02 Lecture, EOIF - Fall 2013

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Essentials of Islamic Banking and FinanceIQRA University Gulshan Campus. MBA Fall, 2013

Talha Saleem [email protected]

Introduction to Shari'ah and IslamicBanking and Finance


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Contents of the lecture

Introduction to Shari'ah: Scope of Shari'ah rulings; Sources of Shari'ah; Role of Fiqh and Fuqahaa;

Principles of Islamic Economics; Basic Concepts and philosophy of Islamic economics;

Four basic prohibitions in financial system of Islam: General prohibitions;

Riba (interest); Gharar (uncertainty); Violation of Islamic Law of contract;


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Introduction to Shari'ah


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Introduction

What do we mean when we say ISLAMIC?ISLMIAC means according to ISLAM;When we say according to Islam we mean in conformity withShari'ah ( (;

Again the same comes to us, what is Shari'ah ( )?Is Shariah ( ( a set of rules and laws set out by religion?

Let us see what is it!


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Islamic rules and guidlines

A perfect combination is required by Islam


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Our scope


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The regulations of the Shari'ah are of two types: Regulations on worships and ritual duties;

This type is known as 'Ibaadat' or 'Huqooqullah' (rights of Allah);This type of rules and guidelines deal with 'Man-to-God' relations;It explain the ways and methods of 'Ibadaat' (worships) and beliefs;This type is, up to some extent, a personal matter between God and a

person; Regulations on juridical, social and political nature;

This type is known as 'Muaamlaat' or 'Hoqooqul Ibaad' (human dealings);This type deals with 'Man-to-Man' relations;Under this type many relationships are covered namely social, political andeconomic;This type defines rules for each type of relationship;This type of rules are of common nature and not specific to each and every

person;


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Sources of shari'ah

As we discussed the rules and guidelines of Shari'ah areCommandments of Allah (SWT) revealed by Him upon Hismessenger Holy Prophet (Sallallahu Alayhi Wa Sallam) as RecitedWahee the nobel Qura'n or Un-recited Wahee the Sunnah;Therefore, the sources of Shari'ah are simply very clear and easy tounderstand;Source of law means 'a definite means for extracting principles andguidelines';There are two types of sources of Shari'ah:

Primary Sources; Secondary / derived Sources;


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Sources of shari'ah

Primary source means a source of laws and rules that is used forextraction of laws as the first source;There are two sources falls in under this type: Quran - The book of Allah:

Qura'n gives main beliefs, principles and wide-ranging directives of Allah.Allah (SWT) said: "Verily, this Qur'an guides to that which is best, and givesglad tidings to the believers who do good that theirs will be a great reward."(17: 9);Rulings derived explicitly from Quran are Frad (obligatory) and itsrefutation is 'Kufr';


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Sources of shari'ah

Quran - The book of Allah:Qura'n gives main beliefs, principles and wide-ranging directives of Allah.Allah (SWT) said: "Verily, this Qur'an guides to that which is best, and givesglad tidings to the believers who do good that theirs will be a great reward."(17: 9);Rulings derived explicitly from Quran are Frad (obligatory) and its

refutation is 'Kufr'; Sunnah or Hadees:

Sunnah includes Sayings, Practices, No-objection (Silent Approvals) of theholy Prophet (SAWS) and practices of four caliphs and other companions ofholy Prophet (SAWS);

Both these sources are primary and main sources of rulings andguidelines of Shari'ah;


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Sources of Shari'ah

Derived /secondary Sources: Ijmaa' consensus of Fuqahaa;

Scholarly consensus means the agreement of a group of Muslim scholars ona specific issue;The condition is that all such scholars or majority of them have to agree to

the ruling;Ijmaa prefers a meaning or explanation of primary sources on other possiblemeanings; Example of Ijmaa' is consensus of Ulema on prohibition of banking interest;


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Sources of Shari'ah

Every Islamic rule is derived from these sources;

Whenever a rule is declared 'Islamic' it will be either derived fromQura'n, Sunnah, Ijmaa' or Qiyass;

Every rule need not be extracted from Qura'n or Hadees;

This is one of the very common mistakes nowadays;

Islamic banking and its all details are not extracted from Qura'n orSunnah only. This system is based use of all sources of Shari'ah;


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Role of Fiqh and Fuqahaa

Sometimes it is misunderstood what is Fiqh and role of Fuqahaa';This is important to understand the contribution of Fuqahaa';The primary sources of Shari'ah, Quar'an and Sunnah, did notconsist of legal rulings only, there are rules and guidelines, storiesof previous nations, mention of circumstances of the day of

judgment and many more;Also rulings about one thing are mentioned dispersedly andrevealed over a period of time;Therefore it was difficult for a common man to go through the

whole book or collection of rulings to conclude a decision about a particular situation;The contribution of Fuqahaa' is compilation and grading of rulingon a particular issue thereby making it easy for a common man tofollow Islamic teachings;


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Sources of Shari'ah

Derived /secondary Sources: Qiyaas The analogy;

Qiyas is 'finding a reason of a ruling by method of analogy';Application of Qiyas means 'searching a solution for a new issue that is notdiscussed in Quran and Sunnah';

The reason or cause of an existing Islamic rule becomes basis for a rulingfor new issue; For example, drugs have been deemed impermissible through an analogy from

the prohibition of alcohol in the Qur'an. This ruling is based on underlyingcause of intoxication ;


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Role of Fiqh and Fuqahaa

For example rulings about prayers are mentioned over a period oftime and dispersedly in many places;Fuqahaa' have compiled all the rulings belong to prayers andcategorized them in Fard, Wajib, Sunnat and Mustahab;This help general people to do what they need easily and asrequired by Shari'ah;


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Principles of Islamic Economics


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Principles of islamic economics

ISLAMIC ECONOMIC MODEL ISLAMIC ECONOMIC MODEL is based on two underlying principles:IMPORTANCE OF ECONOMIC GOALS: Economic activities of man are lawful and sometimes they become obligatory

and necessary;

However economic activity is not the basic problem of human being; Therefore economic progress is not the be-all and end-all of human existence;REAL NATURE OF WEALTH AND PROPERTY: Islam has a different viewpoint about the four Basic Economic Problems: Determination of Priorities:

Adherence to commandment of ALLAH should be the top priority; Allocation of Resources (Land, Labor, Capital, Entrepreneur):

No remuneration to Capital as it is rewarded under entrepreneur;


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Principles of Islamic Economics

Distribution of Income:Both wealth creators and non creators have right in wealth. (Zakat, Sadaqaat, etc. etc.are for non creators);

Development:Only through Halal (permissible) ways and for Halal purposes;

Wealth creation and distribution:Islam suggest a good mechanism of Distribution of Wealth;The purpose is to establish a practicable Economic system under whicheveryone benefits;Islam accepts the following economic laws thing within a certain limits: Laws of demand and supply; Motive of personal profit; Market forces; Natural relation of employer and employee; Profit and loss distribution; Asset based system rather than speculation and document based system;


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Basic prohibitions in financial systemof Islam


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Basic prohibitions

Islam prohibits some economic activities and allow all otheractivities that beyond these prohibited activities;We can categorize these activities in four basic types: General prohibitions; Riba (interest); Gharar (uncertainty); Violation of Islamic Law of contract;


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General prohibitions

This type include all economic activities that involve in any thingswhich is declared disallowed in Islam;For example business of alcohol, pork and film industry is notallowed in Islam;Therefore any involvement in such businesses fall under general

prohibitions;This type is easily understandable for all;


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Interest Riba

Riba means: Any excess compensation over and above the principal which is without due

consideration. It is in fact a premium paid to the lender in return for hiswaiting as a condition for the loan;

It is an impermissible activity in Islam;

In the words of Prophet (SAW): 'Every loan that draws any premium is Riba';

[Hadith is reported by Hazrat Harith ibn Abi Usamah in his Musnad. (See Supreme Court Judgment December 23, 1999)]


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Types of Interest with respect to implicitly and explicitly

Explicit Interest: Main type of interest which is clear and easy to understand for everyone; Lending and borrowing on interest is simple example of it; Banking interest is also an example of it.

Implicit Interest A type of interest that has both possibilities of being interest or not; It is not always surely interest but becomes if it is pre-agreed and

common in practice. Examples:

Premium charged against delaying or rescheduling;Rebate on early payment;Discount offered on payables in case of early settlement.


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Violation of islamic law of contract

Islam has clearly explained certain rules and laws for each type ofeconomic and financial contract;The contracts made in violation of these laws of contract are calledUqood-e-Fasidah (invalid contracts);A detail discussion on the topic will come in coming lectures;


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Summary

Islamic financial system revolves around these basic prohibitions;All financial policies, monetary systems and other practices shouldfollow these rules;A system that follows these guidelines is Islamic or 'Shari'ahcompliant' system;


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Questions?

02 Lecture, EOIF - Fall 2013

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