Islamic concept of brotherhood and equal treatment of all individuals in society is not meaningful unless accompanied by economic justice,

which means everyone gets his due for his contribution to society or to the social product and there is no exploitation of one another. Allah SWT says: Surely Allah SWT enjoins the doing of justice and the doing of good (to others) and the giving to the kindred, and He forbids indecency and evil and rebellion; He admonishes you that you may be mindful... (Surah An-Nahl: 90).

Shariah ( )comes from the word ( )which literally means to prescribe or ordain, law, and a straight road or path. Literal
The road to watering place; the straight path to be

followed

Technical

Rules which are ordained by Allah for His servants by

sending His Messenger

Refers to Islamic laws which were revealed to the Prophet Muhammad (saw) and which are recorded in the Quran and Sunnah.

PRIMARY SOURCES
Al-Quran Sunnah Ijma (Consensus of Muslim Jurist) Qiyas (Analogial Reasoning)

SECONDARY SOURCES
Istihsan (Juristic preference of the stronger principles) Istishab (Presumption of continuity) Maslahah Mursalah (Extended analogy/ consideration of public interest) Sadd al-Zarai (Blocking unlawful means to an unlawful end) Uruf (Custom)

Wajib
Mandub Mubah Makruh

Obligatory
Voluntary Permissible Dislike

Haram

Forbidden

Shariah is divine guidance from Allah SWT and Prophet Muhammad SAW. It is comprehensive, immutable and eternal. It covers all aspects of human life, on the individual as well as collective levels in matters of faith, worship and human relation in personal and public rights Fiqh Muamalah is Islamic rules concerning wealth and trading practices. It is also known as Islamic commercial laws. Islamic finance and the Shariah-Compliant contracts are among the areas of knowledge under Fiqh Muamalah. The implementation of the Islamic rules related to the economy necessitates the implementation of the rules of Zakah, Nafaqah, and Jizyah, which in turn means the implementation of the economic system. The execution of the economic system requires the implementation of the Ibadah, social system, Islamic foreign policy, and rules related to the leader all together.

Financial transactions, in order to be permissible and for the purpose of earning profit, should be associated with tangible real assets. In the Islamic framework, money itself is not recognized as capital, and as such it cannot earn a profit in itself. To ascertain the Shariah position of any types of transaction, we will have to look at their nature. If it is a loan or a credit transaction culminating in a debt, such loans/debts cannot fetch any increase whatsoever. In the sale of goods or their usufructs, however, one can make a profit as per the rules of the Shariah relating to the respective transactions. The profit arises out of business is halal, it is not riba. Hence, Muslim scholars have invented some Islamic transactions which do not involve interest and Islamic banks are adopting these Islamic transactions. Muslim scholars in the world were thinking for a long time how to develop a banking system which will be operated based on shariah principles and will not take any interest on loan given to people.

Muhammad Ayub (2007 ) mentioned:

The Quran enjoins us to write down and take witnesses in all transactions that involve credit one way or the other. Similarly, Prophet Muhammad SAW himself encouraged disclosure of all features of goods being traded and the competitive environment in which people get sufficient information about goods and their prices in the market. The Islamic banks disclosure standards are stringent because their role is not limited to a passive financier concerned only with interest payments and loan recovery. Islamic financing modes are used to finance specific physical assets like machinery, inventory and equipment.

Siddiqi (2001) highlighted:

The main aim of Islamic banking and finance to provide a Shariah compliant solutions to the conventional system that is based on riba. As an alternative to riba, the profit and loss sharing arrangement are held as an ideal model of financing in Islamic finance. It is expected that profit and loss sharing mechanism in Islamic finance will significantly remove the inequitable distribution of income and wealth and may lead to a more efficient and optimal allocation of resources as compared to the interest-based system and it will ensure justice between the parties involved as the return to the bank on finance is dependent on the operational results of the entrepreneur.

Prohibit Elements In Islamic Transactions

RIBA
(INTEREST/USURY) Allah says Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. (AlBaqarah: 275)

GHARAR
(UNCERTAINTY) Allah says O you who believe, Eat not property among yourselves unjustly by falsehood and deception,except it be atrade amongst you,by mutual consent (Al-Nisa: 29).

MAYSIR
(GAMBLING) Allah says They will ask thee about intoxicants and games of chance; in both there is great evil as well as some benefit for man; but the evil which they cause is greater than the benefit which they bring (Al-Baqarah: 219).

Islam recommends avoiding reprehensible transactions and encourages meritorious acts; indifferent acts are Shariah neutral. Prohibited activities have to be avoided in every respect, and obligatory acts must be carried upon and never to be ignored. The underlying principle in Islamic contracts is permissibility and validity. And since most of the new banking and financial transactions did not even exist as such when classical law held sway, any of these transactions would be considered as valid unless there is an explicit text or religious rule proving its prohibition and voiding. Therefore, Islamic banks enter into different concepts while doing the business, namely promises or contracts.

Contracts in Islamic banking are used for trade, lease, partnership, agency, loans, guarantee, etc. exchange of ownership in the form of trade involves mutual exchange of property rights along with usufruct, the asset and its usufruct are both transferred to the buyer following the sale agreement irrespective of cash payment having been made immediately or in the future. In addition, the ownership of the asset and its transfer from the seller to the buyer is an important aspect for Islamic banking transactions since risk remains with the party who owns the asset at a point of time following the transaction. Islamic banks and financial institutions are required to adopt transparency, disclosure and documentation to a greater extent than the conventional banks.

Forms of Islamic Contracts

Deposittaking Contract Sales based contract Lease-based contract Equity-based contract

Fee-based contract
Hybrid Contract

Islamic transaction is an activity that is consistent with the principles of Islamic law and its practical application through the development of Islamic economics. Investing in businesses that provide goods or services considered contrary to Islamic principles is also forbidden. Because Islam forbids simply lending out money at interest, Islamic rules on transactions (known as Fiqh alMuamalat) have been created to avoid this problem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such as profit sharing (Mudarabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah) and leasing (Ijarah).

In Islamic financial contract dealings it is commonly accepted that commercial dealings must be compliant with certain acceptable practices. These practices can be summarized as follows:

The contract price of the item financed must be at a price that is mutually agreeable to all the parties to the contract. The agreement to the price must not be made under duress. The contract must be between parties that are mentally healthy and able to make rational decisions. The parties to the agreement must be old enough to understand the implications and consequences of entering into the said contract or agreement.

The presentation of the fact relevant to the contacted items should be without ambiguity or deception. No contract under Islamic Finance may be contradicting or opposing a value that is prohibited under Islamic law. Prohibited activities have to be avoided in every respect, and obligatory acts must be carried upon and never to be ignored. The underlying principle in Islamic contracts is permissibility and validity. Since most of the new banking and financial transactions did not even exist as such when classical law held sway, any of these transactions would be considered as valid unless there is an explicit text or religious rule proving its prohibition and voiding.

Risk sharing; profit and loss sharing Limited partnership: one partner provides capital; other partner provides expertise/effort and makes business decisions Restricted or unrestricted Examples:

funded participation arrangement establishment of investment fund

Risk sharing; profit and loss sharing in same proportions General partnership / joint venture arrangement between financier and investor Provides equity funding to a venture; greater risk-reward factors and greater investor say in project management

Asset based Trade finance / Acquisition finance Unconditional contract of sale; goods, cost price, markup and payment date = defined and agreed Profit from marked-up sale price (not interest) paid in instalments Examples:
import-export finance infrastructure project financing leveraged acquisition

Deposit cash or other assets. A bank is deemed as a keeper and trustee of funds. The bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah as a form of appreciation for the use of funds by the bank. Two types of Wadiah i.e. Yad Amanah & Yad Dhamanah

Asset based Hybrid between conventional operational and finance leases; a business process Analogous to secured loan Examples:

aircraft finance ship finance project finance