FIN545

ISLAMIC FINANCE
ASSIGNMENT 1

Name : Nor Farah Nabilla binti Abdul Halim

Student No. : 2010197985
Group : EBMF5D
Lecturer : Mohd Faizal bin Kamarudin

Questions 1 :
Explain concept of Maqasid al-shariah.

Answer :
Maqasid al-Shari`ah, or the goals and objectives of Islamic law, is an evidently
important and yet somewhat neglected theme of the Shari’ah. Generally the Shari`ah is
predicated on the benefits of the individual and that of the community, and its laws are
designed so as to protect these benefits and facilitate improvement and perfection of the
conditions of human life on earth. The Qur’an is expressive of this when it singles out the
most important purpose of the Prophethood of Muhammad (peace be on him) in such
terms as: "We have not sent you but a mercy to the world" (21: 107). This can also be
seen perhaps in the Qur’an’s characterisation of itself in that it is "a healing to the
(spiritual) ailment of the hearts, guidance and mercy for the believers" (and mankind)
(10: 57).
The two uppermost objectives of compassion (rahmah)and guidance (huda)in the
foregoing verses are then substantiated by other provisions, in the Qur’an and the Sunnah
that seek to establish justice, eliminate prejudice, and alleviate hardship. The laws of the
Qur’an and the Sunnah also seek to promote cooperation and mutual support within the
family and the society at large. Justice itself is a manifestation of God’s mercy as well as
an objective of the Shari’ah in its own right. Compassion (rahmah) is manifested in the
realisation of benefit (maslahah)which the ‘Ulamâ’ have generally considered to be the
all-pervasive value and objective of the Sharî’ah and is to all intents and purposes
synonymous with rahmah.
Educating the individual (tahdhib al-fard) is another important objective of the Shari’ah
so much so that it comes, in order of priority, even before justice and maslahah. For these
are both socially-oriented values which acquire much of their meaning in the context of
social relations, whereas tahdhib al-fard seeks to make every individual a trustworthy
agent and carrier of the values of the Sharî’ah, and it is through educating the individual
that the Shari’ah seeks to realise most of its social objectives. The overall purpose of a
great deal of the laws and values of the Shari’ah, especially in the spheres of ‘ibadat and
moral teaching, is to train an individual who is mindful of the virtues of taqwa and
becomes an agent of benefit to others.
The Qur’an is expressive, in numerous places and a variety of contexts, of the rationale,
purpose and benefit of its laws so much so that its text becomes characteristically goal-
oriented. This feature of the Qur’ânic language is common to its laws on civil
transactions (mu’amalat)as well as devotional matters (‘ibadat). Thus when the text
expounds the rituals of wudû (ablution for prayer) it follows on to declare that "God does
not intend to inflict hardship on you. He intends cleanliness for you and to accomplish his
favour upon you" (5: 6). Then with regard to the prayer itself, it is declared that "truly
salâh obstructs promiscuity and evil" (29: 45). With reference to jihâd the Qur’an
similarly proclaims its purpose in such term that "permission is granted to those who
fight because they have been wronged" (22: 39). The purpose, in other words, of
legalising jihâd is to fight injustice (zulm) and the purpose of salah is to attain spiritual
purity and excellence that is accomplished together with physical cleanliness through
ablution before prayer. With reference to the law of just retaliation (qisas), the text
similarly declares that "in qisas there is life for you, o people of understanding" (2: 179);
and with regard to poor-due (zakah), the Qur’an validates it "so that wealth does not
circulate only among the wealthy" (57:7). According to another text, the believers are
under duty to lower their gaze in their encounter with members of the opposite sex, "for
this will help you to attain greater purity" (24: 30).
One can add many more examples of the law which show how the Qur’an and the
Sunnah are expressive of their goal justification, cause and benefit in the affirmative
sense, just as one finds numerous references to evil conduct and crime which is
reprimanded and made punishable, in the negative sense, in order to prevent injustice,
corruption and prejudice. In the area of commerce and mu’amalât, the Qur’an forbids
exploitation, usury, boarding and gambling which are harmful and jeopardise the
objective of fair dealing in the market-place. The underlying theme in virtually all of the
broad spectrum of the ahkam is realisation of benefit (maslahah)which is regarded as the
summa of the maqasid. For justice is also a maslahah and so is tahdhib al-fard. The
masalih (pl. of maslahah), thus become another name for the maqasid and the ‘ulama’
have used the two terms almost interchangeably.

Classification Of Benefits

The ‘ulama’ have classified the entire range of masalih-cum-maqasid into three
categories in a descending order of importance, beginning with the essential masâlih, or
daruriyyat, followed by the complementary benefits, or hajiyyat, and then the
embellishment tahsiniyyat. The essential interests are enumerated at five, namely faith,
life, lineage, intellect and property. These are, by definition, essential to normal order in
society as well as to the survival and spiritual well being of individuals, so much so that
their destruction and collapse will precipitate chaos and collapse of normal order in
society. The Shari’ah seeks to protect and promote these values and validates measures
for their preservation and advancement. Jihad has thus been validated in order to protect
religion, and so is just retaliation (qisas) which is designed to protect life. The Shari’ah
takes affirmative and also punitive measures to protect and promote these values. Theft,
adultery and wine-drinking are punishable offences as they pose a threat to the protection
of private property, the well-being of the family, and the integrity of human intellect
respectively. In an affirmative sense again, but at a different level, the Shari’ah
encourages work and trading activity in order to enable the individual to earn a living,
and it takes elaborate measures to ensure the smooth flow of commercial transactions in
the market-place. The family laws of the Shari’ah are likewise an embodiment largely of
guidelines and measures that seek to make the family a safe refuge for all of its members.
The Shari’ah also encourages pursuit of knowledge and education to ensure the
intellectual well-being of the people and the advancement of arts and civilisation. The
essential masalih, in other words, constitute an all-encompassing theme of the Shari’ah
as all of its laws are in one way or another related to the protection of these benefits.
These benefits are an embodiment, in the meantime, of the primary and overriding
objectives of the Shari’ah.
The second class of the interests, known as hajiyyat, or complementary interests, are not
an independent category as they also seek to protect and promote the essential interests,
albeit in a secondary capacity. These are defined as benefits, which seek to remove
severity and hardship that do not pose a threat to the very survival of normal order. A
great deal of the concessions (rukhas)such as the shortening of salah, and opening of the
fast for the sick and the traveller, which the Shari’ah has granted, are aimed at preventing
hardship, but they are not essential since people can live without them if they had to. In
almost all areas of obligatory ‘ibadat the Shari’ah has granted such concessions.
Similarly, in the area of criminal law, the hadith which proclaims that "prescribed
penalties are suspended in all cases of doubt" protects a secondary interest in that it
regulates the manner in which punishments are enforced. These punishments are in turn
designed to protect the essential interests through judicial action. In the sphere of
mu’amalat, the Shari’ah validated certain contracts, such as the sale of salam, and also
that of lease and hire (ijarah)because of the people’s need for them notwithstanding a
certain anomaly that is attendant in both. In the sphere of family law, once again the
Sharî’ah permits divorce in situations of necessity by way, that is, of a concession, which
is aimed, in the final analysis, at ensuring the well-being of the family and defending it
against intolerable conflict.
A maslahah of the second class is elevated to the rank of the essential maslahah when it
concerns the public at large. To illustrate this, the validity of ijarah may be of secondary
importance to an individual but it is an essential interest for the society at large.
Similarly, certain concessions that are granted in the sphere of ‘ibadat may be secondary
to the survival of an individual but it becomes, a matter of primary interest for the
community as a whole. In the event of a conflict arising between the various classes of
interest, the lesser of these may be sacrificed in order to protect a higher interest. When
there is a plurality of conflicting interests and none appears to be clearly preferable, then
prevention of evil takes priority over the realisation of benefit. This is because the
Shari’ah is more emphatic on the prevention of evil, as can be seen in the hadith where
the Prophet (peace be on him) has reportedly said: "When I order you to do something,
do it to the extent of your ability, but when I forbid you from something, then avoid it
(altogether)".

The third class of masâlih, known as tahsîniyyât, are in the nature of desirabilities as they
seek to attain refinement and perfection in the customs and conduct of people at all levels
of achievement. The Sharî’ah thus encourages cleanliness of body and attire for purposes
of prayer and recommends, for instance, the wearing of perfume when attending the
congregational Friday prayer; contrariwise, it discourages the consumption of raw garlic
on that occasion. The Shari’ah also encourages charity to those in need beyond the level
of obligatory taxes, and in ‘ibadat, it recommends supererogatory prayers, and so forth.
In customary matters and relations among people, the Shari’ah encourages gentleness
(rifq), pleasant speech and manner (husn al-khulq)and fair dealing (ihsan). The judge and
the head of state are similarly counselled not to be too eager in the enforcement of
penalties, such a course being considered a desirable one to take. The purpose of all this
is the attainment of beauty and perfection in all areas of human conduct.
This last category of interests is perhaps of special importance as it is pervasive and
relates to all other masalih. One can perform the obligatory salah, for example, in
different ways, with or without proper concentration and giving each of its parts their due
attention, or perform it in a hasty and thoughtless manner, and the difference between
them is that the first is espoused with the attainment of both the essential and the
desirable, and the second ‘can at best be discharged as a duty. One can extend this
analysis to almost every area of human conduct and the implementation of almost all of
the ahkam of the Shari’ah. It should be obvious, then, that the classification of masalih
need not be confined to the ahkam of the Shari’ah or to religious matters alone as it is
basically a rational construct that applies to customary, social, political, economic and
cultural affairs and so forth. To build the first hospital in a town is likely to be necessary
and essential, but to build a second and third may be only complementary and desirable.
And then to equip each one with the latest and most efficient health care facilities may
fall under the category either of the second or the third classes of interests, depending, of
course, on the general conditions of each locality. From this analysis, it also appears that
classifying a certain interest and maslahah under one or the other of these categories is
likely to be relative and involve value judgement that contemplate the attendant
circumstances of each case.

Questions 2 :
Discuss sources of Islamic law.

Answer :

Various sources of Islamic law are used by Islamic jurisprudence to elucidate the Sharia,
the body of Islamic law. The primary sources, accepted universally by all Muslims, are
the Qur'an and Sunnah. The Qur'an is the holy scripture of Islam, believed by Muslims to
be the direct and unaltered word of Allah. The Sunnah consists of the religious actions
and quotations of the Islamic Prophet Muhammad and narrated through his Companions
and Shia Imams. However, some schools of jurisprudence use different methods to judge
the source's level of authenticity.

As Islamic regulations stated in the primary sources do not explicitly deal with every
conceivable eventuality, jurisprudence must refer to resources and authentic documents
to find the correct course of action. According to Sunni schools of law, secondary sources
of Islamic law are consensus among Muslims jurists, analogical deduction, al-Ra'y;
independent reasoning, benefit for the Community and Custom. Hanafi school frequently
relies on analogical deduction and independent reasoning, and Maliki and Hanbali
generally use the Hadith instead. Shafi'i school uses Sunnah more than Hanafi and
analogy more than two others. Among Shia, Usuli school of Ja'fari jurisprudence uses
four sources, which are Qur'an, Sunnah, consensus and aql. They use ijma under special
conditions and rely on aql (intellect) to find general principles based on the Qur'an and
Sunnah, and use usul al-fiqh as methodology to interpret the Qur'an and Sunnah in
different circumstances, and Akhbari Jafaris rely more on Hadith and reject ijtihad.
According to Momen, despite considerable differences in the principles of jurisprudence
between Shia and the four Sunni schools of law, there are fewer differences in the
practical application of jurisprudence to ritual observances and social transactions

Primary sources
The Qur'an is the first and most important source of Islamic law. Believed to be the direct
word of God as revealed to Muhammad through angel Gabriel in Mecca and Medina, the
scripture specifies the moral, philosophical, social, political and economic basis on which
a society should be constructed. The verses revealed in Mecca deal with philosophical
and theological issues, whereas those revealed in Medina are concerned with socio-
economic laws. The Qur'an was written and preserved during the life of Muhammad, and
compiled soon after his death.

Muslim jurists agree that the Qur'an in its entirety is not a legal code (used in the modern
sense); rather its purpose is to lay down a way of life which regulates man's relationship
with others and God. The verses of the Qur'an are categorized into three fields: "science
of speculative theology", "ethical principles" and "rules of human conduct". The third
category is directly concerned with Islamic legal matters which contains about five
hundred verses or one thirteenth of it. The task of interpreting the Qur'an has led to
various opinions and judgments. The interpretations of the verses by Muhammad's
companions for Sunnis and Imams for Shias are considered the most authentic, since they
knew why, where and on what occasion each verse was revealed.

Sunnah
The Sunnah is the next important source, and is commonly defined as "the traditions and
customs of Muhammad" or "the words, actions and silent assertions of him". It includes
the everyday sayings and utterances of Muhammad, his acts, his tacit consent, and
acknowledgments of statements and activities. According to Shi'ite jurists, the sunnah
also includes the words, deeds and acknowledgments of the twelve Imams and Fatimah,
Muhammad's daughter, who are believed to be infallible.

Justification for using the Sunnah as a source of law can be found in the Qur'an. The
Qur'an commands Muslims to follow Muhammad. During his lifetime, Muhammad made
it clear that his traditions (along with the Qur'an) should be followed after his death. The
overwhelming majority of Muslims consider the sunnah to be essential supplements to
and clarifications of the Qur'an. In Islamic jurisprudence, the Qur'an contains many rules
for the behavior expected of Muslims but there are no specific Qur'anic rules on many
religious and practical matters. Muslims believe that they can look at the way of life, or
sunnah, of Muhammad and his companions to discover what to imitate and what to avoid.

Much of the sunnah is recorded in the Hadith. Initially, Muhammad had instructed his
followers not to write down his acts, so they may not confuse it with the Qur'an.
However, he did ask his followers to disseminate his sayings orally. As long as he was
alive, any doubtful record could be confirmed as true or false by simply asking him. His
death, however, gave rise to confusion over Muhammad's conduct. Thus the Hadith were
established. Due to problems of authenticity, the science of Hadith (Arabic: `Ulum al-
hadith) is established. It is a method of textual criticism developed by early Muslim
scholars in determining the veracity of reports attributed to Muhammad. This is achieved
by analyzing the text of the report, the scale of the report's transmission, the routes
through which the report was transmitted, and the individual narrators involved in its
transmission. On the basis of these criteria, various Hadith classifications developed.

To establish the authenticity of a particular Hadith or report, it had to be checked by

following the chain of transmission (isnad). Thus the reporters had to cite their reference,
and their reference's reference all the way back to Muhammad. All the references in the
chain had to have a reputation for honesty and possessing a good retentive memory. Thus
biographical analysis (`ilm al-rijāl, lit. "science of people"), which contains details about
the transmitter are scrutinized. This includes analyzing their date and place of birth;
familial connections; teachers and students; religiosity; moral behaviour; literary output;
their travels; as well as their date of death. Based upon these criteria, the reliability
(thiqāt) of the transmitter is assessed. Also determined is whether the individual was
actually able to transmit the report, which is deduced from their contemporaneity and
geographical proximity with the other transmitters in the chain. Examples of biographical
dictionaries include Ibn Hajar al-Asqalani's "Tahdhīb al-Tahdhīb" or al-Dhahabi's
"Tadhkirat al-huffāz."[ Using this criteria, Hadith are classified into three categories:
1. Undubitable (mutawatir), which are very widely known, and backed up by numerous
references.
2. Widespread (mashhur), which are widely known, but backed up with few original
references.
3. Isolated or Single (wahid), which are backed up by too few and often discontinuous
references.

Secondary sources
All medieval Muslim jurists rejected arbitrary opinion, and instead developed various
 secondary sources, also known as juristic principles or doctrines to follow in case the
primary sources (i.e. the Qur'an and Sunnah) are silent on the issue.

Ijma
The ijma' , or consensus amongst Muslim jurists on a particular legal issue, constitutes
the third source of Islamic law. Muslim jurists provide many verses of the Qur'an that
legitimize ijma' as a source of legislation. Muhammad himself said:
• "My followers will never agree upon an error or what is wrong",
• "God's hand is with the entire community".

In history, it has been the most important factor in defining the meaning of the other
sources and thus in formulating the doctrine and practice of the Muslim community. This
is so because ijma' represents the unanimous agreement of Muslims on a regulation or
law at any given time. There are various views on ijma' among Muslims. Sunni jurists
consider ijma' as a source, in matters of legislation, as important as the Qur'an and
Sunnah. Shiite jurists, however, consider ijma' as source of secondary importance, and a
source that is, unlike the Qur'an and Sunnah, not free from error. Ijma' was always used
to refer to agreement reached in the past, either remote or near. Amongst the Sunni jurists
there is diversity on who is eligible to participate in ijma' , as shown in the following
table:

School of
Formation of ijma'
jurisprudence
through public agreement of
Hanafi
Islamic
through agreement of the entire
Shafi'i
community and public at large
through agreement amongst the
Maliki residents of Medina, the first
Islamic capital
through agreement and practice of
Hanbali
Muhammad's Companions
only the consensus of the ulama of
Usuli the same period as the Prophet or
Shia Imams is binding.
Rationale
jurists the jurists are experts on legal matters
the people cannot agree on anything erroneous
Islamic tradition says "Medina expels bad
people like the furnace expels impurities from
iron"
they were the most knowledgeable on religious
matters and rightly guided
consensus is not genuinely binding in its own
right, rather it is binding in as much as it is a
means of discovering the Sunnah.

In modern Muslim usage it is no longer associated with traditional authority and appears
as democratic institution and an instrument of reform.

Qiyas
Qiyas or analogical deduction is the fourth source of Sharia for the Sunni jurisprudence.
Shiites do not accept qiyas, but replace it with reason (aql). Qiyas is the process of legal
deduction according to which the jurist, confronted with an unprecedented case, bases his
or her argument on the logic used in the Qur'an and Sunnah. Qiyas must not be based on
arbitrary judgment, but rather be firmly rooted in the primary sources.
Supporters of qiyas will often point to passages in the Qur'an that describe an application
of a similar process by past Islamic communities. According to Hadith, Muhammad said:
"Where there is no revealed injunction, I will judge amongst you according to reason."
Further, he extended the right to reason to others. Finally, qiyas is sanctioned by the ijma,
or consensus, amongst Muhammad's companions.

The success and expansion of Islam brought it into contact with different cultures,
societies and traditions, such as those of Byzantines and Persians. With such contact, new
problems emerged for Islamic law to tackle. Moreover, there was a significant distance
between Medina, the Islamic capital, and the Muslims on the periphery on the Islamic
state. Thus far off jurists had to find novel Islamic solutions without the close supervision
of the hub of Islamic law (back in Medina). During the Umayyad dynasty, the concept of
qiyas was abused by the rulers. The Abbasids, who succeeded the Ummayads defined it
more strictly, in an attempt to apply it more consistently.

The general principle behind the process of qiyas is based on the understanding that every
legal injunction guarantees a beneficial and welfare satisfying objective. Thus, if the
cause of an injunction can be deduced from the primary sources, then analogical
deduction can be applied to cases with similar causes. For example, wine is prohibited in
Islam because of its intoxicating property. Thus qiyas leads to the conclusion that all
intoxicants are forbidden.

The Hanafi school of thought very strongly supports qiyas. Imam Abu Hanifa, an
important practitioner of qiyas, elevated qiyas to a position of great significance in
Islamic law. Abu Hanifa extended the rigid principle of basing rulings on the Qur'an and
Sunnah to incorporate opinion and exercise of free thought by jurists. In order to respond
suitably to emerging problems, he based his judgments, like other jurists, on the explicit
meanings of primary texts (the Qur'an and sunnah). But, he also considered the "spirit" of
Islamic teachings, as well as the whether the ruling would be in the interest of the
objectives of Islam. Such rulings were based on public interest and the welfare of the
Muslim community.

“ The knowledge of ours is an opinion, it is the best we have been able to achieve. He
who is able to arrive at different conclusions is entitled to his own opinion as we are
entitled to our own. ” - Abu Hanifa

The Shafi'i school of thought accepts qiyas as a valid source. Imam Shafi'i, however,
considered it a weak source, and tried to limit the cases where jurists would need to resort
to qiyas. He criticized and rejected analogical deductions that were not firmly rooted in
the Qur'an and sunnah. According to Shafi'i, if analogical deductions were not strictly
rooted in primary sources, they would have adverse effects. One such consequence could
be variety of different rulings in the same subject. Such a situation, he argued, would
undermine the predictability and uniformity of a sound legal system.

Imam Malik accepted qiyas as a valid source of legislation. For him, if a parallel could be
established between the effective cause of a law in the primary sources and a new case,
then analogical deduction could be viable tool. Malik, however, went beyond his
adherence to "strict analogy" and proposed pronouncements on the basis of what jurists
considered was "public good".

Questions 3 :
Describe type and categories of riba and gharar.
Answer :

The Islamic economic system as part of spiritual activities obtains its general rules from
Al Qur’an and Sunnah. Therefore, its values consist of what is allowed and leaves out
what is forbidden. Some values that are forbidden in Qur’an and Sunnah are Riba (Usury)
and Gharar (Uncertainty). These values are the biggest differences between Islamic
economics and Capitalism and Socialism economic systems. The following is the
explanation of Riba and Gharar:

A. Riba (Usury)
Riba is literally translated from the Arab language and means ‘an increase, growth,
augmentation or accretion,’ (Khir, Gupta, & Shanmugam, 2008, p.28), and ‘addition and
expansion,’ (Al-Harran, 1993, p.16) although not all of increasing is forbidden in Islam.
And as syari’ah term, it means ‘the premium’ that is paid by the borrower to the lender
together with the principal of loan due to some condition and because of its addition time
to maturity (Chapra, 1992). According to this definition, many scholars agree that the riba
refers to ‘interest’ used commonly in economic conventional system.

Types of Riba:
Scholars have divided riba into two types:
1. Riba Duyun.
This type of riba occurs in a loan or debt. Any kind of addition or increase above the
amount of principal whether the addition or increase are inflicted by the lenders or
willingness of the borrowers. Riba Duyun is divided in two types:
a. Riba Qardh
This is all increments above the amount of the principal of the loan whose amount is
imposed proportionately at the beginning of the lending agreement. The addition above
the amount of the principal and is due in a certain amount of time based on the loan.
b. Riba Jahiliyyah
This occurs when the increment of the principal increases as the time of loan increases.
At first, there is no such fix increment, but when the borrowers want to postpone the loan
or to extend the time to maturity the lenders will compel the increase of the loan.
However, this addition is due to the time of maturity and can also happen along with the
riba qardh above. According to this explanation riba qard and riba jahiliyyah refer to
‘interest’ because they are associated with the ‘addition or increase’ and the ‘extension’
of time to maturity. For example: Loans from the banks, credit card etc.
2. Riba Buyun
Riba buyun occurs in trading transactions. This kind of riba occurs in trading of two of
the same product but in unequal amounts; or the same product in equal amounts but there
is a postponement in delivery.
Types of Riba Buyun are:
a. Riba Fadhl
Riba fadhl is products that are exchanged in different amounts, number, measurement or
weight without the postponement in delivery of the product or the payment. According to
Khir, Gupta, & Shanmugam (2008) it is also called Riba of Excess (p.31). Riba fadhl can
happen in the purchase and sale of different products, but the quantity or the amount of
products that is exchanged are different. The difference in the quantity or the amount is
unjust and dishonest which is prohibited in Islam. Riba fadhl can be avoided if the goods
exchanged are equal in amount, number, quantity, and measurement.
b. Riba Nasi’ah (Riba Yad)
According to Khir, Gupta, & Shanmugam (2008), this is a kind of riba happens in trading
in same weight, measurement and number of products, but the delivery of products, or
the payment of money are delayed. However, Chapra (1992) stated that Nasi’ah come
from nasa’a means ‘to postpone, defer, or wait’ (p.35), and refers to the time the
borrower returns the loan with the addition. And he argues that this is interest in a
conventional system. Although there are some explanations and definitions about types of
riba, basically the meaning is same; because in concluding knowledge, scholars is usually
referred to as Ijma’ Ulama (the teaching from Scholars who have well known about their
knowledge in Islamic Jurisprudence).
Motivation in prohibition of Riba:

Islam is very concerned with human prosperity. Therefore, it would not forbid something
without any explanation for the prohibition. Although riba does not just refer to interest,
but the term of riba is used to explain interest.
The following is the reason why riba is prohibited in Islam:

1. An interest based system damages equity. Interest will force the borrowers to pay
additional money above the principal; while the borrowers do not have a positive profit
from their loan used in business. Therefore, the interest rate will increase the money of
rich people.
2. Interest based systems dissuade people to open a new business. Interest rates will
cause people to hesitate in finding something new or in opening a new venture because
the new business does not yet have a positive return. On the other hand, the owner must
pay definite payments to the lenders.
3. Interest based systems set profit to one side and ignores the other side. Much like
banks, they are just concerned about their returns and don’t care about loss or profit of
the borrowers.
4. Interest based systems depress investment activity. Interest will increase investment
costs.
5. Interest based systems add securities to the lenders rather than participate in
development. For example: For safety lending reasons, banks tend to provide loans to the
most profitable business or company that have been in existence for a long time and are
less concerned with small enterprises that are new in the market.

B. Gharar (Uncertainty)
Gharar means ‘uncertainty, hazard, chance or risk,’ and uncertainty means “where there
is a matter that is concealed by one party, where it (this concealment) can raise a sense of
inequality as well as tyranny to another party,” (Khir, Gupta, & Shanmugam, 2008, p. 38-
39). Hence, gharar is high uncertainty including risky transactions, and not enough
information in regards of the goods or services that will be bought. Contracts that don’t
have enough information about the product will make the outcome not as clear, and this
is prohibited in syari’ah. The gharar transaction includes selling goods in which the time
of delivery of the products are not certain; unclear as to the size, the number, the prices;
this situation will cause many problems in the future. According to Khir, Gupta, &
Shanmugam, (2008), there are two types of gharar:

First, Gharar fahish (Major Gharar) and second, Gharar Yasir (Minor Gharar). Gharar
fahish is a great uncertainty and the product cannot be measured, so the contract is
ambiguous. On the other hand, gharar yasir is a small gharar, for example; a hotel charges
the customer the same prices even though the criteria of the customers are different.
Questions 4 :
Outline the similarities and differences of Islamic finance with conventional finance.

Answer :
Questions 5 :
Why there is a need for Islamic finance?

Answer :