This document provides an overview of the foundations of Islamic finance. It discusses key topics like:
- Islam as a comprehensive way of life that guides all human activities, including financial transactions.
- The philosophical differences between Islamic and conventional Western frameworks that necessitate Islamic finance principles.
- Core concepts in Islamic finance like sharia compliance, maqasid al-sharia (objectives of sharia), and the time value of money from an Islamic perspective.
- Questions around how closely contemporary Islamic finance aligns with its ideals, and how the field can continue evolving in a way that is truly differentiated from conventional practices.
This document provides an overview of the foundations of Islamic finance. It discusses key topics like:
- Islam as a comprehensive way of life that guides all human activities, including financial transactions.
- The philosophical differences between Islamic and conventional Western frameworks that necessitate Islamic finance principles.
- Core concepts in Islamic finance like sharia compliance, maqasid al-sharia (objectives of sharia), and the time value of money from an Islamic perspective.
- Questions around how closely contemporary Islamic finance aligns with its ideals, and how the field can continue evolving in a way that is truly differentiated from conventional practices.
This document provides an overview of the foundations of Islamic finance. It discusses key topics like:
- Islam as a comprehensive way of life that guides all human activities, including financial transactions.
- The philosophical differences between Islamic and conventional Western frameworks that necessitate Islamic finance principles.
- Core concepts in Islamic finance like sharia compliance, maqasid al-sharia (objectives of sharia), and the time value of money from an Islamic perspective.
- Questions around how closely contemporary Islamic finance aligns with its ideals, and how the field can continue evolving in a way that is truly differentiated from conventional practices.
This document provides an overview of the foundations of Islamic finance. It discusses key topics like:
- Islam as a comprehensive way of life that guides all human activities, including financial transactions.
- The philosophical differences between Islamic and conventional Western frameworks that necessitate Islamic finance principles.
- Core concepts in Islamic finance like sharia compliance, maqasid al-sharia (objectives of sharia), and the time value of money from an Islamic perspective.
- Questions around how closely contemporary Islamic finance aligns with its ideals, and how the field can continue evolving in a way that is truly differentiated from conventional practices.
• Why Islamic finance? • What is Islamic finance? • In what ways is Islamic finance different? • Shari’ah • Maqasid al-Shari’ah • Time value of money • Critical discussion Islam as Way of Life (ad-Din)
• Islam prescribes a detailed code of
conduct for every aspect of human activity • Goes beyond activities categorized as rituals (prayers, fasting, Hajj, etc.) • In fact, all human activities (including day-to-day mundane ones) can be viewed as acts of worship (ibadah) • This includes economic and financial activities Why Islamic Finance?
• No human endeavour is completely
value-free • Our values are derived from our worldview • Given that the Islamic worldview is different from the Western (Occidental) worldview Principles and practices of conventional banking and finance (which are based primarily on the Western worldview) may be inconsistent with the Islamic worldview What is Islamic Finance? • Islamic finance provides financial services in accordance with the Shari’ah
• Islamic financial services emphasize
ethical and social dimensions of financial transactions to enhance equity and fairness for the general good of society In what ways is Islamic finance different?
• Source of knowledge – Includes revealed
(divine) knowledge • Supersedes scientific methods and human intuition
• Intention – acts of worship to seek Allah’s
blessings • Apart from fulfilling man’s needs
• Guiding principles – justice, cooperation,
empathy, altruism, entrepreneurship • Not purely profit maximization The Shari’ah
• Literal meaning – path to watering place
• Technical meaning – Path to tread for guidance in this world – Commands, prohibitions, values • Fiqh – Understanding of the Shari’ah – Practical Shari’ah laws, principles and values derived from sources of knowledge – Product of human effort and aql • Objectives of the Shari’ah (maqasid al-Shari’ah) Components of the Shari’ah
Islamic Shari’ah
Tawhid Fiqh Akhlaq
• Belief in oneness • Rules and • Islamic code of of Allah Guidelines conduct • Economic • Al-muamalat – • Ethics, morality resources rulings related to and positive entrusted to man, economic attributes will be held transactions (honesty, accountable for kindness, its use sincerity) Maqasid al-Shari’ah
• Objectives and the rationale of the Shari’ah
– The Shari’ah aims to protect and preserve public interest (maslahah) in all aspects and segments of life – Many Shari’ah texts clearly state the reasoning behind certain Shari’ah rulings • Elements that need to be protected – Faith (din), human self (nafs), intellect (‘aql), posterity (nasl), wealth (mal) • Concept of maslahah often interchangeable with maqasid – Seeking benefit and repelling harm Maqasid al-Shari’ah and Maslahah
• While Maqasid al-Shari’ah (objectives of the Shari’ah)
and the related concept of maslahah (benefit to society) should become the foundation of Islamic finance practices, • It should not be over-emphasized, to the point of rejecting or superseding definitive (qat’iyyat) textual Shari’ah sources – Need to recognize limitations of human perception and cognitive ability • Macro “maslahah” should override micro “maslahah” • “They ask you concerning wine and maysir. Say: In them is great sin as well as benefits to people, but the sin is greater than the benefit.” (Qur’an, 2:219) Maqasid al-Shari’ah – Implications to Islamic Finance
• A holistic view should be adopted in Shari’ah interpretation
– Micro vs. macro maslahah (tree vs. forest) • Legal form vs. economic substance – Validity [meeting all contractual conditions and requirements] (sahih) vs. permissibility [having legitimate purpose and intention] (halal) • Purely financial goals (profit, growth, market share) alone insufficient – Need to develop proxies of spiritual well-being (e.g. distributive justice, cooperation among economic agents, equitable access to economic resources) – These complementary yardsticks should be incorporated in the performance measurement of Islamic financial institutions • Profit sharing schemes vs. fixed-return techniques • Critical appraisal of the “infancy” argument – Sustainability and viability vs. healthy direction of development Some Important Points to Note
• Islam provides a comprehensive solution, its
prescriptions encompasses all aspects of life A specific discipline (such as finance) must be viewed and addressed within a larger context Holistic approach
• Conventional knowledge should not be completely
rejected There can be common grounds or areas of conventional knowledge which are acceptable to Islam Some general concepts can be adopted and amended Economic growth Efficiency Time Value of Money
• A fundamental concept in finance
• The idea that a dollar today is worth more than a dollar to be received in the future due to: • Personal preference for current consumption • Risk (probability of receipt of future dollars) • Investment opportunities forgone (returns on dollars invested today not available to future dollars) • Reduced purchasing power caused by inflation Time Value of Money – An Islamic Perspective
• Islam does not reject the idea of positive time preference
• After all, time has economic value as consumption and production activities consume time • Islam recognizes that the lender makes a sacrifice • Hence why lending is a virtuous act • And why the debtor is encouraged to repay in excess Narrated by Abu Huraira: A man came to the Prophet and demanded a camel (the Prophet owed him). Allah's Apostle told his companions to give him (a camel). They said, "We do not find except an older camel (than what he demands). (The Prophet ordered them to give him that camel). The man said, "You have paid me in full and may Allah also pay you in full.“ Allah's Apostle said, "Give him, for the best amongst the people is he who repays his debts in the most handsome manner.“ Sahih Bukhari Vol.3, Book 41, No.577 • However, while voluntary extra repayment of debt is encouraged, making it contractual amounts to the prohibited riba Time Value of Money – An Islamic Perspective (2)
• Time value of money can however be incorporated in
commercial transactions • Sale of goods on deferred payment terms (for e.g., murabahah) • Time value of money built into calculation of profit on sale or quantum of profit mark-up to reflect the fact that receipt of sale proceeds is delayed • Investor in a business has right to a share in profits (for e.g., mudarabah) • Investor foregoes use of funds in exchange for right to proportion of returns generated by the invested funds • In this respect, time value is applied not to money itself but on economic usage of money • Money cannot be treated as a commodity Critical Discussion
• Kudos to all stakeholders who have contributed to
development of Islamic finance • Arguably all disciplines goes through a process of evolution • More so in the case of Islamic finance which is relatively nascent • To realize such an evolution, it is necessary to ask probing, even painful, questions • To challenge the status quo does not necessarily imply what is currently being done is wrong • We will only know for sure that we are doing the right thing if we question ourselves constructively Probing Questions
• Have we done enough? Is this the end game?
• Is contemporary Islamic finance significantly and fundamentally different from conventional (riba-based) practices? • Is differentiation on the basis of nomenclature and legal technicalities sufficient salvation from the threat of war from Allah and His Messenger? • How should we address the present gap between ideal and reality? • Persist with idealism or focus efforts on compromised objectives? • Is Islamic finance an alternative or panacea (solution)? Role of the Shari’ah
• As guidance and source of reference, not
merely a tool • The Shari’ah should not be relegated to being a means to an end, should be used to determine the end itself • Source of differentiation with (and advantage over) conventional knowledge – revelation • Reason and observation should not dominate over divine guidance, avoid secularized practice of making science replace religion as authority Approach to be taken to develop Islamic Finance
• Current trends in Islamic finance reflect :
• “market demands”, “ground realities”, “the need to acquire critical mass” • One perspective • Shari’ah should dictate manmade concoctions, not vice versa • We should not be force-fitting Islamic contracts into conventional instruments • Islam is for the benefit of mankind, not the reverse • God Almighty does not suffer the slightest detriment if Islamic finance is not prevalent or even present • It is not a popularity contest • Case for discussion • If indeed money is not a commodity, is there a genuine need for short term liquidity instruments? Approach to be taken to develop Islamic Finance (2)
• Underlying precept of the prohibition of riba
• Islam allows (encourages) lending of money • Islam allows (encourages) business activities • Islam does not allow lending of money as a business • Critical questions for contemporary Islamic financial institutions • Are they in the business of lending money? • Are they genuinely in the business of trade or investment? Important Caveat
• Halal and haram are the prerogative and domain
of our Creator • The responsibility of dichotomizing human activities into permissible and not permissible has been delegated to a select few with the prerequisite knowledge, competence and attributes (mujtahid) • The rest of us may have our own opinions and perspectives but should strictly refrain from making pronouncements regarding halal and haram • We ask critical questions and indulge in articulated discussions as part of the learning process