FIN546-CHAPTER 1 (1).pdf

# Introduction to Islamic finance This topic provides a foundational understanding of Islamic finance, its definition, core principles, and the elements that are prohibited according to Shariah law [1](#page=1) [2](#page=2) [3](#page=3). ### 1.1 Definition of Islamic finance Islamic finance refers to financial activities and transactions that comply with Shariah (Islamic Law) and its practical application through the development of Islamic economics. It is a set of financial services specifically designed to adhere to Islamic law or Shariah and is guided by Islamic economics [2](#page=2) [3](#page=3). According to scholars like Ibnu Abu Yusof, Ibnu Taimiyyah, and Ibnu Khaldun, Islamic finance is defined as "The creation, developing and delivery of unique customer satisfying competitive products and services at a profit to organization and customer in the lights of Islamic values and principles". Although these services are primarily designed for Muslims, non-Muslims can also provide and purchase them [3](#page=3). ### 1.2 Core elements prohibited in Islam Islamic finance is fundamentally prohibited from three key elements: * Interest (Riba) [2](#page=2). * Uncertainty (Gharar) [2](#page=2). * Gambling (Maisir) [2](#page=2). The prohibition of interest (Riba) is a significant distinction from Western banking practices. Under Sharia law, money is considered a medium of exchange and has no intrinsic value; therefore, it is not permitted to generate more money simply by being deposited in a bank account or lent to others [2](#page=2). ### 1.3 Philosophy of Islamic finance The philosophy underpinning Islamic finance is built upon several core principles [6](#page=6): * Avoiding interest (Riba) [6](#page=6). * Avoiding Gharar (uncertainty or ambiguity) [6](#page=6). * Avoiding gambling and games of chance (Maisir) [6](#page=6). * Alternative financing principles [6](#page=6). * Valid gains on investment [6](#page=6). * Entitlement to profit, coupled with risk and responsibility [6](#page=6). * Dealing in goods rather than in money itself [6](#page=6). * Emphasis on transparency and documentation [6](#page=6). ### 1.4 Sources of knowledge in Islamic finance The understanding and application of Islamic finance are derived from both primary and secondary sources of knowledge [7](#page=7) [8](#page=8). #### 1.4.1 Primary sources The primary sources of Islamic knowledge are fundamental texts that form the basis of Islamic jurisprudence [8](#page=8) [9](#page=9). ##### 1.4.1.1 Al-Quran The Al-Quran is the literal word of Allah revealed to Prophet Muhammad (peace be upon him) in Arabic, conveyed by the Angel Jibril. Its authenticity as a divine revelation is asserted in Surah al-Najm:3 and 4, stating, "Nor does he speaks out of caprice. It is nothing but a Revelation revealed (Quran)". The Quran serves as the blueprint for the Islamic way of life [10](#page=10) . The Quran comprises 114 Chapters (surahs) and approximately 6,235 verses (ayats). It is considered a miracle of Prophet Muhammad (peace be upon him) and a testament to his prophethood, manifested in several aspects [11](#page=11): 1. **Linguistic Excellence:** Its language is clear, pure Arabic of the highest standard, surpassing any human linguistic capability [11](#page=11). 2. **Historical Narratives:** It contains information and stories about past peoples [12](#page=12). 3. **Foretelling Future Events:** It accurately predicted future events that later transpired as foretold [12](#page=12). 4. **Scientific Realities:** It discusses the realities of nature, including the creation of life and the universe, the orbits of celestial bodies, and the formation of clouds and rain [12](#page=12). 5. **Legal and Social Guidance:** It provides laws and rules for regulating political, legal, economic, social, and moral matters within society. Approximately 350 verses in the Quran are legal verses (ayat ahkam), with 140 concerning acts of worship (ibadat), 70 concerning marriage (munakahat), and 70 concerning transactions (muamalat) [13](#page=13). The general contents of the Quran cover themes such as the unity of Allah (Tauhid), His existence, the afterlife, the stories of past nations, formal prayers, challenges, laws, Jihad, and the hypocrites. The Quranic fields of study encompass theology (al-'aqidah), moral sciences (al-akhlaq), and law (al-shariah) [14](#page=14). There are several Quranic verses related to economics, finance, business, and trade including Surah Ali Imran 3:180, Surah Al Baqarah 2:177, Surah Al Baqarah 2:29, Surah At Taubah 9:60, Surah An Nisa’ 4:58, Surah Al A’raf 7:29, Surah Al A’raf 7:85, Surah At Taubah 9:34, and Surah Al Maidah 5:90 [15](#page=15). ##### 1.4.1.2 The Sunnah The Sunnah refers to the way of life, manner of acting, or mode of conduct of Prophet Muhammad (peace be upon him). It is categorized into three types [16](#page=16): i. **Qaul (saying):** The sayings of the Prophet (peace be upon him) that have bearing on religious matters [16](#page=16). ii. **Fi’l (action/practice):** The actions or practices of the Prophet (peace be upon him) [16](#page=16). iii. **Taqrir (silent approval):** The Prophet's (peace be upon him) tacit approval of the actions or practices of others [16](#page=16). The Sunnah is considered a form of revelation, as Allah (Glorified and Exalted is He) states in Surah an-Najm 53:3 and 4, and Surah al-Maidah 5:67. The Prophet (peace be upon him) was entrusted with the responsibility of clarifying God's intent in the Quran. The Sunnah clarifies the generalities of the Quran and specifies its intended meanings through several means [17](#page=17): i. Explaining the methodology, reasons, requirements, and location of divine injunctions [17](#page=17). ii. Deducing rules and regulations [17](#page=17). iii. Explaining inclusions that could not be logically deduced from the Quran alone [17](#page=17). Examples of the Sunnah related to economics, banking, finance, and trade business include hadiths on the eradication of poverty, such as the Prophet's prayer, "O Allah! I seek refuge from poverty, scarcity and ignominy," narrated by Abu Hurairah. Another example concerns private ownership, where Aisyah reported the Prophet (peace be upon him) stating, "Whoever cultivates land which is not the property of anyone has a better title to it" [18](#page=18). #### 1.4.2 Secondary sources Secondary sources are derived from interpretations and consensus of scholars, providing further guidance when primary sources are not explicit [19](#page=19). ##### 1.4.2.1 Ijma’ Ijma’ signifies the consensus, unanimous, and agreed-upon opinion of the Companions or Muslim scholars (Mujtahid) on a legal point not explicitly stated in the Quran and the Sunnah. The authorization for Ijma’ is supported by a Hadith stating, "My community will never agree upon an error," and by references in Surah An Nisa’:110 and Surah Al Baqarah:143 [20](#page=20). ##### 1.4.2.2 Qiyas Qiyas means "measuring by," "comparing with," or "judging by comparisons". It is a method of analogical reasoning to derive rulings. The authorization for Qiyas is found in Surah an Nisa’:59 and Surah al Hasyr:2. An example of Qiyas is the prohibition of producing, marketing, selling, and consuming alcoholic products. This is derived by analogy from the prohibition of khamr (intoxicants), as the Prophet (peace be upon him) stated, "Every intoxicant is khamr and every form of khamr is haram" [21](#page=21). ##### 1.4.2.3 Istihsan Istihsan involves preferring one opinion over another because it appears more suitable to the given situation and circumstances. Its authorization is based on Surah al A’raf:143. An example of Istihsan in economics and finance is the government's right to collect taxes from the wealthy, beyond Zakat, if the interest of the state demands it, even though Shariah only explicitly specifies Zakat [22](#page=22). ##### 1.4.2.4 Istishab Istishab is a process of deducing Fiqh law by linking a later set of circumstances with an earlier set. It operates on the assumption that a Fiqh law applicable to a certain condition remains valid as long as it is not certain that these conditions have altered. For example, if someone is long absent and it is doubtful whether they are alive or dead, Istishab dictates that all rules concerning their previous status (e.g., property rights) must remain in force as if they were still alive, until certainty of their death is established [23](#page=23). ##### 1.4.2.5 ‘Urf ‘Urf refers to the customs and social habits prevalent among people throughout the Muslim world. These customs are accepted as secondary sources of Islamic law, provided they do not contradict Shariah. Examples include customs related to rental agreements, where Shariah does not require immediate payment of the price until the sold item is fully delivered and norms surrounding offer and acceptance in buying and selling transactions [24](#page=24). --- # Objectives of Islamic finance and prohibited elements This section outlines the core objectives of Islamic finance, rooted in Maqasid Shariah, and details the fundamental prohibited elements within Islamic financial dealings. ### 2.1 Objectives of islamic finance (Maqasid al-shariah) The primary objective of Islamic finance is to fulfill the aims of Shariah, known as Maqasid al-Shariah. These aims focus on the protection and preservation of five essential values [26](#page=26): #### 2.1.1 Protection of religion (Hifz al-deen) This is considered the most crucial value for Muslims to safeguard, both individually and communally. Personal protection of faith is achieved through acts of worship like prayer, fasting, zakah, and Hajj. Islam prohibits practices such as shirk (associating partners with Allah) and khurafat (superstitions) to protect religion [26](#page=26). #### 2.1.2 Protection of life (Hifz al-nafs) Life is deemed essential and valuable for everyone, irrespective of their status or faith, and must be protected under all circumstances. Shariah imposes severe punishments, including the death penalty under the law of qisas (retaliation), for the killing of innocent human beings [27](#page=27). #### 2.1.3 Protection of intellect (Hifz al-‘aql) The intellectual faculty is a significant gift from Allah, differentiating humans from animals. Individuals are commanded to protect and utilize their intellect for the benefit of all and to avoid destructive uses. This protection includes abstaining from substances that impair the mind, such as liquor (al-Khamr) and similar intoxicants, for which severe punishments are prescribed [28](#page=28). #### 2.1.4 Protection of lineage (Hifz al-nasb) Lineage is a fundamental aspect of human life and requires protection. This involves safeguarding individuals' rights to marry suitable spouses to ensure family continuity. It also emphasizes maintaining respectful and responsible relationships between men and women, prohibiting free mixing and unnecessary contact between non-mahram individuals [29](#page=29). #### 2.1.5 Protection of property (Hifz al-mal) Acquiring and protecting property is a necessity for mankind. Islam prohibits transgressing and acquiring others' property without legitimate reasons or proper contracts. Illegitimate acquisition methods include riba, cheating, breach of trust, and theft, with punishments like hand amputation for theft [30](#page=30). #### 2.1.6 Broader objectives of Islamic finance Beyond the Maqasid al-Shariah, Islamic finance aims to: * Conduct banking and financial activities in compliance with Shariah principles, free from riba and exploitation [31](#page=31). * Mobilize and consolidate economic resources by fostering individual saving awareness [31](#page=31). * Channel funds into investments that contribute to the economic and social development of the Islamic nation (ummah) [31](#page=31). Islamic finance is viewed as a manifestation of Allah's mercy (rahmah), realized through educating individuals, establishing justice, and promoting public welfare [31](#page=31). ### 2.2 Fundamental prohibited elements in islamic finance Islamic finance strictly prohibits certain elements to ensure fairness, justice, and ethical conduct. These are Riba, Gharar, and Maisir [32](#page=32) [37](#page=37). #### 2.2.1 Riba Riba is a core concept in Islamic finance, generally understood as equivalent to interest in conventional finance [37](#page=37) [38](#page=38). ##### 2.2.1.1 Definition of riba Literally, "riba" means excess, expansion, increase, or growth. In Islamic terminology, it refers to any unjustified excess above the capital sum, whether in loan contracts or in trade involving similar commodities [40](#page=40). ##### 2.2.1.2 Basis of prohibition of riba The prohibition of riba is based on principles of justice and equity, as it is seen as an unfair transaction that creates wealth at the expense of others (zulm) [38](#page=38). ##### 2.2.1.3 Divisions of riba Riba is broadly divided into two categories [41](#page=41): * **Riba’ al-Duyun (Riba in loan contracts):** This occurs when a debtor borrows money and repays an amount greater than the principal. This can manifest as periodic interest on a loan, or an increased amount when a debtor fails to settle on time, leading to an extension of the payment period with added interest [41](#page=41) [42](#page=42). * **Riba al-qardh:** Riba imposed from the beginning of the loan [43](#page=43). * **Riba al-jahiliyyah:** Riba imposed only after the debtor defaults on the initial loan repayment [43](#page=43). * **Riba’ al-buyu’ (Riba in exchange contracts):** This type of riba arises from trading or exchange transactions, particularly when similar commodities (ribawi items) are exchanged in unequal amounts or with a delay in delivery. It is based on a hadith specifying that certain items (gold, silver, wheat, barley, dates, and salt) should be exchanged like for like, equal for equal, and hand-to-hand (on the spot) [41](#page=41) [44](#page=44) [45](#page=45). * **Riba al-fadhl:** Involves an additional quantity or inequality in the exchange of similar ribawi items (quantity factor), such as differing weights or measurements [46](#page=46). * **Riba al-nasiah or riba al-yad:** Involves a delay in the exchange of similar ribawi items (time factor), where payment and delivery are not immediate [46](#page=46). ##### 2.2.1.4 Ribawi items Ribawi items are categories of commodities that are subject to specific rules regarding Riba al-buyu'. These are broadly divided into two categories [47](#page=47) [48](#page=48): 1. **Currency:** This includes gold, silver, and various national currencies like RM, USD, Singapore Dollar, Australian Dollar, and Hong Kong Dollar [47](#page=47). 2. **Foodstuff:** This category includes items like wheat, barley, dates, salt, grains (e.g., rice, corn), sugar, and other condiments [48](#page=48). ##### 2.2.1.5 Conditions for barter transactions involving ribawi items Two critical conditions must be met in barter transactions involving ribawi items [49](#page=49): 1. **Equal amount:** The commodities must be of equal value; for instance, exchanging 2 kg of wheat for 2 kg of wheat [49](#page=49). 2. **On-the-spot exchange:** Delivery of both commodities must be immediate. A delay in delivery of either commodity results in riba al-buyu' or riba al-yad [49](#page=49). If the commodities differ (e.g., wheat for dates), the amounts can differ, provided the exchange is on the spot [50](#page=50). > **Example:** > * Exchanging RM 200 with RM 200 on the spot is permissible [50](#page=50). > * Exchanging RM 100 with USD 380 on the spot is permissible [50](#page=50). > * Exchanging currency with foodstuff is permissible [50](#page=50). > * Exchanging Food A with Food A requires equality and must be on the spot [50](#page=50). > * Exchanging Food A with Food B must be on the spot [50](#page=50). ##### 2.2.1.6 Riba in modern financial transactions In contemporary finance, Riba’ al-duyun is relevant in loans and certain controversial contracts like bay’ al-’inah and bay’ al-dayn. Riba’ al-buyu’ is primarily applicable in bay’ al-sarf (exchange of currencies) [51](#page=51). #### 2.2.2 Gharar Gharar refers to excessive uncertainty, risk, or ambiguity in a transaction [52](#page=52). ##### 2.2.2.1 Definition of gharar Literally, "gharar" means risk, uncertainty, or hazard. It is defined as the sale of a probable item whose existence or characteristics are uncertain due to its risky nature, making the trade akin to gambling. Gharar is categorized into minor (yasir) and major (fahish) [53](#page=53). ##### 2.2.2.2 Types of gharar * **Minor Gharar (Gharar yasir):** Minor uncertainty is generally forgiven, and contracts involving it are permissible and valid. The price in such contracts often takes this minor uncertainty into account [54](#page=54). * **Major Gharar (Gharar fahish):** This is an unacceptable level of uncertainty that is either too great to be acceptable or too vague to be quantified [54](#page=54). ##### 2.2.2.3 Specific instances of major gharar Major gharar can arise from several factors [55](#page=55) [56](#page=56) [57](#page=57): 1. **Relating to the buyer or seller:** * The buyer or seller is not capable of taking responsibility (e.g., not of majority age, or drunk) [55](#page=55). * The buyer or seller is prohibited from disposing of their property (e.g., declared bankrupt or declared prodigal/wasteful) [55](#page=55). * The buyer or seller is coerced or forced into the transaction [55](#page=55). 2. **Relating to the asset:** * The asset or property does not exist at the time of the contract [56](#page=56). * The asset or property is not free from encumbrances [56](#page=56). * The asset or property is not specific or does not match its stated specifications [56](#page=56). 3. **Relating to the price:** * The price is not mentioned in an absolute amount [57](#page=57). * Two different prices are stipulated in a single contract [57](#page=57). * A reduction (ibraa') is mentioned in an absolute amount or as a percentage of the selling price [57](#page=57). 4. **Relating to the contract:** * The contract is conditional (in sale) [57](#page=57). * The contract is not expressed in absolute and decisive language (e.g., using vague terms like 'shall', 'will', or 'agree to' instead of a firm commitment) [57](#page=57). #### 2.2.3 Maisir Maisir refers to the acquisition of wealth by chance, often associated with gambling and wagering [58](#page=58). ##### 2.2.3.1 Definition of maisir Maisir signifies easily available wealth or the acquisition of wealth through chance, irrespective of whether it deprives another person of their right. The Quran uses the term "maysir" to prohibit gambling and wagering. Gambling is considered a form of gharar because the outcome is unknown to the gambler. It involves putting money at stake, with the possibility of significant gains or total loss. Modern lotteries are also considered a form of gambling [59](#page=59). --- # Comparison and historical development of Islamic finance This topic explores the fundamental similarities and differences between Islamic and conventional finance, followed by a detailed historical overview of the evolution of Islamic banking and finance, with a specific focus on its development in Malaysia. ### 3.1 Similarities between Islamic and conventional finance Despite their foundational differences, Islamic and conventional finance share several operational similarities, particularly in their product offerings, services, and overarching objectives [61](#page=61). #### 3.1.1 Product and service similarities Both systems offer a range of financial products, such as deposits, insurance, and savings options. Similarly, the services provided by financial institutions in both frameworks are often comparable, including fast cheque deposits, ATM card access, and internet banking [61](#page=61). #### 3.1.2 Objective similarities The primary objectives of both Islamic and conventional finance often align. Both aim for profit maximization and customer satisfaction [61](#page=61). ### 3.2 Differences between Islamic and conventional finance The core divergence between Islamic and conventional finance lies in their underlying principles, prohibited elements, approach to risk, and ethical considerations [63](#page=63) [64](#page=64). #### 3.2.1 Principles and prohibited elements Islamic finance is strictly based on Shariah-compliant principles. In contrast, conventional finance operates on principles that are entirely man-made. A key distinction is that Islamic finance is free from prohibited elements (haram), whereas conventional finance does not adhere to such restrictions [63](#page=63). #### 3.2.2 Risk sharing versus assured interest Islamic finance actively promotes risk-sharing between the capital provider (investor) and the user of funds (entrepreneur). Conventional finance, however, typically assures the investor of a predetermined rate of interest, which is not a feature of Islamic finance [63](#page=63). #### 3.2.3 Asset-backed financing Islamic finance does not recognize money as a subject of trade itself. Instead, it emphasizes asset-backed financing. Conventional banks and financial institutions, on the other hand, primarily deal in money and monetary instruments [64](#page=64). #### 3.2.4 Moral dimension Islamic finance operates within the moral values of Islam, meaning it cannot finance projects that conflict with these values. Conventional finance, conversely, is not concerned with the moral implications of the activities it finances [64](#page=64). ### 3.3 Historical development of Islamic banking in the modern era The modern development of Islamic banking has a history that spans several decades, marked by intellectual critiques, pioneering initiatives, and significant institutional growth. #### 3.3.1 Pre-1950s: Early critiques and theoretical foundations As early as the 1890s, institutions like Barclays Bank opened branches in Cairo to facilitate financial transactions. This period saw scholars begin to challenge bank operations, particularly their dealings with interest. These critiques extended to other Arab regions and the Indian subcontinent, influencing communities with a sizable Muslim population. A significant consensus emerged among Shariah scholars who declared that interest, in all its forms, amounted to *riba* (usury). By 1953, Islamic economists had put forth the first theoretical descriptions of an interest-free bank, proposing models based on either two-tier *Mudharabah* or *Wakala* [66](#page=66). #### 3.3.2 1960s-1980s: Establishment of key institutions and national Islamization The 1960s to 1980s witnessed the establishment of pioneering Islamic financial institutions. Mit Ghamir Bank in Egypt and the Pilgrimage Fund in Malaysia were established during this period. The first Islamic commercial bank, Dubai Islamic Bank, opened its doors in 1974. The Islamic Development Bank (IDB) was founded in 1975 and the Islamic Research and Training Institute (IRTI) was established by the IDB in 1981. This era also saw the Islamization of economies in Iran, Pakistan, and Sudan, where their banking systems were converted to interest-free models. Bahrain and Malaysia took a significant step in 1983 by promoting Islamic banking systems to run parallel to their conventional banking systems. Islamic insurance, known as Takaful, was introduced in 1984 [67](#page=67). #### 3.3.3 1990s-Present: Growth, regulation, and innovation The period from the 1990s to the present has been characterized by the establishment of regulatory bodies, the development of innovative products, and global market integration. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established to set standards. Islamic equity funds (mutual funds) began to emerge. Market indices, such as the Dow Jones Islamic Index and FTSE Index, were developed to track Shariah-compatible stocks. To address regulatory and supervisory challenges, as well as corporate governance issues within the Islamic financial industry, the Islamic Financial Services Board (IFSB) was established. The market also saw the launch of Sukuk, or Islamic bonds [68](#page=68). ### 3.4 Historical development of Islamic banking and finance in Malaysia Malaysia has played a pivotal role in the development and mainstreaming of Islamic banking and finance, establishing a robust framework that supports dual banking systems and fosters continuous innovation. #### 3.4.1 Early foundations (1969-1981) The groundwork for Islamic finance in Malaysia began with the establishment of the Pilgrims’ Fund Board (Lembaga Tabung Haji) in 1969. This institution focused on the systematic mobilization of funds to assist the Muslim community in performing their pilgrimage and to encourage participation in investment and economic activities. A significant impetus came in 1980 when the Bumiputera Economic Congress proposed the establishment of an Islamic bank. This proposal was fueled by a resurgence of Islamic values among the Muslim population and the successful implementation of Islamic banks in the Middle East. In 1981, a National Steering Committee undertook a comprehensive study, making recommendations on all aspects of establishing and operating an Islamic bank [70](#page=70). #### 3.4.2 Legal framework and the emergence of the first Islamic bank (1983-1992) A landmark year was 1983, with the enactment of the Islamic Banking Act (IBA) 1983. This legislative action paved the way for the incorporation of Bank Islam Malaysia Berhad (BIMB) as Malaysia’s first Islamic bank. BIMB was granted a ten-year period of exclusivity to operate without competition, a measure designed to protect its growth and development. During this period (1983-1993), BIMB achieved an impressive average annual growth rate of 48%. In the same year, the Government Investment Act (GIA) 1983 was enacted, enabling the issuance of government papers and bonds. Initially, Government Investment Certificates (GIC) were offered on a *qardh hasan* (benevolent loan) basis, but this was later changed to *bay’ al-’inah* (buy and sell-back). Takaful companies were established in 1984 to complement the operations of Islamic banks. By 1992, BIMB was listed on the Kuala Lumpur Stock Exchange (KLSE) [71](#page=71). #### 3.4.3 Dual banking system and further expansion (1993-2008) The year 1993 marked the implementation of the Dual Banking System, allowing Islamic and conventional banking to coexist and operate concurrently within the financial system. This was facilitated by the introduction of the Islamic Banking Scheme (IBS), which permitted conventional banks to offer Islamic banking services through dedicated windows. Bank Muamalat Malaysia Berhad, Malaysia’s second full-fledged Islamic bank, was incorporated in 1999, emerging from the merger of Bank Bumiputera Malaysia Berhad (BBMB) and Bank of Commerce Berhad (BOCB). The KLSE Islamic Index was introduced in the same year. To foster harmonization and streamline Islamic banking practices and to provide a platform for voicing industry concerns, the Association of Islamic Banking Institutions of Malaysia (AIBIM) was established in 2000. Also in 2000, the Islamic Banking and Finance Institute Malaysia (IBFIM) was set up as an industry-owned training institute [72](#page=72). In 2002, standard generic names were introduced for Islamic banking products, such as savings account-i, current account-i, home financing-i, and hire purchase-i, among others. An Islamic banking logo was also introduced to enhance visibility and branding for Islamic financial products. Malaysia issued its first global sovereign *sukuk al-ijarah* bond in 2002. By 2006, Malaysia had a significant presence of Islamic financial institutions, comprising 27 entities: 9 fully-fledged Islamic banks, 8 commercial banks, 4 merchant banks, and 6 discount houses. Several new Islamic banks were incorporated, including Affin Islamic Bank Berhad, EONCAP Islamic Bank, AmIslamic, KFH, and Al-Rajhi. Asian Finance Bank Berhad was incorporated in 2007 and Maybank’s Islamic Banking division commenced operations in 2008 [73](#page=73). --- # The future of Islamic finance Islamic finance is poised for significant growth, driven by its dual appeal of religious adherence and financial viability. For adherents, the religious commitment is a primary motivator for choosing Islamic investment and financing methods. However, to attract a broader audience and establish its credibility, a clear and compelling demonstration of the Islamic financial system's strengths from a purely financial standpoint is essential [75](#page=75). ### 4.1 The appeal and viability of Islamic finance Islamic banking and finance products are characterized by their inherent religious appeal, which attracts individuals seeking to align their financial activities with their faith. This religious dimension is sufficient for many to adopt Islamic financial practices for both investment and financing [75](#page=75). > **Tip:** While religious appeal is a strong driver, demonstrating the practical financial benefits is crucial for wider adoption and acceptance. ### 4.2 Islamic finance as a diversification strategy From a management perspective, Islamic finance offers a valuable avenue for diversification within the broader financial discipline. Diversification is a well-established strategy for effective risk management [76](#page=76). ### 4.3 Potential for dominance It is posited that Islamic finance may, in the future, become a more dominant force in the global financial system. This potential stems from the fact that Islamic finance is not merely a collection of products, but an overarching system designed to guide societal practices in both wealth creation and wealth transfer [76](#page=76). --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Shariah | The Islamic religious law derived from the Quran and the Sunnah, guiding all aspects of life, including financial transactions. | | Riba | Literally meaning "excess" or "increase", it refers to any unjustified increase or excess above the capital in loans or in trade of similar commodities, fundamentally prohibited in Islamic finance. | | Gharar | Arabic term for uncertainty, ambiguity, or risk in a contract. Transactions involving excessive or avoidable uncertainty are prohibited to prevent potential disputes and exploitation. | | Maisir | Refers to gambling or games of chance, where wealth is acquired easily and by luck, often at the expense of others. It is prohibited as it involves uncertainty and potential deprivation of rightful earnings. | | Al-Quran | The holy book of Islam, considered the literal word of Allah revealed to Prophet Muhammad, serving as the primary source of Islamic law and guidance. | | Sunnah | The practices, sayings, and silent approvals of Prophet Muhammad. It serves as a secondary source of Islamic law, clarifying and elaborating on the teachings of the Quran. | | Ijma’ | The consensus or unanimous agreement of Muslim scholars (Mujtahid) on a point of Islamic law that is not explicitly mentioned in the Quran or Sunnah. | | Qiyas | A process of analogical reasoning used in Islamic jurisprudence to derive rulings for new cases by comparing them to existing rulings based on a common effective cause or rationale. | | Istihsan | A legal doctrine in Islamic jurisprudence that allows for the preference of one ruling over another if it is deemed more suitable to the circumstances or in the interest of justice, even if it deviates slightly from strict analogy. | | Istishab | A principle in Islamic jurisprudence that assumes a previously established legal ruling or condition remains in effect unless there is certainty that it has been altered or invalidated. | | ‘Urf | Custom or social practice that is widely accepted within a society. It can be used as a secondary source of Islamic law, provided it does not contradict the Quran or Sunnah. | | Maqasid Shariah | The objectives or higher purposes of Islamic law. These are generally categorized into the protection of religion (Hifz al-deen), life (Hifz al-nafs), intellect (Hifz al-‘aql), lineage (Hifz al-nasb), and property (Hifz al-mal). | | Muamalat | Refers to the branch of Islamic jurisprudence dealing with human transactions, including contracts, trade, and financial dealings, all of which must comply with Shariah principles. | | Riba’ al-Duyun | Riba that occurs in loan contracts. It involves an excess charged on the principal amount borrowed, irrespective of the use of the money. | | Riba’ al-Buyu’ | Riba that occurs in exchange or sale contracts. It arises when similar commodities are exchanged in unequal amounts or with a delay in delivery. | | Ribawi Items | Commodities that are subject to specific rules regarding exchange to prevent Riba. These typically include gold, silver, and certain staple food items as mentioned in prophetic traditions. | | Bay’ al-‘Inah | A controversial Islamic finance transaction involving the sale and subsequent repurchase of an asset on credit at a higher price, often seen as a way to circumvent the prohibition of interest. | | Sukuk | Islamic financial certificates, often referred to as "Islamic bonds," that represent ownership in an underlying asset or usufruct, structured to be compliant with Shariah principles. | | Takaful | An Islamic system of mutual insurance where members contribute to a fund to cover each other’s losses. It operates on principles of mutual assistance and risk-sharing, avoiding Riba and Gharar. |