Shari’ah as the Bedrock of Islamic Finance

What differentiates Islamic finance from its conventional counterpart is being Shari’ah compliant. Thus, it is vital to understand what Shari’ah means and how it governs different aspects of Islamic finance and beyond. Shari’ah literally means ‘the way’ or ‘a path to a watering place’, ‘a clear path to be followed, and more precisely, ‘the way …

The expression ‘Islamic Finance’ is a combination of the meaning of ‘finance’ and ‘Islamic’. The noun ‘finance’ implies that Islamic Financial Institutions, like its conventional counterparts deal with resource allocation, management, acquisition, and investment. It is also expected to deal with risk transformation and management which is a fundamental issue of finance. However, what differentiates it from its counterpart is the adjective which is ‘Islamic’. Shari’ah is the bedrock on which Islamic finance primarily differentiates from its conventional counterpart. Thus, Islamic finance strictly prohibits a predetermined rate of interest (riba’), prevents ambiguity (gharar) in contracts, prohibits gambling (maysir), and prohibits conducting economic or investment activities that are unethical and socially unacceptable despite being profitable (pornography, alcohol, and prostitution).

Sadly, the word ‘Shari’ah’ has been the most misunderstood Arabic word, not only among non-Muslims but also among Muslims. In the same breath, Shari’ah is also the foundation upon which Islamic finance is built. Therefore, it is important that we understand what exactly is Shari’ah briefly. For most Muslims, Shari’ah is probably something limited to acts of worship, marriage, death, or the way to slaughter a chicken. For non-Muslims, on the contrary, Shari’ah is understood to be evil and outdated or limited to Muslim countries. For them, Shari’ah is synonymous with capital punishment or veiling the face for women. Nothing could be further from the truth. Indeed, Shari’ah is not limited to a specific area of an individual’s life or something evil to be feared of. In fact, it governs all aspects of life so that a believer could succeed in this world and the next.

Shari’ah literally means ‘the way’ or ‘a path to a watering place’, ‘a clear path to be followed’ and more precisely, ‘the way which leads to a source.’ Technically, Shari’ah represents a body of Islamic teachings and systems, which were revealed to Prophet Muhammed (ﷺ) through the revelation of the Holy Quran and later deduced from the Prophet’s Sunnah. The Sunnah itself represents a divinely guided lifestyle and is the recorded accounts of whatever Prophet Muhammed (ﷺ) said, did or tacitly approved. Imam Abu Dawud (Rah) has divided Shari’ah into five areas. First, Imaniyath or otherwise known as articles of faith includes believing in Allah, His angels, His books, His Messengers, the last day, and in Taqdir (predestination), that all good and bad is from Allah the Most High. Secondly, Ibadath or acts of worship which include prayer, almsgiving, fasting and pilgrimage, and other optional acts of worship.

Thirdly, Mu’aasharaath or dealing with family members and other creations of Allah. Fourthly, Muamalath or business transactions or dealings which includes all types of commercial transactions. And finally, Akhlaq or character and conduct which includes all noble characteristics such as truthfulness, trustworthiness, compassion, being just and etc. Thus, it is clear as crystal that Shari’ah is inseparable from a life of a believer.

 

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