Islamic Finance: Principles

In the name of God, the compassionate the merciful

The foundation of Islamic finance principles can be deduced from the Shariah (Quran and Hadeeth/Sunnah). Owing to this, a command from Allah or His messenger to a Muslim is pivotal, hence obeying such a command earns a Muslim a reward, and disobeying such command is a Kabair (a big sin). Let’s list some of the verses of the Quran and some Ahadeeth to support these principles. To this effect, Allah the exalted be He said “O you who have believed, obey Allāh and obey the Messenger and those in authority among you. And if you disagree over anything, refer it to Allāh and the Messenger, if you should believe in Allāh and the Last Day. That is the best way and best in result.” (Quran 4: 9).

The messenger of Allah may the peace and blessings of Allah be upon him also said: “On the authority of Abu Hurairah, who said: I heard the messenger of Allah say: “What I have forbidden to you, avoid; what I have ordered you, do as much of it as you can. It was only their excessive questioning and their disagreeing with their prophets that destroyed those who were before you.” Forty hadeeth of imam Annawawi,(#9).

In another authentic hadeeth, the messenger of Allah (SAW) is reported to have said: “Perform the prayer as you have seen me performing the prayer.” And last but not least, the messenger of Allah said about a pilgrimage to Haj: “Take from me the way to perform your rituals of haj.”

The foundation explained above ought to promote ethical and socially responsible financial principles. Now let’s talk about the major principles of Islamic finance:

Prohibition of Riba (Usury or Interest): Islamic finance prohibits the payment or receipt of interest (riba). Quran2: 275-281 prohibits interest on no uncertain terms. And also, the prophet (SAW) cursed the receiver and the payer of interest, the one who records it and the witnesses to the transaction, and said: ‘They are all alike’. In another narration the prophet said “A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times”. So instead, Islam encourages profit-sharing arrangements to ensure that both parties share in the risks and rewards of a transaction

Mudarabah: Mudarabah is a partnership arrangement where one party provides capital, and the other party provides labor and management. Profits are shared based on a pre-agreed ratio, but losses are borne by the capital provider.

Murabaha: In Murabaha transactions, the Islamic financial institution purchases an asset on behalf of the customer and sells it to them at a markup. The cost and profit margin are disclosed upfront.

Ijara (Leasing): Ijara involves leasing assets, and the lessor retains ownership throughout the lease period. The lessee pays rent for the use of the asset. At the end of the lease, the asset may be transferred to the lessee.

Istisna (Contracting for Manufacture): Istisna is a contract where a party commissions the manufacture of a specific asset. The price and payment terms are agreed upon in advance.

Sukuk (Islamic Bonds): Sukuk represents ownership in a tangible asset or a business venture. Investors receive a share of the profits generated by the asset or venture. Sukuk complies with Sharia principles and does not involve interest payments.

Takaful (Islamic Insurance): Takaful is an Islamic insurance system based on cooperation. Participants contribute to a common fund to cover potential losses or damages. If a participant suffers a loss, they are compensated from the fund.

Sharia Compliance (Halal Investment): All financial activities and investments must comply with Sharia principles. This includes avoiding investments in businesses related to alcohol, gambling, pork, and other prohibited activities.

Avoidance of Gharar (Excessive Uncertainty or Ambiguity): Islamic finance discourages transactions with excessive uncertainty or ambiguity (gharar). Contracts should be clear, and uncertainty should be minimized.

Ethical and Social Responsibility: Islamic finance encourages ethical behavior and social responsibility. Investments should contribute positively to society, and financial transactions should avoid harm to individuals or the community.

These principles guide Islamic financial institutions in providing services that align with Islamic values and ethics (shariah compliant). It’s important to note that interpretations and applications of these principles may vary, and scholars within the Islamic finance community play a key role in providing guidance and ensuring compliance with Sharia. And Allah knows best! “Praise be to Allah in Whose favor good deeds are accomplished” (ibn Majah 3803).

YAHAYA ILIASU MUSTAPHA

The writer is an Islamic Banking and Finance patron and advocate in Ghana.

Email: yahaya0246873726@gmail.com

https://www.facebook.om/Yahaya.iliasu.94

0506218343 / 0246873726

 

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