Islamic
Financial
System
Sources
of
the
Shariah
• Primary
Sources
– The
Holy
Quran
– Sunnah
(the
sayings,
deeds
and
endorsements
of
Prophet
Muhammad
PBUH)
Sources
of
the
Shariah
• Secondary
Sources
(mostly
by
the
exercise
of
Ijtihad
(reasoning
by
the
learned)
ÉIjma (Unanimous
decision
of
the
Ulama)
ÉQiyas (analogy)
ÉIstishan/
Istihab (equity
in
Islamic
law)
ÉMaslahah (necessity
of
the
people)
ÉSurdul Dara’ih (Blocking
the
means)
ÉU’ruf (custom)
Framework of Islamic Finance
• In general, the framework of Islamic finance is the same
framework used by the conventional finance practices.
• These frameworks are, inter alia legal and regulatory
framework, taxation framework, accounting and auditing
standards, etc.
• Might have different or additional framework, such as
accounting and auditing standard, etc, due to its peculiarity.
• In certain jurisdiction, Islamic banking and finance might be
regulated by different sets of regulations, either separate or
additional, e.g. IBA 1983
Cont’d
• However,
Islamic
Finance,
as
the
name
suggests,
has
another
framework,
which
is
considered
the
major
element
that
differentiates
IBF
from
the
conventional
banking
and
finance.
• Any
violation
of
this
framework
will
definitely
effect
the
validity
of
Islamic
finance
itself.
• Shariah Compliance
Framework
The
Shari’ah Framework
of
Islamic
Banking
and
Finance
• Three
main
interrelated
terminologies:
Shariah,
Fiqh
&
Muamalat
• Shariah,
when
viewed
from
legal
perspective
is
the
fixed
elements
of
Islamic
law,
i.e.
what
has
been
clearly
stipulated
and
mentioned
in
the
text.
E.g.
five
time
prayers,
prohibition
of
riba’,
etc.
• As
such,
it
is
revealed
in
nature
WHAT
IS
ISLAMIC
FINANCE?
• In contrast to conventional finance, IF involves the provision of
financial products and services by institutions offering Islamic
financial services (IIFS) for Shariah approved underlying transactions
and economic activities that comply with Shariah laws.
• Shariah is rules and principles explained in the two primary sources
i.e. al-‐Quran (the words of Allah Al-‐Mighty) and as-‐Sunnah (the
words, acts and endorsement of the Prophet Muhammad SAW).
This is the factor that distinguishes IF from conventional finance.
• Provision of these Shariah compliant financial products and services
must add value to the real economy.
• To ensure compliance with Shariah rules & principles, IIFS rely on an
external Shariah Supervisory Council comprising Shariah scholars
and in-‐house Shariah division/ department.
KEY
ELEMENTS
OF
ISLAMIC
FINANCE
• Direct
link
to
real
economy • Prohibition
of
unethical
elements,
• Money
is
not
a
commodity,
practices
and
activities
e.g.
just
a
medium
of
exchange hoarding
• Certainty-‐supported
by
• Prohibition
of
maisir (gambling),
underlying
activities
riba (usury),
zulm (oppression)
(prohibition
of
gharar i.e.
• Prohibition
in
financing
of
non
uncertainty/
ambiguity/
permissible
transactions
or
misinformation
or
deceit/
Shariah economics
fraud) values
• Emphasis
on
fairness
and
justice
• Prohibition
of
excessive
consistent
• Safety
net
mechanism
for
the
poor
leverage with
universal
e.g.
zakat
(Islamic
tithe),
waqf
values (trust)
etc
• Greater
transparency
&
disclosure:
• Different
contractual
üAdditional
Shariah
relationships
governance
• Equity-‐based
üUnique
risks
specific
to
Islamic
• Risk
and
reward
sharing
finance
which
helps
ensure
greater
• Greater
fiduciary
duties
&
market
discipline
accountability
3/
FEATURES
ISLAMIC
BANKING
&
FINANCE
Differentiating
Conventional Banking Islamic Banking
Factor
The functions and Based on man-made principles Based on Shariah rules and
operating modes principles
Interest-based Most of the activities are Absence of interest-based (riba)
transactions interest-based transactions
Investment and No restriction Subject to Shariah restrictions. Must
financing portfolio be constructive and beneficial to the
ummah.
Penalty Impose penalty and Charge in the form of ta’widh
compounded interest in case of (compensation) or gharamah
defaulters (penalty) for charity.
Bank-customer Creditor and debtor Partners, investors and trader,
relationship buyer and seller
Ethics No religious based guideline Must follow Shariah guideline
Zakat Not necessary to pay zakat Pay zakat
3/
FEATURES
ISLAMIC
BANKING
&
FINANCE
Differentiating
Conventional Banking Islamic Banking
Factor
Underlying Asset No need for underlying asset Underlying asset is compulsory
because they can create money because any benefit/ earning from
with money. loan is prohibited.
Terminologies Interest (lending money) Profit (sale & purchase)
(Requirements on Penalty based on interest Ta’widh
communication)
Loan Financing
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