Strict adherence to rules and regulations in any endeavor is very key to promoting discipline culminating into success and circumventing or bending the rules will open the floodgate of corruption. This is particularly important when it comes to economic and financial endeavors. It brings about discipline and self-evaluation. Owing to this, Islamic economics and finance are derived from immutable principles rooted in the rulings of the Shariah legal code. Unlike legal systems that are limited to secular aspects of daily life, Shariah jurisprudence does not distinguish between religious and other aspects of life, including transactions falling under either the political, economic, or social sphere (muamalat).
In Islamic economics, productive human activity is mandatory. Islam does not endorse every human wish, and it prohibits or endorses an activity on moral grounds. For example, activities related to tobacco and other drugs, alcohol, pork products, gambling involving money and non-money assets (maysir), speculation, pornography, armaments and destructive weapons, bribery, and corruption are strictly prohibited. The following principles are very important as far as rules and regulations of transactions are concerned:
Principle of equity: Is the rationale for the prohibition of predetermined payments (riba), to protect the weaker contracting party in a financial transaction. Riba (interest) means an increase in wealth that is not related to engaging in a productive activity. Also, the basis for prohibiting excessive uncertainty (gharar) as manifested by contract ambiguity or elusiveness of payoff, so information asymmetry is reduced to the barest minimum otherwise the presence of gharar would nullify the contract. It is also the basis of wealth distribution in Islam where 2.5 percent levy is imposed on cash or in-kind wealth (zakat), on all Muslims who meet specific minimum levels of income and wealth to assist the less fortunate and foster social solidarity.
Principle of participation: This principle lies at the heart of Islamic finance as it ensures that an increase in wealth accrues from productive activities. Ensures capital is rewarded for participating in a productive activity equitably. This is by the key Shariah ruling that “reward (that is, profit) comes with risk-taking,” It ensures investment returns were earned in tandem with risk-taking and not with the mere passage of time as in riba (Interest payments) it is also the basis for legitimizing return on capital by risk-taking. It is the basis for the determination of the return ex-post based on asset performance or project productivity, thereby ensuring a link between financing activities and real activities.
Principle of ownership: This principle is derived from the following Shariah rulings: “You do not sell what you do not own”. For example, short-selling). “you cannot dispossessed of a property except based on right” The principle was the basis for preservation and respect for property rights, as well as upholding contractual obligations by underscoring the sanctity of contracts. Islamic finance has, thus, come to be known as asset-based financing, forging a robust link between finance and the real economy.
In a nutshell, these are principles that have ensured trust, equity, security, protection, transparency, and justice in the Islamic finance industry. And Allah knows best! “All praise is due to Allah by Whose favor good deeds are accomplished” (ibn Maja 3803).
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana and beyond.
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