A HANDBOOK FOR

ASSOCIATE QUALIFICATION
IN ISLAMIC FINANCE

ISLAMIC BANKING & FINANCE INSTITUTE MALAYSIA

Recommended learning material for

PHILOSOPHY AND FUNDAMENTAL OF SHARIAH FOR
ISLAMIC FINANCE
 First Published by
IBFIM 200701005076 (763075-W)
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First Edition 2016

©IBFIM 2016
Revised Edition 2020

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CON TENTS

PAGE

TOPIC 1
INTRODUCTION TO SHARIAH AND FIQH 1-15

TOPIC 2
RULE-MAKING PROCESS IN ISLAMIC LAW 16-50

TOPIC 3
RULE-MAKING PROCESS IN MODERN ISLAMIC BANKING AND FINANCE 51-58

TOPIC 4
OVERVIEW OF FIQH AL - MU‘AMALAT AL-MALIYYAH 59-71

TOPIC 5
ISLAMIC ECONOMICS AND FUNDAMENTALS OF ISLAMIC BANKING 72-86
AND FINANCE

GLOSSARY 87-92

ABBREVIATION 93-94
Topic 1
Introduction to Shariah and Fiqh

Learning Objectives
At the end of this topic, you will be able to:
• Define the meaning of Shariah
• List the main components of Islam
• Explain the definition and classification of Fiqh
• Explain the relationship between Shariah and Fiqh
• Describe the salient features of Shariah
• Explain the objectives of Shariah

UNIT 1: DEFINITION OF SHARIAH

The word Shariah literally means, ‘the road to watering place’ or ‘the path to be followed’. It is then used
technically as the injunctions revealed to the Messengers of Allah SWT related to law or belief. Other scholars
simply define Shariah as the injunctions of Allah SWT as the way of life. Thus, al-Qaradawi, observed that the
word Shariah in this context is used to mean the religion of Islam itself.

Based on numerous and yet interrelated definition of Shariah, it is safe to conclude that Shariah is the sum
total of Islamic teaching and system, which was revealed to Prophet Muhammad SAW as recorded in the
Quran and the Prophetic tradition of Muhammad SAW. Shariah within this understanding consists of three
components, namely; belief in the Oneness of Allah SWT (‘Aqidah), observance of the rules relating to
conducts (fiqh/Shariah) and code of moral and ethics (Akhlaq).

Topic 1 Introduction to Shariah and Fiqh 1

 UNIT 2: MAIN COMPONENTS OF ISLAM

As indicated earlier, the holistic teaching of Islam is well presented in its three main components namely;
‘Aqidah, Shariah and Akhlaq.

Aqidah

ISLAM
Shariah Akhlaq

Diagram 1 : The Main Components of Islam

'Aqidah
'Aqidah literally means a knot. As far as Islamic tradition is concerned, 'Aqidah generally refers to a firm belief
in the fundamental of Islam which primarily centered at the pillars of Iman. It is a belief system that requires
the highest degree of faith and accepts no doubt whatsoever. This faith ('Aqidah) is founded on the belief
of the Oneness of Allah SWT, His Angels, His Messengers, His Books, Hereafter and His Divine decree. From
this key foundation, stems the entire concepts of Islam, rules and regulations as expounded in the Quran and
Prophetic traditions.

Shariah
Notwithstanding the foregoing, Shariah is also used interchangeably by scholars to mean a branch of Islam
which relates to the practical aspects (al-ahkam al-‘amaliyyah), as opposed to rules of belief (al-ahkam al-
‘iqtiqadiyyah) and rules relating to moral and ethics (al-ahkam al-akhlaqiyyah). The definition of Shariah in
this manner is more specific. It deals only with section of Islam that interacts with human’s action. Al-Qaradawi
suggests that the term Shariah in this instance relates closely to fiqh. Shariah within this understanding is
everything attributable to human conduct whether between himself, his fellow creatures and the Creator.

Akhlaq
Akhlaq is derived from the root word khulq which means to create, to shape and to give form. The term
khulq is used in the Quran and Prophetic tradition that denotes good behaviour or a standard of conduct to
be observed, or the set of moral principles. Simply put, Akhlaq subsumes all actions that are characterised
as virtuous deed (‘amal salih). Imam al-Ghazali defines Akhlaq as an established state of the soul from which
actions proceed spontaneously without any need for reflection and deliberation.
(Imam al-Ghazali: Ihya’ Ulum ad-Din)

2 Topic 1 Introduction to Shariah and Fiqh

 UNIT 3: DEFINITION AND CLASSIFICATION OF FIQH

At the outset, the word ‘fiqh’ literally means comprehension or to perceive deeply, and understanding of the
core of something. In this regards, Allah SWT says in the Quran:

“They said: O Shu‘aib! Much of what you say we do not understand” (Hud 11: 91)

Technically, it refers to the knowledge of the practical rulings of Shariah which is deduced from their respective
particular evidence. Hence, it is apparent that fiqh is limited to comprehension of Shariah that relates to
human conduct and preclude 'Aqidah and Akhlaq. These rulings are not readily available but deduced from a
particular text or evidence. That is to say, fiqh is a result of an independent exercise of jurist’s intelligence in
deciding Shariah ruling. Having said that, jurists are not at liberty in coming to the conclusion of a particular
ruling, instead they are subjected to a proper methodology of ijtihad.

Given the inherent nature of fiqh, it is not a stretch of mind to appreciate the reason of divergence of opinions
that stem out from numerous Islamic Schools of Legal Thought (madhhab or madhahib). The divergence of
opinion in fiqh is very much celebrated in Islam and it serves for at least two purposes:

1. It allows for a certain degree of flexibility in adopting Shariah rulings which suit a particular context that
ever changing by time and place; and

2. It is a form of ‘Ibadah for jurists who exert their intellectual capability in coming to the conclusion of a
particular Shariah ruling.

Classification of Fiqh
Generally, fiqh can be classified into two categories:

1. Fiqh al-‘Ibadah - the rulings that govern the relationship between man and Allah SWT which includes
praying (salah), fasting (saum), almsgiving (zakah), and performing pilgrimage (hajj).

2. Fiqh al-Mu’amalah - the rulings that govern the relationship between man and man, and man and other
creatures of Allah SWT which includes:

a. The rulings related to family law (ahwal al-shakhsiyyah)

b. The rulings governing the commercial transactions between the parties involved in the transaction
(ahkam al-mu’amalah).

c. The rulings concerning the management of finance of the state or the economic system of an Islamic state.

d. The rulings related to the administration of justice in Islam (ahkam al-qada’ wa turuq al-ithbat).

e. The rulings governing the rights of non-Muslims in an Islamic state (ahkam al-dhimmi wa al-musta’min).

f. The rulings determining the relationship between an Islamic government and a foreign government
(ahkam al-siyar).

Topic 1 Introduction to Shariah and Fiqh 3

 g. The rulings governing the political system in Islam (ahkam al-siyasah).

h. The criminal law of Islam (ahkam al-jinayah).

i. Other laws governing the relationship between man and other creatures of Allah SWT. This includes
the protection of environment and the animal rights and other related matters.

Divergence of opinion in fiqh can be a form of Ibadah as per in Prophetic :

“If a judge passes judgement and strives to reach the right
conclusion and gets it right, he will have two rewards; if he strives
to reach the right conclusion but gets it wrong, he will still have
one reward”
(al-Bukhari and Muslim)
4 Topic 1 Introduction to Shariah and Fiqh
 UNIT 4: RELATIONSHIP BETWEEN SHARIAH AND FIQH

The relationship between Shariah and fiqh is just like the body and its component such as fingers, nose
etc. Shariah is the body of revealed injunctions found both in the Quran and Sunnah, while, fiqh is the
comprehension of Shariah deducted within the confine of Shariah. As correctly observed by al-Qaradawi,
fiqh within this definition, "a knowledge founded by revelation". The human understanding in deriving and
deducing rules of Shariah should always be restricted within the ambit of this revelation or the boundaries of
revelation revealed to Rasulullah SAW.

To explain further, Shariah is the whole divine law and values revealed by Allah SWT, and fiqh is the law
extracted by jurists from the sources of Islamic law. Thus, fiqh contains human involvement which is required
for juristic interpretation. The terminology of ‘Islamic law’ as used by many scholars often refers to this
meaning of fiqh. The term Shariah is wide and encompassing various branches of Islam. Normally, it is general
in nature and it emphasises only on the principles, and not the detailed rules, although not all the time.

Shariah Comprehension Fiqh

(Process of Ijtihad)

Diagram 2 : Relationship between Shariah and Fiqh

From the above, it can be concluded that:

1. Shariah consists of a total sum of Shariah principles and rules embedded in the Quran and Sunnah.

2. Application of Shariah requires a proper comprehension (ijtihad) of the Quran and Sunnah with adherence
to a specific methodology (principles of Islamic jurisprudence).

3. The comprehension process must be conducted by a competent personnel (mujtahid) with a standard
due care and diligence as required by Shariah.

4. The product of ijtihad by mujtahid is called of fiqh and it governs the practical aspect of human activities.

Topic 1 Introduction to Shariah and Fiqh 5

 UNIT 5: SALIENT FEATURES OF SHARIAH

As mentioned earlier, Shariah consists of three fundamental components. An in-depth contemplation and
comprehension of these components suggest that, there are five main salient features of Shariah:

1. Divinely Origin (Rabbaniyyah)

2. Universal (‘Alamiyyah)

3. Realis�c (Waqi’iyyah)

4. Completeness (Shumuliyyah)

5. Moderate (Wasatiyyah)

Diagram 3 : Salient Features of Shariah

1. Divinely Origin (Rabbaniyyah)

Rabbaniyyah denotes that Shariah is a law which is based on divine revelation. The sources, objectives,
methods and the purposes of life of human being in Islam have been determined by Allah SWT.
Furthermore, the divine value indicates that the ultimate goal of Muslims is to attain Allah’s SWT love
and pleasure (ridwan Allah). Islam allows Muslims to attain the worldly pleasure, but all their efforts to
attain the pleasure in the world must serve the ultimate goal of life, which is, to please Allah SWT and
gain His rewards. Thus, every tenet of the Islamic law aims at preparing man to be a pure servant of Allah
SWT only.

The proof of Rabbaniyyah is evident as follows:

a. The impeccable of the Quran in terms of scientific explanation, linguistic, factual contradiction and
many others.

b. Futuristic report of Prophetic traditions which came true in modern time.

2. Universal (‘Alamiyyah)
Allah SWT sent the Prophet Muhammad SAW, for the whole universe to complete the mission of the
earlier Prophets AS. The message of Prophet Muhammad SAW is for the whole of mankind.

Allah SWT says:

“And We have not sent you, [O Muhammad], except as a mercy to the worlds.” (al-Anbiya’ 21: 107)

Thus, Islam is not confined to certain race, tribe or group. It is not for Arab only nor for Malay. Islam is for
the whole of the human race regardless of their colours, languages, races or nationalities. It subjects to
no time limits and no geographical boundaries.

3. Realistic (Waqi’iyyah)
While Shariah emphasises on the noble values of morality, it does not prevent the giving of attention to
the reality that is faced. Shariah does not operate in the ocean of fantasy nor fly in the air nor float in

6 Topic 1 Introduction to Shariah and Fiqh

 the pseudo-space of idealism that creates the ideal man without existence. Shariah takes cognisance the
nature of man and reality of this worldly life as prescribed in rules and regulations which include:

a. It is permissible for any Muslim to perform the obligatory prayer in sitting mode if his condition does
not permit him to stand; or

b. It is permissible for the patron or the guardian of orphans to take a fixed amount from their money
for his guardianship.

4. Completeness (Shumuliyyah)
Shumūl means complete or comprehensive. Islam is a complete and comprehensive religion and a way of
life, not simply a form of belief and worship. Islam covers all aspects of human life:

a. Relationship between man and Allah SWT;

b. Relationship between man and his fellow human being;

c. Relationship between man and the unseen world such as genie; and

d. Relationship between man and the environment which includes animals.

The completeness of Islam as a religion and a way of life is indicated in the following Quranic verse:

“Today have I perfected your religious law for you, and have bestowed upon you the full measure of My
blessings“ (al-Ma’idah 5: 3)

Its teachings have the capacity to manage the whole life of all human existence. The message of Islam is:

a. for all time;

b. to the whole world, to all people of all races in all situations;

c. to guide man throughout his life, his childhood, adolescence, young, middle age, and old age; and

d. concerned with all aspects of man: mentally, physically and spiritually.

5. Moderate (Wasatiyyah)
Shariah is also balanced and moderate. It balances between the need of the body and soul, intellect and
emotions, this worldly life and hereafter, theory and reality, thinking and acting, and the unseen and
the apparent. It promotes freedom, yet it commands responsibility. It places a balanced focus on the
individual as well as the community.

Allah SWT says:

“But seek, through that which Allah has given you, the home of the Hereafter; and [yet], do not forget your
share of the world. And do good as Allah has done good to you. And desire not corruption in the land. Indeed,
Allah does not like corrupters.” (al-Qasas 28:77)

Topic 1 Introduction to Shariah and Fiqh 7

 UNIT 6: THE OBJECTIVES OF SHARIAH (MAQASID AL - SHARIAH)

The notion of Maqasid al-Shariah revolves around the idea that all injunctions and commandments of
Shariah aim at avoiding harm and acquiring benefit to the whole mankind. Thus, the end result of each and
every Shariah should always relate and adhere to these objectives.

Allah SWT says:

“And We have sent you (O Muhammad SAW) not but as a mercy for al-‘Alamin (mankind, genie and all that
exist)” (al-Anbiya’ 21: 107)

The very word mercy (rahmatan) in the verse includes anything that offers benefit to mankind and prevents
harms in the eyes of Allah SWT. In this regard, the great scholars of Maqasid al-Shariah pointed out that
Shariah is meant for the benefit of mankind, both in this world and the hereafter. This is the primary objective
and the unifying factor which can be seen in all the detailed rulings of Shariah.

Maqasid is the plural form of maqsad which literally refers to a purpose, objective, intent, goal or end.

Technically, Maqasid al-Shariah is defined as “the deeper meanings and inner aspects of wisdom (hikam)
considered by the Lawgiver (Allah SWT) in all or most of the areas and circumstances of legislation.”

According to Imam Al-Ghazali:

“The objective of Shari’ah is to promote the well-being of all mankind, which lies in safeguarding their faith
(din), life (nafs), lineage (nasl), intellect (‘aql), or wealth (mal). Whatever ensures the safeguard of these five
principles serves public interest and is therefore desirable”.

5 1
Wealth Faith (din)
(mal)

4 Safeguarding 2
Intellect Life
(’aql) (nafs)
3
Lineage (nasl)

Diagram 4 : Objectives of Shariah

Al-Ghazali's categorisation of maqasid into five principles has become a matter of consensus agreement of
the later scholars when discussing the notion of Maqasid al-Shariah,except those who added safeguarding
of dignity as the sixth maqsad of Shariah.

Shariah Safeguards these Objectives in Twofold:

1. Enjoining Benefit (Jalb Masalih):
Enjoining whatever that could enhance these objectives whether directly or indirectly. Thus, all the Shariah
commandments of doing something would come under any of these objectives such as the imperative
order of conducting business by mutual consent that is aimed at safeguarding wealth. Likewise, the order
to put into writing of loan contract is to ensure tranparency within the objective to safeguard wealth.

8 Topic 1 Introduction to Shariah and Fiqh

2. Avoiding Harm (Dar’ al-Mafasid)
Prohibiting those activities that may defeat or erode these objectives. Prohibition of usury (riba) for
instance is aimed at ensuring the proper creation of wealth. This is within the objective to safeguard
wealth.

In short, whatever ensures the safeguard of these five principles and serve public interest, is therefore
desirable, and those that harm these five principles should be avoided. This is within the objective to
safeguard wealth.

The following topic depicts the Shariah’s operation in safeguarding its basic objectives. The examples given
are not to be limited in scope, instead to shed a light on the discussion.

1. Protection of Faith
Protection of faith is the most important objective of Shariah that takes priority over other objectives. It
is apparent as the raison d’être because it serves the objective of safeguarding faith. Faith is the ultimate
objective of all as it brings mankind prosperity in both worlds.

Enjoining benefit in safeguarding faith includes:

a. Observance of the different kinds of ‘ibadah, such as performing the five prayers, fasting, paying of
zakah and performing hajj; and

b. Propagating the teachings of Islam (da’wah) through various means such as writing, speeches and
other relevant means.

Avoiding harm in safeguarding faith includes:

a. Severe punishment to those who belittle Shariah commandments such as, blasphemy; and

b. Enactment of jihad in defending Islamic faith against those who attacked Islam.

Allah SWT says:

“And fight in the Way of Allah SWT those who fight you, but transgress not the limits. Truly, Allah SWT likes
not the transgressor” (al-Baqarah 2:190)

2. Protection of Life
Life is essential as all other components of life depend on life itself. Shariah requires absolute protection
of life in all circumstances regardless of one’s status. It makes no difference between the life of the rich
and poor, leader and the subordinate, Muslim and non-muslim.

Allah SWT says: “O you who believe! Al-Qisas (the law of equality in punishment) is prescribed for you in case
of murder…” (al-Baqarah 2:178)

Allah SWT says: “And do not kill the soul which Allah has forbidden (to be killed) except by (legal) right”
(al-’An‘am 6: 151)

Topic 1 Introduction to Shariah and Fiqh 9

 Enjoining benefit in safeguarding life includes:
a. Commandments to seek and enjoy the bounties of Allah SWT in this world and to benefit them in
such a way not detrimental to life; and

b. Encouragement and commandments to benefit from the exceptions (rukhsah) in certain situations
that endanger one’s life or health.

Avoiding harm in safeguarding life includes:

a. Severe punishment to those who kill others;

b. Prohibition of putting one’s life in a detrimental or evil situation; and

c. Stern indicative warning to those who cause the destruction of the universe.

3. Protection of Lineage
Shariah regards lineage as a sacred and essential component of life. It is the source of happiness as human
beings evolved, nurtured and developed in chain of lineage. Islam puts a great emphasis on lineage and
there are specific sets of Shariah to govern the affairs of lineage.

Enjoining benefit in safeguarding lineage includes:

a. Permissibility of marriage and its degree of injunction. Marriage would be obligatory or encouraged
depending on one’s condition;

b. Permissibility of polygamous marriage; and

c. Observance of ‘aurah.

Avoiding harm in safeguarding lineage includes:

a. Prohibition of unlawful sexual intercourse (zina); and

b. Prohibition of close proximity (khalwah).

4. Protection of Intellect
Intellect is one of the human capacities that differentiate man from animal. Islam regards intellect
highly because it plays a significant role in Shariah injunction (taklif). Hence, this precious gift should be
protected accordingly in avoiding its destruction.

Enjoining benefit in safeguarding intellect includes:

a. Allah SWT commandment of constant contemplation of His creation of universe in learning a lesson
that may enhance one’s intellect and eventually bring him to the submission to Allah SWT; and

b. Islam encourages the exertion of one’s intellectual capability (ijtihad) in resolving issues.

Avoiding harm in safeguarding intellect includes:

a. Prohibition of anything that would possibly harm the ability and function of brain such as the
consumption of liquor; and

b. Stern caution to those who practice “blind followers” (taqlid) without questioning the validity of their
practices.

10 Topic 1 Introduction to Shariah and Fiqh

5. Protection of Wealth
Islam emphasises on prosperity of both worlds. While hereafter is the ultimate goal and final destination,
Islam makes it very clear that worldly life is a bridge to the next world that has to be equally recognised.
As property and wealth are crucial components of worldly life, Shariah requires property and wealth to
be protected and honoured accordingly as one of its objectives.

Enjoining benefit in safeguarding wealth includes:

a. Permissibility of numerous contracts that seeks to cater human needs;

b. Enjoinment of seeking the bounties of Allah SWT and to utilise it for the betterment of one’s life; and

c. Observance of zakah to help the needy.

Avoiding harm in safeguarding wealth includes:

a. Prohibition of taking properties of others illegally or against their consent;

b. Prohibition of riba; and

c. Islam imposes severe punishment for those who steal or fiddle the properties of others.

Allah SWT says:

“And eat up not one another’s property unjustly (in any illegal way e.g. stealing, robbing, deceiving, etc.)
(al-Baqarah, 2: 188)

Division of Maqasid al-Shariah

The foregoing explains the five domains of Maqasid al-Shariah as proposed by Imam al-Ghazali. These
maqasid are further divided into three categories that represent different levels of importance and urgency.
That is to say, each and every objective can be divided into three categories based on its significance namely:

1. Essentials (Daruriyyat)
Essential requirements for the establishment of the five maqasid and without which the maqasid will be
definitely destroyed. It is the prerequisites or basic needs that ensure the minimal existence of the five
Maqasid al-Shariah. For instance, an access to basic food or nutrition is an essential of maqasid in respect
of life as it is the basic need of life.

2. Complementary (Hajiyyat)
Important requirements that are crucial to the well-being of the five maqasid, without which will lead
to hardship. Though the non-observance of the complementary aspect of Maqasid al-Shariah would not
out rightly destroy the maqasid, it will severely affect the well-being of mankind. For instance, a proper
shelter is one of the complementary aspect of maqasid in the sense that one’s life would be miserable
but it would not destroy completely one’s life.

3. Embellishments (Tahsiniyyat)
Additional requirements that further strengthen the complementary and essential aspects of Maqasid
al-Shariah. It is something that is good to have on top of the existence of complementary of Maqasid al-
Shariah. For instance having a comfortable accommodation or transportation is something that further
enhances the existing elements of Maqasid al-Shariah to a better standard.

Topic 1 Introduction to Shariah and Fiqh 11

 In the event of conflict between two or more maqasid, the preservation or protection of maqasid will take
priority based on the level of its significance. For instance, if someone is in the state of emergency to save his
life and he is left with no other option except to commit something forbidden such as drinking liquor, two
maqasid will be in conflict. If he consumes the liquor it will protect the maqsad of safeguarding life but it
will partly defeat the maqsad of protecting intellect. In this particular situation, the maqsad of life will take
priority as the threat to life is clearly at the level of essential while the effect of drinking liquor in this situation
though it will affect one’s mind, is temporary.
Faith
Wealth (din)
(mal)

Embellishments

Complementary

Essentials
Life
Intellect (nafs)
(’aql)

Lineage (nasl)

Diagram 5 : Division of Objectives of Shariah

Dimension of Objectives of Shariah: General, Specific and Partial

Apart from the classical understanding and division of maqasid, there is another way of understanding
maqasid namely, general, specific and partial:

1. General Objectives (Maqasid ‘Ammah)

These maqasid are observed throughout Islamic laws. It is clear that Shariah is a system of life that is
revealed primarily to protect human well-beings (maslahah).

2. Specific Objectives (Maqasid Khassah)

These maqasid are observed in a specific chapter of the Islamic law, such as the welfare of children in the
family law, preventing criminals in the criminal law, and preventing monopoly in the financial transaction
law.

3. Partial Objectives (Maqasid Juz’iyyah)

These maqasid refer to particular objectives intended by Allah SWT in specific Shariah rulings. These
intented and specific scripts or rulings, such as the intent of discovering the truth in seeking a certain
number of witnesses in certain court cases, the intent of alleviating difficulty in allowing an ill and/or a
fasting person to break his/her fasting.

When conflict occurs between two

or more maqasid, the preservation
or protection of maqasid will take
priority based on the level of its
significance.
12 Topic 1 Introduction to Shariah and Fiqh
 Objective of Shariah

General Specific Par�al

Shariah in all of its parts

Par�cular objec�ves
aims at securing benefits
intended by Allah SWT in
(masalih) for the people or
specific Shariah rulings
pretec�ng them against
corruptons and evils

Diagram 6 : Dimension of Objectives of Shariah

Objectives of Shariah in Islamic Finance

In general, the objective of Islamic finance falls within the generic protection of wealth. In a more specific
term, Muslim scholars observed that there are a few objectives in Islamic finance as enshrined in the Quran
and Prophetic tradition. These objectives include:

1. Wealth creation and wealth transfer

Islamic finance seeks to create wealth underpinned by real economic activities. Economic activities will
eventually stimulate a sustainable and real wealth transfer within the economic system. This objective
primarily centred at the idea that wealth must be circulated to the widest circulation of society instead
of circulating within the selected few.

Allah SWT says:

“And what Allah SWT restored to His Messenger SAW from the people of the towns - it is for Allah SWT and
for the Messenger SAW and for [his] near relatives and orphans and the [stranded] traveller - so that it will
not be a perpetual distribution among the rich from among you” (al-Hasyr 59: 7)

2. Fair and Transparent

Islamic finance operation and activities must be conducted in such a way that they discard dispute
and hostility among parties in a contract. In this regard, fair and transparent dealing are among the
key principles, whereby Shariah put a great emphasis in commercial dealing. It is reinforced with other
related concept, such as mutual consent (taradi) that arises out of transparent and fair dealing.

Allah SWT says:

“O you who have believed, when you contract a debt for a specified term, write it down. And let a scribe write
[it] between you in justice”. (an-Nisa’ 4:29)

Allah SWT says:

“O you who have believed, do not consume one another’s wealth unjustly but only [in lawful] business by
mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you ever Merciful”. (an-Nisa’
4:29)

Topic 1 Introduction to Shariah and Fiqh 13

 3. Equity and Justice
Islamic finance aims at establishing a win-win situation among contracting parties. It debunks the
practice of gaining profit at the expense of any counter parties through an oppressive dealing, fraudulent,
misrepresentation and undue influence.

Allah SWT says:

“Indeed, Allah SWT orders justice and good conduct and giving to relatives and forbids immorality and bad
conduct and oppression. He admonishes you that perhaps you will be reminded”. (al-Nahl 16: 90)

4. Preservation of Wealth
As economic resources are relatively depleting, Islamic finance seek to achieve a sustainable development
that caters both present and future needs in respect to wealth preservation. Therefore, zakah for instance
is imposed on the surplus of one’s revenue that remains for a considerable period of time (haul). Likewise,
it is prohibited for anyone to spend his money or wealth without due reason and authority may impose
certain limitation on those considered as prodigals (safih).

Yahya narrated to me from Malik that he had heard that Umar ibn al-Khattab said, “Trade with the property
of orphans and then it will not be eaten away by zakah” (Imam Malik: Muwatta’)

5. Brotherhood
Commercial transaction must be conducted in the light of brotherhood. The manifestation of brotherhood
transpired in both parties wanting benefits from the contract. There should not be any bad intentions
(mala fide) to each other in completing the contract.

Allah SWT says:

“O mankind, indeed We have created you from male and female and made you peoples and tribes that you
may know one another. Indeed, the most noble of you in the sight of Allah SWT is the most righteous of you.
Indeed, Allah SWT is Knowing and Acquainted”. (al-Hujurat 49: 13)

14 Topic 1 Introduction to Shariah and Fiqh

 PRACTICE QUESTIONS

1. The objective of Shariah is to protect:

I. Religion
II. Life
III. Intellect
IV. Lineage
V. Property

A. I, II, III and IV

B. I, II, IV and V
C. I, III, IV and V
D. All of the above

2. What is the definition of Maqasid Shariah?

A. All injunction and commandments of Shariah aim at avoiding harm and acquiring benefit to the
whole mankind.

B. Islamic teaching and systems which were revealed to the Prophet Muhammad SAW, as the way of life.

C. Knowledge of practical rulings of Shariah which are deduced from their respective particular evidence.

D. A saying, action or approval related to the Prophet Muhammad SAW.

Topic 1 Introduction to Shariah and Fiqh 15

 Topic 2
Rule-Making Process in Islamic Law

Learning Objectives
At the end of this topic, you will be able to:
• Define Ijtihad
• Describe the historical development of Ijtihad
• Explain the salient features and differences of opinion among the Schools of Islamic Legal Thought
• Describe why the divergence of opinion is acceptable in Islam
• List the ethics of disagreement in Islam
• Describe the rule making process by Mujtahid
• Describe the sources of Shariah
• Define Islamic Legal Maxims
• Describe the five main rules of Islamic Legal Maxims
• Describe the relationship between Islamic Legal Maxims and Islamic Jurisprudence
• Define and list Siyasah Shar‘iyyah

UNIT 1: DEFINITION OF IJTIHAD

Ijtihad is an Arabic word which literally means to strive, endeavour, make every efforts and work hard in
doing something. In a technical term, Ijtihad refers to “a process of acquiring probable knowledge by exerting
mujtahid’s full efforts, ability and capacity”. Likewise, Imam al-Amidi defined ijtihad as “to spare no effort in
discovering the Shariah rulings”. Simply put, Ijtihad is exerting and maximising mujtahid abilities and efforts
in adducing Shariah rulings.

Given the fact that primary texts of Shariah are limited while the issues and incidents of humans are
unlimited, Ijtihad is extremely important as it offers continuous respond to the new unprecedented cases,
where the texts are absents. Though the texts might be available, ijtihad is also pertinent in deriving the
correct understanding, especially in extracting the (‘illah) of any given texts.

As far as Islamic financial system is concerned, the role of ijtihad is not merely confined in understanding the
Shariah texts per say, but also is required in coming with a new invention of financial products.

Good to know
“The Muslim world is contemporarily facing multifaceted challenges in various spheres of life. Among the most
visible and impacting spheres is the economic and financial aspect, especially with the emergence of the Islamic
financial system in the 1970s. There is no doubt that the exponential rate of development of the Islamic financial
system has brought to limelight many transient issues which the Shariah provisions are needed to resolve”.

“The ability of the ummah to recognise contemporary or transient issues and make adequate Shariah legislations
on them lies with the institution of “Ijtihad”, a dynamic process of rulemaking by competent Muslim scholars
based on agreed principles”.
( Source : Mustafa Daud & Dr. Salihu, ‘Abdul Wahid Adelabu - Jan 2012)

16 Topic 2 Rule-Making Process in Islamic Law

 UNIT 2: HISTORICAL DEVELOPMENT OF IJTIHAD

         

  
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Diagram 7 : Historical Development of Ijtihad

Topic 2 Rule-Making Process in Islamic Law 17

 UNIT 3: SCHOOLS OF ISLAMIC LEGAL THOUGHT:
SALIENT FEATURES AND DIFFERENCES OF OPINION
While it is true that the Quran and the Prophetic traditions (Sunnah) are the main sources of Shariah, the
process of understanding them or adducing the specific rulings are subjected to human involvement. That
is to say, the detail of Shariah rulings are not something that are ready-made in the sense that the Quran
and Sunnah provide detailed answers for each and every issue. Instead, the texts mainly consist of general
principles, rules and numbers of precedent cases from which scholars and jurists adduce new ruling in
accordance to specific methodologies.

Given the nature of the Quran and Sunnah, it gives an impression that understanding of Shariah is always
open for interpretation and legal reasoning by mujtahid. Having said that, it is in no way to suggest that
Shariah rulings are developed by way of scholars’ intuition; instead, it is developed by way of interpretative
process with strict adherence to well established methodologies. These methodologies were developed
overtime and eventually lead to the emergence of Schools of Islamic Legal Thought (fiqh or madhahib).

There are four main Schools of Islamic Legal Thought (madhahib) :

The Hanafi Madhhab

a. The founder of the Hanafi madhhab is Imam Abu Hanifah al-Nu’man ibn Thabit ibn Zuta (80-150 A.H./700-
768 A.D.).

b. He is considered as one of the greatest hadith scholars (muhaddith) during his era. In other words, he was
deemed to be the Greatest Imam among the great ones.

c. Imam Abu Hanifah was living in the lifetime of some of the Great Companions like Anas ibn Malik in
Basrah, Sahl ibn Sa’ad in Madinah and Abu al-Sufayl, Amir ibn Watilah in Mekkah.

d. However, according to the historians, he had never had the chance to meet the companions, and had never
narrated any Hadith from them. This means that Imam Abu Hanifah was not a student of companions
(tabi‘in) but a follower of tabi‘in.

e. In spite of this, Imam Abu Hanifah had the opportunity to meet some other companions who granted
him the title of a minor tabi‘in.

f. His outstanding intelligence and contribution in Islamic jurisprudence had been written in several important
books such as al-Fiqh al-Akbar (The Greatest of Jurisprudence), al-Radd ‘ala al-Qadariyyah (Rejoinder
to the Opponents of Predestination), Ikhtilaf al-Sahabah (Disagreements between the Companions),
Musnad Imam Abi Hanifah (Imam Abu Hanifah’s Collection) and Jami’ al-Masanid (Collections of Hadith).

Salient Features of Hanafi Madhhab in Ijtihad

a. The general expression of texts carries definitive (qat‘i) implication.

b. Reason and logic are legitimate in the process of Ijtihad pertaining to rules related to practical questions
of life.

18 Topic 2 Rule-Making Process in Islamic Law

c. Preference should be given to a clear cut analogy over the solitary hadith.

d. Juristic preference (istihsan) is preferred in the event analogy leads to absurd result.

e. Application of juristic preference (istihsan) in formulating their juridical decisions.

f. They are regarded as the most flexible and workable school in the area of commercial transactions.

Example of Ijtihad based on Hanafi Madhhab

• An adult girl is eligible to conclude her own marriage contract in the absence of her legal guardian
(wali).

• No one may impose any restrictions on the owner’s right to utilise his property even if it inflicted
harm on another person so long the harm is not exorbitant.

• The government nor the society may interfere in the personal liberty of individuals provided it is
not in violation of any laws.

The Maliki Madhhab

a. The Maliki madhhab was founded by Abu Abdulllah, Malik ibn Anas ibn Malik ibn Abi Amir ibn Amr.
Imam Malik had an early education in Islamic jurisprudence since he was born into a family of jurists and
teachers.

b. Imam Malik was reported to have learnt from more than 900 teachers, 300 of which were students of
Companions (Tabi‘in) whilst the rest were the followers of the Tabi‘in.

c. Since Imam Malik had been living in Madinah from birth, he was a strong supporter of the Hadith, and
had in fact learned to incline more towards the use of personal reasoning (ra’y) from Rabi’ah and Yaḥya
ibn Sa’id.

d. Imam Malik was known for his very sharp memory and quick thinking. He has never rushed to issue any
fatwa before exhausting his thinking faculty.

e. The Malikis main sources of legal deduction are basically the Quran, Sunnah, the consensus of the
people of Madinah (ijma’), analogy (qiyas), the statement of the Prophet’s companions (qawl al- sahabi),
unrestricted interest (maslahah mursalah), customs (‘urf), blocking the means to an evil (sadd al-dhara’i‘),
juristic preference (istihsan) and presumption of continuity (istishab).

f. The most influential book written by Imam Malik is al-Muwatta’ which is a compilation of Hadith and
its legal effects. Al-Muwatta’ is the first book of its kind and contains about 1,720 number of Hadith,
from which a total of 822 Hadith are from the Prophet SAW with the remainder from the Companions
(sahabah), students of Companions (tabi‘in) and others.

Salient Features of Maliki Madhhab in Ijtihad

a. Formulation of juridical decisions is heavily relied upon the well- established practice of early associates
of the Prophet Muhammad SAW and Madinese people.
Topic 2 Rule-Making Process in Islamic Law 19
 b. Preference is given to the practice of Madinese over solitary Hadith.

c. Application of analogical deduction in cases not explicitly mentioned in the Quran and Sunnah.

d. Subscribed to the application of juristic preference (istihsan) and unrestricted interest (maslahah
mursalah) as valid sources of Shariah.

Example of Ijtihad based on Maliki Madhhab

• Imam Malik rejected the application of Hadith that say, parties in contract are free to change their
minds so long they have not separated. This Hadīth according to Imam Malik is in contradiction
with the practice of Madinese.

• Levying of additional taxes on the wealthy is allowed when government runs out of fund.

• Judicial divorce on ground of injurious treatment by husband is valid and enforceable.

The Shafi’i Madhhab

a. The founder of this madhhab is named Abu Abdullah, Muhammad ibn Idris ibn Uthman ibn Shafi’i ibn al-
Sai'b al-Matlabi al-Qurayshi or known as Imam al-Shafi'i.

b. He was born in 150 A.H, the year Imam Abu Ḥanifah died.

c. While in Baghdad, Imam al-Shafi’i met with Abdul Raḥman ibn al-Mahdi, an expert of Hadith, who had
asked him to write a book on fiqh and its methodology, which Imam al - Shafi’i accepted.

d. In this writing, Imam al-Shafi’i combined the principles of both; the School of Hadith in Madinah and
School of Ra’y in Kufah. This celebrated book is known as al-Risalah. Through this book, Imam al-Shafi’i
is labelled as the father of Islamic jurisprudence.

e. One of the established Ijtihad made by the Shafiite is the penalty for an accomplice who assisted a
murder by restraining the victim. The Malikis rule that both the murderer and the accomplice must be
executed for the murder whereas the Shafiite held that, only the man who committed the act of killing
(mubashir) shall be executed but not the accomplice. The accomplice will be punished with penalty
(ta‘zir) punishment.

Salient Features of Shafi’i Madhhab in Ijtihad

a. Shafi’i’s methodologies of Ijtihad are partly contributed by Hanafis and Malikis methodologies.

b. Emphasis on the aspect of devotional (ta‘abbudi) and avoiding ratiocination in matter of worship.

c. Emphasis on the outward or manifest evident in arriving at Shariah rulings rather than assumption.

d. Shafi’i is known for his magnificent synthesis of legal theory in Islamic jurisprudence.

e. Equation of the authority of the authentic Sunnah with that of the Quran except those texts related to
matters of beliefs.
20 Topic 2 Rule-Making Process in Islamic Law
 Example of Ijtihad based on Shafi’i Madhhab

• Permissibility of ‘Inah contract as it fulfils the Shariah basic requirements of contract. A contract
can’t be deemed as invalid merely on presumption of people’s intentions. Instead it must be
based on tangible or manifest evident.

The Hanbali Madhhab

a. The Ḥanbalī madhhab is founded by Abu Abdullah, Ahmad ibn Muhammad ibn Hanbal al-Shaybani.

b. Imam Ahmad grew up to be known as ibn Ḥanbal, taking the name of his grandfather.

c. Imam Ahmad had collected the total of 40,000 Hadith and compiled them in his celebrated book called
al-Musnad. In this book the Hadith are classified based on the narrators and fiqh of the companions.

d. Imam Ahmad , like the previous Imams, had placed paramount consideration on the divine law i.e. the
Quran and Sunnah before arriving at a ruling.

e. Imam Ahmad was not keen in supporting the secondary sources of Islamic law.

f. According to Imam Ahmad, Hadith cannot be overruled by the prevailing customs or by ijma’ and Qiyas,
for that matter.

g. An instance of the Hanbalis’ Ijtihad lies in the ruling of invalidating a judgement passed in anger. The
Hanbali’s render a judgement passed in relation to the above as invalid. Such a ruling is based on the
Hadith which means “Let no judge adjudicate a case between two people when he (the judge) is angry”.

Salient Features of Hanbali Madhhab in Ijtihad

a. Hanbalis is known for their central reliance on Prophetic traditions (sunnah) instead of other means of
juristic methodologies. Application of analogical deduction is very limited.

b. Preference will be given to Hadith though it is a weak Hadith if the former contradicts with the practices
of the companions.

Example of Ijtihad based on Hanbali Madhhab

• Probation period (‘iddah) of the divorced women who are pregnant is lapse upon delivery and not
longer than two periods namely 130 days or until delivery.

• Owner of a large house has to provide shelter to the homeless.

Topic 2 Rule-Making Process in Islamic Law 21

 Hanafi Madhhab
Hanbali Madhhab
Shafi’i Madhhab
Maliki Madhhab

Diagram 8: Distributions of Schools of Islamic Legal Thought

Factors Contributing to the Differences of Opinions among the Schools of Islamic Legal
Thought.
As indicated earlier, divergence of opinions in fiqh is inevitable due to the very nature quranic texts and
Prophetic tradition. On top of that, the differences of opinions is attributed by the following factors :

1. Differences in Methodologies of Usul al-Fiqh

Scholars of various Schools of Islamic Legal Thought differed in the principles they applied. For instance
accepted the rulings of the companions of the Prophet SAW as a sound basis for Shariah rulings, while
others do not not place such a great reliance on the rulings of the companions.

Some Scholars adopted the principle of unrestricted interest (Maslahah Mursalah) while the others did
not take this principle as a valid source of law, and this leads to actual differences in formulating the laws.

2. Authority of Sunnah
Most of the juristic differences among the early scholars can be traced back to the narration of sayings
attributed to the Prophet SAW. A jurist may receive a Hadith which he considers to be defective, thus
preventing him from using it for making a legal ruling. The following are some possibilities in this regard:

a. The chain of narration (isnad) going back to the Prophet SAW may not be weak and may include a
narrator who is obscure or untrustworthy, or whose memory is weak or defective.

b. The isnad may be “interrupted,” that is to say the narrator did not cite the first authority who had
heard the Hadith from the Prophet SAW.

22 Topic 2 Rule-Making Process in Islamic Law

 c. The jurist, especially in the case of a Hadith reported by a single narrator, may impose certain conditions
for the probity of a narrator which others do not impose. His conclusions and his judgements on
these particular issues may therefore differ from those of others.

3. Differences in Accepting Particular Sources of Shariah

There are many principles of this kind of which the scholars were at variance. They differed over the
admissibility of using the principles of “blocking the means to wrongdoing” (sadd al-dhara’i‘), “juristic
preference” (istihsan), “presumption of continuity” (istishab), “adopting the more cautious” (al-akhdhu bi
al-ahwat), “adopting the more lenient” (al-akhdhu bi al-akhaff), “adopting the more severe” (al-akhdhu
bi al-athqal), “customary law” (`urf), and “local custom” (al-‘adah). They also differed on the implications
of primary texts, the methods of arriving at these implications, and what could justifiably be supported
from these texts. In this way, many differences in the field of subsidiary laws arise.

4. Different Ways of Understanding the Arabic Language

A single word in a Quranic text or Hadith may have several different meanings. The word ‘ayn for example
can mean an organ of sight, running water, pure gold, or a spy. If such a word is used in a context where
it is difficult to say precisely what it means, even scholars (mujtahidun) who try hard may give variant
meanings of a word or expression which can be sustained by the text. Meanings may alsobe suggested
which are totally at odds with the intended meaning of the word.

A case in point is the disagreement among jurists as to the true meaning of the word quru’ in the verse:

Allah SWT says:

“And divorced women shall undergo, without remarrying, a period of three quru’.” (al-Baqarah 2: 228)

The word qur’ (plural: quru’) can either mean menstruation or purity following menstruation. The actual
length of the waiting period can thus vary depending on which meaning is adopted. Some jurists from the
Hijaz concluded that the waiting period should be three intervals of purity while jurists from Iraq concluded
that it should be calculated on three occurrences of menstruation, which could mean a shorter waiting-
period.

Differences in Accep�ng
Par�cular Sources
of Shariah

Diagram 9: Factors Contributing to the Differences of Opinions among the Schools of Islamic Legal Thoughts

Topic 2 Rule-Making Process in Islamic Law 23

 UNIT 4: ETHICS OF DISAGREEMENT

Realising the fact that divergence of opinions is inevitable, Muslim scholars have put forth the guidelines to
be observed in managing the differences of opinions. This is important to avoid unnecessary dispute that
breaks and divides the brotherhood of the ummah. In understanding the ethics of disagreement it is crucial
to have preliminary thoughts on disagreement in respect of fiqh.

Why Divergence of Opinion is Acceptable in Islam ?

1. Divergence of Opinions in Matters of Fiqh is Inevitable

The inevitability of disagreement of opinion is attributable to the following:

a. Nature of Shariah: Shariah does not provide everything in a definitive term except for a few principles
and commandments. The rest is stipulated in such a way that requires human involvement in
determining the meaning.

Allah SWT says:

“And if your Lord had willed, He could have made mankind one community; but they will not cease to differ.”
(Hud 11: 118)

b. Nature of Man: Man is created with different capabilities and inclination. To have an unanimous
agreement on some thing is rather difficult, especially on matters that affect vast majority of people
that live in different places and experience different cultures.

c. Nature of the Universe: Undoubtedly differences are the inherent nature of the universe. Everything
is created differently in terms of needs, functions, contributions and etc. in a complementary
arrangement that make up the universe.

2. Divergence of Opinions in Matters of Fiqh is a Blessing

Shariah is intentionally revealed in such a way that opens room for disagreement. Prophet SAW
says, “Whatever has been permitted by Allah SWT in His Book is permissible, and whatever has been
prohibited is forbidden and whatever is silent is forgiven. Do accept His forgiveness. Indeed Allah SWT is
not forgetful." Then the Prophet SAW recited “And never is your Lord forgetful."

Dr Yusuf al-Qaradawi says, "The word forgiveness in the Hadith refers to His blessings in Shariah for the sake
of people. Disagreements of opinions allow certain degree of flexibility in applying and implementation
of Shariah to various contexts".

Imam Abu Hanifah said:

“Ours is no more than an opinion. We do
not oblige or coerce anyone into accepting
it. Whoever has a better judgement, let him
advance it.”
(Source:Ibnu Abdul Bar: Al-Intiqa’ fi Fadail Thalsa
Fuqaha’)
24 Topic 2 Rule-Making Process in Islamic Law
Ethical Foundation in Managing Disagreements

1. Sincerity in Seeking the Truth for the Sake of Allah SWT

In seeking the truth, the main intention must always be for the sake of Allah SWT as intellectual
endeavour is perceived as the act of worship (‘ibadah) in Islam. Imam Shafi’i was reported as said, “The
best act worship in the eyes of Allah SWT after the obligatory act is seeking knowledge. Thus, having
other intentions than the blessings of Allah SWT will definitely disqualify one to be rewarded as an act
of ‘ibadah."

2. Adherence to Moderate Approach

Shariah clearly denounces any form of extreme in both, understanding and application of Shariah.
Extreme in understanding includes:

i. To hold that one’s opinion in matters of fiqh is absolutely correct and other opinions are absolutely
wrong.

ii. To practice the commandments of Shariah without due regard to one’s ability.

Prophet SAW says:

“Beware! The extremists perished (saying it three times)". (Sahih Muslim)

3. Proper Understanding and Articulation on Point of Disagreement

Full understanding of scholars’ opinions is pertinent in avoiding unnecessary debate.

Most of the hostile debates on matters of fiqh are resulted from the vagueness of both parties in
understanding the point of disagreement among them and scholars alike. This is evident, for instance, in
the debate of permissibility of Bay‘ ‘Inah. Some of the opponents of Bay‘ ‘Inah asserted that Imam Shafi’i‘s
was wrong in permitting Bay‘ ‘Inah while some the opponents of Bay‘ ‘Inah at erred in subscribing
to Imam Shafi’i‘s opinion without carefully scrutinising and appreciating the opinion pertaining to the
permissibility of Bay‘ ‘Inah.

"My opinion is correct but

it might be wrong, others’
opinions are wrong but it
might be correct".
(Source: Imam Shafi’i, Al-Umm)
"I never once argued with
anyone hoping to win the
debate; rather I always
wished that the truth would
come from his side".
(Source: Imam Shafi’i, Al-’Umm)
Topic 2 Rule-Making Process in Islamic Law 25
 Imam Shafi’i’s opinion regarding Bay‘ ‘Inah:
“The basis for my position is that if a contract fulfills the Shariah’s manifest criteria for its
validity, I will not invalidate it on the basis of a presumption or a customary practice between
the seller and the buyer. Hence, I will approve it by virtue of its apparent validity, but I prohibit a
kind situation where the two of them nurse an intention that may likely lead to the invalidation
of the contract if it is manifested.

For instance, I forbid someone buying a sword with the intention to kill with it unjustly, but it
is not unlawful for the seller to sell it to someone he suspects will use it to kill unjustly because
it is possible that he will not use it to kill unjustly. I, therefore, do not invalidate this kind of
business transaction. Likewise, I detest that someone sells grapes to a buyer he thinks will
use them to make wine, but I do not invalidate such sale because he is selling it as something
lawful, and it is possible that the buyer will not however, make wine from the fruit, just as it is
possible that the purchaser of a sword may not use it to kill”.
Imam Shafi‘i : Al-’Umm

Imam Shatibi in defending Imam Shafi‘i said:

“It is absolutely incorrect to say that Shafi‘i allowed the
adoption of means that leads to usury. He does not presume
the existence of an intention to do something forbidden
unless there is manifest evidence to that effect”.
(Source: Islamic Financial System Principles and Operations, ISRA,
pg. 222)
26 Topic 2 Rule-Making Process in Islamic Law
 UNIT 5: METHODOLOGY OF ISLAMIC RULE MAKING PROCESS (IJTIHAD)

In practicing Ijtihad, the mujtahid must first of all look at the explicit texts (nusus) of the Quran and Sunnah,
which must be given priority over all other evidences. If there are manifested texts on the issue under study,
he shall not employ any other sources of law in deriving rules.

Should there be no manifested texts on the subject, or the text is subjected to various interpretations, the
mujtahid may resort to other sources of law, assisting him in the deduction of the ruling. If no text is to be
found at all, he shall find out if there is a ruling of ijma‘ on the matter. Otherwise, he has to employ a variety
of sources to derive a ruling of the Shariah on the matter.

The process explained above was in essence formulated by Imam al-Shafi’i. He developed the methodology
of rule making process as follows:

A�er ge�ng a case, a mujtahid must need to check

from the verses of the Quran first. If he does not find it,
he must refer to the Hadith.

If he could not find the answer from there, the

mujtahid must refer to ijma'.

If he s�ll could not find the solu�on through the

method of ijma, the mujtahid should turn to the
method of Qiyas.

If he does not find this possible, and all else fails, then
he may apply the principles of original absence of
liability (al-bara’at al-asliyyah).

And finally, all what has been said must be in full

organise of the rules that apply to the conflict of
evidence, which means that the mujtahid should know
the methods deployed in reconciling such conflicts or
even elimina�ng one in favour of the other, should this
prove to be necessary.

Diagram 10 : Methodology of Islamic Rule Making Process (Ijtihad)

Topic 2 Rule-Making Process in Islamic Law 27

 UNIT 6: PRINCIPLES OF ISLAMIC JURISPRUDENCE (USUL AL-FIQH)

Usul al-Fiqh is the root of Islamic law. It is a method by which the Shariah rulings are adduced from their
sources. The word “Usul al-Fiqh” comprises of two words, usul and fiqh. The word " Usul al-Fiqh" is the plural
of ‘aṣl’ which literally means root, basis or foundation. On the other hand, fiqh is defined as the knowledge of
the practical rulings of Shariah which are deduced from their respective particular evidences. Therefore, Usul
al-Fiqh denotes the knowledge of the foundation and methodology by which the rules of fiqh are deduced
from their sources.

This definition signifies the importance of Usul al-Fiqh as a definite prerequisite to derive rulings. Al-Shawkani
has put high emphasis on the knowledge of Usul al-Fiqh in Ijtihad. He quoted al-Fakhr al-Razi in al-Mahsul
where he stated that Usul al-Fiqh is the most important field of knowledge to be possessed.

Al-Shatibi summarised the prerequisite of Ijtihad into two categories. First, he must have a complete
understanding of objectives of Shariah (Maqasid al-Shariah) and secondly, he must have the ability to extract
rulings based on his understanding. By the second, he refers to the list of sciences that are listed by other
jurists of usul as being pre-conditions of Ijtihad. This elaboration by al-Shatibi appears to fully resonate with
the requirement of mastery of Usul al-Fiqh. This demonstrates the importance of Usul al-Fiqh in the rule
making process of Islamic law. The knowledge of the sources would not only be enough, unless the person
knows how to employ these sources in order to deduce the detail rules of Shariah in certain particular issues.

Sources Process
Legal evidences agreed (Methodology of extrac�ng
upon by Jurists Shariah rulings)
Legal evidences over by
jurists
(Dilalat)

Purpose
(Shariah Rulings) Person
Lawgiver (Hakim) (Mujtahid)
The Subject (Mahkumalaih) Condi�ons of Mujtahid
The Act (Mahkum fihi) Usul Rules of ijtihad
The Rulling (Hukm)
al-Fiqh Area of ijtihad
Muqallid

Diagram 11 : Components of Usul al-Fiqh

28 Topic 2 Rule-Making Process in Islamic Law

 UNIT 7: SOURCES OF SHARIAH

Sources of Shariah

Legal Evidences Agreed Legal Evidences Disputed Over by

Upon by Jurists Jurists
(al-Adillah al-Mutaffaq 'alaih) (al-Adillah al-Mukhtalaf fiha)
1. Quran
2. Sunnah 1. Juris�c Preference (Istihsan)
3. Consensus of Opinion (Ijma) 2. Unrestricted Interests (Maslahah
4. Analogical Deduc�on (Qiyas) Mursalah)
3. Customary Prac�ce (Urf)
4. Presump�on of Con�nuity
(Istishab)
5. Blocking the Means (Sadd
al-Dharai)
6. The Fatwa of a Companion
(Aqwal al-Sahabi)
7. The Legisla�ve Laws of The
Previous Prophets (Sharu Man
Qablana )

Diagram 12 : Sources of Shariah

Legal Evidences Agreed Upon By Jurists

1. Quran
Quran literally means ‘reading’ or ‘recitation’ derived from the root word qara’a with the literal meaning
‘to read’. Technically, it is defined as the words of Allah SWT that are revealed to Prophet Muhammad
SAW in the Arabic language as His argumentation.

Salient Features

a. It is the word of Allah SWT revealed to the Messenger of Allah SWT, Muhammad SAW.

b. Its wording and meaning are both from Allah SWT.

c. It was revealed in Arabic.

d. It was transmitted from the Prophet SAW to the next generation by such a large number of people
and it is impossible that they would agree upon a lie. It was revealed in two periods of the Prophet’s
life, Makkah and Madinah.

Nature and Content of the Quran

a. It contains rules and regulations

i. Rules relating to worship (over 400 verses)

ii. Rules relating to family affairs (70 verses)

iii. Rules relating to transactions (70 verses)

Topic 2 Rule-Making Process in Islamic Law 29

 iv. Rules relating to judiciary and evidence (13 verses)

v. Rules relating to crime and punishment (30 verses)

vi. Rules relating to constitution (10 verses)

vii. Rules relating to international relation (25 verses)

viii. Rules relating to economic system (10 verses)

b. Presentation of the rules

i. Concise Presentation of the Rules

For example:
• Permissibility of sale and prohibition of interest (riba)

Allah SWT says:

“Allah SWT has permitted trading and forbidden riba” (al-Baqarah 2: 275)

• Commandment of performing prayer (salah) and paying zakah.

Allah SWT says:

“Be steadfast in prayer and practice regular charity (zakah)” (al-Baqarah 2: 43)

ii. General presentation by outlining the general principles

For example:
• Principle of consultation

Allah SWT says:

“And consult them in affairs (of moment)” (ali-‘Imran 3: 159)
“Their affairs by mutual consultation” (al-Shura 42: 38)

• Individual Accountability

Allah SWT says:

“No bearer of burden can bear the burden of another” (al-An’am 6: 164)

• Punishment in proportion of crime

Allah SWT says:

“The recompense for injury is injury equal thereto” (Al-Shura 42: 40)

• Acquiring of property such as a prohibition of acquiring property by unlawful means

30 Topic 2 Rule-Making Process in Islamic Law

 Allah SWT says:
“O ye who believe eat not up your property among yourselves in vanities, but let there be among you traffic
and trade by mutual good will.” (al-Nisa’ 4: 29)

• Fulfilling of an obligation

Allah SWT says:

“O ye who believe fulfill all contracts (obligations).” (al-Ma’idah 5: 1)

ii. Definitive and details explanation of the rules

For example:
• Rules of inheritance

Allah SWT says:

"Allah SWT (thus) directs you as regard your children’s (inheritance): to the male a portion equal to that of two
female: if only daughters, two or more, their share is two-thirds of inheritance; if only one, her share is a half."
(al-Nisa’ 4:11)

c. Indication of the texts

i. Definitive indication

Allah SWT says:

“Allah SWT (thus) directs you as regard your children’s (inheritance): to the male, a portion equals to that of
two females: if only daughters, two or more, their share is two-thirds of inheritance; if only one her share is a
half. For parents, a sixth share of the inheritance to each, if the deceased left children” (al-Nisa’ 4: 11}

The word, one male equals to two females, two third, half and one sixth are definitive in meaning.

ii. Speculative indication

The verses have more than one meaning

Allah SWT says:

“Divorced women shall wait concerning themselves for three quru’ ” (al-Baqarah 2:228)

The word “quru’ ” literally means clean period and menstruation.

2. Sunnah
Literally Sunnah means habitual or customary practice, whether this practice is good or bad. In the
terminology of Usul al-Fiqh or principles of jurisprudence, Sunnah denotes a saying (qawl), action (fi’l) or
tacit approval (taqrir) related from the Prophet SAW or issuing from him other than the Quran.

Salient Features

a. Sunnah is the second main source of Islamic law and its position is next after the Quran
Topic 2 Rule-Making Process in Islamic Law 31
 b. Sunnah encompasses the sayings, doings and tacit approvals of the Prophet SAW

Nature and Content of the Sunnah

a. The Sunnah reemphasises and reiterates the injunction of the Quran.

Example:
Injunction relating to the prohibition of taking a property of other person without his consent. “It is
unlawful to possess a property of a Muslim without his express consent” (Reported by al-Daraqutni).

This Sunnah emphasizes the Quranic injunction:

Allah SWT says:

“O ye who believe! Eat not up your property among yourselves unjustly except it be a trade amongst you”
(al-Baqarah 2: 188)

b. The Sunnah explains and clarifies the verses of the Quran

i. Specify the generality rule of the Quran

Example:
The Sunnah, “He who kills the deceased will not inherit” (Reported by al-Daraqutni).

This Sunnah specifies the generality of the rule contained in the Quranic verse:

Allah SWT says:

“Allah SWT commands you concerning your children:for the male is the equal of the portion of two females.”
(al-Nisa’ 4:11)

ii. Restrict the absolute rule of the Quran

Example:
The Sunnah restricts the absolute rule of the verse: “As to the thief male or female cut off his or
her hands: A punishment by way of example from Allah SWT for their crime…” (al-Ma’idah 5:38)

By prescribing the value of property, the property must be under custody and that it is the right
hand that is to be cut.

iii. Explains and elaborates the concise verses of the Quran

Example:
The Sunnah explains the manner of performing prayer, fasting, types of riba etc.

c. The Sunnah abrogates the rule established by the Quran.

Example:
According to majority of Muslim jurists, the Sunnah “No will should be made to legal heir” abrogates
the verse prescribed to make a will to parents and near relatives.
32 Topic 2 Rule-Making Process in Islamic Law
 Allah SWT says:
“It is prescribed for you, when death approaches one of you, if he leaves behind some goods to make a will for
parents and near relatives.” (al-Baqarah 2: 180)

d. The Sunnah lays down legal injunction that is silent by the Quran.

Example :
i. The prohibition of wearing a gold ring by man

ii. Prohibition of marrying a woman together with her paternal auntie and maternal auntie in
marriage

Classification of Sunnah

Sunnah can be categorised into two categories: according to its nature and method of transmission.

a. Classification of Sunnah According to its Nature

i. Practical Sunnah or Sunnah by action (Sunnah Fi’liyyah)

This type of Sunnah refers to the conducts of the Prophet SAW from which legal rulings are derived
or have been relied upon. An example of this kind of Sunnah is salah. Prophet SAW has asked that
the Muslims pray as he did. However, the physical movements in ṣalāh could only be observed
through watching the Prophet’s movements. The same goes to the taking of ablution (wudu’) before
performing salah. Some other examples include also pilgrimage (hajj).

ii. Sunnah by tacit approval/agreement (Sunnah Taqririyyah)

It refers to the sanction of Prophet SAW (or he did not prohibit as the case may be) on the saying
or actions of his companion(s). For example, after the call to prayer (adhan) is made for Maghrib,
some companions used to perform additional prayer (commendable); of two raka’at before the
obligatory Maghrib prayer. The Prophet SAW himself was not doing the same, but has never stopped
the companions from such prayer. This is known as Sunnah Taqririyyah.

iii. Sunnah by words (Sunnah Qawliyyah)

Sunnah Qawliyyah refers to the words of Prophet SAW or the messages he conveyed verbally. For
example, when Prophet SAW explicitly said, “Pray as you see me pray” (Sahih al-Bukhari)

Sunnah should be distinguished from

Hadith. While Sunnah is everything
attributable to the Prophet SAW,
saying, doing, and tacit approval. On
the other hand, Hadith is confined
to the narration of the saying, of the
Prophet SAW.
Topic 2 Rule-Making Process in Islamic Law 33
 b. Classification of Sunnah According to its Method of Transmission
Sunnah in this regard is referring to Hadith, in which the method of which Sunnah is transmitted to us. It
is broadly divided into two:

i. Continuous Chain:
A Sunnah whose chain of narrator or transmitter is continuous. It is further divided into two (according
to majority of scholars)

• Consecutive: Refers to Hadith which is reported in such a number of narrators, make it that
impossible for them to agree upon a lie. It is the highest category and its authenticity is ranked
next to the Quran.

• Solitary: Refers to Hadith which is narrated by one or number of narrators who do not reach the
level of consecutive Hadith.

ii. Broken Chain:

A Sunnah whose chain of narrators is not continuous but missing or broken. This Hadith is considered
as weak Hadith and is not very reliable and its application, if any, is subjected to a strict condition.

SUNNAH

Nature Method of
Transmission (Hadith)

Sunnah by
Prac�cal Sunnah Tacit Approval/ Sunnah by Words Con�nuous Chain Broken Chain
Agreement

Consecu�ve Solitary

Diagram 13: Classification of Sunnah

The Main Collection of Hadith

Hadith has been codified by the classical scholars according to their respective detailed criteria. In general,
there are six authentic collection of Ḥadith:

• Sahih al-Bukhari
• Sahih Muslim
• Sunan Al-Nasai
• Sunan Abu Daud
• Al-Jami’ al-Tirmizi
• Sunan Ibn Majah

34 Topic 2 Rule-Making Process in Islamic Law

3. Consensus of Opinion (Ijma`)
Ijma’ is a source of Islamic law which connotes the rulings derived from divine revelation through the
process of human reasoning. Ijma’ has a binding effect on the entire Muslim community. It is defined as
the agreement of the mujtahidun (jurists) from among community of Prophet Muhammad SAW after his
death in a certain period of time upon a rule of Islamic law.

Conditions of Ijma’

a. The agreement must take place among all mujtahid of one particular period. Mujtahid is a person
who is qualified to exercise Ijtihad.

b. The decision reached by the mujtahid on the issue at hand, must be unanimous. An issue that is
decided on the basis of majority does not constitute an Ijma’. The agreement must be unanimous.

c. Such consensus or unanimity must be clearly reflected through the speech or action of the mujtahid
or a member mujtahid acting within his capacity as a member of the mujtahid.

d. The consensus agreement must be held after the demise of Prophet Muhammad SAW.

e. The consensus agreement must be held on matter of Islamic law.

Types of Ijma’

a. Explicit Ijma’
All mujtahid of one period have explicitly expressed their opinion whether agree or disagree in respect
of the Shariah rulings.

b. Silent Ijma’
Consensus opinion that arise out of an agreement of some group of scholars whose opinions are explicit
while the other scholars keep silent in such a way their opinion are unknown whether agree or disagree.

Legal Position of Ijma’

a. The majority of Muslim jurists, particularly the jurists of four well known schools of Islamic Legal Thought,
are in agreement that express ijma’ is an authoritative source of Islamic law.

b. It is incumbent on the Muslim to follow the legal rule of Islamic law that derived from ijma’ as similar to
the rule established by the texts of the Quran and Sunnah.

c. The legal rule based on ijma’ is definitive and it is not permitted to reject the rule.

d. In addition, the mujtahid are not allowed to exercise Ijtihad on the legal issue that has been settled
through ijma’.

e. According to Imam Shafi’i and Maliki, silent Ijma’ is not considered to be Ijma’ nor a probable proof
whereas majority of Hanafis and Hanbalis jurist hold that silent ijma’ has legal effect on Shariah rulings.

Topic 2 Rule-Making Process in Islamic Law 35

 4. Analogical Deduction (Qiyas)
Qiyas literally means measuring or ascertaining the length, weight, or quality of something, by using
something else. Technically Qiyas is the extension of Shariah rulings from an original case (asl) to a new
case, because the latter has the same effective cause as the former. It may be loosely translated in English
as analogy.

The idea of Qiyas is that any given rulings stipulated in the Quran and Sunnah is attributed to its respective
effective cause (‘illah). Therefore, whenever a new issue arises and it shares a similar effective cause, the
same ruling should be applicable to the latter.

Essential Elements of Qiyas and Its Conditions

a. Original Case (Asl):

Also known as muqis ‘alaih which refers to two meanings. It refers to the original case or issue that
has expressed ruling in the main sources (Quran and Sunnah). Second original case refers to the
original ruling that arises out of the sources.

Conditions

i. Sources of the original ruling must be established by the Quran and Sunnah.

ii. The original ruling must be a practical Shariah ruling as Qiyas only applicable to matters of fiqh.

iii. The original ruling is not abrogated (mansukh).

iv. The original ruling is something that human intellect is capable of understanding the reason or
the effective cause that lead to the hukm.

b. New Case (Far‘):

Also known as muqis and it refers to an issue which is in need of a ruling derived from an analogical
reasoning.

Conditions

i. There is uniformity of effective cause between the new case and the original case.

ii. The application of Qiyas to a new case must not result in defeating the law of the text.

c. Effective Cause (’llah):

It refers to an attribute (wasf) of the original ruling (asl) which is the common factor shared by both
issues; original and the current one. According to the majority scholars, effective cause is an attribute
of the original ruling which is constant and evident and bears a proper relationship to the ruling.

Conditions

i. Effective cause must be a constant attribute.

ii. Affective cause must be established by apparent or evident proof (texts).

36 Topic 2 Rule-Making Process in Islamic Law

 iii. There must be a proper relationship between the effective cause and the Shariah rulings. A proper
relationship is established if it serves the objective attributed to the ruling.

iv. The effective cause must not in any way defeating the law on the texts.

Illustration of Qiyas

Original Case: Wine drinking

Allah SWT says:

“O you who have believed, indeed, intoxicants, gambling, [sacrificing on] stone alters [to other than Allah
SWT], and divining arrows are but defilement from the work of Satan, so avoid it that you may be successful.”
(al-Ma’idah 5:90)

Original Ruling: Forbidden (haram)

Effective Cause: The effective cause between liquor and its prohibition is intoxication. It is proper and
reasonable to hold that intoxication is the effective cause as it serves the objective of Shariah in safeguarding
one’s intellect.

New Case: Consumption of drug

Consumption of drug leads to the same result as the consumption of wine. Therefore they share the same
Shariah rulings which are forbidden (haram).

LEGAL EVIDENCES DISPUTED OVER BY JURISTS

The jurists disputed over the actual numbers of these sources. In brief, there are seven legal evidences
disputed over by the jurists:

1. Juristic Preference (Istihsan)

2. Unrestricted Interests (Maslahah Mursalah)

3. Customary Practice (‘Urf)

4. Presumption of Continuity (Istishab)

5. Blocking the Means (Sadd al-Dhara’i‘)

6. The Fatwa of a Companion (Aqwal al-Sahabi)

7. The Legislative Laws of The Previous Prophets AS (Shar’u Man Qablana)

1. Juristic Preference (Istihsan)

This source of law is largely attributed to the Hanafi madhhab. Istihsan, literally, means to approve or
to deem something good. Istihsan, as a form of Ijtihad, has received recognition in accommodating
Shariah’s principles with the robust development and the ever changing public needs.

Topic 2 Rule-Making Process in Islamic Law 37

 Technically, istihsan refers to departure from an established precedent to a different ruling for a stronger
underlying reason. The aim of Istihsan is to avoid rigidity and an absurd result due to literal application
of the existing law.

The jurists differ in their acceptance to this source of law. The following are views of jurists on istihsan:

Hanafis Imam Malik

The Hanafis largely Imam Malik is also reported

considered this is as a to have used Istihsan
source of law in his opinion

Imam al-Shafi’i Imam al-Shawkani

The fiercest opponent of Istiḥsān Al-Shawkani contended that
is Imam al-Shafi’i. His infamous the total disallowance to
saying condemning Istiḥsān is,
"whoever prac�ces Istiḥsān, the prac�ce of Istihsan is
he has actually totally unwarranted.
become a lawgiver.

Diagram 14: Jurists's Opinion on Istihsan

Classification of Istihsan
Istihsan can be classified based on its basis into six categories:

i. Istihsan on the basis of text

ii. Istihsan on the basis of ijma’

iii. Istihsan on the basis of necessity

iv. Istihsan on the basis of custom

v. Istihsan on the basis of public interest

vi. Istihsan on the basis of subtle analogy

Example of istihsan:

Contract of Muzara‘ah (agriculture)

According to the established principle in Hanafi Madhhab, the contract of Muzara‘ah is terminated with
the death of both contracting parties: the owner of the land and the farmer or any one of them.

But the Hanafi jurists made an exception in case of the death of the owner of the land and the crops have
not ripen. This is for the protection of the interest of the farmer.

2. Unrestricted Interests (Maslahah Mursalah)

Maslahah Mursalah is maslahah that is neither acknowledged nor is rejected by Shariah. In other words,
maslahah in line with the objective of Shariah but has not been explicitly regulated by the texts.

38 Topic 2 Rule-Making Process in Islamic Law

 The jurists differ in their opinions in accepting Maslahah Mursalah as an independent source. They are
three main opinions:

a. Malikis and Imam al-Haramayn

The Malikis in general and Imam al-Haramayn accepted maslahah mursalah as an independent
source of law.

AI-Qarafi went further by claiming: “We use it and the truth is that it is generally accepted among the
schools. He further alleged that in fact all Schools of Islamic Legal Thought have either consciously or
unconsciously applied it.

Imam al-Ghazali puts a condition that for a maslahah mursalah to be accepted, it shall have the
features of necessity (daruriyyah), explicit (qada’iyyah) and general (kulliyyah).

b. Zahiri and Shafi’i

Some jurists including that of the Zahiri, Shafi’i, Maliki like Ibn Hajib and al-Amidi rejected Maslahah
Mursalah as an independent source of law.

c. Imam al-Shatibi
Imam al-Shatibi opined that the purpose of this verse is to abolish or eliminate any barrier dividing
humanity in order to be blessed with Allah’s mercy.

Condition for the Application of Maslahah Mursalah

a. Must not be in conflict with definitive proof of the Quran and Sunnah.

b. Must be genuine. A mere conjecture of maslahah is insufficient.

c. Must be general in the sense of securing benefit and removing harms to the people as a whole and
not to a particular person or a group of person.

3. Customary Practice (‘Urf)

The term ‘urf, meaning “to know”, refers to the customs and practices of a given society. Although this
was not formally included in Islamic law, the Shariah recognizes customs that prevailed at the time of
Prophet SAW but were not abrogated by the Quran and Sunnah.

‘Urf and ‘adah are largely synonymous and the majority of the jurists have used them interchangeably.

The jurists, especially Hanafis and Malikis, have considered ‘urf as one of the sources of Shariah.

Condition of ‘Urf

a. It must represent a common and recurrent phenomenon.

b. It must be in existence at the time a contract is executed.

c. It must not contravene the clear stipulation of an agreement.

Topic 2 Rule-Making Process in Islamic Law 39

 d. It must not contravene the naṣ of the Quran and Sunnah that is the definitive principle of Islamic law.

e. ‘Urf must be acceptable to people of sound nature.

4. Presumption of Continuity (Istishab)

Istishab literally means escorting or companionship. It relates to deduction by presumption of continuity.

Under this principle, laws on certain matters will continue to be valid until proven otherwise, at best be
a principle of evidence rather than the source of law. No jurist disputes on this principle, however, they
dispute whether it can stand as a source of Shariah on its own.

Istishab can be categorised into five categories:

Istishab hukm al-ibahah Istishab al-umum
al-asliyyah which presumes the con�nuity
which presumes the con�nuity of of general applica�on of a thing
the general rules and principles �ll specific evidence is discovered
of the law to limit that generality

Istishab al-wasf
or con�nuity of a�ributes such
as the presump�on that a
missing person is s�ll alive

Istishab 'adam al-asl Istishab a rule

or the presump�on of original that has been established by
absence which means that a fact way of ijma'(consensus) onto an issue
or rule of law which has not existed in the which is a case of dispute among the jurists
past is presumed to be no jurists existent
un�l the contrary is proven

Diagram 15: Categories of Istishab

Islamic legal maxims originating from Istiṣḥāb are as follows:

a. It is a fundamental principle that a thing shall remain at its original state.

b. The general principle is that the original state of thing is permissible.

c. Freedom from liability is a fundamental principle.

d. Certainty is not dispelled by doubt.

5. Blocking the Means (Sadd al-Dhara’i‘ )

Literally, sadd means blocking and the word dhara’i‘ which is the plural of dhari’ah; it means a path that
leads to something.

Technically, Sadd al-Dhara’i‘ indicates closing the path that leads to something or blocking the means to
an expected end which is likely to occur if the means towards it is not blocked.

40 Topic 2 Rule-Making Process in Islamic Law

 Muslim jurists have classified the dhara’i‘ into four types and each type is governed by different rules.

Type I: Action which will definitely lead to evil. This type of action is totally prohibited by the majority of
the Muslim jurists.

Type II: Action which is most likely to lead to evil and is rarely, if ever, expected to leads to a benefit such
as the selling of grapes to a wine manufacturer. According to Imam al-Shatibi, such transaction is
invalid based on the consensus of the Muslim jurists. (Source: Al-Muwafaqat, al-Shatibi).

Type III: Action which frequently leads to evil but there is no certainty, or prevailing probability that such
will always be the case such as deferred sales (bay’ al-mu’ajjal), that is alleged to be a means to
riba. The Malikis and Hanbalis invalidated the transaction that leads to riba whereas the Shafites
and Hanafis opined that the mere possibility of riba must not be allowed to override the legality
of a valid sale.

Type IV: Action that is rarely expected to lead to evil and is most likely to lead to a benefit. For example,
the action of planting grapes is not prohibited as the means that leads to a benefit is greater than
an evil flexibility and growth.

6. The Fatwa of a Companion (Aqwal al- Sahabi)

Reliance on the fatwa of the companions is a practice that was initiated after the death of the Prophet
SAW. The jurists nevertheless are not in agreement as to whether such fatwa could be relied upon as a
binding source. The jurists have arrived at two opinions with regard to this. Imam Shafi’i, Imam Ahmad
bin Hanbal in one riwayah, and some of the Hanafis and Malikis are of the opinion that this fatwa cannot
be taken as strong evidence. On the contrary, the Hanafis, Imam Ahmad bin Hanbal in another riwayah,
and Imam Malik held it to be otherwise as it is formed as a consensus among the companions and thus
has a binding effect on Muslims.

It should be noted that the opinion of the companions is only disputable if it is formed by way of Ijtihad.

7. The Legislative Laws of The Previous Prophets AS (Shar’u Man Qablana)

Shar’u man qablana refers to the practical rules of Shariah that were revealed prior to the arrival of Islam.
The Quran and Sunnah have recorded the lives of previous Prophets AS and some of the rulings from
the revelations they have accordingly received. All divine laws share the common source which is the
revelation from Allah SWT through His Prophets AS.The jurists agreed unanimously that there shall be no
repeal to the aspects of faith (al-umur al-‘aqa’idiyyah) as the revelation of such matters is everlasting and
is applicable at all times, transcending any boundaries of times of Prophet AS.

Nevertheless, jurists differ on the issue of enforceability and applicability of the practical laws that were
previously revealed to Prophets AS before the prophethood of Muhammad SAW. The general rule is that,
the laws that were revealed before the arrival of Islam and not mentioned, neither in the Quran nor
Sunnah are not applicable in our Shariah. Similarly if the rules are mentioned, yet it explicitly mentions
the rules have been abandoned, then it should also be discharged. On the other hand, if the rules are
mentioned in the text with approval, the jurists unanimously accepted it as part of the Shariah. However,
if the texts of the Quran or Sunnah have referred to a ruling of the previous revelation without clarifying
the position as to whether it should be abandoned or sustained, the jurists dispute on this. The majority
of Hanafi, Maliki, Hanbali and some Shafi’i jurists unanimously agree that the laws revealed prior to the
arrival of Islam form one part of the Shariah.
Topic 2 Rule-Making Process in Islamic Law 41
 UNIT 8: ISLAMIC LEGAL MAXIMS (QAWA‘ID FIQHIYYAH)

Islamic legal maxims refers to general principles of fiqh presented in precise texts which comprise of general
rulings of Shariah on issues covered by them. They are derived from the detailed observation of fiqh on various
topics. Islamic legal maxims are formulated by scholars as a result of their observations on the branches of
fiqh that lead to certain conclusions. The actual wording of the maxim is sometimes taken from the very word
of the texts of the Quran and Sunnah.

Islamic legal maxims offer a prompt understanding of Shariah rulings and enable the scholars to gauge Shariah
injunctions by merely looking at the stature or facts of the issues. However, Islamic legal maxims remain as
a speculative guideline that subjects to numerous exceptions. That is to say, Islamic legal maxims are not
meant to be generic and absolute guideline in adducing Shariah rulings but an indicator towards Shariah
rulings. In this regard, Islamic legal maxims are in the nature of probabilities (aghlabiyyah).

42 Topic 2 Rule-Making Process in Islamic Law

 UNIT 9: FIVE MAJOR ISLAMIC LEGAL MAXIMS

The five major of Islamic legal maxims are:

2 “Certainty is not Dispelled by Doubts”

3 “Hardship Begets Facility”

4 “Injury is to Put an End”

5 “Custom is of Force”

Diagram 16: Five Major Islamic Legal Maxims

1. Matters are Determined According to Intentions

Basis of this rule is the saying of the Prophet SAW:

“All acts are in accordance with their intentions” (Sahih al-Bukhari)

General meaning of the Maxim:

The maxim signifies that the end result of any matter, be it action or word, validity or void, is governed by
the purpose, motive and intention of such acts.

The Applications of the Maxim:

a. The liability of a person who finds somebody’s goods lying in the way and picks it up will be contingent
upon the intention with which he has picked it up. If he intends to hand it over to the owner and has
made it known to others, he will be treated as a trustee and will not be required to indemnify the
owner in case the property is destroyed while in his possession. But if he has kept it as his own, he
would be treated as a usurper (ghasib), and will be required to indemnify the owner in case the
property is destroyed.

b. If two persons concluded a contract apparently a specific rental is provided for, the contract would be
regarded as a contract of hire as its real meaning indicates, and not a contract of loan (i'arah) as the
wording of the contract would suggest.

c. In wakalah contract, if one appoints an agent (wakil) to buy a defined horse, for example, then the
agent purchases another horse, the consequences of contract can be divided into two conditions: if
the agent intends to buy the horse on behalf of a principal (muwakkil) the horse is for the principal.
However, if his intention is for his interest so the contract is for himself.

Topic 2 Rule-Making Process in Islamic Law 43

 2. Certainty is not Dispelled by Doubts
Basis of this rule is the saying of the Prophet SAW:

If any one of you has pain in his abdomen, but is doubtful whether or not anything has issued from him, he
should not leave the mosque unless he hears a sound or perceives a smell.” (Sahih Muslim)

General meaning of the Maxim:

This maxim provides the guidance in respect of the principle, which should be adopted in addressing
prevailing issue that arises due to the existence of doubt in the underlying facts of the matter.

The judgement of the whole matter is supported by evidence, or token or other considered means cannot
be dispelled by doubt. It is because the certainty cannot be repelled by a thing that is weaker as such
doubt. Hence, the judge will always stand on certainty and it will remain on it until there is legitimated
proof for another certainty. For example, the certainty of water is pure and it will remain pure unless
there is another certainty of evidence that shows the water is not pure anymore.

Applications of the Maxim:

a. In the case of performing the ablution, the maxim emphasises that the status of ablution undertaken
or carried out by a person is considered to remain valid unless there is evidence or indication showing
otherwise. The state of ablution of that person shall not be disputed or ceased to be valid primarily
due to the doubt that arises on the matter. The decision on the invalidity of ablution shall only be
supported by strong evidence.

b. In the case of loan (qard) or financing contract, a person shall consider that he or she is still indebted
to the lender or financier in the event where he or she is unable to provide the evidence of payment.
This is due to the fact that the outstanding amount of loan or financing will remain valid and certain
as stipulated under the contract and will only reduce by the settlement amount. It is known fact that
loan or financing transaction executed with financial institutions is supported with written evidence
and proper documentation.

3. Hardship Begets Facility

Basis is from the Quran:

Allah SWT says:

“And Allah SWT has imposed no difficulties on you in religion.” (al-Hajj 22:78)

General meaning of the Maxim:

The maxim combines two different words. The first of which is mashaqqah which connotes hardship and
the second is taysir which means simplicity or facility. When combined together, it simply means hardship
brings easy or hardship begets facility. From Shariah point of view, this maxim points out that any rules
causing hardship in its implementation will be resorted by alternative and way out in order to overcome
the difficulties and hardships.

44 Topic 2 Rule-Making Process in Islamic Law

 Applications of the Maxim:

a. If a person has not been able to pray in standing position due to the pain, he is tolerated to pray with
sitting-down or lying down position.

b. A doctor is allowed to see to see the needed part of patient’s body for medical purposes.

c. Shariah also gives a certain concession to those who are on a journey to break their fasting in
Ramadan, leaving Friday prayer and exercising qasr and jama‘ in prayers.

d. A person is given the flexibility to subscribe for insurance product if the option for the takaful
product is not available in the market or if the risk to be covered is not in the takaful policy.

4. Harm is to Put an End

Basis is the saying of the Prophet SAW meaning:

“Damage and retaliation by damage is not allowed.” (Sahih Muslim)

General meaning of the maxim:

Technically, harm (darar) is defined as anything that impedes the achievement of legitimated public
benefit (maslahah ammah), either this benefit is for public themselves or others, due to infringement,
arbitrarily or neglecting. From this definition, anything that breaks maslahah will cause the harm to the
ummah so that should be removed. The harm in this maxim consists of general and specific harm and
also before or after its occurrence.

The maxim is a basic of prohibition of harm-causing action. Islam requires eliminating any harm before or
after it happens. Harm before occurring can be overcome through preventing action while eliminating it
after taking place can be done through removing its impact and preventing its recurrence. However, Islam
prefer prevention to remove. The rule shows the care of Shariah teaching to avoid any causes of damage
and remove harm or injury that jeopardises people in their lives. The prohibition of any harm will create
the achievement of public benefit as an objective of Shariah.

Applications of the Maxim:

a. Driving beyond the stipulated limit on the highway that might lead to an accident is prohibited in
Islam as it will cause harm to individuals and their property. Similarly a person is obliged to adhere to
the traffic rules and regulations in order to prevent harm.

b. Based on this maxim, it is permitted to cast into prison for those who are well-known on doing
prostitution and corruption although there is no defined criminal evidence through the judicial to
avoid their harm actions.

c. If someone sells a defective good to a customer but covers such defect so that the customer does
not realise it. The customer has the right to return the defective good and takes back his money as an
application of defective option (khiyar ‘aib) in jurisprudence.

Topic 2 Rule-Making Process in Islamic Law 45

 d. If a debtor deliberately avoids paying his debt whereas he is able to pay, the judge can impose to
sell his property to settle his debt. It is done to avoid harm. In the context of Islamic finance, Shariah
Advisory Council (SAC) of BNM has allowed the imposition of compensation (ta'widh) and penalty
charge (gharamah). This is simply to protect the Islamic banks and the interest of depositors from
dishonest clients who deliberately avoid the payment. The compensation is imposed for actual loss
suffered by the Islamic bank. The penalty charge is to discipline the customer to pay on time. The
penalty charge must be channelled to baitulmal or certain charities bodies.

5. Custom is of Force
Basis is the saying of ṣaḥabah namely Ibn Mas’ud:

"What the Muslims see as good in the sight of Allah SWT, and what they (the Muslims) see as bad is bad in the
sight of Allah SWT." (Musnad Ahmad and Mustadrak)

General meaning of the Maxim:

This legal maxim rules that customary practices of a society in terms of the words and actions are
acknowledged and recognised by the Shariah in the absence of textual injunctions, provided they have
fulfilled the following requirements:

a. The custom must not violate a divine text of the Quran and Sunnah or any Shariah principles.

b. The custom must be consistently applied and be prevailing in the society.

c. The custom must have been in effect at the time the activity or transaction was carried out.

d. 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 recognised.

Application of the Maxim:

With reference to contemporary Islamic financial transactions, a good example which is deemed to be
a valid customary practice by scholars is the acceptance of the definition used in spot trading for cross
border transactions. Even though the common understanding for spot trading from the Islamic financial
transaction’s perspective is on the same day and within the contractual session (majlis al-‘aqd), the delay
of two business days (t + 2) has now been recognised as a spot transaction due to the prevalent market
practice to facilitate the transfer of funds from one country to another.

46 Topic 2 Rule-Making Process in Islamic Law

 UNIT 10: RELATIONSHIP BETWEEN ISLAMIC LEGAL MAXIMS (QAWA‘ID FIQHIYYAH)
AND ISLAMIC JURISPRUDENCES (USUL AL-FIQH)
Both Qawa'id Fiqhiyyah and Usul al-Fiqh are tools that are used to deduce Shariah rulings. The relationship can be
observed as follows:

QAWA‘ID FIQHIYYAH USUL AL-FIQH

1. Deducing of Fiqh 1. Founda�on of Fiqh
Qawa'id Fiqhiyyah is a principle formulated and Usul al-Fiqh in relation to fiqh is a guideline in ensuring
accumulated from detailed application of Shariah the correct understanding of Shariah rulings. In this
rulings in relation to mukallaf matter it is like Arabic grammar (nahu) in ensuring a
proper command of Arabic

2. Formula/Maxim Subjected to Excep�on 2. General Principle Applicable Across the Board in

(aghlabiyyah) Deducing Islamic Ruling
Qawa'id Fiqhiyyah covers numerous issues but it Usul al-Fiqh is a general principle that covers all
does cover all issues issues in respect of Shariah rulings

3. From Detailed Observa�on of Fiqh 3. Derived and Formulated from Sources of Shariah
Qawa'id Fiqhiyyah is a general formula formed after Usul al-Fiqh is constructed and formulated based on
the detail observation of fiqh issue is done the observation of sources of Shariah

4. Fiqh Begets Qawa'id Fiqhiyyah 4. Usul al-Fiqh begets fiqh

Fiqh precedes Qawa'id Fiqhiyyah and fiqh is Usul al-Fiqh precedes fiqh and Qawa'id al-fiqh
founded on Usul-Fiqh

Table 1: Relationship between Qawa'id Fiqhiyyah and Usul al-Fiqh

Topic 2 Rule-Making Process in Islamic Law 47

 UNIT 11: SIYASAH SHAR‘IYYAH

Meaning of Siyasah Shar‘iyyah

Ibn Qayyim defined Siyasah Shar‘iyyah as an act of giving benefit to mankind and to avoid any harms being
inflicted upon them, even if the action made by the ruler was not specially mentioned by the Prophet SAW and
revealed by Allah SWT. He quoted another scholar by the name Ibn ‘Aqil who observed that “action through
which the people are brought closer to prosperity is Siyasah Shar‘iyyah” (Source: Al-Turuq al-Hukmiyyah fi
al-Siyasah al-Shar'iyyah, Ibn Qayyim).

Above all, Siyasah Shar‘iyyah is always closely associated with government policy as enunciated by Ibn
Taymiyyah. (Siyasah Shar‘iyyah, Ibn Taimiyyah).

Siyasah Shar‘iyyah concerns the following matters:

a. Government decision should always be based on legal text, political and economic consideration as well
as custom.

b. Siyasah Shar‘iyyah aims at securing benefit for the people in any possible way though it is not provided
in the texts.

c. Siyasah Shar‘iyyah denotes administration and management of the public affairs in harmony with Shariah
within an Islamic state with the aims of securing public benefit and avoiding mischief.

“Rules and regulations by the government in the administration of state and people’s affairs which actually in
conformity with the spirit and general principles of Shariah and would realise the benefit for the society even
though there was no revelation in the Quran or Sunnah approving that action” (Source ‘Abd al-Rahman Taj, Siyasah
Shar‘iyyah wa al-Fiqh al-Islami)

As far as the implementation is concerned, it is about the institutionalisation of Siyasah Shar‘iyyah in respect
of policies that observe the following:

a. In compliance with the objective of Shariah in deciding any policies.

b. Any policies does not contravene the specific rulings of the Quran and Sunnah of the Prophet SAW.

c. The government policies should aim at facilitating or opening the doors of mercy and beneficence to the
people.

Based on the definitions, Muslim scholars further divided Siyasah Shar‘iyyah into three types:

1. Siyasah Iqtisadiyyah
Siyasah Shar‘iyyah relating to the management and administration of the government in economic
matters includes the following example:

a. Bank Negara Malaysia (BNM) / Central Bank of Malaysia

b. Securities Commission (SC)

48 Topic 2 Rule-Making Process in Islamic Law

2. Siyasah Idariyyah
Siyasah Shar‘iyyah relating to the management and administration of the government, in matters
pertaining to social and general administration of the state includes the following examples:

a. Agensi Antidadah Kebangsaan (AADK) / National Anti-Drugs Agency

b. Jabatan Kehakiman Syariah Malaysia (JKSM) / Syariah Judiciary Department Malaysia

c. Majlis Amanah Rakyat / Council of Trust for the People (MARA)

3. Siyasah Qada’iyyah
Siyasah Shar‘iyyah relating to the management and administration of the government, in matter
pertaining to juridicial and administration of justice includes the following examples:.

a. Civil Courts

b. Shariah Courts

c. The Kuala Lumpur Regional Centre for Arbitration (KLRCA)

Topic 2 Rule-Making Process in Islamic Law 49

 PRACTICE QUESTIONS

1. The objective of Shariah is to protect:

I. Religion
II. Life
III. Intellect
IV. Lineage
V. Property

A. I, II, III and IV

B. I, II, IV and V
C. I, III, IV and V
D. All of the above

2. What is the definition of Maqasid Shariah?

A. All injunction and commandments of Shariah aim at avoiding harm and acquiring benefit to the
whole mankind.

B. Islamic teaching and systems which were revealed to the Prophet Muhammad SAW, as the way of life.

C. Knowledge of practical rulings of Shariah which are deduced from their respective particular evidence.

D. A saying, action or approval related to the Prophet Muhammad SAW.

1. Among the following which is/are EXCLUDED as a source of Shariah rulings:

I. Ijma’ (Consensus of opinions)
II. Qiyas (Analogical deduction)
III. Istihsan (Juristic preference)
IV. ‘Urf (Customary practice)

A. II
B. III
C. IV
D. None of the above

2. Ijma’ is ___________.
A. All that is narrated from Prophet Muhammad saw, including his actions, sayings and whatever he has
tacitly approved.

B. The extension of a Shariah value from the original case, to a new case, because the latter has the
same effective cause (‘illah) as the former.

C. The unanimous agreement of the mujtahidin of the Muslim community of any period following the
demise of Prophet Muhammad saw on any matters.

D. The speech of Allah, sent down upon the last Prophet Muhammad saw, in its precise meaning and
precise wording, transmitted to us by numerous persons (tawatur), both verbally and in writing.

50 Topic 2 Rule-Making Process in Islamic Law

Topic 3
Rule-Making Process in Modern Islamic Banking and Finance

Learning Objectives
At the end of this topic, you will be able to:
• Explain the concepts of Shariah Governance Framework in Islamic Banking and Finance in Malaysia
• Describe the roles and duties of Shariah Advisory Council of Bank Negara Malaysia and Securities
Commission
• Describe the roles and duties of Shariah Committee
• Describe the roles and duties of Shariah Advisor at the fund management level
• Describe the roles and duties of Shariah Officer at an Institutional level

UNIT 1: SHARIAH GOVERNANCE FRAMEWORK IN ISLAMIC BANKING AND

FINANCE IN MALAYSIA
Islamic Financial Institutions (IFIs) and typical Financial Institutions share a common institutional arrangement
of corporate governance framework except the additional set of organizational arrangement in IFIs to meet
the requirement of Shariah compliance in all aspects of its business transactions and operations.

Func�ons Typical Financial Addi�on in IFIs Remarks

Ins�tu�ons
Governance Board of directors Shariah commi�ee Independent organisa�on which provide decisions, views
and opinions with regard to Shariah related ma�ers.
Report directly to the board.

Internal & external Shariah auditors Perform by internal audit personnel that are trained in
auditors Shariah. Conduct audit on Shariah related ma�ers. The
Risk result of assessment will be reported to Shari'ah
Management commi�ee and the board.
& Internal Internal & external Shariah auditors Form part of the integrated riskmanagement control
Control auditors func�on to iden�fy allpossible risks of Shariah
non-complianceand provide mi�ga�ng measures to
reduce the risk.

Compliance Regulatory & financial Shariah review Con�nually assess the level of Shariah compliance of all
compliance officers, func�ons or unit ac�vi�es and opera�ons. Where instance of
unit or department non-compliances are iden�fied, to take prompt rec�fica�on
measures and put in place the necessary mechanism to
avoid recurrences. Report to Shariah commi�ee, the board
and administra�vely to the management

Table 2 : Financial Institutions Governance Framework

Islamic Financial Regulators in Malaysia

Bank Negara Malaysia (BNM) and Securities Commission (SC) are the regulators of Malaysia Islamic financial
system. Both BNM and SC have put in place the right framework in ensuring the compliance of IFIs to the
precept of Shariah.

Topic 3 Rule-Making Process in Modern Islamic Banking and Finance 51

 Diagram 17: Islamic Financial Regulators in Malaysia

The Shariah Advisory Council (SAC) is the highest authority of Shariah controls functions for IFIs. In order to
enforce Shariah in Islamic finance, BNM and SC have adopted a two-tier Shariah governance infrastructure
comprising two vital components, which are a centralised SAC and an internal Shariah committee/ Shariah
advisor.

Bank Negara Malaysia

Bank Negara Malaysia (BNM), is a statutory body which started operations on 26 January 1959. BNM is
governed by the Central Bank of Malaysia Act 2009. The role of BNM is to promote monetary and financial
stability. This is aimed at providing a conducive environment for the sustainable growth of the Malaysian
economy.

Securities Commission Malaysia

The Securities Commission Malaysia (SC) is a statutory body entrusted with the responsibility of regulating
and systematically developing the Malaysia’s capital markets. The SC was established on 1 March 1993. It
has direct responsibility in supervising and monitoring the activities of market institutions and regulating all
persons licensed under the Capital Markets and Services Act 2007.
Securities
Commission

SAC of
Bank Negara Malaysia

Shariah Commi�ee Shariah Advisor

of Capital Market
of Banks & takaful Product

Shariah Officer
of Banks & takaful

Diagram 18: Shariah Governance in Malaysia

52 Topic 3 Rule-Making Process in Modern Islamic Banking and Finance

 UNIT 2: ROLES AND DUTIES OF SHARIAH ADVISORY COUNCIL (SAC) OF BNM AND SC

Roles and Duties of SAC of BNM

1. The SAC has been given the mandate to ascertain the Islamic law for the purposes of Islamic banking
business, takaful business, Islamic financial business, Islamic development financial business, or any
other businesses, that are based on Shariah principles and are supervised and regulated by BNM.

2. As the reference body and advisor to BNM on Shariah matters, the SAC is also responsible for validating
all Islamic banking and takaful products to ensure their compatibility with Shariah principles.

3. In addition, the SAC advises BNM on any Shariah issues pertaining to Islamic financial business or
transactions of BNM, as well as other related entities. In the recent provisions of the Central Bank of
Malaysia Act 2009, the roles and functions of the SAC is accorded the status as the sole authoritative
body on Shariah matters pertaining to Islamic banking, takaful and Islamic finance in Malaysia.

4. In addition, the courts and arbitrator are also required to refer to the rulings of the SAC for any proceedings
relating to Islamic financial business, and such rulings shall be binding. The SAC comprises prominent
scholars and Islamic finance experts, whom are qualified individuals with vast experience and knowledge
in various fields, especially in finance and Islamic law

Roles and Duties of SAC of SC

1. The SAC was given the mandate to ensure that the running of the Islamic capital market (ICM) complies with
Shariah principles. Its scope of jurisdiction is to advise the SC on all matters related to the comprehensive
development of the ICM, and functions as a reference centre for ICM-related issues.

2. The SAC is also responsible for issuing a list of Shariah-compliant securities (formerly known as list of
Shariah-approved securities). The list is constantly updated and the SC announces the updated list twice
a year.

Topic 3 Rule-Making Process in Modern Islamic Banking and Finance 53

 UNIT 3: ROLES AND DUTIES OF SHARIAH COMMITTEE

The Shariah committee is expected to understand that in the course of discharging the duties and
responsibilities, they are responsible and accountable for all Shariah decisions, opinions and views provided
by them. Among others, they are expected to:

1. Advise the board and IFI

The Shariah committee is expected to advise the board and provide input to the IFI on Shariah matters in
order for the IFI to comply with Shariah principles at all times.

2. Endorse Shariah policies and procedures

The Shariah committee is expected to endorse Shariah policies and procedures prepared by the IFI and
to ensure that the contents do not contain any non-Shariah compliant elements.

3. Endorse and validate relevant documentations

To ensure that the products of the IFI comply with Shariah principles, the Shariah committee must
approve:

a. The terms and conditions contained in the forms, contracts, agreements or other legal documentations
used in executing the transactions; and

b. The product manual, marketing advertisements, sales illustrations and brochures used to describe
the products.

4. Assess work carried out by the Shariah review and Shariah audit
To assess the work carried out by the Shariah review and Shariah audit complies with Shariah matters. It
is the duty of the Shariah committee to provide their assessment of Shariah compliance and assurance
information in the annual report.

5. Assist related parties on Shariah matters

The related parties of the IFI such as its legal counsel, auditor or consultant may seek advice on Shariah
matters from the Shariah committee and the Shariah committee is expected to provide the necessary
assistance to the requesting party.

6. Advise on matters to be referred to the SAC of BNM

The Shariah committee may advise the IFI to consult the SAC on Shariah matters that cannot be resolved
internally.

7. Provide written Shariah opinions

The Shariah committee is required to provide written Shariah opinions in circumstances where the IFI
makes reference to the SAC of BNM for further deliberation, or where the IFI submits applications to the
BNM for new product approval.

54 Topic 3 Rule-Making Process in Modern Islamic Banking and Finance

 UNIT 4: ROLES AND DUTIES OF SHARIAH ADVISOR AT FUND MANAGEMENT LEVEL

Among other, Shariah advisor is expected :

1. To advise all aspects of Islamic fund management business in accordance with Shariah principles.

2. To provide Shariah expertise and guidance on all matters, particularly in documentation, structuring and
investment instruments, and ensure compliance with relevant SC regulations and/or standards, including
resolutions issued by the SAC.

3. To review reports prepared by compliance officers of the Islamic fund manager on investment transaction
to be in compliance with Shariah principles.

4. To provide a written opinion and/ or periodic report to confirm and certify whether the Islamic fund
management business has been managed and/or administered in accordance with Shariah principles.

In carrying out the roles above, a Shariah advisor must act with due care, skill and diligence.

Topic 3 Rule-Making Process in Modern Islamic Banking and Finance 55

 UNIT 5: ROLES AND DUTIES OF SHARIAH OFFICER/SECRETARIAT AT INSTITUTIONAL
LEVEL (BANK & TAKAFUL)
1. Shariah Review

a. Shariah review refers to a function that conducts regular assessment on the compliance of the
operations, business, affairs and activities of the IFI with Shariah requirements.

b. The review process shall cover:

i. identify, assess and monitor the compliance of the IFI’s business operations and activities with
Shariah;

ii. report to the board, Shariah committee and senior management regularly on Shariah non-
compliance issues and findings;

iii. inform and provide updates to the board, Shariah committee and senior management on the
latest developments in legal and regulatory requirements in Islamic finance, especially in relation
to issuance of the SAC rulings; and

iv. ensure adequate training and guidance are provided to the officers of an IFI on relevant Shariah
requirements governing the IFI’s operations, business, affairs and activities.

2. Shariah Audit

a. Shariah audit refers to a function that provides an independent assessment on the quality and
effectiveness of the IFI’s internal control, risk management systems, governance processes as well as
the overall compliance of the IFI’s operations, business, affairs and activities with Shariah.

b. The scope of Shariah audit shall cover:

i. establish an audit methodology to assess the risk profile and vulnerabilities of each auditable
area;

ii. generate an audit plan for the assignments to be performed;

iii. establish clear documented audit programs that provide guidance to the internal auditors in
gathering information, auditing procedures and audit assessment; and

iv. communicate results to the board and Shariah committee through an audit report, detailing the
audit findings and recommendations for rectification measures, as well as the auditee’s responses
and action plans.

3. Shariah Risk Management

a. Shariah risk management refers to a function that systematically identifies, measures, monitors and
reports Shariah non-compliance risks in the operations, business, affairs and activities of the IFI.

56 Topic 3 Rule-Making Process in Modern Islamic Banking and Finance

 b. Shariah risk management function involves:

i. integrate Shariah non-compliance risk considerations with enterprise-wide risk management;

ii. identify Shariah non-compliance risk exposures in the business operations and activities of the
IFI;

iii. assess Shariah non-compliance risk and measure the potential impact of the risk exposures to
the IFI;

iv. establish appropriate risk mitigation measures;

v. monitor Shariah non-compliance risk exposures and effectiveness of the risk mitigation measures;

vi. report to the board, Shariah committee and senior management on the Shariah non-compliance
risk exposures; and

vii. constructively challenge decisions that may give rise to Shariah noncompliance risks.

4. Secretariat to the Shariah committee

a. An IFI shall appoint a secretariat to serve the Shariah committee. The secretariat has the responsibility
to provide operational support for effective functioning of the Shariah committee, which includes:

i. coordinating communications and disseminating information among the Shariah committee, the
board and senior management;

ii. performing in-depth research and studies on Shariah issues;

iii. providing day-to-day advice to relevant parties within the IFI on Shariah matters based on the
rulings of the SAC and decisions or advice of the Shariah committee;

iv. ensuring proper dissemination of decisions or advice of the Shariah committee within the IFI; and

v. undertaking administrative and secretarial functions to support the Shariah committee.

Topic 3 Rule-Making Process in Modern Islamic Banking and Finance 57

 PRACTICE QUESTIONS

1. Shariah Advisor/Committee of IFI is an independent body of specialized jury in ______Religion

A. Fiqh al-munakahat (Islamic Family Law)

B. Fiqh al-muamalat (Islamic Commercial Law)

C. Fiqh al-jinayat (Islamic criminal law)

D. Fiqh al-ibadat (jurisprudence of worship)

2. Following are the duties or responsibilities of Shariah committee, EXCEPT:

A. To advise the Board of Directors on Shariah matters in order for the IFI to comply with Shariah
principles at all times.

B. To endorse Shariah Compliance Manuals.

C. To advise which Shariah products are profitable and marketable.

D. To advise on matters to be referred to the Shariah Advisory Council of BNM

58 Topic 3 Rule-Making Process in Modern Islamic Banking and Finance

Topic 4
Overview of Fiqh Al- Mu‘amalat Al-Maliyyah

Learning Objectives
At the end of this topic, you will be able to:
• Describe the salient features and principles of mu‘amalat
• Explain the importance of mu‘amalat
• Explain the relationship between mu‘amalat and Islamic economy
• Describe the general prohibitions in mu‘amalat contracts

UNIT 1: SALIENT FEATURES AND BASIC PRINCIPLES OF MU‘AMALAT

Basic principles of Shariah rulings in mu‘amalat:

1. Freedom of Contracts
The meaning of one of the Hadith of the Prophet SAW says that Muslims are free to put conditions in
their agreements except that prohibits something is permissible or permits something is prohibited.

Prophet SAW said:

“Muslims are bound by the conditions they made; except a condition that legalises impermissible act or inval-
idates permissible act”. (Sunan al-Tirmizi: 1352)

2. Permissibility as Original Status of Matters

According to an Islamic legal maxim ‘permissibility is the basic norm with regards to things’. According to
the Shariah, the status of all matters other than rituals is permissible until evidence is given that a certain
matter is prohibited. This rule has been emphasised in a number of Quranic verses and Hadith such as:

Quran Verses:

Allah SWT says:

“And He has subjected to you, as from Him, all that is in the heavens and on earth: Behold, in that are Signs
indeed for those who reflect” (al-Jathiyah 45:13)

Allah SWT says:

“Say, I do not find within that which was revealed to me [anything] forbidden to one who would eat it unless it
be a dead animal or blood spilled out or the flesh of swine - for indeed, it is impure - or it be [that slaughtered
in] disobedience, dedicated to other than Allāh. But whoever is forced [by necessity], neither desiring [it] nor
transgressing [its limit], then indeed, your Lord is Forgiving and Merciful” (al-An‘am 6:145)

Allah SWT says:

“Why should ye not eat of (meats) on which Allah’s name hath been pronounced, when He hath explained to
you in detail what is forbidden to you - except under compulsion of necessity? But many do mislead (men) by
their appetites unchecked by knowledge. Thy Lord know the best those who transgress” (al-An‘am 6:119)

Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah 59

 Hadith:

Prophet SAW said:

“Reconciliation is allowed among the Muslims, except for reconciliation that makes the lawful unlawful, or the
unlawful lawful. And the Muslims will be held to their conditions, except the conditions that make the lawful
unlawful, or the unlawful lawful.” (Sunan al-Tirmizi)

3. Custom is of Force
An Islamic legal maxim states that “Custom is of Force”. In many Shariah commercial contracts many
things become permissible following the customs. An example of this maxim which is a valid customary
practice by scholars is the acceptance of the definition used in spot trading for cross border transactions.

4. Conclusion of Contract by Mutual Consent

Free mutual consent of the contracting parties is a prerequisite for the validity of a contract. In other
words, the contract entered into by the two parties must be free from any elements of coercion, fraud,
misrepresentation or other illegal means. Otherwise, the contract is void. The principle of free mutual
consent has been emphasised in a number of Quranic verses and Hadith such as:

Quran Verses:

Allah SWT says:

“O you, who believe, devour not your property among yourselves by unlawful means except that it be trading
by your mutual consent”. (al-Nisa’ 4:29)

Hadith:

Prophet SAW said:

“The contract of sale is valid only by mutual consent”

Prophet SAW said:

“Allah has forgiven my follower for mistakes and forgetfulness, and what they are forced to do”. (Sunan Ibn Majah)

5. Conformity of Contract with The Objectives of Shariah (maqasid al-Shariah)

Any transaction or contract entered by individuals shall be in accordance with the Maqasid al-Shariah i.e.
preservation of faith, life, lineage, intellect and wealth. Otherwise, the transaction is considered invalid.

6. The Principle of Wide Circulation of Wealth

Hoarding is not permitted in Islam because it will lead to the accumulation of wealth in the hands of a
few people without circulating and pumping it back into the economic circle. Wealth and property should
be circulated among the general public and actively transferred from one hand to another in the form of
expenditures and investments. For this reason, Shariah facilitates the proper circulation of wealth and
transfer of property ownership among the public. There are a number of Shariah compliant financial and
economic transactions that can be used as the tools. In addition, the obligation to pay zakah is another
principle of the distribution of wealth in Islam.

60 Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah

 Allah SWT says:
“O ye who believe! There are indeed many among the priests and anchorites, who in Falsehood devour the
substance of men and hinder (them) from the way of Allah SWT. And there are those who bury gold and silver
and spend it not in the way of Allah SWT - announce unto them a most grievous penalty” (al-Tawbah 9:34)

7. The Principle of Transparency in Commercial Dealings

The principle of transparency means that all financial transactions must be conducted in a manner
where all the parties involved are clear about the important facts on the contract including the terms
and conditions of their dealings. This is to avoid any disputes, clashes or damages.

8. Justice and Fair Dealings

Justice in the context of Islamic commercial law means placing wealth and property in its proper place as
prescribed by the Creator.

This includes the right to acquire wealth, to discharge all the duties related to such wealth and to find the
wisest ways to spend or to invest the wealth. Justice is the general principle of Shariah that needs to be
observed in all Islamic transactions and contracts. Contracts that have the elements of fraud, deception
or uncertainty are prohibited in Islam. There are a number of Quranic verses on justice such as:

Allah SWT says:

"We sent aforetime our messengers with Clear Signs and sent down with them the Book and the Balance (of
Right and Wrong), that men may stand forth in justice; and We sent down Iron, in which is (material for) mighty
war, as well as many benefits for mankind, that Allah SWT may test who it is that will help, Unseen, Him and
His messengers: For Allah SWT is Full of Strength, Exalted in Might (and able to enforce His Will)” (al-Hadid 57:25)

Allah SWT says:

"O you who believe, stand up as witnesses for God in all fairness, and do not let the hatred of a people deviate you
from justice. Be just: This is closest to piety; and beware of God. Surely God is aware of all you do." (al-Ma’idah 5: 8)

Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah 61

 UNIT 2: IMPORTANCE OF MU‘AMALAT

The followings are among the importance of mu‘amalat in relation to mankind as a whole:

1. To establish the spirit of brotherhood as the primary objective of transacting parties. The mu‘amalat by
contracting parties is expected to be for their mutual benefits and this will ultimately develop the notion
of brotherhood especially among them.

2. To ascertain and enforce the rights and duties of the parties involved in the mu‘amalat. A valid and
enforceable contract would bind the parties to the contract and both parties are under obligation to act
according to such contract. In fact, the parties have the rights to take legal action against the other party
who has not performed his obligation as prescribed in the contract.

3. To avoid any misunderstandings among the parties in the transactions. The principles of mu‘amalat
provide some fundamental guidelines and if it is observed by the contracting parties, it would certainly
protect them from any violence, fraud, dishonesty and misappropriation.

4. To upgrade the status of mankind to a respectable position (ashraf al-makhluqat) through faith and
discipline as the mu‘amalat contributes to the role of human personality building. For example, it
regulates all parties to a transaction with the spirit of honesty, justice and brotherhood.

5. To encourage human beings to participate actively in commercial transactions. The Prophet SAW said:
“The trustworthy, honest Muslim merchant will be with the martyrs on the Day of Resurrection”. (Sunan
Ibn Majah)

62 Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah

 UNIT 3: RELATIONSHIP BETWEEN MU‘AMALAT AND ISLAMIC ECONOMY

Islamic economy are driven by Fiqh mu‘amalat, Islamic regulations which relate to trading ‘hukm’ for a
social relationship which consists of various economic and non-economic activities. Having that in mind, the
relationship between mu‘amalat and Islamic economy would be as follows:

Mu’amalat is social
rela�onship which
consists of various
economics and
non-economics
ac�vi�es.

Fiqh Mu’amalat is
Islamic regula�ons Islamic economics
which relate to trading are driven by Fiqh
"hukm" which is the Mu’amalat
framework for Islamic
economic.

Diagram 19: Relationship between Mu‘amalat and Islamic Economy

Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah 63

 UNIT 4: GENERAL PROHIBITIONS IN MU‘AMALAT CONTRACTS

Trade and commerce in Islam must conform to the requirements of the Shariah, which broadly speaking refer
to:

• Abstaining from prohibitions, (haram matters); and

• Observing that every contract possesses all its essential elements and that every essential element meets
the necessary conditions.

Shariah Requirements in Mu‘amalat

Shariah

Shariah
Requirement

Observing that every

contract possesses all its
essen�al elements
meets and that every
essen�al element meets
the necessary condi�ons

Shariah

Diagram 20: Shariah Requirements in Mu‘amalat

Prohibitions
1. Riba

2. Gharar, i.e. ambiguity or uncertainty

3. Maysir, i.e. anything that involves betting

4. Producing and selling non-halal goods i.e. pork, liquor, etc

5. Facilitate Shariah non-compliance activities, i.e. selling of grape to wine producer

64 Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah

Prohibition of Riba
Riba in Arabic literally means an increase, expansion or growth. In Islamic jurisprudence it refers to unjus-
tified increase in the eye of Shariah but not every increase. Contrary to the general understanding, riba is
not narrowly confined to premium that must be paid by the borrower to the lender, instead it refers to any
benefits arise out of a loan contract or transaction that involves usurious (ribawi) items.

The prohibition of riba is clearly stated in the Quran and Hadith:

Quran Versers:

Allah SWT says:

“They say: trade is like riba, but Allah SWT has permitted trading and forbidden riba” (al-Baqarah 2:275)

Allah SWT says:

“O you who believe: Fear God and give up what remains of your demand for usury if you are indeed believers”.
(al-Baqarah 2: 278)

Hadith:

Jabir ibn Abdillah said that Allah ‘s Messenger SAW cursed the accepter of interest and its payer, and one who
records it, and the two witnesses, and he said: “They are all equal (in guilt)”. (Sahih Muslim)

Division of Riba
Notwithstanding of the foregoing, riba can be divided into riba al-duyun and riba al-buyu’.

Debt-Based Riba (Riba al-Duyun)

Debt based riba involves imposing an interest or any other extra benefits in favour of the creditor by virtue
of lending money. Debt based riba mainly takes two forms:

1. Riba al-Jahiliyyah: An additional benefit imposed on the borrower attributed to borrower default in
repaying the sum borrowed with the stipulated time. In riba al-jahiliyyah, the additional benefit was
never been stipulated upfront, instead it comes into effective due to borrower failure to settle the debt
within the agreed period. It was initially and widely practiced during the period of jahiliyyah among the
pagan.

2. Riba al-Qard: Simply put, riba al-qard refers to any benefit imposed upfront by virtue of lending money
regardless whether the borrower will default in the future or not. Riba al-qard takes many forms as the
benefit imposed is not confined to monetary term, instead it could be in term of kind, usufruct or any
other possible forms of benefits.

The idea behind the prohibition of riba al-qard in particular and other type of riba is to avoid any
oppressive conduct that deters the borrowers who are in need of money. On this score loan contract in
Islam is categorised as gratuitous contract as it is meant to help those in need of money.

Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah 65

 Sale-Based Riba (Riba al-Buyu’)
Guidance on the riba al-buyu’ is derived from the Hadith reported by Abdullah bin Samit:

Prophet SAW said:

“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, like for like,
equal for equal, and hand-to-hand. If the commodities differ, then you may sell as you wish provided that (the
exchange) is hand-to-hand”. (Sahih Muslim)

From the principles of Islamic jurisprudence perspective, the Hadith indicated elements that represent the
effective cause (‘illah) of the prohibition of riba in the contract of exchange. These two effective causes are:

a. Deferment of the counter value in term of time; and

b. Different measurements of the counter value of similar ribawi items.

Based on these two elements as indicated in the Hadīth, scholars classify riba:

a. Riba al-Nasi’ah:
Riba by virtue of deferment in time of counter values (ribawi item) that belong to:

i. the same basis ('illah) and same kind eg: gold and gold; or

ii. the same basis ('illah) and different kind eg: gold and silver.

b. Riba al-Fadl:
Riba by virtues of excess of one of the counter values (ribawi items) that falls under the same basis ('illah)
and same kind.

Ilustration for Riba al-Nasi’ah and Riba al-Fadl:

• If one buys gold in exchange for gold, then the exchange must be at equal measurement and spot payment.
Should the equal measurement is lacking, the transaction tantamount to riba al-fadl. On the other hand,
should the spot payment is lacking the transaction tantamount to riba al-nasi’ah.

• If one buys gold in exchange for silver, only the requirement of spot payment is required but not the
requirement of equal measurement. This is due to both counter values belong to same basis ('illah) but
do not fall under the same kind.

• If one buys dates in exchange for gold or silver none of the two requirements are mandatory. Parties to
the contract are at liberty to transact as they wish because both counter values neither belong to the
same basis ('illah) nor kind.

The above illustration is equally applicable to the remaining ribawi items.

66 Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah

 Diagram 21: Types of Riba

Extension of the Application of Ribawi Transaction

Further to the above illustration, it is pertinent to ask whether the list of ribawi items is exhaustive or it can
be further extended to other similar items.

The answer is affirmative. The ribawi items are extended to other items that share similar effective cause.
It is submitted that, two (gold and silver) out of the six items represent a medium of exchange whereas the
remaining four items (wheat, barley, dates and salt) are subject to divergence of opinions among scholars.
Shafi’i holds the view that four items are ribawi by virtue of their edibilility. Hence, the exchange between
the two other edible items, for instance rice, must be subjected to the same rule. Hanafi, on the other
hand, viewed that the effective cause of the four items are attributed to the nature of those items that are
measured by weight and capacity. Therefore, any other items that are measured by weight and capacity
according to Hanafi madhhab are equally ribawi items. Yet another view is from Maliki who asserted that the
effective cause of those items is foodstuffs and these items are preserveable.

Simply put, majority of the scholars agreed that the list of ribawi items stipulated in the Hadith are extendable
to other items that share similar effective causes except they differ on what constitute these effective cause.

Effective Cause of Ribawi Items

BASIS (MEDIUM OF EXCHANGE) BASIS (FOODSTUFFS/STAPLE FOOD)

Gold Grains - rice, wheat, corn

Silver Meats - beef, mu�on, chicken
Currency : MYR, USD Vegetables - tomatoed, bean
Fruits - apples, oranges
Condiments - salt, sugar

Diagram 22: Ribawi Materials

Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah 67

 Rules of Exchange of Ribawi Items

Ribawi items • Items must be of the same measurement

of the same
kind of the (weight or number of units)
same basis • Payment/delivery must be on cash terms

Ribawi items • Differences in measurement (weight or number

of different of units) is allowed
kind of the
same basis • Payment/delivery must s�ll be on cash terms

Ribawi items
of different
kind of • No rules are imposed
different
basis

Diagram 23: Rules of Exchange of Ribawi Materials

Wisdom of the Prohibition of Riba

1. Riba Impairs Social Justice

Riba violates the principles of justice and equity (al-‘adl wa al-ihsan) in financial transaction because profit
of one party is guaranteed without giving any due regards to the other party except for the borrowed
money. On the contrary, loan in Islām is considered as gratuitous-based contract because the creditor is
absolutely prohibited from taking any advantage out of the loan on his favour except for the returning of
the principal borrowed.

2. Riba Hampers the Creation of New Wealth

The inherent nature of riba is anti-sustainable wealth creation. The artificial wealth created by riba is
detached completely from any real commercial activities; instead wealth is created out of thin air by
imposing interest for lending money. The so called interest earned will be deployed to create another
bubble of wealth. Islamic finance on the other hand, emphasises very much on the creation of wealth
that stimulates real economic activities. Profit in Islamic finance must always be associated with the real
economic activities.

3. Riba Hampers Wealth Transfer

Wealth transfer is an extension of wealth creation. It refers to the circulation of wealth by way of its proper
distribution among different parts of the societies. Ribawi system will definitely ruin the circulation and
proper transfer of wealth as there is no real wealth is created. Thus, large segment of the society will not
benefit from the artificial wealth being created; instead it will bring harm to the society at large. Case in
point is the government’s exercise of issuing notes and bond in order to raise funds, which will eventually
end up by issuing another debt instruments to cover the payment of the expiring debt. This recurring
exercise will certainly accumulate burden that brings country into debt crisis.

68 Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah

Differences between Profit and Interest

2. Derived from amount of money added upon cost price 2. Derived from amount of money added on top
of capital lend to debtor

4. Interest is guaranteed and free from any liability

encumbrance and duty
Table 3 : Differences between Profit and Interest

Prohibition of Gharar
The Arabic word of gharar means deceit/fraud (khid‘ah), uncertainty, danger/risk, and peril/ hazard (khatar)
that might lead to destruction and loss. Avoidance of gharar aims at avoiding any element that may give rise
to enmity, hostility and dispute among the contracting parties arise out of uncertainty.

Thus, avoidance of gharar is applicable to the whole arrangement of any given contract ranging from parties
to contract, asset, offer and acceptance as well as price.

A contract is presumed to suffer from gharar when:

1. The parties are unaware whether such an event will take place or not.

2. The subject matter is not within the knowledge of the parties.

3. There is no certainty over the existence of the subject matter.

4. Its acquisition is in doubt.

5. Its quantum is unknown.

Examples of gharar are a sale of fish in the sea, birds in the sky, sale of an unborn calf in its mother’s womb,
sale of un-ripened fruits and sale of a runaway animal.

Gharar is prohibited in Islam based on the rule of justice and fair dealings. Gharar, however, is tolerated in
certain circumstances, in which the risk is:

1. Negligible except in trust contract (‘uqud al-amanah) like Murabahah contract.

2. Inevitable: by way of necessity such as public needs, like Salam contract.

3. Unintentional (to some jurists).

4. In charitable contracts (‘uqud al-tabarru‘at) according to most of the jurists. Mohammad Hashim Kamali
stated that “gharar does not in principle apply to ‘uqud al-tabarru‘at such as gift. For example, a person
who wishes to donate a meal without specifying the delivery time.”

Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah 69

 Gharar can be classified into two types as shown below.

TYPES OF GHARAR

GHARAR FAHISH GHARAR YASIR

(Major Gharar) Minor Gharar

In general terms major gharar is: • Minor gharar or minor uncertainty is

• Uncertainty which is so great that it forgiven
becomes unacceptable, or
• Contracts involving minor gharar are
• It is so vague that there is no means permissible and valid.
of quan�fying it.
• The Gharar that causes a contract to
be invalid is major gharar

Diagram 24: Types of Gharar

Maysir
Gambling (maysir) is betting or charging something that will be forfeited if one fails to obtain the greater gain
that one hopes for.

Speculation is not a gambling. Some jurists say that speculation is prohibited, but contracts involving
speculation are still valid. There are two types of gambling :

1. Gambling in game/competition.
Competition in which competitors pay money then the winner takes all the money, or a prize is bought for
him with it. It means all kinds of games of chance in which you win or lose money like dice, card games,
lottery, football pools, lotto, betting and sweepstakes are regarded as gambling.

2. Gambling in lucky draw.

A person purchases a coupon at a certain price without receiving anything for it, only to subscribe in the
lucky draw. This is forbidden since it is nothing but gambling.

70 Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah

 PRACTICE QUESTIONS

1. The following are description of riba contract, EXCEPT:

A. The prohibition of riba is mentioned multiple times in the Quran

B. Riba will occur in the transaction that involve with the delay of delivery of two different currencies.

C. The practice of Bank charges interest on the loan is not consider engaging in riba transactions if the
customer willing to the pay for the said interest.

D. Literally means excess, increase, expansion, growth

2. Which of the following is NOT correct in describing gharar?

A. Refers to uncertainty and ignorance of one/both parties in a contract over the substance of the
contract.

B. Prohibition of gharar is made conclusively by the Sunnah of the Prophet Muhammad S.A.W.

C. Gharar yasir is not tolerated and may result violability of a contract.

D. Gharar is not fixed in application as its application changes with the quality of knowledge, legal
framework, technology etc.

Topic 4 Overview of Fiqh Al- Mu‘amalat Al-Maliyyah 71

 Topic 5
Islamic Economics and Fundamentals of Islamic Banking and Finance

Learning Objectives
At the end of this topic, you will be able to:
• Describe economics and economic principles of Islam
• Explain Islamic view on economic problems
• Describe the development of Islamic banking and finance globally and locally
• Explain the differences between Islamic and conventional banking
• Explain the perspectives of Shariah in the implementation of Islamic bankin

UNIT 1: DEFINITION OF ECONOMICS AND ECONOMIC PRINCIPLES OF ISLAM

The Economic Principles of Islam

Islam has laid down certain principles and limits for the economic activity of a man so that the entire pattern
of production, exchange and distribution of wealth may conform to the Islamic standard of justice and equity.

What is Economics?
The word economics has many definitions, some of these definitions are:

a. Economics is the social science that studies the allocation of scarce resources to satisfy unlimited wants.

b. The social science concerned with the efficient use of limited or scarce resources to achieve maximum
satisfaction of human materials wants.

c. Economics is the study of choice and decision-making in a world with limited resources.

Definition of Islamic Economics

a. Islamic economics is a social science which studies the economic problems of people imbued with the
values of Islam.

b. It is a study of social science which enables people to perform their obligations to Allah SWT and to the
society.

c. Islamic economic is a study of an individual not only as an isolated individual but also a social individual
having;

i. Faith

ii. Ethics (believing in the six articles, his deeds is accountable to Allah SWT as it is guided by Shariah)

iii. Responsibility (propagating in good doing and prohibiting bad doing (Al-’Amr bi al-Ma‘ruf wa al-Nahy
‘an al-Munkar) in the society

72 Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance

Fundamentals of Islamic Economic Philosophy
1. Tawhid: a comprehensive concept, implying complete submission of oneself to The One and Unique
being, Who is the Creator, Sustainer, Owner of everything, All-knowing, All-wise, and the Most Powerful.
2. Risalah: an institution of Prophethood, which brings the revealed guidance in all dimensions of human
life from Allah SWT in the form of the Kitāb, and demonstrates its application through practice which is
recorded in the form of Sunnah.

3. Akhirah: the hereafter for accountability, and for getting the outcome of all deeds including economic
activities, in an eternal life.

4. Economic and Non-Economic well-being for leading a good life and discharging socio-Islamic obligations
in this world and for achieving the home of hereafter.

Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance 73

 UNIT 2: VIEWS OF ISLAM ON THE ECONOMIC PROBLEMS

Islam views the economic problems from the following perspectives:

1. Abundant versus Scarcity of Resources

These Quran verses stipulates that Allah SWT has created resources in abundant, and there are enough
resources for all, implying that there is no absolute scarcity of resources. However resources in the
eyes of man are scarce and limited because there is a lack of means to reach them for examples, lack of
knowledge, skills, etc.

Allah SWT says:

“It is Allah SWT Who hath created the heavens and the earth and sendeth down rain from the skies, and with
it bringeth out fruits wherewith to feed you; it is He who hath made the ships subject to you, that they may sail
through the sea by His command; and the rivers (also) hath He made subject to you”. (Ibrahim 14:32)

Allah SWT says:

“And He give you of all that ye ask for. But if ye count the favors of Allah SWT, never will ye be able to count
them. Verily, man is given up to injustice and ingratitude“. (Ibrahim 14:34)

Allah SWT says:

“And the earth We have spread out (like a carpet); set thereon mountains firm and immovable; and produced
therein all kinds of things in due balance”. (al-Hijr 15:19)

Allah SWT says:

“And there is not a thing but its (sources and) treasures (inexhaustible) are with us; but We only send down
thereof in due and ascertainable measures”. (al-Hijr 15:21)

Scarcity of means necessitates a choice to provide higher values but at the same time performing one’s
mission in this life. Choice in Islam should be ranked according to the needs and fulfilment but not greediness.

According to the Islamic concept, wealth is considered as an endowment and a gift from Allah SWT and
human beings are considered as trustees of Allah SWT’s resources on earth. These resources are to be wisely
treated, not abused, destroyed, wasted or left to idle. Hence, when a man dies, one of the major questions
which will be asked is regarding the acquisition and spending of his wealth.

Prophet SAW said:

“Man’s feet will not move on the Day of Resurrection before he is asked about his life, how did he consume it,
his knowledge, what did he do with it, his wealth, how did he earn it and how did he dispose of it, and about
his body, how did he wear it out.” (Sunan al- Tirmidhi)

74 Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance

2. Unlimited Wants
Islam recognizes that human desires are unlimited. This is explained in the Quran and Hadith.

Allah SWT says:

“Fair in the eyes of men is the love of things they covet: Women and sons; Heaped-up hoards of gold and silver;
horses branded (for blood and excellence); and (wealth of) cattle and well- tilled land. Such are the possessions
of this world’s life; but in nearness to Allah SWT is the best of the goals (to return to)”. (Ali-‘Imran 3:14)

Allah SWT says:

“Thinking that his wealth would make him last for ever!” (al-Humazah 104:3)

Allah SWT says:

“And ye love wealth with inordinate love!”(al-Fajr 89:20)

Prophet SAW said:

“If a son of Adam were to own a valley full of gold, he would desire to have two. Nothing can fill his mouth
except the earth (of the grave). Allāh turns with mercy to him who turns to Him in repentance”. (Sahih al-Bukhari
and Muslim)

Based on these entire observations, Islam does not restricted human being to make choices as long as it
is in line with Shariah principles.

Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance 75

 UNIT 3: DEVELOPMENT OF ISLAMIC BANKING AND FINANCE

Rapid liberalisation in the Islamic finance industry, coupled with facilitative business environment has
encouraged financial institutions all around the world to move foward in Islamic banking business. This has
created a diverse and growing community of local and international financial institutions that indicates wide
recognition and acceptance to its presence as a solution for global economic crisis, which had impacted on
the contemporary banking and finance architecture.

1. Journey of Modern Global Islamic Finance

Although the concept of Islamic finance can be traced back about 1400 years, its modern global
developement can be outlined as follows:

• Al-Baraka, Egypt
• Bank Islam Malaysia Berhad, Malaysia
• Islamic Bank, Bangladesh
• Qatar Islamic Bank, Qatar
• Dar Al Mal Al Islamic Trust, Switzerland
• AHZ Global Islamic Finance, UK

• Islamic Bank of Brunei, Brunei

• Islamic Interbank Money Market, Malaysia
• Accoun�ng and Audi�ng Organiza�on for Islamic Financial Ins�tu�ons
(AAOIFI), Bahrain
• Bank Muamalat Malaysia Berhad, Malaysia

• Interna�onal Islamic Financial Market (IIFM), Bahrain

• Malaysia Interna�onal Islamic Finance Centre (MIFC), Malaysia
• Islamic Financial Services Board (IFSB), Malaysia
• Interna�onal Centre for Educa�on in Islamic Finance (INCEIF), Malaysia
• Bursa Suq al-Sila’ (BSAS) / Commodity Exchange, Malaysia

• Interna�onal Shariah Research Academy (ISRA), Malaysia

• Interna�onal Islamic Liquidity Management Corpora�on (IILM), Malaysia
• Islamic Interbank Benchmark Rate (IIBR) Thomson Reuters, New York
• Bloomberg AIBIM Bursa Malaysia MYR Sukuk Index, Malaysia
• First Sovereign Sukuk issued non-Muslim na�on, UK

Diagram 25: Global Islamic Financial Service Industry Development

76 Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance

2. Phases of Islamic Banking and Finance in Malaysia

Development Phases of Islamic Banking and Finance in Malaysia

Malaysia is recognised as one of the dynamic leaders and practitioners of Islamic finance. From its
inception in the 1960s, Islamic finance in Malaysia has made transitions through four distinct phases.
These four phases include the establishment of Islamic financial institutions and infrastructure, Islamic
windows, Islamic subsidiaries and liberalisation of Islamic finance.

Diagram 26: Phases of Islamic Banking and Finance in Malaysia

Phase 1
Establishment of Islamic Financial Institutions

Tabung Haji
The experience of Islamic bank in Malaysia can be traced from the birth of the world’s first Pilgrimage
Management and Fund Board or better known as Tabung Haji, which was established under Act 8 of
Pilgrimage Management and Fund Board 1969 and Act A 168 of Pilgrimage Management and Fund Board
(Amendment) 1973.

The objectives of this entity, among others are:

• To enable Muslims to save gradually to support their expenditure during pilgrimage and for other
beneficial purposes.

• To enable Muslims to have active and effective participations in investment activities which are
permissible in Islam through their savings.

• To protect the interests and welfare of pilgrims during pilgrimage by providing various facilities and
services.

Tabung Haji’s commitment and dedication in materialising the above objectives are evident, not only
by efficiently and effectively managing pilgrimage matters but also by becoming an alternative entity in
managing the investments of Muslims, in accordance to Islamic teachings, besides giving competitive
returns to the depositors.

In order to further strengthen its competitiveness domestically and internationally by way of diversifying
its scope and functions, a new act, the Pilgrimage Board Act 1995 or better known as Akta Tabung Haji
1995 (Act 535) was enacted on June 1, 1995. This new Act has automatically abolished the previous act
and consequently, the name Pilgrimage Management and Fund Board has been changed to Pilgrimage
Board (better known as Lembaga Tabung Haji) effective from August 28, 1997.

A more corporate-looking abbreviation, TH, was introduced to the Malaysian and international public to
replace the words Tabung Haji. Most of the funds mobilised by the Board are invested in corporate

Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance 77

 securities including subsidiary shares, real estate companies, trust funds, and short-term investment
such as government investment certificate. For the first time in 1990, the Board had invested in Islamic
bond based on Bay’ Bithaman Ajil and Musharakah concept.

Bank Islam Malaysia Berhad

The formal set-up of Islamic bank as a Shariah-based financial intermediary in Malaysia came into
existence when the National Economic Congress in 1980 passed a resolution for the government to
allow Tabung Haji to establish an Islamic bank in Malaysia. The initiative was partly influenced by the
global movement to develop alternative banking system serving the needs of the Muslims to comply with
Shariah principles.

This aspiration led to the establishment of the first Islamic bank, Bank Islam Malaysia Berhad (BIMB)
which commenced operations on 1 July 1983. The establishment of Islamic banks was made possible with
the passing of the Islamic Banking Act (IBA), which came into effect on 7 April 1983. The IBA empowers
the Central Bank of Malaysia (BNM) to supervise and regulate Islamic banks, similar to the case of other
licensed banks.

In the same year, the Government Investment Act 1983 was also enacted to empower the Government of
Malaysia to issue Government Investment Issue (GII), a sovereign security instrument to manage liquidity
of the newly established Islamic bank which is issued based on Shariah principles. With the issuance of
GIl, the Islamic bank could invest to meet the prescribed liquidity requirements as well as to invest their
surplus funds. The GII also enables BIMB to procure assets in the absence of assets sourced on its own.

Phase 2
Islamic Windows

Interest-Free Banking Scheme/Islamic Banking Scheme

Malaysia has always known to adopt a ‘gradualist’ approach in the development of its Islamic banking.

As such, the Government, with the major role played by the Central Bank has adopted a step-by-step
approach to achieve the objectives, in order to spread the virtues of Islamic banking on a nation-wide
basis, with many possible players and to be able to reach all Malaysians. This has led to the development
of the second phase of Islamic banking evidenced by the establishment of Islamic windows, which
commenced ten years after the establishment of Bank Islam.

On 4 March 1993, Bank Negara Malaysia introduced a scheme known as ‘Skim Perbankan Tanpa Faedah’
(SPTF) or Interest-free Banking Scheme. Later, it became known as ‘Skim Perbankan Islam’ (SPI) or Islamic
Banking Scheme. In this new arrangement, conventional banks were permitted to offer Islamic banking
services by providing the leverage on their existing infrastructure and branches.

Banks participating in SPI were required to have firewalls between their conventional and Islamic funds,
to establish Islamic banking units, to create an Islamic banking fund and to appoint at least one Shariah
consultant to advice on day-to-day operations of the Islamic banking division. This effort was deemed
as the most effective and efficient approach to increase the number of participation of local banking
institutions offering Islamic banking services at the lowest cost and within the shortest time frame.

78 Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance

Islamic Inter-Bank Money Market (IIMM)
With the increased number of players offering Islamic banking services, concern over its stability and
sustainability has become more inevitable. In particular there was an urgency to establish an Islamic
money market which is integral to the functioning of the Islamic banking system. This Islamic money
market could provide Islamic financial institutions with the facility for funding and adjusting portfolios
over the short-term and serve as a channel for the transmission of monetary policy for the Central Bank.

Consequently, Islamic Inter-bank Money Market (IIMM) was introduced on 3 January 1994 as a short-term
intermediary to provide a ready source of short-term investment outlets based on Shariah principles.

Through various Islamic financial instruments introduced and active interbank investment this would
allow surplus banks to channel funds to deficit banks, thereby maintaining the funding and liquidity
mechanism necessary to promote stability in the system. More importantly through the IIMM, the
Islamic banks and banks participating in the Islamic Banking Scheme are able to match their funding
requirements and efficiently based on Shariah requirements and principles. Bank Negara Malaysia (BNM)
also issued the Guidelines on the IIMM on 18 December 1993 to facilitate proper implementation of the
IIMM.

Phase 3
Islamic Subsidiaries

In 2003, Bank Negara Malaysia’s review called for the setting-up of the ‘Islamic subsidiary’ as the Islamic
windows achieved wide acceptance. The Islamic subsidiary was formed to give greater strategic focus
and resources as well as higher autonomy and governance for Islamic banks.

Among the commercial banks that set up distinct Islamic subsidiaries were:

• Hong Leong Islamic Bank which had its origin from a division before being incorporated as a separate
entity on 28 March 2005.

• Affin Islamic Bank Berhad (AFFIN ISLAMIC) and EONCAP Islamic Bank commenced business operations
on 1 April 2006.

• AmIslamic Bank (currently known as AmBank Islamic) started its operations on 1 May 2006. The
official launching ceremony was held on 18 May 2006.

• On 1 January 2008, Maybank’s Islamic Banking began to operate under a new subsidiary of Maybank
known as Maybank Islamic Bank Berhad (MIB).

During the same period, Malaysia adopted legal reforms to improve the efficiency of the Islamic Banking
and financial system and also remove any impediments to this reform. High Court judges started to
preside over matters relating to Islamic banking and finance.

At the Bank Negara’s level, Law Review Committee was set up to review domestic legislation and
incorporate Shariah principles wherever necessary.

Under the amendments to the Central Bank Act, a Shariah Advisory Council was established at the Central
Bank. The Council has authority in all matters relating to Islamic banking and finance.
Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance 79
 Phase 4
Liberalisation

The integration of local Islamic bank with international Islamic banks began in 2003 when three foreign
Islamic Banks have been granted a license by Bank Negara Malaysia to undertake Islamic Banking business.
The banks were:

• Kuwait Finance House (KFH) which commenced operations on 17 February 2006. In fact, KFH was the
first foreign Islamic bank to be licensed by the Ministry of Finance.

• Al-Rajhi Bank set up its first overseas operations in Malaysia in October 2006.

• Asian Finance Bank Berhad (AFB) was incorporated on 28 November 2005 and backed by a consortium
of shareholders, from leading Middle Eastern financial institutions; such as Qatar Islamic Bank and
associates (70%), RUSD Investment Bank Inc of Saudi Arabia (20%) and Global Investment House of
Kuwait (10%). Its first branch was opened on 19 January 2007. The Islamic banking license of AFB was
purchased by MBSB which is now known as MBSB Bank Berhad.

The liberal and open approach of Islamic banking sector is likely to promote increased competitiveness,
resilience and sustainability of the Islamic financial system as a financial intermediation. It will also
contribute towards facilitating greater cross border flows, in terms of increased trade and investment
transactions. This will give greater benefit to the customers as users of Islamic financial products and
services.

The Ninth Malaysian Plan, which covers the period of 2006 -2010 aims to position Malaysia as a global
Islamic financial hub. The hub will become a centre for originating, issuing and trading instruments for
the Islamic capital market as well as related treasury instruments. The hub will also serve as a platform for
the management of funds, an offshore Islamic financial services market, takaful and retakaful businesses.

3. Milestones of Islamic Banking and Finance in Malaysia

Malaysia has achieved significant milestones in the development of its Islamic financial services industry
and they are as follows.

Year Key Milestone

1969 Establishment of Pilgrims’ Fund Board (Lembaga Tabung Haji)
• Systema�c mobiliza�on of funds
• Assist Muslim community to perform Pilgrimage as well as par�cipate in investment
and economic ac�vi�es

1980 Bumiputera Economic Congress proposed the se�ng up of an Islamic bank

• Triggered by a growing revival of Islamic values amongst the Muslim popula�on
• Reinforced by the successful implementa�on of Islamic banks in the Middle East

1981 • Na�onal Steering Commi�ee undertook a study and made recommenda�ons on

all aspects of the se�ng up and opera�ons of an Islamic bank

1983 • Enactment of the Islamic Banking Act (IBA) 1983

• Bank Islam Malaysia Berhad (BIMB) was incorporated as Malaysia’s first Islamic
bank
• BIMB was given a grace period of 10 years to operate without compe��on, to
80 protect
Topic 5 Islamic Economics and its growth
Fundamentals of Islamicand development
Banking and Finance
• Over the period of 1983 – 1993, BIMB achieved an average annual growth rate of
 • Triggered by a growing revival of Islamic values amongst the Muslim popula�on
• Reinforced by the successful implementa�on of Islamic banks in the Middle East

1981 • Na�onal Steering Commi�ee undertook a study and made recommenda�ons on

Year KeyallMilestone
aspects of the se�ng up and opera�ons of an Islamic bank

1969
1983 •Establishment
Enactmentof ofPilgrims’
the Islamic
Fund Banking Act (IBA) 1983
Board (Lembaga Tabung Haji)
• Systema�c
Bank Islammobiliza�on
Malaysia Berhad (BIMB) was incorporated as Malaysia’s first Islamic
of funds
bank Muslim community to perform Pilgrimage as well as par�cipate in investment
• Assist
• andBIMB was given
economic a grace period of 10 years to operate without compe��on, to
ac�vi�es
protect its growth and development
1980 •Bumiputera
Over the Economic Congress
period of 1983 proposed
– 1993, the se�ng
BIMB achieved anup of an Islamic
average annualbank
growth rate of
• Triggered
48% by a growing revival of Islamic values amongst the Muslim popula�on
• Reinforced
Enactment by the
of the successfulInvestment
Government implementa�on of Islamic
Act (GIA) 1983 banks in the Middle East
• Enables the issuance of government papers and bonds
1981 • Na�onal Steering Commi�ee undertook a study and made recommenda�ons on
• Government Investment Cer�ficates (GIC) ini�ally offered on the basis of Qard
all aspects of the se�ng up and opera�ons of an Islamic bank
Hasan but subsequently changed to Bay’ ’Inah
1983
1984 •• Enactment
Se�ng up ofoftakaful
the Islamic Banking
company, Act (IBA) 1983
to complement the opera�ons of Islamic banks
• Bank Islam Malaysia Berhad (BIMB) was incorporated as Malaysia’s first Islamic
1990 • Malaysia became the first country to issue sukuk worth RM 125 million by Shell
bank
• MDS
BIMB(M)
wasSDN givenBHDa grace period of 10 years to operate without compe��on, to
1993 • protect
The DualitsBanking
growth and development
System was implemented, allowing Islamic and conven�onal
• banking
Over thetoperiod of 1983 – 1993, BIMB achieved
co-exist and run concurrently an average
in the financial annual growth rate of
system
48%
• Islamic Banking Scheme (IBS) introduced, which allowed conven�onal banks to
Enactment of thebanking
offer Islamic Government
windowsInvestment Act (GIA) 1983
• Enables the issuance of government papers and bonds
1994 •• Government
EstablishmentInvestment Cer�ficates
of Islamic Interbank Money(GIC)Market
ini�ally(IIMM)
offered on the basis of Qard
Hasan but subsequently changed to Bay’ ’Inah
1995
1984 Establishment Associa�on
• Se�ng up of takaful of Islamic
company, Banking Ins�tu�on
to complement of Malaysia
the opera�ons (AIBIM)
of Islamic banks
1984 • Se�ng up of takaful company, to complement
• Promote sound Islamic banking system and prac�ce in Malaysia the opera�ons of Islamic banks
1990 •• Promote
Malaysia public
became awareness
the first country to issue sukuk worth RM 125 million by Shell
Islamic
MDS (M) SDN BHD Finance Ins�tute Malaysia (IBFIM) was established and
Banking and
introduced as a center for professional development and training in the field of
1993 • The banking
Islamic Dual Banking System was implemented, allowing Islamic and conven�onal
and finance
banking to co-exist and run concurrently in the financial system
1999 Bank Muamalat
• Islamic Banking Malaysia
Scheme Berhad, Malaysia’s second
(IBS) introduced, full-fledged
which allowed Islamic bank,
conven�onal bankswas to
incorporated
offer Islamic banking windows
• Resulting from the merger between Bank Bumiputera Malaysia Berhad (BBMB)
1994 • and Bank of Commerce
Establishment of IslamicBerhad
Interbank(BOCB)
Money Market (IIMM)
• KLSE Islamic Index was introduced
1995
1984 Establishment Associa�on
• Se�ng up of takaful of Islamic
company, Banking Ins�tu�on
to complement of Malaysia
the opera�ons (AIBIM)
of Islamic banks
2001 Establishment
• Promote soundofIslamic
Interna�onal
banking Islamic
system Financial
and prac�ceMarketin(IIFM)
Malaysia
• Promote public awareness
2002 Introduction of standard generic names for Islamic banking products, e.g. savings
Islamic Banking and Finance Ins�tute Malaysia (IBFIM) was established and
account-i, current account-i, home financing-i, hire purchase-i, cash line facility-i,
introduced as a center for professional development and training in the field of
share-financing-i, working capital financing-i, letter of credit-i
Islamic banking and finance
Introduction of Islamic banking logo
1999 • ToMuamalat
Bank increase visibility,
Malaysiaprovide
Berhad,branding
Malaysia’s of second
Islamic full-fledged
financial products
Islamic and bank, reflect
was
commitment
incorporated of the development of Islamic banking and finance
Malaysia issued
• Resulting firstmerger
from the global sovereign
between Sukuk al-Ijarah bond
Bank Bumiputera Malaysia Berhad (BBMB)
and Bank of Commerce Berhad (BOCB)
2003
1984 • Establishment of Malaysian Takaful Association (MTA).
• KLSE Islamic Index was introduced
• Islamic Financial Services Board (IFSB) started its opera�ons in Malaysia.
2001 • Establishment of Interna�onal Islamic Financial Market (IIFM)
2004 The natural progression from Islamic windows under IBS to full-fledge Islamic banking
2002 subsidiaries: of standard generic names for Islamic banking products, e.g. savings
Introduction
• RHB Islamic
account-i, currentBankaccount-i, home financing-i, hire purchase-i, cash line facility-i,
• CIMB Islamic Bank
share-financing-i, working capital financing-i, letter of credit-i
1984
2005 Introduction
• The establishmentbanking
of Islamic logo
of Interna�onal Centre for Educa�on in Islamic Finance
• To increase
(INCEIF). visibility, provide branding of Islamic financial products and reflect
Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance 81
commitment of the development of Islamic banking and finance
2006 The Malaysia
• Malaysia issuedInternational
first global Islamic
sovereignFinancial Centre (MIFC)
Sukuk al-Ijarah bond initiative was launched
 2004 The natural progression from Islamic windows under IBS to full-fledge Islamic banking
subsidiaries:
• RHB Islamic Bank
Year Key Milestone
• CIMB Islamic Bank
1984
2005
1969 •Establishment
The establishment ofFund
of Pilgrims’ Interna�onal CentreTabung
Board (Lembaga for Educa�on
Haji) in Islamic Finance
(INCEIF). mobiliza�on of funds
• Systema�c
• Assist Muslim community to perform Pilgrimage as well as par�cipate in investment
2006 • and
Theeconomic
Malaysia International
ac�vi�es Islamic Financial Centre (MIFC) initiative was launched
to develop Malaysia as an international marketplace for Islamic finance
1980
1984
2008 Bumiputera Economic
• International IslamicCongress
Bankingproposed the se�ng
licenses were issued up of an Islamic
to Unicorn bank Islamic
International
• Triggered
Bank, FirstbyIslamic
a growing revival of
Investment Islamic
Bank values amongst
Ltd (owned the Muamalat
by PT. Bank Muslim popula�on
Indonesia)
• and
Reinforced by the successful
Deutsche Bank AG: implementa�on of Islamic banks in the Middle East

1981 • -Na�onal
to allow the bank
Steering to provide
Commi�ee Islamicacommercial
undertook and recommenda�ons
study and made investment services on
alldenominated
aspects of theinse�ng
foreignupcurrencies
and opera�ons of an Islamic bank
• Establishment of Interna�onal Shariah Research Academy for Islamic Finance
1983 • (ISRA)
Enactment of Ins�tute
& Asian the Islamic Banking(AIF)
of Finance Act (IBA) 1983
• Bank Islam Malaysia Berhad (BIMB) was incorporated as Malaysia’s first Islamic
2010 • bank
5 new Islamic banking licenses to foreign banks (BNP Paribas SA, PT Bank Mandiri,
• Na�onal
BIMB wasBank givenof Abu Dhabi,
a grace period Mizuho
of 10 yearsBankto and Sumitomo-Mitsui
operate Banking
without compe��on, to
Corpora�on) and the establishment
protect its growth and development of "Bank Islam Mega"
•• Over
Establishment
the periodofof
Interna�onal
1983 – 1993, Islamic
BIMBLiquidity
achievedManagement Corpora�on
an average annual growth(IILM) to
rate of
issue
48% Shariah-compliant instruments for Islamic financial ins�tu�ons
•Enactment
Shariah ofGovernance Framework
the Government was established
Investment Act (GIA) 1983
1984
2013 •• Enables the issuance of government papers
Islamic Financial Services Act 2013 was established. and bonds
•• Government
New legislation Investment
reinforced Cer�ficates (GIC) ini�ally offered on the basis of Qard
Shariah matters
Hasan but subsequently changed to Bay’ ’Inah
2018 • Introduc�on and implementa�on of "Value-based Intermedia�on" strategy for
1984 • Se�ng up of takaful company, to complement the opera�ons of Islamic banks
Islamic banking ins�tu�ons.
1990
1984
2019 •• Malaysia became the Policy
Shariah Governance first country
Documentto issue
2019sukuk
wasworth RM 125
established bymillion
BNM by Shell
MDS (M) SDN BHD
Table 4 : Milestones of Islamic Banking and Finance in Malaysia
1993 • The Dual Banking System was implemented, allowing Islamic and conven�onal
banking to co-exist and run concurrently in the financial system
• Islamic Banking Scheme (IBS) introduced, which allowed conven�onal banks to
offer Islamic banking windows

1994 • Establishment of Islamic Interbank Money Market (IIMM)

1984
1995 Establishment Associa�on
• Se�ng up of takaful of Islamic
company, Banking Ins�tu�on
to complement of Malaysia
the opera�ons (AIBIM)
of Islamic banks
• Promote sound Islamic banking system and prac�ce in Malaysia
• Promote public awareness
Islamic Banking and Finance Ins�tute Malaysia (IBFIM) was established and
introduced as a center for professional development and training in the field of
Islamic banking and finance
1999 Bank Muamalat Malaysia Berhad, Malaysia’s second full-fledged Islamic bank, was
incorporated
• Resulting from the merger between Bank Bumiputera Malaysia Berhad (BBMB)
and Bank of Commerce Berhad (BOCB)
• KLSE Islamic Index was introduced
2001 • Establishment of Interna�onal Islamic Financial Market (IIFM)
2002 Introduction of standard generic names for Islamic banking products, e.g. savings
account-i, current account-i, home financing-i, hire purchase-i, cash line facility-i,
share-financing-i, working capital financing-i, letter of credit-i
Introduction of Islamic banking logo
• To increase visibility, provide branding of Islamic financial products and reflect
Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance
82
commitment of the development of Islamic banking and finance
• Malaysia issued first global sovereign Sukuk al-Ijarah bond
 UNIT 4: DIFFERENCES BETWEEN ISLAMIC AND CONVENTIONAL BANKING

The func�ons and opera�ng modes of Islamic banks The func�ons and opera�ng modes of conven�onal
are based on the principles of Islamic law banks are based on fully manmade principles

Financing arrangement based on partnership, trading, Loan arrangement based on lending & borrowing and
agency and services services

Able to provide financing to any business or individual Able to provide loans to any business or individuals
that does not engage in illegal ac�vi�es or uses the even though their ac�vi�es are Shariah non-compliant
money or facili�es in ac�vi�es restricted by Shariah

Absence of interest-based transac�ons Conven�onal banks assure a pre-determined rate of

interest

Avoidance of economic ac�vi�es involving specula�on Only aims at maximising profit

In the modern Islamic banking system, it has become It does not deal with Zakah
one of the service-oriented func�ons of the Islamic
banks to be a Zakah Collec�on Centre and they also
pay out their Zakah

The Islamic banks, give greater emphasis on the The conven�onal banks give greater emphasis on
viability of the projects credit-worthiness of the clients

Ḥarām goods and services are prohibited Lending money and ge�ng it back with compounding
interest is the fundamental func�on of the
conven�onal banks

The status of Islamic bank in rela�on to its clients is The status of a conven�onal bank, in rela�on to its
that of partners, investors and trader, buyer and seller. clients, is that of creditor and debtors.

Table 5 : Difference between Islamic and Conventional Banking

Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance 83

 UNIT 5: INSIGHT OF THE SHARIAH ASPECT IN THE IMPLEMENTATION OF
ISLAMIC BANKING

Value propositions of Islamic banking and finance is evident in the following perspectives:

1. Economy

2. Social

3. Environment

1. Economic Perspective
Islamic banking seeks to achieve an economic prosperity (well-being) underpinned by sustainable wealth
creation and transfer. It is achieved primarily by adhering to the following key principles:

• Stable

• Transparent

• Sharing of profit and loss (Musharakah)

• Sharing of profit (Mudarabah/Musaqah)

• Asset based system

• Avoid manipulation

• Avoid riba

• Avoid gharar

• Avoid excess leverage

• Real economic activities

2. Social Perspective
Economic activities shall be conjunctively executed and operated in the light of social consideration. The
well-being is insufficiently achieved by solely relying on economic gain in term of dollar and cents, instead
it shall be tied up with social well-being that inter alia requires avoidance of harmful and detrimental
activities which in cludes:

• Prostitutions

• Pornography

• Cruelty

84 Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance

 • Interest based

• Drug

• Weapon of mass destruction

• Production of liquor

• Tobacco

3. Environment Perspective
Quran in unequivocal term cautioned that the mischief on the world is attributed to human conduct.

Allah SWT says:

“Corruption has appeared throughout the land and sea by [reason of] what the hands of people have earned
so He may let them taste part of [the consequence of] what they have done that perhaps they will return [to
righteousness]”. (ar-Rum 30: 41)

On the contrary Quran clarifies man is entrusted with the role of khilafah, whose responsibility to
administer the world for the benefit of the whole creature.

Allah SWT says:

[We said], “O David, indeed We have made you a successor upon the earth, so judge between the people in
truth and do not follow [your own] desire, as it will lead you astray from the way of Allah SWT. Indeed, those
who go astray from the way of Allah SWT will have a severe punishment for having forgotten the Day of
Account”. (Sad 38: 26)

Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance 85

 PRACTICE QUESTIONS

1. Unlike conventional banks that operate on the basis of borrowing and lending with pre- specified interest
rates, Islamic banking is a system of conducting trade and banking activities that in line with the principles
of Shariah while avoiding all the prohibited activities such as riba, gharar, financing of haram trades and
businesses. In addition to that, what are the other requirements that need to be observed?

A. The avoidance of speculations

B. The avoidance of oppression

C. Promotion of fairness and full disclosure

D. All of the above

86 Topic 5 Islamic Economics and Fundamentals of Islamic Banking and Finance

 GLOSSARY

‘Adah Local custom

al-Adillah al-mukhtalaf Legal evidences disputed over by jurists

fiha

al-Adillah al-muttafaq Legal evidences agreedupon by jurists

'alaiha

Aghlabiyyah Numerous or probabilities

Al-ahkam al-akhlaqiyyah Rules of moral and ethics

Al-ahkam al-‘amaliyyah Rules of practice

Al-ahkam al-‘iqtiqadiyyah Rules of belief

Akhirah The hereafter

Akhlaq Good behaviour or a standard of conduct to be observed or the set of moral

principles

‘Alamiyyah The whole universe

‘Amal salih Virtuous deed

Al-’amr bi al-ma‘ruf wa al- Propagating good doing and prohibiting bad doing
nahy ‘an al-munkar

‘Aqidah The belief of the Oneness of Allah SWT, His Angels, His Messengers, His Books,
Hereafter and His Divine decree

‘Aql Intellect

Aqwal al-sahabi The fatwas of a companion

‘Aurah Part of the body which must be covered

Da’wah Issuing a summons or making an invitation

Dar’ al-mafasid Avoiding harm

Darariyyat Essential requirements for the establishment of the five maqasid and without
which the maqasid will be definitely destroyed

Glossary 87
 GLOSSARY

Din Faith

Fi'l Action

Fiqh The knowledge of the practical rulings of Shariah which is deduced from their
respective particular evidence

Gharar Uncertainty that might lead to destruction and loss

Gharar fahish Major or excessive gharar

Gharar yasir Minor or slight gharar

Hadith The record of the sayings of Prophet Muhammad SAW. The sayings and conduct
of Prophet Muhammad SAW constitute the Sunnah

Hajiyyat Important requirements that crucial to the well- being of the five maqasid,
without which will lead to hardship

Haul Period of time (one lunar year)

‘Ibadah Devotional acts/ worship in everything that Allah SWT loves of words and
deeds, manifest and hidden

‘Iddah Probation period

‘Illah The effective cause

Ijma’ Consensus of opinion

Ijtihad Independent reasoning or the utmost effort an individual can put forth in an
activity. It is recognized as the decision-making process in Islamic law

Isnad The chain of narration

Istihsan Juristic preference

Istishab Presumption of continuity

Jama’ Combinations of two prayers in one time (Zohor with Asar, Maghrib with ‘Isya’)

Jalb al-masalih Enjoining benefit

Jihad Striving and determined effort in the path of Allah SWT

88 Glossary
 GLOSSARY

Khalwah Close proximity

Kulliyyah General

Madhahib Islamic schools of thought

Mal Wealth

Maqasid ‘ammah General objectives

Maqasid juz’iyyah Partial objectives

Maqasid khassah Specific objectives

Maqasid al-Shariah Objectives of Shariah

Maslahah mursalah Maslahah that is not based on Islamic law either cancels it or accepts it

Maysir Gambling

Mu‘amalat Any form of mutual dealing held between man to solve their everyday needs,
especially in the matters relating to trade and commerce

Muhaddith Hadith scholar

Mujtahid Scholar who are able to perform Ijtihad according to its conditions

Mutawatir Consecutive Hadith

Nafs Life

Nahu Grammar

Nasl Lineage

Nusus Texts

Qada’iyyah Explicit

Qat‘i Definite

Qawa‘id fiqhiyyah Islamic legal maxims

Qawl Saying or statement

Glossary 89
 GLOSSARY

Qasr Shortening the four raka’at prayers into two raka’at

(Zohor, ‘Asar & ‘Isya’)

Qawl al- Sahabi Statement of the Prophet’s companions

Qiyas Analogical deduction

Quran The Islamic sacred book, believed to be the word of Allah SWT as dictated
to Muhammad SAW by the Gabriel and written down in Arabic. The Quran
consists of 114 units of varying lengths, known as surah; the first surah is said
as part of the ritual prayer. These touch upon all aspects of human existence,
including matters of doctrine, social organization, and legislation.

Quru’ Menstruation or purity following menstruation

Ra’y Personal reasoning

Rabbaniyyah Divine revelation

Riba Interest, increase, addition or growth, though it is usually translated as 'usury'

Riba al-buyu' Sale-based riba

Riba al-duyun Debt-based riba

Riba al-fadl Riba by virtues excess of one of the counter values (ribawi items) that falling
under same basis ('illah) and kind

Riba al-nasi’ah Riba by virtue of deferment in time of counter values (ribawi item) that belong
to the same basis ('illah) and kind

Riba al-qard Any benefit imposed upfront by virtue of lending money regardless whether
the borrower will default in the future or not

Riba al-jahiliyyah Additional benefit imposed on the borrower attributed to borrower default in
repaying the sum borrowed with the stipulated time

Ribawi items The six substances (items) comprise of currency and good, literally: gold, silver,
dates, wheat, salt and barley.

Ribh Profit

Risalah An institution of prophethood, which brings the revealed guidance in all

dimensions of human life from Allah SWT

90 Glossary
 GLOSSARY

Rukhsah Some exemptions for exceptional cases

Sadd al-dhara’i‘ Blocking the means

Safih Prodigal

Sahabah Companion

Shariah The sum total of Islamic teaching and system, which was revealed to Prophet
Muhammad SAW recorded in the
Quran and the Prophetic tradition of Muhammad SAW

Shar'u Man Qablana The legislative laws of the previous Prophets AS

Shumuliyyah Complete or comprehensive

Siyasah idariyyah Relating to the management and administration of the government, in matters
pertaining to social and general administration of the state

Siyasah iqtisadiyyah Relating to the management and administration of the government, in

economics matters

Siyasah qada’iyyah Relating to the management and administration of the government, in matter
pertaining to juridical and administration of justice

Siyasah Shar‘iyyah An act of giving benefit to mankind and to avoid any harm being inflicted upon
them

Sunnah The legal way or ways, orders, acts of worship and statements of the Prophet
Muhammad SAW that are ideals and models to be followed by Muslims

Ta‘zir Sentence decided at the discretion of the judge

Tabi‘in Student of companions

Tabi‘ tabi‘in Follower of tabi‘in

Tahsiniyyat Additional requirements that further strengthen the complementary and

essentials aspect of maqasid al-Shariah

Taklif Duty and responsibilities

Taqlid Just follow the views of certain sects blindly without knowing the evidence
clearly

Glossary 91
 GLOSSARY

Taqrir Approval

Taradin Mutual consent

Tawhid Submission of oneself to The One and Unique being, Who is the Creator,
Sustainer, Allah SWT

Ummah The whole community of Muslims bound together by ties of religion

‘Uqud al-amanah Trust contract

‘Uqud al-tabarru‘at Charitable contracts

‘Urf Customary law

Usul al-fiqh A method by which the Shariah rulings are adduced from their sources

Wali Legal guardian

Waqi’iyyah Practical, ideal and realistic

Wasatiyyah Balanced and moderate

Zakah Almsgiving and religious tax in Islam

Zina Unlawful sexual intercourse

92 Glossary
 ABBREVIATION

AADK Agensi Antidadah Kebangsaan / National Anti-Drugs Agency

AAOIFI Accounting and Auditing Organisation for Islamic Financial Institutions

AFB Asian Finance Bank Berhad

AIBIM Association of Islamic Banking Institutions of Malaysia

AS ‘Alaihi al-Salam

BBMB Bank Bumiputera Malaysia Berhad

BIMB Bank Islam Malaysia Berhad

BNM Bank Negara Malaysia / Central Bank of Malaysia

BOCB Bank of Commerce Berhad

GIA Government Investment Act

GIC Government Investment Certificates

GII Government Investment Issue

IBA Islamic Banking Act

IBFIM Islamic Banking and Finance Institute Malaysia

IBS Islamic Banking Scheme

ICM Islamic Capital Market

IIMM Islamic Inter Bank Money Market

INCEIF International Centre for Education in Islamic Finance

JKSM Jabatan Kehakiman Syariah Malaysia / Syariah Judiciary Department Malaysia

KFH Kuwait Finance House

KLRCA Kuala Lumpur Regional Centre for Arbitration

KLSE Kuala Lumpur Stock Exchange

Abbreviation 93
 ABBREVIATION

MARA Majlis Amanah Rakyat / Council of Trust for the People

MIB Maybank Islamic Bank Berhad

MIFC Malaysia International Islamic Financial Centre

MTA Malaysian Takaful Association

SAC Shariah Advisory Council

SAW Sallallahu ‘Alaihi Wasallam

SC Securities Commission of Malaysia

SPI Skim Perbankan Islam / Islamic Banking Scheme

SPTF Skim Perbankan Tanpa Faedah / Interest-Free Banking Scheme

SWT Subhanahu wa Ta‘ala

94 Abbreviation
ISLAMIC BANKING & FINANCE INSTITUTE MALAYSIA