INTRODUCTION TO FUNDAMENTAL CONCEPTS

OF ISLAMIC BANKING & FINANCE

Contents
Introduction to Shari'ah;
Fiqh and Fuqahaa';
Types of rules of Shari'ah;
Sources of Shari'ah;
Objectives of Shari'ah;
Introduction to Islamic economic principles;
Islamic economic guidelines:
Factor of production classical and Islamic perspective;
Wealth creation and distribution;
Comparison of economic thoughts;
Status of economic activities in Islam;
Q & A;
Shari'ah Introduction

What do we mean when we say ISLAMIC?

We certainly mean an act, action, activity or
thing that is in conformity with Islamic
teachings;
And when we say ( )what do we
mean?
A set of rules and laws set out by religion?
Let us see what is it!
Shari'ah Introduction
Literally Shari'ah means "way" or "path to the water
source";
This word had been used by Allah for the system He has
bestowed upon Muslims. Allah (SWT) says in Sura Al Jasiyah
(Verse No. 18 of Surah No. 45):

A definition says: 'Shari'ah is the body of Islamic religious

law' which means it is a legal framework within which the
public and private aspects of life are regulated;
Although this defines Shari'ah up to some extent but
Shariah is not only a 'Law' in pure literal or terminological
sense as it supersedes Law in its inclusion of beliefs and
substance & form both;
 Shari'ah Introduction

Shari'ah gives concept of another world the day of

judgment;
Therefore Shariah is:
'a system consisting of laws and rules for religious,
political, social, domestic and private aspects of life
of individuals and groups';
Both who live in a Muslim legal system and those who
live in a non Muslim system are required to follow
Shari'ah up to possible level;
Every individual is responsible for balancing between
all aspects in manners required and guided by Shariah;
Shari'ah Introduction

Scope of our discussion

 Shari'ah Introduction of Fiqh
The role of Fiqh is very important to understand concept of Shari'ah;
The word fiqh is an Arabic term which literally means 'deep
understanding' or 'full comprehension;
It technically it refers to 'the science of extraction of rules and laws
from sources of Shari'ah';
The process of gaining knowledge of Islamic rules through
jurisprudence, and the body of legal advisements so derived, is known
as fiqh;
Fiqh is a significant process which is done under the principles of
Islamic jurisprudence;
Many a time it is misunderstood what is Fiqh and role of Fuqahaa;
The contribution of Fuqahaa' is great, broad based and inclusive.
Almost more than 1000 year long period of human intellectual
contribution made it an immense body of knowledge;
Role of Fiqh and Fuqahaa
The primary sources of Shari'ah did not consist of legal
rulings only, there are rules and guidelines, stories of
previous nations, mention of circumstances of the day of
judgment and many more;
Also rulings about one thing are mentioned in more than
one place and revealed over a period of time;
A common man can not go through the whole book or
collection of rulings to conclude a decision about a
particular situation;
The contribution of Fuqahaa' is:
(1) Compilation and (2) Categorization of ruling on a particular
issue;
This made it easy for a common man to follow Islamic
teachings;
Types of rules of Shari'ah

The regulations of the Shariah can be divided into

two groups:
Regulations on worship and ritual duties;
This type is known as 'Ibaadat' or 'Huqooqullah' (rights
of Allah) and this type of rules and guidelines deal with
'Man-to-God' relations;
Regulations on public relations and issues of juridical and
political nature;
This type is known as 'Muaamlaat' or 'Hoqooqul Ibaad'
(human dealings) and this type deals with 'Man-to-Man'
relations;
Human relationships of social, political and economic
nature fall in ambit of this type;
Sources of Shari'ah
Source of laws means 'definite means for extracting
principles, rules and guidelines';
The rules and guidelines of Shari'ah are
'commandments of Allah (SWT) revealed by Him
upon His messenger Holy Prophet (Sallallahu Alayhi
Wa Sallam)';
These rules have been revealed as:
Recited Wahee the noble Qura'n; or
Un-recited Wahee the Sunnah;
There are two types of sources of Shari'ah:
Primary Sources;
Secondary / derived Sources;
Sources of Shari'ah
Primary source means the first source which is used for
extraction of laws;
There are two sources fall under this type: (1) Quran - The
book of Allah, and (2) Sunnah or Hadees.
Sunnah includes Sayings, Practices, No-objection (Silent
Approvals) of the holy Prophet (SAWS) and practices of
four caliphs and other companions of holy Prophet
(SAWS);
Sunnah is explainer of Qura'n in view of all Muslim schools
of thoughts;
Both Qura'n and Sunnah are primary and main sources of
rulings and guidelines of Shari'ah;
Sources of Shari'ah
Derived /secondary Sources mean the second level source which is used for
extraction of rules in light of primary sources;
There are two sources fall under this type: (1) Ijmaa' consensus of Fuqahaa, and
(2) Qiyaas The analogy;
Scholarly consensus means the agreement of a group of Muslim scholars on a
specific issue or meaning of primary sources;
All such scholars or majority of them must agree to the ruling;
Ijmaa prefers a meaning or explanation of primary sources on other possible
meanings;
Example of Ijmaa' is consensus of Ulema on prohibition of banking
interest;
Qiyas is 'finding a reason of a ruling by method of analogy'. This is used to 'find a
solution for a new issue that is not discussed in Quran and Sunnah';
The reason or cause of an existing Islamic rule becomes basis for a ruling for
new issue;
For example, drugs are impermissible because of underlying cause of
intoxication. This is analogy from the prohibition of alcohol in the
Qur'an.
Objectives of Shari'ah

The understanding of objectives of Shari'ah is

important;
Imam Ghazali (ra) says:
The very objective of the Shari'ah is to promote the
welfare of the people, which lies in safeguarding their (1)
faith, (2) their life, (3) their intellect, (4) their posterity and
(5) their wealth. Whatever ensures the safeguarding of
these five serves public interest and is desirable.
Therefore management of wealth, its production &
distribution and other related activities are Halal and
important;
Objectives of Shari'ah
 BASIC CONCEPTS AND
PHILOSOPHY OF ISLAMIC
ECONOMIC GUIDELINES
 Islamic Economic Guidelines
Islamic Economic Model is based on two underlying principles:
(1) Importance of economic goals, and (2) Real nature of wealth and
property;
Importance of economic goals;
Economic activities of a man are of three levels:
Obligatory and necessary: Earning minimum means to live is
essential. Prophet (SAW) once said: . . . and that you leave your heirs
well off (or he said: prosperous) is better than to leave them (poor
and) begging from people . . . (Bukhari, Book 013, Number 3997);
Lawful and permissible: Earning more than basic needs but with due
care of all rights of Allah and his creations;
Prohibited and impermissible: Earning through impermissible ways
and low or no attention to rights of Allah and His creations;
Because economic activities are not the basic problem therefore
economic progress is not the ultimate and the only target of human
existence;
Islamic Economic Guidelines
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 financial capital as
it is rewarded under entrepreneur;
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;
Factors of production classical model

Land Labour Capital Entrepreneur

Piece of land; Human Physical The owner

Natural resources employed capital: All men

made tools and
equipments;
Financial capital:
Funds to buy
physical capital

Wealth (Goods and Services)

Rent if not owned Rent for physical Profit (left after

deduction of

by the owner; capital;

Wages
Free if owned by Interest on payment to
the owner financial capital; above three;
Factors of production Islamic view

According to a view, factors of production

should be three:
(1) Land, (2) Labor, and (3) Entrepreneur;
This viewpoint suggests that Land will include
all natural and man made resources while
Entrepreneur and financial capital become a
single factor of production;
Any amount provided as capital should be on
the basis of profit and loss sharing;
 Wealth creation and distribution
Islam suggests a good mechanism of Distribution of Wealth;
The purpose is to establish a practicable Economic system under
which everyone benefits;
Islam accepts the following economic laws thing within a certain
limits:
Market forces: Laws of demand and supply;
Exchange of services and goods;
Motive of personal profit;
Natural relation of employer and employee;
Profit and loss distribution;
Asset based system rather than speculation and document
based system;
Comparison of economic thoughts
 Status of economic activities in Islam
Islam prohibits some economic activities and consider them
harmful for human society. Some big problems are listed below
and we call it (8 ills):
Haram Economic dealings and activities (general prohibitions)
Riba (interest)
Gharar (excessive uncertainty)
Qimar (gambling)
Violation of law of contract
Concentration of wealth [Irtikaaz] (circulation in hand of few)
Hoarding [Ihtikaar] (gathering for creation of scarcity)
Concealment of wealth [Iktinaaz] (non-fulfillment of
obligations related to wealth Zakat, Sadaqaat etc.)
Basic economic prohibitions in Islam

Among 8 ills four are very important in our

circumstances. These are:
Haram Economic dealings and activities (general
prohibitions);
Riba (interest);
Gharar (excessive uncertainty) Qimar (gambling) as
its part;
Violation of law of contract;
Rest three are qualitative issues and pertain to macro
economic issues. Therefore we do not focus on it;
Basic economic prohibitions in Islam

First type i.e. general prohibitions mean

economic dealings in goods and services which
have been declared as Haram;
This type is known to almost all and also it
does not depend on financial understanding
only;
Riba, Gharar and violation of law of contract
are three main issues which will be focused in
our introduction;
We will discuss it later;
Q&A