What is Islamic Finance?

The answer for this question may differ depending on the person who you question. One thing’s for sure, the answer is either associated with the amount of knowledge a person has about the industry or a personal experience they had during their life time. Some may surprise you by saying that it’s just another religious doctrine to provide financing for mosques, charities or funding for Muslim entrepreneurs. Other critical observers might respond that Islamic finance is a broader political agenda to transform the present state of the world or at least some aspect of it to accord more closely with the principles of Islam.

Shari’ah as the Bedrock of Islamic Finance

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 deals with resource allocation, management, acquisition and investment. It is also expected to deal with risk transformation and management which is the 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), prohibits conducting economic or investment activities that are unethical and socially unacceptable despite being profitable (pornography, alcohol and prostitution).

Sadly, the word ‘Shar’ah’ has been the most misunderstood Arabic word, not only among the non-Muslims but also among the 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 of the Muslims, Shari’ah is probably something limited to acts of worships, marriage, death or the way to slaughter a chicken. For the non-Muslims, on the contrary, Shari’ah is understood to be evil and outdated or limited to Muslim countries.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 to capital punishment, or veiling the face for women. Nothing could be further from 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 system, 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 which includes believe in Allah, His angels, His books, His Messengers, the las day, and in Taqdir (predestination), that all good and bad is from Allah the Most High. Secondly, Ibadath or acts of worships which includes prayer, alms giving, fasting and pilgrimage and other optional acts of worships. Thirdly, Musharakath or dealing with family members and other creates of Allah. Fourthly, Muamalath or business transactions or dealings which includes all types of commercial transactions. And finally, Akhlaq or character and conduct which include all noble characters 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.