1.

0 Introduction

Under this part show the meaning of the key words of this work

1.1 Commercial transaction

A commercial transaction is a type of business activity in which goods or services are exchanged
for money or other valuable consideration between two or more parties. These transactions occur
between businesses or between businesses and consumers, and are essential to the functioning of
the economy. Commercial transactions can involve the sale of physical goods such as cars,
clothing, or food, or the provision of services such as consulting, healthcare, or transportation1.

Commercial transactions may be conducted in a variety of settings, including brick-and-mortar

stores, online marketplaces, and through direct sales representatives. They may also involve
different payment methods, such as cash, credit cards, checks, or electronic transfers.
Additionally, commercial transactions are often governed by laws and regulations that protect
consumers, ensure fair competition, and prevent fraudulent or deceptive practices.

1.2 Shariah Compliance

Shariah compliance refers to the adherence to Islamic principles and values in business and
finance. These principles are derived from the Quran and the teachings of Prophet Muhammad,
and are designed to promote social justice, fairness, and ethical behavior. Shariah compliance is
important for Muslims who seek to conduct their financial and business activities in accordance
with Islamic principles.

In the context of finance, Shariah compliance requires the avoidance of interest-based

transactions (riba), speculation (gharar), and investments in businesses that are considered
unethical, such as those involved in alcohol, gambling, or pornography. Instead, Islamic finance
relies on profit and loss sharing arrangements and asset-backed transactions, which are designed
to promote risk-sharing and discourage excessive speculation2.

1
El-Gamal, M. (2007). Incoherent pietism and Sharia arbitrage. Financial Times, 23(05).
2
Ahmad, W. M. W., & Marhaini, W. (2008). Some Issues of Gharar (Uncertainty) in Insurance. Essential Readings
in Islamic Finance.
To ensure Shariah compliance in finance, Islamic scholars and experts review financial products
and transactions to ensure that they are in accordance with Islamic principles. Shariah
compliance certification is also available for financial institutions, which helps to assure
customers that the products and services they offer are in compliance with Islamic principles.

1.3 Islamic Finance

Islamic finance refers to financial activities that are conducted in accordance with Islamic
principles and values, as derived from the Quran and the teachings of Prophet Muhammad.
Islamic finance is based on the principles of risk-sharing, fairness, and social responsibility, and
aims to promote economic growth and development while upholding ethical values3.

Islamic finance prohibits the payment or receipt of interest (riba), which is considered
exploitative and unfair. Instead, it uses profit and loss sharing arrangements, in which profits and
losses are shared between the parties based on an agreed-upon ratio. Islamic finance also requires
transactions to be backed by real assets, and prohibits investments in businesses that are
considered unethical, such as those involved in alcohol, gambling, or pornography4.

Islamic finance has developed a range of financial products and instruments to meet the needs of
consumers and businesses. These include mudarabah (profit-sharing), musharakah (partnership),
murabaha (cost-plus financing), ijara (leasing), and sukuk (Islamic bonds)5.

Islamic finance has gained popularity in recent years, with many financial institutions and
governments around the world introducing Islamic finance products and services. This growth
has been driven by a growing demand for ethical and socially responsible investment options, as
well as the increasing awareness of the benefits of Islamic finance, such as risk-sharing and
stability.

3
Saiful Azhar, 2015. Islamic Banking and Financial Market. Oxford Islamic Studies Online.
4
Hearn, B., Piesse, J., & Strange, R. (2012). Islamic finance and market segmentation: Implications for the cost of
capital. International Business Review, 21(1), 102-113.
5
Rahman, A. Z. (2010). Contracts and the products of Islamic banking. CERT Publications.
2.0 Major norms of Islamic Finance

As a rule, Islamic law does not recognize transactions that have a proven illegitimate factor and
or object. For that purpose, Sharia’h has identified some elements which are to be avoided in
commerce or business transactions. In this regard, the prohibition of Riba, Gharar ,gambling and
prohibition to trade on impressible goods and service is the most strategic factor that defines
invalid and voidable contracts and demarcates the overall limits which should not be crossed.
2.1 Prohibition of riba

Riba is derived from the derivative word “raba-wa” it has certain meanings as “to increase; to
grow; to grow up, to exceed, be more than. In the specific sense, Riba is generally translated into
English as usury or interest but in fact it has a much broader sense under Shari’ah, Also a word
riba came from root word ribh.

Riba is an Islamic term which has been defined as an excess or additional compensation without
due consideration. This prohibition has necessitated innovation by Islamic banks in a bid to find
alternative means of earning returns on their investments6.

It means increase in or addition to. Riba can be define as additional amount to the original
amount, or an excess to the principal amount, which the extra is charge by the lender to the
borrower of money. It means for example, Magoma lends for Tsh 1000 but Saida ask to pay for
Tsh 1500. It existed since in pre Islamic period in money lending and barter system activities.7

Riba classified into two categories:

a. Riba Al Nasiyah. This is the primary form of riba. Imam Abu Bakr Hassan Razi has
defined this form of riba as: “that kind of loan where specified repayment period and an
amount in excess of capital are predetermined”.

6
Muhammad Imran Ashraf Usmani, (Darul-Ishaat 2002) „Meezan Bank‟s Guide to Islamic Banking‟p. 8.

7
Paldi, C. (2014). Understanding Riba and Gharar in Islamic Finance. Journal of islamic banking and finance, 2(1),
249-259.
 b. Riba Fadl. This form of riba is established in the Sunnah and is referred to as Riba Al
Hadees. It is defined to mean an excess compensation taken in exchange for specific
commodities.

Therefore some scholars added a third category of Riba named Riba aljahiliyah or pre-islamic
Riba8, often manifested by the lender asking the borrower at maturity date if he will settle the
debt or increase it.9

The main rationale for the prohibition of riba in Islamic jurisprudence stems from the principles
of equity and maslaha that have been put in place to protect the poor in society from
exploitation10.

On Riba, the direct Quranic references are to be found in four surahs or chapters. These verse are
an ascending scale which starts with a mere judgment of value, followed by an implicit
prohibition, then a limited one and finally, a total and conclusive prohibition (Al-Rum, 30:39;
Al-Nisa, 4:161; Ali-Imran, 3:130 and Al-Bakarah, 2:275-9)11.

Example Allah prohibited Riba and mention the punishment of riba’ as in The Quran:

Those who consume interest cannot stand [on the Day of Resurrection] except as
one stands who is being beaten by Satan into insanity. That is because they say,
“Trade is [just] like interest.” But Allah has permitted trade and has forbidden
interest. So, whoever has received an admonition from his Lord and desists may
have what is past, and his affair rests with Allah. But whoever returns to [dealing
in interest or usury] - those are the companions of the Fire; they will abide
eternally therein. (The Quran 2:275)

8
Haqqi, A. R. A. (2009). The philosophy of Islamic law of transactions. CERT Publications.
9
Muhammad Iman, 2016. Contemporary Practice of Ribā, Gharar and Maysir In Islamic Banking And Finance.
International Journal Of Islamic Management And Business (Vol2-2).
10
S TahirGhazaly and SOS Agil(1992),„Readiness in Microeconomics: An Islamic Perspective‟,
11
Hearn, B., Piesse, J., & Strange, R. (2012). Islamic finance and market segmentation: Implications for the cost of
capital. International Business Review, 21(1), 102-113.
Also providing in the hadith narrated that Jaabir said:

“The Messenger of Allah (blessings and peace of Allah be upon him) cursed the
one who consumes riba and the one who pays it, the one who writes it down and
the two who witness it, and he said: they are all the same.” Muslim (1598)

It is also reported that the Prophet (s.a.w.) has said to the effect:

“(Exchange) gold for gold, silver for silver, wheat for wheat, barley for barley,
dates for dates, salt for salt, measure for measure and hand to hand. If the
(exchanged) articles belong to different genera, the exchange is without restraint
provided it takes place in a hand to hand transaction.”3 It is more than evident
from the above discussion that Riba i.e., interest in the modern world is
categorically prohibited in the Holy Quran and practices of the Prophet (s.a.w.).

Example of riba transaction is Insurance a common practice by citizen. Insurance is haram

because of a few factors and one of it because of riba. Insurance clearly contains riba. Insurance
is the sale of money for money, of a greater or lesser amount, with delay in one payment. In case
of insurance, it contains ribaal-fadhl and riba al-nasiah. Riba al-fadhl is when the amount of
money is not equal, thus it contains interest, and riba al-nasiah is based on time12.

These both riba incurred because in insurance, company take people’s money and promise to pay
them either an amount is more or less than the amount they had pay and the payment will be
made because of specific accident happen and stated in the policy. Thus, the amount of money
they pay is not equal to the amount they receive, and the amount paid is in the future, thus this
will make riba existed and riba is strictly prohibited.

2.3 Prohibition of Gharar

The Arabic word Gharar is a fairly broad concept that literally means deceit, risk, fraud,
uncertainty or hazard that might lead to destruction or loss. Also Gharar, which refers to the
uncertainty or hazard caused by lack of clarity regarding the subject matter or the price in a
12
Paldi, C. (2014). Understanding Riba and Gharar in Islamic Finance. Journal of Islamic Banking and Finance,
2(1), 249-259.
contract or exchange. A sale or any other business contract which entails an element of Gharar is
prohibited.

The term Gharar has been defined to mean trading in risk or uncertainty. It is a trading venture
whose consequences are hidden or unknown.13Professor Mustafa Al- Zarqa stated that “gharar is
the sale of probable items whose existence or characteristics are not certain, due to the risky
nature which makes the trade similar to gambling”

Hanafi scholars have defined Gharar as “something which its consequence is undetermined.”
While Shafi’i scholars have described it as “something which in its manner and its consequence
is hidden.

According to Al-Sarakshi,“anything that the end result is hidden or the risk is equally
uncommon, whether it exists or not.” Therefore, Gharar in Islam refers to any transaction of
probable objects whose existence or description are not certain, due to lack of information and
knowledge of the ultimate outcome of the contract or the nature and quality of the subject matter
of it14.

Gharar is divided into two types:

a. Gharar fahish (excess Gharar) and

b. Gharar yasir (light Gharar).

Examples of Gharar fahish in contracts are plenty as shown by the Al Hadith and normally is
associated with the reasons why Gharar sales are prohibited. On the other hand, Gharar yasir,
which means small in amount or trivial is the uncertainty that is always present in all contracts
and conducts, thus its existence is tolerated. All scholars agree that every transaction have some
amount of Gharar in it but they start to differ when referring to the amount of Gharar contained
in each15.

13
This is the Hanafi definition of gharar.

14
Ahmad, W. M. W., & Marhaini, W. (2008). Some Issues of Gharar (Uncertainty) in Insurance. Essential Readings
in Islamic Finance.
15
Paldi, C. (2014). Understanding Riba and Gharar in Islamic Finance. Journal of Islamic Banking and Finance,
2(1), 249-259.
There are a few verses in the Holy Quran regarding the prohibition of gharar. One of it is in The
Quran 2:188;

“And do not consume one another’s wealth unjustly or send it [in bribery] to the
rulers in order that [they might aid] you [to] consume a portion of the wealth of
the people in sin, while you know [it is unlawful].” (The Quran 2:188

And also stated in the hadith, for example in hadith Narrated by Abu Hurairah:

“The Prophet SAW has prevented (us) from (doing) a sale (by means of a small
stone throw) and sale of goods in a gharar” (HR Muslim)

In addition to that tradition of our beloved Prophet (s.a.w.) on many occasions forbade many
transactions which included Gharar.

For example, the Prophet (s.a.w.) has forbidden the purchase of the unborn animal in the
mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of
war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the
catch of a diver. Gharar occurs in all sorts of transactions where the subject matter, the price or
the two, are not determined and fixed in advance. Speculative activities in capital market.

An example for the common practice of activities involver gharar is clinic or hospital bill and
consultation. According to Dr Zaharuddin Abd Rahman 16, when the patient get the treatment in
the clinic or hospital, all the information regarding the price and details of services and medicine
need to be disclosed clearly at the beginning of the contract. If it is not doing so, it will lead to
gharar fahish. It is important to give information on the consultation fees or treatment fees before
it would be done. It must be clearly stated for example RM20 per 10 minutes consultation. The
clinic or hospital cannot just assume that patient already know. Therefore, it is a must for the
clinic or hospital to disclose the charges including medicine price.

Another example is gharar existed in restaurant. It is happened when owner of the restaurant did
not disclose the price of the food. Therefore, when the customer orders the food, then they eat
without knowing the price of the food. It will result when they want to make a payment,

16
El-Gamal, M. (2007). Incoherent pietism and Sharia arbitrage. Financial Times,
23(05
sometimes they will surprise with the food price. It may be too expensive. This is involved
gharar fahish in the transaction. Therefore, it is important for the owner to disclose all the price
to avoid gharar. In Islam, elimination of gharar is important to protect both side from mistreated
17
.

2.4 Prohibition of maysir (gambling) in common practice

Maysir is known as gambling. Literally it means gambling. It is defining as easy acquisition of

getting something by chance towards money, wealth or product. Maysir also defined as any form
of business activity where monetary gains are derived from mere chance, speculation or
conjecture. In case of gambling, all parties involve will put something usually money, however
only one party will get profit and the other will lose.

Common example of gambling is uncertainty of the timing of benefits of a pure life insurance
and Casinos where it simply transfers of wealth take place from losers to winner without creating
a new stock of wealth.

Maysir is prohibited in Islam because it is speculative of something either it could be profit or

loss. It is more to analysis of a lot of economic and financial data, and involves the investment of
assets, skills and labour. Besides, maysir is effortless which people just need to speculate and
depend upon to the luck. In Islam, money should be earned by work it and put on effort which
able to achieve by knowledge and skill18.

The prohibition of maysir also stated in The Quran (5:90) and (5: 91); Allah Subhanahu Wa
Ta'ala said:

"O you who have believed, indeed, intoxicants, gambling, [sacrificing on]
stone alters [to other than Allah], and divining arrows are but defilement
from the work of Satan, so avoid it that you may be successful." ( Al-
Maaida: Verse 90

17
Saifudin, 2017. Basic Principles of Muamalat. Fiqh: Kewangan Islam
18
Obaidullah, M. (2005). Islamic financial services. Islamic Economics Research
Center, King Abdulaziz University, Jeddah, Saudi Arabia.
 “Satan only wants to cause between you animosity and hatred through
intoxicants and gambling and to avert you from the remembrance of Allah and
from prayer. So, will you not desist?” (The Quran 5:91)

In the hadith, Narrated by Abu Hurairah:

The prophet peace be upon him said, “you should not bet an amount of money
except on races of camels, arrows or horses”

This hadith shows that betting is something that we need to avoid. Betting is similar as gabling
because one part will win, and the others will lose. It is incurred possibilities or chance of loss.

2.4 Prohibition of trade on impossible goods and service

Some activities, such as producing and selling alcohol or pork, are prohibited in Islam. The
activities are considered haram or forbidden. Therefore, inversting in such activities is likewise
forbidden.

The Quran chapter 16:116 state that

Do not falsely declare with your tongues, “This is lawful, and that is unlawful,”
˹only˺ fabricating lies against Allah. Indeed, those who fabricate lies against Allah
will never succeed.

The principle of Istihsab states the presumption of continuity meaning that every commodity or
actions are presumed to be halal until proven otherwise and that is by the Quran and Sunnah.
Whenever a doubt is to occur in debate whether a thing or commodity is haram or halal then it
shall automatically be termed as haram.

For example under Islamic Commercial Law it has not been allowed and has been genuinely
prohibited to loan people an amount of money for the purpose of committing activities which are
prohibited under the law like selling of alcohol or opening of casinos.
3.0 Conclusion

Nowadays, many Islamic banks exist in order to provide Islamic products and services to the
Muslims and non-Muslim . Generally, Muslims and non-Muslim aware on existing of Islamic
products to eliminate the consuming of conventional products.
Therefore, for those who want to avoid from taking any prohibited element would go for
transaction and trading offered by Islamic institution such as Islamic bank. It is because, chosen
Islamic institution is the best solution to confirm it is free from any prohibited elements.
However, there are certain transaction in our daily life that could be as a normal practice by
citizen without they realize, it also contains prohibited elements.