An Introduction to basic
concepts of Islamic Law
(Shari’ah) & Islamic Finance
- Mufti Z Bayat (MA-RAU)
Director: Islamic Information Centre, Durban
muftizb@gmail.com
zb@darulihsan.com
The Sharī‘ah (Islamic Law) literally means
“the path to follow”, is a legal system that dates
back 1400 years. It is based on revelation, which
has its own underlying rationale. It differs from
modern or conventional systems of law in two
respects:
the scope of Sharī‘ah is much wider: it is not merely a
system of law, but a comprehensive code of behaviour
that embraces both private and public activities
Islamic concept of law is based on Divine revelation: In
Islamic jurisprudence it is not the society of law makers
alone that mould and fashion the law, but law that is
rooted in divine revelation
SCOPE OF ISLAMIC LAW
Worship and rituals
Dietary Law (Halaal edibles)
Family Law
Commercial/Finance Law
Criminal Law
Administrative & International Law
Ethics, Etiquette and Values
Characterisation of Shariah rules:
Obligatory (wājib, fard)
Desirable but not obligatory (sunna,
mandūb)
Neutral (mubāh)
Undesirable but not prohibited (makrūh)
Prohibited (harām)
Islamic Commercial / Finance Law
covers issues such as
- trade, leasing & hiring, debts, interest, gifts,
endowments, deposits, guarantees, agency,
partnerships, unethical financial practices, etc.
- Islamic Law (Shari’ah) based on justice and equity to
safeguard overall interests of mankind
- Commercial Law of Islam secures propriety rights of
mankind by prescribing ethics & fairness and prohibiting
exploitation & usurpation
ISLAMIC ECONOMICS:
Three Global Economic systems
Capitalism
Socialism
Islam
 Comparison between 3
Economic Systems
Prohibitions in Financial Activities
Avoidance of Haraam
Transactions
Avoiding all forms of unethical
activities such as gambling,
drugs, pornography or
dubious transactions
Avoidance of Qimar
Gambling and Chance
Based (zero-sum)
transactions
Avoidance of Interest (riba)
Risk-free or guaranteed
rate of return on
loaned money or
investment
Equity &
Ethics in Islamic
Financial
Activities
Avoidance of Jahala
Clarity of intentions
and transparency is
imperative in
all dealings
Avoidance of Gharar
Excessive uncertainty in
contracts – eg. entering into
transaction consequence
is out of usual trade norms –
a) Financial Derivatives
b) Insurance Contracts
Avoidance of
Exploitation
Contracts to reflect
justice and fairness
Stocks & Equities – Islamic rules:
 Qualitative Filters
The main business of that particular company should not
violate Shari’ah. Businesses such as financial services,
entertainment, alcohol, gambling etc. are not permitted
for investment
 Quantitative filters
Certain financial ratios and criteria need to be met – not
highly geared, minimal impermissible income
Results (Financial Statements) and Prospectuses
(Memorandum & Articles) of companies are scrutinised
The rise of Islamic Investment
The Islamic investment fund market is one of the
fastest growing sectors within the Islamic financial
system
Assets managed in these funds currently exceed
USD 5 billion and is growing at around 15% per
annum
Prohibited areas include abortion, alcohol,
armament, gambling, human cloning and
pornography. The usury prohibition bars
investment in conventional banks and insurers and
any company that has a gearing of more than 30%
ISLAMIC BANKING: OVERVIEW
 Globally Islamic banking has made a considerable
impact on financial services market
 235 players in global Islamic banking industry with
$309bn in assets
 Conventional banks entering Islamic Banking arena –
with “Islamic windows” potential cannot be ignored
(Wesbank, ABSA, Standard, Old Mutual)
 Islamic banking industry expected to grow to $1 trillion in
2010
 AAOIFI – Bahrain-based international regulating body –
Accounting & Auditing Organisation for Islamic Financial
Institutions
COMPARISON
Islamic Banks: Basic principles
1. The functions and operating modes of
Islamic banks are based on the principles of
Islamic Law (Shariah-based)
2. It promotes risk sharing between provider
of capital (investor) and the user of funds
(entrepreneur)
3. It aims at maximizing profit but subject to
Shariah restrictions
4. Participation in partnership business is the
fundamental function of the Islamic banks
5. The Islamic banks have no provision to
charge any extra money from the defaulters.
Only small amount of penalty and these
proceeds are given to charity
6. Since it shares profit and loss, the Islamic
banks pay greater attention to developing
project appraisal and evaluations
7. Islamic banks give greater emphasis on
the viability of the projects
8. The status of Islamic bank in relation to its
clients is that of partners, investors and
trader, buyer and seller
9. If the account is based on the participation
concept, client has to share in loss
Conventional Banks: Basic Principles
1. The functions and operating modes of
conventional banks are based on man-made
principles
2. The depositor is assured of a
predetermined rate of interest
3. It aims at maximizing profit without any
restriction
4. Lending money and getting it back with
compounded interest is the fundamental
function of the conventional banks
5. It can charge additional money (penalty
and compounded interest) in case of default
6. Since income from the advances is fixed, it
gives little importance to developing expertise
in project appraisal and evaluations
7. Conventional banks give greater emphasis
on credit-worthiness of the clients
8. The status of a conventional bank, in
relation to its clients, is that of creditor and
debtors
9. A conventional bank has to guarantee all
its deposits
MODES OF ISLAMIC BANKING
Qardh/Wadiah – Current account
Murabahah – Cost plus profit
Mudharabah – Participation
Musharakah – Equity based
Diminishing Musharakah – asset finance
Ijarah – Lease
Salam – forward sale
Istisna – project financing
GENERAL ISLAMIC PRINCIPLES
GOVERNING CONTRACTS (1)
1. All contracts and transactions are deemed
permissible unless rendered unlawful by a
prohibiting factor. The broad principal of Shariah
holds true:
‫ االصل في االشياء االباحة‬- “All things in Shari’ah are in
their original nature lawful and permitted”
All things are permissible unless prohibited by
specific texts from Quran and Sunnah or rulings
derived from these or contradict the objectives of
the Shariah
2. Free and natural consent of parties. Thus consent
obtained due to coercion, fraud, misrepresentation
or in intoxication, or in jest or mistake or done
fictitiously will invalidate contract
GENERAL PRINCIPLES (2)
3. Gharar – which maybe broadly defined as
uncertainty of the outcome of a contract which
could lead to disputation and litigation
- Examples of Gharar – based transactions:
1. Transaction based on object which may be nonexistent
2. Transaction based on object whose quantum is
unknown
3. Transaction based on object whose acquisition
is doubtful
4. Transaction based on object unknown to the
parties
5. Transaction based on an event unsure of
occurrence
- Gharar would entail sale of fish in water, birds in the
air, foetus in the womb, crops that may grow in
future, etc.
GENERAL PRINCIPLES (3)
4. Interest based (Riba)
5. Maysir – Speculative transactions
6. Deception – Tasriyah, Najash,
Ghabn-Fahish, Tatfif, etc.
7. Conditional/contingent transactions
(Bay-wa-shart)
8. Combined transactions (safaqa-fisafaqatain)
RECOMMENDED READING
Introduction to Islamic Finance – Mufti
Taqi Usmani (downloadable)
Dr Umer Chappra
Dr Najatullah Siddiqui
Dr Yusuf De Lorenzo
Dr Khurshid Ahmed
Dr Rushdie Siddiqui
THE END
Questions ??