Islamic Financial Markets:
Shari’ and Tabi’ Principles
IB1006 Islamic capital market (CIFP1)
Prof. Saiful Azhar Rosly, INCEIF
When one listens to discussions and lectures on Islamic banks, takaful, Islamic funds
and investment, it seems to gravitate on one issue, namely the Shariah guidelines. It
deals with the permissible (halal) and prohibited (haram) as ordained by Allah swt.
Islamic law of contracts (fiqh muamalat) has become indispensable and Shariah
scholars are sought after by many Islamic banks and fund managers.
However, Islamic financial markets do not deal with Divine rules alone as business
cannot run without making decent profits. The operational aspects of the Islamic
markets should also be considered. But how? In what way is the Shariah aspects
related to the mundane, namely the day to day running of the business? Is the
mundane to be considered a secular and worldly affair something Shariah advisors
cannot intrude? If Islamic financial markets are propelled by Shariah values, what
then is the role of reason and sense experience in financial transactions?
To make things simple, the study of Islamic financial markets can be divided into to
aspects, namely the 1) Shari’ and 2) Tabi’. In doing so, one can see the Islamic
worldview in play where the dunya aspect is related in a profound and inseparable
way to the akhirah aspect and in which the akhirah aspect has the ultimate and final
significance. This is the concept of Islamic worldview as expounded by Syed Naquib AlAttas. The dunya aspect relates to the mundane where man applies reason and
experience to run their daily business while the akhirah convey the Divine rules that
man must observe doing the same.
Since the Shari’ principles are derived from the Quran and Sunnah, they are common
in all aspects of financial transactions taking place, whether one deals with Islamic
banks, mutual funds, investments, takaful and financial planning. This is where
Shariah scholars are needed to help market players know and understand what is
halal and haram. These Shariah principles are given by God and remain permanent.
These are given below:
1.
2.
3.
4.
5.
Prohibition of riba
Application of al-bay’ (trade and commerce)
Avoidance of gharar (ambiguities) in contractual agreements.
Prohibition of maisir (gambling)
Prohibition from conducting business involving prohibited commodities such as
pork, liquor and pornography.
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ISLAMIC FIN ANCIAL MARKETS
Shariah Principles
Tabi’ Principles
Islamic banking
Asset-liability
Management (ALM)
Takaful
Risk assessment
4. Prohibition of
maisir (gambling)
Islamic Equities
Fundamental &
Technical analysis
5. Forbidding the
production of prohibited
commodities
Islamic financial
planning
Cash flow
management
1.
Prohibition of riba
2.
Application of
al-bay’
3. Av oidance of
gharar (a mbiguities)
Figure 1.6 Islamic Financial Markets
But each of the above Shariah principles is unique in its own way when one looks
at each particular market at a time. For example, the prohibition of riba is the
cornerstone in the markets of deposits and funds in Islamic banking. However,
when one deals with Islamic investments and derivatives, the gambling (maisir) and
gharar issues seemed more urgent than riba. In takaful, riba, gharar and maisir
factors are equally given importance, although the gambling factor is given more
weight. In Shariah stock screening, more attention is given to the activities of
issuing companies as relatively less given to the gharar factor. That is, first and
foremost, the business must not be involved in the production of prohibited
commodities.
But irrespective of the different emphasis and weights given to each of the Shariah
principles, say on banking or takaful, one thing remains clear. That is, these
principles are meant to promote justice (‘adalah) and equity in business
transactions. God has guaranteed that justice will prevail when man obeys His
Commandments (Shariah). This is the akhirah aspects of the Islamic worldview. It
is about doing it right. By adhering strongly to the Shariah principles, the akhirah
aspect is well-guarded and truly observed by the contracting parties.
While the Shariah principles expounded the equitable nature of Islamic financial
markets, other dimension of market activities need not depend on explicit divine
guidance. This is the tabi’ aspect of financial market activities. It defines efficiency.
It is about doing things right. Tabi’ means natural. It is nature’s way. Tabi’ values
are universal values. Once found, these values can be used by all people,
irrespective of faiths and beliefs. Market players applied knowledge accumulated
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from reason and experience to understand how the market works and operates,
which is a natural thing to do.
Thus knowledge derived from non-divine sources cannot be downgraded as
ungodly. In Islam, ‘ainul yaqin refers to the knowledge derived from sense perception,
namely material (jismani) and facts (haqiqi) wherelse ‘ilm-ul-yakin is based on
reasoning (‘aql) and human judgement (khayali). For example, to reduce cost
per unit, the company should increase output. This is economies of scale. To
increase sales, it should first conduct marketing research. To look for a credible
partner, it should conduct due-diligence and so on. The tabi’ aspect of business
cannot be ignored even when it runs under an Islamic label. Muslims and non Muslims alike are expected to obey the tabi’ law. It has less to do with the faith
(aqidah).Working against this law is only inviting disaster and chaos. Business
is doomed to fail when the tabi’ law is ignored.
As an example, to conduct an Islamic venture capital business, the Shariah
principles are well-known and readily given by the Quran. But the tabi’ principles is
different from that in banking. In Islamic venture capital, the tabi’ aspects deal with
1) deal-making 2) due-diligence and 3) market analysis. In banking the tabi’
aspects deal with 1) asset-liability management 2) risk-management
and 3)
marketing research. Likewise, in takaful the tabi’ aspects looks at 1) risk
assessment 2) promotion and 3) fatality investigation. In equities, the fund
managers conducted both fundamental and technical analysis to study what halal
stocks to buy. They must know how to calculate the yield and when to exit the
market. Defining what is halal and haram constitutes the Shariah aspects, but how
and when to buy and sell is sorely based on reason and facts. Man does not have to
resort to the Quran or Sunnah to make economic forecast or execute stock
purchases. The role of the intellect (‘aql) is paramount here. This is what tabi’ law
stands for.
The concept of tawakul can be used to highlight the interlinking of Shariah and tabi’
law. Investing in Shariah approved stocks implies that firstly, one must know what
constitutes the halal stocks. This is the Shari’ aspect. Once, the screening is done,
the tabi’ aspect is in play. To select a stock, one should consider its price-earning
ratio, the return on investment, the earning per share. This is the company
analysis. But company performance can be affected by macroeconomic variables
such as inflation, unemployment, the gross domestic product and exchange rates.
This is where knowledge on the market and economy is crucial. This is tabi’ law.
The Shariah scholars know less about these things as they have no expertise on
modern economics and finance. Their main role is to define and execute the Shariah
sreeening process and ensure that the Shariah stocks are always free from the
prohibited elements. But sometimes the tabi’ operations may implicate riba or
gambling.For example, to avoid currency risk, a Shariah approved company may
indulge in currency trading as it tries to hedge against market volatilities.
Promotion and marketing of mutual funds may be associated with unethical
practices. Thus, there are some tabi’ operations are are purely free from Shariah
rules but some may not. This is because the Shariah does not only deal with the
legal aspects (hukm) of financial transactions but also the moral and ethical aspects
(akhlak).
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