Friday, May 15, 2009


I received the following e-mail today asking for my comment:

"We know well that literally Shariah means “ path leading to water” which means path leading to “ life itself”. Shariah are rules and regulations prescribe to the Believers (mukallaf) by God Almighty embodied in the Quran and Sunnah of the Holy Prophet pbuh.

But some of these rules and regulation are also man-made, which we call fiqh. Fiqh is the product of the ‘aql (intellect) through the process of qiyas,Ijtihad,Istishab, Istihsan. The ulama derive new rules or fatwa to solve current problems of Muslims. This body of Shariah is call fiqh.

Some rules resulting from fiqh have caused serious disagreement (khilaf)among Shariah scholars (ulama). Issues such as bay enah, tawarruq,CM,Islamic hedge funds are some examples. These are not distinctly Quranic (ie not explicitly revealed in the Quran) in nature but sponsored by some ulama at the supervisory level (government or corporate) through Fiqh, under the pretext of darura,maslaha,uruf,umum balwa etc."

Such concepts as you mentioned, i.e darura, maslaha, uruf, umum balwa are all have their basis in the original sources of the Shariah. But the issue here is that of whether those parties truly apply them in the right context/circumstances. For me if all those legitimate concepts are employed
just to facilitate money/debt trading (ribawi practices), of course that is not acceptable. Although some may argue that (modern application) may not necessarily be haram, but at least they are Makruh/shubhah where the best option is not to make use of them. According to a well-known hadith, the halal is clear, so is the haram, but between these two there are grey areas/shubhah, and for a Muslim to avoid shubhah is a better option for the sake of his religion and his standing/reputation.

On the second point about fiqh, fiqhi opinions are not purely of 'aql origin as the 'aql is only employed to discover what the law is; it is not the process of inventing the law they way modern legislation is. In ijtihad, the jurists with the aids of those techniques do the search for the law in the original sources trying all the best that they can. It’s like in oil exploration where the geologists and all the other experts employ the best of their knowledge and skills to do the search. When they discover the oil, can we say that they have thus made oil for us?. Or you may go treasure hunting and you are given all the signposts/clues; you may be able to find the treasures or you may not but the fact is that you have been given all the major signs leading to the place. Similarly the jurists/fuqaha’ study the signs/shariah evidence and techniques (via usul al-fiqh) and they go “law hunting”, they may get it or they may fail; but they must employ the best of their knowledge and skills to do that, just like in the process of the oil discovery operation.
However the true shariah law/hukm remains with Allah the Al Mighty. If the jurist got it right he will be given 2 rewards otherwise only one, for the best efforts carried out to help discover the law of Allah SWT.

Wednesday, May 13, 2009



Islamic finance has been a catch-word at least for the past 10-15 years, and in that context many Islamic-Arabic terminologies have been introduced into English reading materials both at professional and academic levels. The term like sukuk, which was itself barely known some 5-6 years ago has become so popular now that anyone who does not know its meaning will simply be considered as uncultured. Month after month hundreds of seminars and conferences on Islamic finance have been organized covering many aspects related to the theme. While there seems to be an endless interest in Islamic finance worldwide, the fact is that the true nature of Islamic finance is sometimes not clear to many players in the market, let alone newcomers, such that many a time one is told that there is no difference between Islamic and the well-established conventional practices. This misunderstanding has been going on for quite some times partly due to the fact that in many circumstances the so-called Islamic financial products have been replicated from the conventional ones; the fact that many are confused as to whether these products are really shariah compliant if the whole Shariah scheme of things is to be used to test them. No doubt in most cases Islamic terminologies have been used to describe the products, yet in essence it was argued, they are rather conventional concepts in disguise.

One feature that differentiate true Islamic finance from its conventional counter-part is that the former relies heavily on guidance from the Shariah law, thus giving rise to the well-understood notion among practitioners as shariah compliant products and instruments. However one big question to ask at this moment in time, after seeing through the three decades or so of the rapid development of this field is whether the Islamic finance movement has come closer to the main objectives of the Shariah itself or has it deviated from its straight path? Or whether despite the use of some nomenclatures that sound Islamic or at least Arabic, things have really evolved the way they should?

What is noticed is that more and more products or instruments are introduced into the market taking the existing conventional models as the basis. It has to be sincerely admitted that it is not difficult to understand, that in many circumstances, it seems many Islamic classical rulings have been “tamed” in such a way that they can be made appropriate to be applied in this so called modern world of ours which is dominated by conventional finance that revolves around interest and the dominant force of financial intermediation which itself is based on interest and interest payment.

As known, Islamic or Shariah law was not revealed to facilitate interest based transactions but quite the opposite, it was and is still among others, a weapon to fight injustices of the interest base system. The biggest mistake that one can think of in retrospect as far as modern Islamic finance is concerned is the fact that it was firstly started through the banking sector. Banking itself is a term that is in essence widely accepted to refer to the business of financial intermediation, although there are a number of services provided by banks that are based on fees and commission.

So when Muslims were celebrating the birth of the first few Islamic banks several decades ago, their hopes at that time were to see that things would slowly be moving toward Islamic concept of economic justice and fairness inspired by a true spirit of partnership and co-operation through the overall application of Shariah principles and rulings. However after nearly 30 years of experiment, it seems that banks are banks whether they are Islamic or otherwise. Banks can never free themselves from the yoke of financial intermediation theory because that is their identity by definition. In many jurisdictions Islamic banks are still regulated within the same frameworks that regulate conventional institutions.

Given the predominance of this line of thinking among the majority of players, who are mainly imported from conventional practices into the so-called Islamic one, hardly that we find them able to really appreciate the distinctive feature of Islamic transactions as compared to the conventional ones. For many, Islamic bank or financial institutions are no less different from their conventional counterparts at least in one major role; they are to collect as much deposit from customers, and give financing when suitable customers are found for the purpose. It is the business of intermediation between the surplus and deficit sides, nothing more or less, as economists may recall. But then one may justifiably ask why can’t Islamic bank do just that, is there anything not Islamic about the role as financial intermediary as described?.

The answer lies squarely on the fact that in conventional interest-based system, money, goods or commodities are treated the same way; the treatment that has lead to the acceptance of the notion of a fixed price for the use of money in the form of interest charges justified within the ambit of the time value of money doctrine. On the contrary, Islamic law is quite clear about the need to distinguish money from commodity or goods as money is defined as price cum medium of exchange. Hence riba’ or usury/interest is made illegal under the Shariah system seemingly to avoid money being treated as commodity that can be given a price, contrary to its basic function as price determination medium. In line with this conception, Islamic law is quite straight forward when it provides that there must be a proper distinction between money trading and money investment, the later means to use money as capital for investment and not money itself is to be traded. In Islam what needs to be traded are goods/assets and services and not money as such. This is actually the essence of difference between the Islamic worldview on finance and that of the conventional perspectives.

The current financial turmoil that has been engulfing the world shows very clearly that in the conventional system, trading in money and debt of various classes is something that is taken for granted. In fact within this system, not only money is traded on spot basis but also sold in forward and future markets; the last two methods make it possible for any relevant parties to resort to speculative trading of money and currencies. Apart from this, debts are bundled together to make it possible for securitization to take place, purportedly to help the issuer to have what is known as the advantages of off balance sheet treatment of their assets. These securitized debts, previously were mainly made of mortgage debts now also come from many other non ending classes of debts. Then they invented derivative instruments that were purportedly structured to help various parties to hedge their positions in the financial market as part of the so-called risk mitigation strategy. The issue here is that whether such a strategy works in a long run or is it not the case that it is the source of the problem in itself. The current crisis speaks for itself as far as the dark side of derivatives is concerned.

Muslim jurists and thinkers on the other hand had warned since around 1000 years ago that when money is allowed to be treated as commodity of trade, people have to wait a little while for financial crisis to emerge the scale of which is difficult to be described. Ibn al-Qayyim, a prominent jurist from the Hanbali school of Islam of law, for one had this statement in one of his celebrated works to state the point:
“It is illegal for anyone to corrupt people’s money or to cause changes or fluctuation in its value. Similarly it is illegal (from Shariah perspective) to treat money as commodity of trade, since if it is not, serious problem will be faced by the people in the scale or magnitude only Allah will know. What is required is that money should be treated as capital for business and not as commodity of trade. When the government prohibits the use of any currency, such must be accordingly withdrawn from circulation”

On the nature of Islamic finance, perhaps the Syrians are better than the rest of us when it comes to understanding the real difference between Islamic and conventional banking. Although they are late comers to the so-called Islamic club of banking and finance, their analysis is sharper than that of others. It was reported in March last year that they would start introducing Islamic banking products in their country but not on conventional footings as have been done by the rest. Theirs would be Islamic investment banking in the true sense of the word. They envisaged a more accurate role of Islamic financial institutions as predominately investment companies rather than banking institutions per se. The implication of this, if we were to read between the lines of this news, is that their institutions will never be allowed to fall into the trap of conventional mentality that cannot free itself from the magic word of financial intermediation in the context of banking business. What is expected is that their institutions must adhere to their status as real traders of assets or goods and not money or currency traders .

That being said, the likely outcome would be, once again other investment contracts will be given prominence in their operations. The contracts like mudarabah and musharakah which are investment/partnership -based are likely to be relied upon more frequently. These two concepts when practically put into proper operation will redefine the nature and scope of risk management strategy of the players given that in Mudarabah and Musharakah structures both the bank or the financial institutions and investors or customers will equally share the associated risk arising from the relevant business activities. The likely outcome would be that the institutions will be able to absorb jointly with their providers of funds unexpected shocks happening in the market.

With respect to trading in money and debts, in so far as these institutions remain truthful to the Islamic rules and principles governing these aspects, there would be no chance for them to behave the way conventional institutions have behaved in the context of unlimited ways of trading in money and debts. Precisely because Islamic law prohibits money exchange or trading other than on spot and at par basis only the possibility of such institutions to fall into the same scenario as currently faced by conventional banks in major western countries is slim. However as it was recently pointed out by a Reuter coverage on Islamic finance, that will only be possible if Islamic financial institutions remain truthful to the true teaching of Islam in this context. Meaning that if they should behave the way their western conventional counter parts have been conducting themselves, definitely they would fall into the same trap primarily due to the treatment of money and debt as commodities of trade.

Other interesting point to see is whether the concept of two-tier mudarabah will also be fully employed in the operation of these Islamic banks given the fact that this is the closest that Islam has reached with respect to the notion of financial intermediation. Of course two tier mudarabah can only be implemented with prior approval of the capital provider as allowed by some schools of Islamic law. The only major differences between two-tier mudarabah and conventional intermediation is that in the case of the first, reliance is placed on expected rate of actual return of investment as opposed to fixed rate of return/interest in conventional financing.

But regrettably, the rest of the Muslim world is not learning the way the Syrians have done in term of their understanding about this very important point. Hardly any day should pass now in many corner of the globe without there be some reports about parties who are rushing to come out with derivative-based instruments for hedging purposes in addition to Murabahah and deferred payment-based structures that have been widely resorted to despite calls by many scholars for these instruments to be minimised. And then came Inah and tawarruk munazzam (organized tawarruk) as the two champions of personal finance facilities granted to customers cum consumers in needs. The essence of all these is that debt financing has been in essence been relied upon, and techniques have been be put in place to handle the relevant risks, typical of strategies employed by conventional financial institutions.

In truth, we have to go back to basic and ask the most valid question of our time as far as modern application of Islamic finance is concerned, that is what is money and financial intermediation from Shariah perspective?. Without properly answering this basic question it is doubtful that we can arrive at our true destination in achieving the Islamic objective of justice and fairness . There is no denying the fact that there are forces around that are relentlessly trying to prevent us from leaving the comfort zone of conventional thinking and customary ways of doing things saying that the march toward a more deep-rooted Islamic thinking is so risky to try. In answer we may recall the fact that the Muslim world had prospered in the past when there was not a single bank, as we know it today, to help them. What were there are no other than the true spirit of business risk taking based on the full understanding of the concept of mudarabah and musharakah applied truthfully in line with the golden principle that says “no pain no gain” . Why can’t the Muslim world repeat its history once again in term of prosperity and success in a way that is truthful to its traditions and past records? Surely if it is to happen it will not be within the framework of interest-based system because Allah Almighty will never make riba’-based activities prosperous in the true sense of the word. After all the world is now fully aware of the peril and instability of the interest-based system.

Monday, May 4, 2009



ISLAMIC business and finance are about ways of conducting financial transactions in accordance with the tenets of Islam. For individuals, it may relate to methods employed to manage daily financial activities at various levels that may essentially involve the sale and purchase of goods and services on a daily basis. The way we conduct ourselves determines how we treat our fellow citizens in the process of buying and selling. In Islam, the key principles are fairness and justice for all. Although Islam does not forbid us from making profits in commercial dealings, it prescribes honesty as the mainstay of conducting business.


Islam cares for the interest of both parties in a dealing. Take the case of a mortgage or charge in a loan or credit transactions. In the conventional system, upon failure of the borrower to repay the loan on time the creditor will begin foreclosure proceedings, starting with the issuance of notice to the borrower to remedy the breach within a certain period. Failing this, the creditor will ask for an order of sale at the High Court to sell off the collateral by public auction i.e. a forced sale.

In contrast, Islam tells us that if a borrower is unable to repay the money debt when it is due, then according to the Quranic injunction, he must be given time to settle it provided that he is facing a genuine case of hardship. In the case of the creditor's right to sell off the collateral or charged property, Islamic law says he cannot ask the court and the court cannot make an order for the forced sale of the property until and unless the borrower is given an opportunity to sell the property himself. Juristic opinions, however, differ as to whether a borrower's refusal to dispose off the charged asset entitles the court to make an order of sale.

Some schools of Islamic law are of the opinion that the court can proceed with the sale. Other schools maintain that contempt proceedings can be taken against the borrower for not complying with the court order and the court can imprison him until he is willing to sell the property and pay off the debt. The wisdom behind the Islamic ruling is that the charged asset is the borrower's property, so only he can sell it. He needs to be given time to find a suitable buyer who is willing to pay the market price for the property.

Islamic law is thus more considerate in its treatment of the borrower but at the same time protects the interest of the lender in allowing the court to intervene. Islam respects the right of ownership to the fullest extent when it says that the owner must be given a chance to sell the property first because only he will try to sell it at the highest possible price. Only if he failed or refused to do so is such right to be delegated to an independent party after the court grants an order of sale.


In sales, Islam requires sellers to disclose all that they know about defects in their goods. Buyers must be told of the existence of such defects and be allowed to make up their mind whether or not to buy the goods based on informed judgment. Concealment of defects is considered unlawful. The position is different in certain other systems where buyers are expected to discover for themselves all material facts about the products they are buying. Here, the concept of caveat emptor (buyers beware) is followed.


Some observers have maintained that there are no differences between the Islamic and conventional ways of conducting commercial dealings given the perception on the ways Islamic finance has been pursued. For many it seems that Islamic finance products and services are more or less replicas of the conventional ones such that their distinctive Islamic features are difficult to be known. Others have argued that such perception is not necessarily true given the rationale for the introduction of the Islamic financial system in many Muslim countries? Why can't the Muslims just accept the conventional way of conducting business if there are no true differences between the two systems?


The fact is that there are many major differences between the Islamic and conventional systems, the most striking of which relates to the concept of money. Islam views money as primarily a medium of exchange and unit of account, whereas in the capitalistic world money is more of a commodity of trade and as such can be bought, sold and speculated freely. Money, thus, has a time value and one who uses other peoples' money must pay for it in the form of interest. The basic position in Islam is that money lending or qard must remain a benevolent act worthy of being rewarded highly by Allah the Almighty. Money lending should never be allowed to be used for profit-making activities. In the conventional sense, lending is primarily for unjustified gain in the form of riba' (interest).

The current provision of financial services by Islamic financial institutions is said to be coloured by doubtful elements such that many parties have reservations about some of the financial instruments introduced in the market. Some institutions, they argue, have resorted to back-door money lending activities that involves interest. What they mean is that these institutions which claim to follow the Islamic way have remained essentially as financial intermediaries that use certain modes of financing which raise doubts as to their motives. By twisting words and phrases, they have coined certain concepts to make them look Islamic, while the true intention or motive of the institutions' activities is hidden behind the veil of the permissibility of sale.

In Islam, forms or words used shall never take precedence over intention and motive not only in contractual matters but in fact in all affairs. Islamic finance, if it is to be truly successful, must avoid impurities in form and essence, as it is a system based on the highest standard of morality and religious conscience. When Islam abolished interest, it naturally disallowed everything that might lead to it.

Hence, it is high time now, given the speed of the development of Islamic finance, that serious efforts be made by all parties involved to re-examine whether the process followed so far is truly in line with the teachings of Islam. It is true that innovation is badly needed, especially now. It should not however , in any way, sacrifice the true spirit and injunctions of Islam. Islam is a system that seeks to act as a benchmark for acceptable rules of conducts considered to be just for all. It is therefore very naive to think, in the context of being innovative, that everything the capitalistic system provides us with must be replicated since not all the so-called modern and sophisticated products are just and good for us.