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As-Saalam Alaykum dear readers,
Today, I wanted to explore the fundamental principles of Islamic rulings which will underpin future discussions about Islamic Finance.
Note: Obligatory warning – I am not a scholar, so if I make any mistakes in my understanding please feel free to comment with authentic sources and I will endeavor to correct them wherever possible.
In the west, we are taught almost nothing in school about general finance, let alone alternative financial systems such as Islamic Finance. As Muslims, it is important to understand how the Shariah (Islamic law / legal system) in Islam is understood and applied in all aspects of our lives. We are required to think about how we earn, transact and invest our wealth in a Halal (permissible) way; which can be difficult to do living in the west. We will try our best to lay out the foundations of Islamic rulings in this post as a basis for future discussions on Islamic financial vehicles and investments.
Sources of Islamic Law
When it comes to understanding how rulings are made within Islamic law, Muslims look at the following sources (in order) to determine how to proceed. Muslims always start with the most authentic sources, then look to expand understanding with additional sources if clarification is needed.
These sources in order of authenticity are:
- The Quran – The Muslim Holy Book
- The Sunnah – The authentic, recorded observations and interactions of the Prophet Muhammad’s life
- Ijma – Consensus of scholars on a specific topic
- Qiyas – Using analogy to derive a ruling
I will explain in some detail the above 4 sources so that readers can get an brief understanding of how we look at these sources; as they will makeup the basis for the rulings relating to Islamic Finance. I will also touch briefly on Islamic commercial law in this introduction.
The Quran
To Muslims, the Quran is the most sacred text in our traditions. We believe that the Quran is the 100%, defacto word of Allah (God in Arabic) revealed to the prophet Muhammad ( صلى الله عليه وسلم) over the course of its 23 year revelation. The Quran is seen as infallible and contains guidance, support, explanations, commands and warnings for Muslims that deal with all aspects of life. The Quran, with support of the Sunnah deals with all aspects of Shariah (Islamic Law) including our legal system and code of conduct in our dealings across individual, political, community and business domains.
The Sunnah
The Sunnah comprises a specific corpus of texts that narrate how the prophet Muhammad ( صلى الله عليه وسلم) lived including his actions, sayings, explanations of Islamic principles as well as his dealings with internal Muslim community and the external political environment of his time. The Sunnah also has an order of authenticity and gradings that we will briefly explore. In this blog, I want to stress that we only want to focus as much as possible on the authentic sources in Islam. These sources are:
- The 2 most authentic collections – Sahih Bukhari and Sahih Muslim, especially those narrations are found in both books. Sahih means “authentic“, and refers to the reliability of the transmission and who transmitted it.
- Other Sahih books – Sunan Abu Dawud, Sunan Al-Tirmidhi, Sunan Al-Nasa’i, Sunan Ibn-Majah, with a focus on Sahih Hadith (narrations) in these collections. I don’t want to spend time talking about the science of Hadith, chains of narration and transmission – but it is extensive – and really a science. If there is interest I can link sources in the future for more in-depth discussions.
Ijma (Consensus)
Ijma refers to an agreed upon consensus of Muslim scholars around a given topic. We resort to consensus when there isn’t a clear direction of opinion on a specific topic found in the Quran and Sunnah. This consensus is not equivalent to a law written in stone; different groups of scholars have different opinions based on the time-in-history, place, people and circumstances affecting their given communities. The Islamic tradition is rich in divergent thought around every Islamic topic imaginable, but our goal is try and follow the general mainstream opinion and ruling wherever possible.
One point that I want to note; it is not allowed in Islam to go “Fatwa shopping”, which is essentially looking for one-off rulings or permission from scholars to support a point of view that you desire because you know it probably doesn’t cut it in regards to a legitimate mainstream opinion. This is important in Islamic Finance as we want to ensure that we are following the mainstream opinion of scholars who are actually trained in Islamic Finance.
Qiyas (Analogy)
Qiyas refers to a legal tool whereby we use analogy to something already understood to derive a ruling on a particular topic. Qiyas is considered a secondary source in application to Shariah, and many scholars throughout history have had both anti-Qiyas and pro-Qiyas points-of-view. An example of Qiyas would be: “the Quran forbids the sale and purchase of goods at the time of Friday prayer (specifically after the last call for prayer). By Qiyas, this prohibition is generalized and extended to all kinds of transactions since the same underlying cause (abandonment of prayer) applies to more than one case (not just buying and selling of goods)”. So this is really all about using an existing rule to derive a new rule. Qiyas cannot be used as an infinite chain to keep deriving rulings based on more and more generic analogies; there are clear guidelines (which I won’t get into here) that govern how and when Qiyas can be used, if at all.
Islamic Commercial Law
Islamic commercial law follows a general principle in Islam for all rulings that do not impact the core beliefs and teachings of a Muslim. The general principle is: Everything is allowed, unless it’s prohibited. This is important to understand as many people have the wrong understanding about the “restrictiveness” of Islam, when in reality it only applies to the core elements such as belief, creed and worship. In Islamic commercial law there should always be a Aqd (contract), where there is an identified buyer, seller, terms of delivery, and time sensitivity of execution. One interesting thing to note: in Islamic commercial law you must actually own something to before you can sell it. So you guessed it; selling futures / options in Islam is Haram (forbidden).
I wanted to also mention a couple of core principles relating to Islamic commercial law, which incidentally resonates to a very ethical way of transacting with wealth. Islamic Finance aims to ensure that there is a system of comprehensive communal prosperity through financial transparency, validation of financial ownership and continuity of the circulation and investment of wealth so all parties can prosper. There is no “Lose-Win” relationships in true Islamic Finance, both parties need to share the risk and reward of a financial transaction.
Riba (Interest) is not allowed. Gharar (contractual ambiguity or uncertainty) is also not allowed as it provides an unfair advantage to one party over another. Protection of the environment and the social good is a requirement, so no investing in things that hurt the the environment or your fellow humans. Finally, there is no coercion in Islamic Finance, so all parties must approach the transaction from a fair perspective where everyone can prosper and win together.
I want to give a shout-out to Safdar Alam for his great content, point of view and support. You can find him here.
I hope my readers found this post insightful as a basis for further discussion in the futures about Muslim Financial Independence and Islamic Finance. Did you guys like the post? Please feel free to leave a message or leave me a note on my Contact Us page.
Until next time!
As-Saalam Alaykum