DEFINITION,

OBJECTIVE &
PRINCIPLES

DEFINITION

Quick definition:

Financial services specifically designed to adhere to

Islamic law or Syariah and guided by islamic economics.
According to Ibnu Abu Yusof, Ibnu Taimiyyah and Ibnu Khaldun:

The

creation, developing and delivery of unique

customer satisfying competitive products and services at
a profit to organization and customer in the lights of
Islamic values and principles.
Although these financial services are designed for
Muslims, they are not exclusively available to Muslims.
Non-muslims can also provide and buy the services.

OBJECTIVES
To promote, foster and develop the banking
finance and product based on Islamic principles.
Responsible for promoting the establishment of
investment companies or other business.
Enhance economic development of Islamic
countries.

PRINCIPLES OF
FINANCIAL SYSTEM
Transaction is based on a valid contract
Prohibition of Riba
Prohibition of Gharar
Asset-backed financing
Risk-bearing and profit sharing

Transaction is based on a VALID CONTRACT

Islam support contractual obligations and the disclosure of information as a
sacred duty.
Intended to reduce the risk of asymmetric information and moral hazard.
Transactions in Islamic Financing - Based on contractual agreements
between the buyer and the seller.

Prohibition of RIBA
Quick Definition; Excess,Increase, growth
Refer to the premium that must be paid by the borrower to the lender along with
the principle amount as a condition for the loan or for an extension on its maturity.

Asset-backed financing
Islamic financing is based on illiquid assets, which creates real assets and
inventories. It does not recognize money as a subject-matter of trade compared
with conventional financing that deal in money and monetary papers only. Money
has no intrinsic utility; it is only a medium of exchange
Therefore, profit earned through dealing in money is interest, hence prohibited

Prohibition of GHARAR
Quick Definition; Uncertainty.
Refers to something that is not completely set in stone within a contract.
Islamic financial system discourages hoarding and prohibits transactions
featuring extreme uncertainties, gambling, and risks.

Risk-bearing and profit sharing

Since interest is prohibited, suppliers of funds become investors instead of
creditors.
The provider of financial capital and the entrepreneur share business risks in
return for shares of the profits.
Profit sharing - One party will provide capital and another party will be an
entrepreneur. The entrepreneur will carry-out business and both parties will
share the profits according to the ratios agreed but if the company losses, it
will be borne by bank.

SCOPE OF ISLAMIC
FINANCE

MALAYSIAN FINANCIAL
SYSTEM
Bank Negara
Malaysia (BNM)

Islamic Commercial Finance Merchant

Bank
Companies
Banks
Banks

Discount
Houses

Credit Guarantee Corp (CGC)

Foreign Banks Rep. Offices

1. BANKING
SYSTEM
Bank Negara
Malaysia (BNM)

Islamic Banks

Commercial
Banks

Investment
Banks

2. NON-BANK
SYSTEM

Development
Financial
Institutions

Savings
Institutions

Provident &
Pension Funds

Other Financial
Intermediaries

Insurance
Companies
including
Off-shore

Money Market &

Foreign Exchange

3. FINANCIAL
MARKET

Derivative
Market

Capital Market

SOURCES IN
ISLAMIC FINANCE

SOURCES

PRIMARY
QURAN
SUNNAH

SECONDARY

Ijma
Qiyas
Istihsan & Istislah
Istishab
Urf

PRIMARY
SOURCES

The Quran

Foundation of Islam, book of religious and moral priciples.

Book of Allah (S.W.T) that was revealed to the Prophet
Muhammad (S.A.W) through Jibrail (A.S).
The authenticity of the Quran as a revelation is proven by
Allah (S.W.T) and it represent blueprint for the Islamic way
of life.
General contents:
Allahs unity (Tauhid), Allah existence,The next life, The people of old, Formal
prayer , Challenges, Laws, Jihad, and The hypocrites.

Quranic field of a study:

-Information related to the theology (al-aqidah)
-Information related to moral sciences (al-akhlaq)
-Information related to the law (al-syariah )

Examples of the Quranic verses pertaining to

economics, banking, finance and trade

Surah Ali Imran 3:180

Surah Al Baqarah 2:177
Surah Al Baqarah 2:29
Surah At Taubah 9:60
Surah An Nisa4:58
Surah Al Araf 7:29
Surah Al Araf 7:85
Surah At Taubah 9:34
Surah Al Maidah 5:90
Surah Al arar 7:31

The Sunnah
A way of rule or manner of acting or mode of life.
(Ali,1950)
3 kinds of Sunnah (Ali, 1950):
(i) Qual or saying of the prophet (S.A.W) which has a
bearing on a religious question.
(ii) Fil represent action or practice of the prophet (S.A.W)
(iii) Taqrir or a silent approval of the prophet (S.A.W) of the
action or practice of another.

Sunnah is considered as a revelation as Allah (S.W.T)

says in surah an-Najm 53:3 and 4 ; and surah al
Maidah 5:67
The Prophet (S.A.W) was given a power and
responsibility of clarifying mankind Gods intent in the
Quran.

Exposition of the Quran by which it generalities were clarified and

its intended meaning were specified. The clarification include:
-The explanation of the methodology , reasons,
requirements and locations
-The deduction of a rule and regulation
-The explanation of the inclusion which could no be
logically deduced.

Examples of the Sunnah regarding the economics,

banking, finance and trade business

(1) The eradication of poverty

Narrated by Abu Hurairah , the prophet (S.A.W) used to pray o Allah !
I seek refuge from poverty , scarcity and ignominy
(2) Private ownership
Aisyah reported the prophet said whoever cultivates land which not the
property of anyone has a better title to it

SECONDARY
SOURCES

Ijma

Ijma is consensus, unanimous and agreed upon opinion of the

Companions or of the Muslims scholars (Mujtahid) on any point of
law not specified in the Quran and the Sunnah.
The Hadith which says , My community will never agree upon an
error
The authorisation of Ijma is based on the followings:
-Surah An Nisa 4:110
-Surah Al Baqarah 2:143

Qiyas

Means measuring by or comparing with or judging by comparisons

(Ali,1950).
The authorisation of Qiyas is based on the following
-Surah an Nisa 4:59
-Surah al Hasyr 59:2

Example of Qiyas is the hukm of producing, marketing, selling and

consuming tuak is unlawful (haram) based on the hukm on khamr , because the
prophet (S.A.W) every intoxicant is khamr an every form of khamr is haram

Istihsan and Istislah

Involved the preference of an opinion over another opinion
because it appears more suitable to the situation and
circumstances
Authorisation based on Surah al Araf 7:143
Examples of istihsan and istislah regarding the economics,
banking, finance and business;

The right of the government to collect taxes from the rich

other than zakat. The government is allowed to collect
taxes other than zakat from the rich if the interest of the
state demands it although in syariah only zakat has been
specified.

Istishab
Process of deducing fiqh law by linking a later set of
circumstance with an earlier set.
Based on the assumptions that the fiqh laws applicable
to certain condition remain valid as long as it is not
certain that these condition have altered.
Examples
Long absence of someone, it is doubtful whether he is
alive or dead. Therefore in istishab deduction, all rules
must remain in force which in one knew that he was still
alive.

Urf
The various customs and social habits of people
throughout the muslim world were accepted as a
secondary sources of the islamic law as long as they did
not contradict with the shariah.
Example:
In rental customs. The shariah does not require the
payment of the price until the thing sold has been
delivered completely being.

SIMILARITIES &
DIFFERENCES

SIMILARITIES WITH
CONVENTIONAL FINANCE
In term of products and services that both
provided.
SIMILARITIES Between ISLAMIC FINANCE
and CONVENTIONAL
Product

E,g Deposit, Insurance, Saving

Services

E.g Issuing fast cheque deposit, ATM cards

Objective

Profit maximization, Customer satisfaction

DIFFERENCES WITH
CONVENTIONAL
FINANCE
ISLAMIC
FINANCE
CONVENTIONAL
FINANCE

1. Principle

2. Prohibited
elements
3. Risk sharing

Based on Shariah
compliance.

Based on fully
manmade principles.

Free from prohibited

elements.

Not applicable.

In contrast, it promotes risk

The investor is assured
sharing between provider of of a predetermined rate
capital (investor) and the user
of interest.
of funds (entrepreneur).

4. Products

Shariah compliance
products.

Not applicable

5. Asset-Backed
Financing

Does not recognise

money as a subjectmatter of trade

Banks and financial

institutions deal in
money and monetary
papers only

5. Moral dimension

Work within the

moral values of
Islam, cannot finance
any projects which
conflicts with the
moral value of Islam.

Not concern about

moral implication of
the activity they
finance.