
an end to by its like albeit higher returns.

If harm or damage is unavoidable, the In the event where a banking firm

‫الضرر األشد يزال‬ strategy is to choose the lighter has no other option except to
‫بالضرر األخف‬ damage between those two. Another
similar maxim is that the smaller of
reduce a certain number of
employees or close branches in
Severe damage is
avoided by a lighter two harms is chosen. order to remain sustainable, it may
damage do so because the damage of a
collapsed bank is more severe than
the suffering of the few workers.

Page  61 (61)
 Islamic Maxim Description Examples of Application

One has to succumb to the damage Avoiding of financing companies

‫يتحمل الضرر‬ which is private in nature in order to that manufacture illicit drugs or
‫الخاص لدفع‬ prevent social harm. In other words,
a firm’s operation should be biased
activities detrimental to public
consumption is deemed
‫ضرر عام‬ in favour of society if two harmful necessary even at the expense of
To repel a public acts are conflicting. undermining individual profits.
harm a private
damage is tolerated

Anything which may cause harm An Islamic firm which acquires

must be abolished regardless of
‫الضرر ال يكون‬ whether it is old or new. It implies
that any preceding harm must not
‫قديما‬ be allowed to continue although
Harm must not be circumstances which originally
sustained cause such harm might have
changed.
another firm must cease any
illegitimate business activities or
contracts (e.g. investment in
alcohol business, gambling etc.)
which the latter used to operate

Page  62 (62)
 Islamic Maxim Description Examples of Application

If there is a conflict between A bank should avoid financing

harm and benefit, it is obligatory activities, which might be
‫ درء المفاسد مقدم‬to repeal or lift the harm first perceived as productive in terms of
even if by so doing it will remove profits or supposed to satisfy some
‫ على جلب المصالح‬the benefits. This is because demand (e.g. pornography,
The repealing of harm harm can easily spread and gambling, prostitution, promotion
is preferred to the cause severe damage, and hence of alcohol, etc.), but nevertheless
attainments of priority ought to be given to the contain elements which may
benefits aversion of harm over attaining severely damage and bring harm
benefits. to the society, moral, health, etc.

Page  63 (63)
 Other Maxims related to Finance and Commerce:
The original rule in contracts is permissibility.
‫األصل في األشياء اإلباحة‬

Gain is (allowed) with (the undertaking of) risk.

‫الغنم بالغرم‬

In contracts, attention are given to the objects and meaning and not to the word and
form.
‫العبرة في العقود للمقاصد والمعاني ال لأللفاظ والمباني‬

The remaining of a thing in the state in which it was.

‫األصل بقاء ما كان على ما كان‬

(64)
Page  64
 Promote Maslahah
(Public benefit) Entitlement to
Equal, Adequate,
Freedom from Accurate Info.
Riba (Usury)

Promote
Freedom from Brotherhood
Gharar (Uncertainty)

A system grounded
Freedom from on moral and
Dharar (Harm) ethics

Characteristics of
Shariah-compliant Entitlement to
Transaction at
Freedom to Banking and Financial Fair Price
Contract
System
Freedom from Freedom from
Price control & Qimar & Maysir
Manipulation (Gambling)

Page  65 (65)
 General Classification of Contract in Islam

Charitable Contracts Profit-Making Based

(Tabarru`) Contracts

(66)
Page  66
VARIOUS FORM OF ISLAMIC CONTRACT
Deposit-taking Contracts
Safekeeping with guarantee, Profit
sharing (mudharabah); (Loan
without interest (al-Qard)
Fee-based Contracts
Kafalah/Dhaman (Guarantee);
Wakalah (agency)
Equity-based Contracts
Profit Sahring Contract -
Mudarabah, Musyarakah (Profit-
Loss Sharing Contract)
Page  67
Sales-based Contracts
BBA – deferred sale; Murabahah
– cost-plus sale; Bai al-Inah –
sale & buy back, Bai al-Tawarruq
– tripartite sale
Islamic
Contracts Lease-based Contracts
Ijarah Wa Iqtina; Ijarah Thumma
Al-Bai’, Ijarah Muntahia
Bitamleek
Hybrid Contracts
Musyarakah Mutanaqisah
(Dimishing Partnership), AITAB
(Laese and Sale) etc.
Profit Making
Effort No Riba

Risk Liability

© 2011
Page  68 www.isra.my
 THANK YOU

Page  69