OVERVIEW OF

Topic 1  ISLAMIC
FINANCE AND
BUSINESS

LEARNING OUTCOMES

By the end of this topic, you should be able to:

Explain the religion of Islam and its framework
Analyse the relationships between Aqidah, Syariah and Akhlak
Discuss the importance of fiqh muamalah in Islamic studies
Explain the differences between Islamic finance and conventional finance

INTRODUCTION
Islam is not just a religion but it is the most beautiful way of life. It has
a comprehensive set of systems and it is the way of life that Allah
wants all creatures to live. It is so comprehensive that it covers every
aspects of human life from private matters to relationship with others
and from the family to the widest community. These include such
matters as spiritual, social, laws, family, hygiene, business transaction
and so much more. This chapter will introduce you some basis
components in Islam which has become the backbone of Islamic
finance and business practices. In Islam, business is a dignified
occupation and therefore all business transactions must be governed
by Islamic laws
2  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

THE FRAMEWORK OF ISLAM

1.1
The first thing that you should know about Islam is what the word
“Islam” itself means because Islam is not named after a person such
as other religions. Islam is the true religion of Allah and it is not
Prophet Muhammad alone who advocated this teaching but it is a
legacy of all prophets. It began with the first human being; prophet
Adam and through all the prophets until prophet Muhammad (SAW).

The word Islam is an Arabic word which means peace and submission.
The object of this submission is Allah. Technically Islam is the religion
of Allah revealed to the prophet Muhammad (SAW) in order he might
proclaim it to all mankind. Therefore they might be able to believe in it
and put its teachings and regulations into practice. The people who
profess the faith of Islam are called muslims. The religion of Islam is
based upon these five primary pillars.

a) Creed (Syahadah)

This is the initial act of faith, expressed in a statement which testifies

to one's commitment to following the straight path of Allah's guidance
upon which muslims seek to live their lives; "I bear witness that there
its no god but Allah and I bear witness that Muhammad is His prophet.
"

b) Prayer (Salat)

Prayer involves physical movements and recitations of verses of al-

Quran. It is compulsory for every muslim that who is sane and above
the age of puberty. They must perform prayer five times daily; at dawn
(Subuh), afternoon (Zuhur), before sunset (Asar), after sunset
(Maghrib) and after nightfall (Isyak).

c) Fasting (Sawm)

A muslim must fast during whole month of Ramadhan and it involves

abstinence from eating, drinking, smoking and marital intercourse from
dawn until sunset. It is obligatory for a sane muslim who has attained
the age of puberty to fast during the month of Ramadhan except if the
person is travelling or ill or if a woman is in her monthly periods or is
bleeding after the delivery of a child.
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  3

d) Paying Zakat

Zakat is an annual payment of a fixed amount to every muslim who

has wealth in excess of his consumption needs for the benefit of the
needy person. It is based on taking a portion of the wealth of the
wealthy muslim and giving it to the poor and those in need. It is one of
the Islamic financial instruments that provides a method in managing
the society's economy and finance.

e) Pilgrimage (Hajj)

All muslims should perform acts of worship at the Holy House of the
Kaaba in Makkah. It is a once in a lifetime obligation for every adult
muslim who is physically and financially able to perform it.

Generally Islam encompasses three major categories: Aqidah, Syariah

and Akhlak. Aqidah is also known as faith, Syariah is known as Islamic
law and Akhlak is known as ethics. These three components play
important roles in the life of every muslim because Aqidah shows the
truth of Islam, Syariah shows the justice of Islam and Akhlak shows the
beauty of Islam. If illustrated in a diagram the coverage of Islam would
be as follows.

Figure 1.1: The Coverage of Islam

ISLAM

AQIDAH SYARIAH AKHLAK

(Faith) (Law) (Ethics)

IBADAT MUAMALAH
(Man to God) (Man to Man)
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1.1.1 Aqidah
Aqidah is the basis by which the whole system in Islamic teachings
pertaining to all aspects of life. Aqidah is an Arabic word that derives
from its root “aqada” which means bond or tie. Technically Aqidah is
the definitive faith and firm creed that one's heart is fixed upon
without any wavering or doubt. It is called Aqidah
because the person binds his heart upon it. To every muslim, Aqidah is
a spirit that will ensure attainment of a happy and good life. Without
Aqidah, life of a muslim will be meaningless. Prophet Muhammad
(SAW) explained detail about the pillars of this faith.

He said:
"To believe in Allah and His angels and His books and His messengers
and the Last Day and predestination of good and evil."

It is a must for every muslim to know these pillars with a correct

understanding. Muslim will not be called a complete believer just by
knowing and understanding these pillars but he must come to the level
where he submits and implements what is described in above hadith.
Therefore the foundations of Aqidah comprise these six pillars.

a) Belief in Allah

The belief in the existence of Allah is the first pillar of faith. The muslim
testifies that “there is no God except Allah”. The concept of oneness of
Allah is a very important concept in Islam. It rejects the ideas of
polytheism; a system in which people believe in many gods. All
muslims believe that Allah is the only God and there are no equal and
superior Gods. If there is a conflict between following commands of
Allah and human interests for example, the commands of Allah must
predominate.

b) Belief in the angels

Muslims believe that angles are special creatures created by Allah for
special missions. Their duties include maintaining a record of human
actions, protecting and taking life and other commandments from
Allah.

c) Belief in the scriptures

Muslims believe that the scriptures revealed by Allah through the

prophets are for the guidance of mankind. Without these scriptures, it
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  5

is difficult for human to manage their life. There are four scriptures
revealed to the prophets. The Taurat (Torah) was revealed to prophet
Musa (Moses), The Injil (Gospel) was revealed to prophet Isa (Jesus),
The Zabur (Psalms) was revealed to prophet Dawud (David) and the al-
Quran revealed to prophet Muhammad. Muslims believe that al-Quran
confirms whatever is true in previous chapters or scriptures and rejects
whatever changes human have made on them.

d) Belief in the prophets

Muslims believe that Allah sent prophets to teach and guide them in
their life. The duty of the prophets is to bring the messages of Allah to
mankind. Eventhough all prophets are human, but they are the most
perfect examples of what humans should be. Muslims also believe that
Muhammad (SAW) is the most important prophet among all prophets.

Table 1.1 : Name of Prophets

Qur'anic Biblical Qur'anic Biblical

Name Name Name Name
Adam Adam Ayyub Job
Idris Enoch Musa Moses
Nuh Noah Harun Aaron
Hud Hud Dhu'l-kifl Ezekiel
Salih Salih Dawud David
Ibrahim Abraham Sulaiman Solomon
Ismail Ishmael Ilias Elias
Ishaq Isaac Al-Yasa Elisha
Lut Lot Yunus Jonah
Ya'qub Jacob Zakariyya Zechariah
Shu'aib Shu’aib Yahya John
Yusuf Joseph Isa Jesus
Muhammad Muhammad

e) Belief in the Day of Judgment

Muslims believe that the life of this world has not lasting significance
except as preparing us for the Day of Judgment. Muslim with the
6  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

proper faith will do anything that benefits him not only in this life but
also in the Hereafter.

f) Belief in the destiny

Muslims believe that every thing that is happen in the universe from
the smallest to the greatest events, is controlled by Allah. There is no
such thing as random or chance events, and nothing happens without
His command.

SELF CHECK 1.1

(a) What is meant by Islam?
(b) Why aqidah so important for muslims in business transaction?

(b) <add self-check here>

1.1.2 Akhlak
Akhlak concerns the behaviors of a muslim in his personal conducts.
Akhlak is important for human beings in the sense that akhlaq is
developed in conviction in all articles of faith (Aqidah) and also muslim
actions (Syariah). It is the characteristics which Allah has ordered the
muslim to abide by when performing his actions. Akhlak also conforms
to the human nature, for instance being generous and hospitable to
the guest, helping the needy, humility and modesty.
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  7

1.1.3 Syariah
The literal meaning of Syariah is the road to the watering place.
Technically it means the divine law provided by Allah to guide the
mankind with a proper direction. It is the comprehensive set of laws
that define the paths of life that muslim must take. It includes the
Islamic beliefs and concepts and their implications concerning the
attributes of Allah, the nature of life, what is apparent and what is
hidden in it, the nature of man, and the interrelationships among
these.

All activities in muslim life have to conform to the Islamic law with the
aim to achieve the Objective of Syariah (Maqasid Syariah). The study of
Maqasid al-Syariah is important because it reflects the basis of Islamic
law and it also helps Islamic scholars in determining the prohibition and
permissibility in muslim actions.

There are five necessities in Maqasid Syariah as illustrated in this

diagram

Figure 1.2 : Five Necessities in Maqasid Syariah

Religion
Life
Progeny
Intellect
Property

These five necessities are impotant in muslim life and every muslim
should preserve and protect these necessities in order to ensure
individual and social welfare in this world and Hereafter. The
relationships describe above indicate that some necessities have a
higher priority than others. Religion has a higher priority than life. Life
8  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

is prior than progeny. Progeny is prior than intellect and intellect is

prior than property. In practice this would mean

• It is permitted to take the property of other person if such thing

can save his life. This is because life is prior than property.
• If someone want to bribe us with money (property) in order to
get the tender, we should not accept it because progeny or pride
is prior than property.
• Prophet Muhammad (SAW) rejected gift and rank that offered by
mushrikin in order to persuade him to stop in preaching. This is
in line with the concept of religion has a higher priority than
property.

Therefore in order to ensure the establishment of the first necessity;

religion, Allah has made worship obligatory such as prayer, pilgrimage
and others. He also imposed preventative punishments in order to
protect religion against destruction. The interest of life is secured by
creating laws for the existence of life such as marriage and healthy
living and the way to protect life is through the enforcement of Islamic
law such as prohibition in killing and suicide.

Meanwhile the interest of progeny is established through the creation

of family law such as marriage and it is preserved by prohibiting the
sex outside marriage. The interest of intellect is established by lawful
means of sustenance and to ensure its preservation Allah imposed
punishment for anything that diminished the intellect’s ability to
function properly such as prohibition on alcohol and drugs. The interest
of property is established by lawful means for its acquisition and
preserved by defending right of ownership such as punishment for
theft.
ACTIVITY 1.1

(a) Can you make a comparison between lives with and without
syariah?

Syariah deals with many aspects of day-to-day life including politics,

economics, business, family and social issues. In short, Islamic jurists
have classified Syariah into two types namely Ibadat and Muamalat.

i) Ibadat
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  9

The meaning of "Ibadat" in the Arabic language is obedience,

submission, and humility. Technically Ibadat is the ultimate obedience,
the ultimate submission, and the ultimate humility to Allah along with
the ultimate love for him. Muslims believe that Ibadat is the reason for
the existence of all humanity. That is, muslims believe that all people
exist only to worship Allah. Ibadat consequently means following
Islamic beliefs and practices. Ibadat is also something that comes from
the heart or sincerity as a result of belief in Islam. Therefore Ibadat is
something that can not be forced upon another person.

Ibadat consists all rules about prayer, fasting, pilgrimage and paying
zakat. The nature of worship rules are to worship Allah according to
what were the commands of Allah. Therefore the basis principle in
Ibadat as mention in fiqh maxim: “basis principle in Ibadat is
prohibition except which if there is the proof of its permissibility”.
Because Ibadat is something that which Allah orders it to be obligatory
or recommended, whatever falls out of this is not considered as Ibadat.

ii) Muamalat

Muamalat refers to any form of mutual dealings held between

contracting parties to fulfil their needs and requirements. It covers all
aspects of a person’s daily life with other person ranging from issues of
marriage to business or from social to politics. For the purpose of
study, term Muamalat used after this will refers to the business
transactions and financial contract.

Allah encourages muslims towards exchanging commodities through

business transaction. This transaction may contribute to the economic
development and also promote stability to the society. Business
transactions were revealed by al-Quran and al-Sunnah in detail in
many issues. The principle of Muamalat is more flexible from the
principle of Ibadat because of the focus of Muamalat transactions is to
eliminate the injustice elements. Muamalat stipulates that everything
is permitted except if it is prohibited in al-Quran and al-Sunnah.

Figure 1.3 : Basic Principles in Ibadat and Muamalat

10  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

SYARIAH

IBADAT MUAMALAT

Everything is prohibited
Everything is permissible
except as revealed
except if prohibited in
otherwise in Quran and
Quran and Sunnah
Sunnah

Table 1.2 : The five ruling (hukum) related to Syariah

Hukum Description Examples

Wajib Any act that Islam makes obligatory on a Muslim and Prayer, fasting
(Compulsory) Islam sets punishment for whoever leaves it intentionally,
and rewards for whoever performs it perfectly.
Haram Any act that Islam prohibits the Muslim from committing Taking
(Prohibited) and sets a punishment for the transgressors, while praising interest,
and rewarding the one who totally abstains from such acts Gambling
Mubah Any act that the Muslim is urged to do and he deserves Trading,
(Allowed) divine reward and Allah's pleasure. But no punishment is Sports
set for any one who leaves it. It is the widest among the
daily social human behaviours

Mandub Any act that the muslim is urged to do, whereby he is Greeting
(Recommended viewed a performer of the good and so deserves divine others, Paying
) reward and Allah's pleasure. But no punishment is set for visits to
any one who leaves it or considers it easy, because, if neighbors
done, its fruits will be to his benefit, and if left or ignored
no harm will result from it

Makruh Any act that the muslim is urged to avoid although it is not Sleeping till
(Hated) unlawful. It is preferable to avoid such acts in the interests after sunrise,
of self or society. However, Islam does not set a Ablutions
punishment for the Muslim who does it, because it is not
considered haram.This

Table 1.3 : Rewards and punishments in ruling of Syariah

Performance Non Performance

Compulsory Rewarded Punished
Prohibited Punished Rewarded
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  11

Permissible Not Rewarded Not Punished

Recommended Rewarded Not Punished
Disliked Not Punished Rewarded

SELF CHECK 1.2

(a) What is the purpose of Ibadat in Islam?

(b) Define Muamalat from linguistic and technical meanings?

ACTIVITY
1.2
(a) Based on your understanding, what are the differences
between Islam and other religions?

FIQH AL-MUAMALAT IN ISLAMIC

FINANCE AND BUSINESS
1.2
Before we discuss about Islamic finance and business we should know
what is fiqh. Fiqh refers to the science of deducting Islamic law from
evidence found in the al-Quran and al-Sunnah. These rulings deal with
individual actions and also society. It covers laws related with Ibadat
(fiqh al-Ibadat), criminal (fiqh al-jinayah), finance (fiqh al-Muamalat)
and others.

Fiqh al-Ibadat : discuss about prayer, fasting, zakat and pilgrimage.

Fiqh al-Jinayah : discuss about criminals and their punishment
Fiqh al-Muamalat : discuss about business transactions and financial
dealings
Fiqh al-Siasah : discuss about management and organization of
government.
Fiqh al-Munakahat : discuss about marriage, divorce and family issues.

Fiqh Muamalat is one of the fields of knowledge in fiqh. It covers the

knowledge of business contracts, exchange of properties and whatever
transaction that have relationship with business. This knowledge
12  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

actually plays a very important role in maintaining peace in the

society. The benefits of study fiqh Muamalat are

• to upgrade the status of mankind to a respectful

position through faith and discipline
• to encourage people to participate actively in
business transaction
• to avoid any misunderstanding among contracting
parties in business transaction
• to keep the legal spirit by avoiding unlawful
dealings in any kind of transactions
• to enforce the rights and duties of the contracting
parties in business transaction.

PHILOSOPHY OF ISLAMIC FINANCE

AND BUSINESS
1.3
To understand the structure of Islamic finance and business we may
first discuss it philosophy. Philosophy is the study of fundamental
problems concerning matters such as knowledge, truth and justice.
When we believe that a statement is a fair statement and we justify
such belief by answering relevant questions and giving evidences in
supporting the answers, we have philosophized for such belief.
Therefore in other to become a philosophy, it must meet 3 conditions;

1) The statement must be true

2) We must believe that the statement is true
3) There must be good evidence for believing the statement

Islam developed a set of principles that provide a basic framework for

the conduct of Islamic finance and business contracts. This is because
these contracts result in rights and liabilities of the parties and they
must fulfill the liability as stated in the contract. Below are some of the
philosophy of Islamic business and finance which directly affecting the
contracts and instruments in the Islamic financial system.
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  13

a) Everything is belong to Allah

Everything in this world and also universe is created by Allah and it

belongs to Allah. He also delegated to human the right to enjoy these
creations such as air, land and minerals. Therefore human are holding
all these in trust and they must share this bounty with others in such
ways like paying zakat and giving donation. Allah also blesses those
who earn and spend this bounty in compliance with His commands. He
does not bestow His blessing on those who earn it illegitimately and
spend it irresponsibly.

Allah said :
He is the creator of the heavens and the earth. How could He has a son
when He has no consort? He has created everything and is aware of
everything (Al-an’am :101)

b) Profit as a secondary aim

Business will bring two types of profits; first profit in the form of money
and second profit in the form of rewards by Allah. As a muslim the first
goal of business should not be focusing on money based profit but
more to get reward and blessing from Allah. In Islam seeking profit is
not a bad aim, but it should be secondary. In doing business, we are
not only trying to make profits but we are actually doing service to the
society by providing the goods and services that people need.

Allah said :
O Prophet, tell them; if your fathers, your sons, your brothers, your
spouses, your relatives, the wealth that you have aquired, the business
in which you fear a loss, and the homes which you like are dearer to
you than Allah, His Prophet and making Jihad in His way, then wait until
Allah brings about His decision. Allah does not guide the transgressors.
(At-Taubah : 24)

b) Business transactions should be conducted by mutual

consent

All business transactions must be based on mutual consent among the

contracting parties. Consent obtained through oppression, injustice and
fraud will makes a contract invalid in Islamic law. This is mentioned in
the hadith and also al-quran

Prophet (SAW) said:

14  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

“The sale is complete when the two part with mutual consent.”

Allah said:
O you who believe! eat not up your property among yourselves in
vanities: but let there be amongst you trade by mutual consent: nor kill
yourselves: for verily Allah has been to you Most Merciful. (An- Nisa 29)

Based on descriptions on above hadith and al-quran indicate that no

one can take the property of others wrongfully

c) Any transaction involves riba (interest) is void

All forms of contracts and transactions must be free from riba. Islam
prohibits muslims from taking or giving interest regardless of the
purpose for which such loans are made and regardless of the rates at
which riba is charged. It includes all returns from loans and anything
above the principal and covers all forms of commercial and personal
loans. Many verses of the al-Quran and Hadith clearly mention that all
business transactions which involve riba are prohibited in Islam.
According to the Quran also there is a clear distinction between profits
and riba; while the former is recommended, the latter is hated.

Allah said :
Allah has permitted trading and forbidden Riba (Al-Baqarah :275)

Allah said :
O you who believe! Fear Allah and give up what remains of your
demand for usury if you are indeed believers. (Al-Baqarah 278)

The major purpose of this prohibition is to avoid injustice where a

person receives a monetary advantage in loan or trading transactions
without giving a fair countervalue. It also creates parasites in the
financial system and contributed to the widen gap between the rich
and poor.

d) Unlawful subject matter

Islam gives complete freedom to muslims to involve in business

transactions. They can organize any kind of business within the limits
set by the Islamic law. Islam does not recognize business transactions
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  15

that have proven illigitimate products as mentioned by Allah and

prophet Muhammad (SAW).

Allah said:
He has only forbidden you dead meat and blood and flesh of swine and
that on which any other name has been invoked besides that Allah (Al-
Baqarah 173)

Allah said:
O you who believe, intoxicants and gambling, (dedication of) stones
and (divination by) arrows are an abomination of Satan’s handiwork.
Eschew such abomination that you may prosper. (Al-Maidah 93)

The Prophet (SAW) said:

If Allah makes something unlawful, he makes its price also unlawful.

According to Al-Quran and Al-Hadith, the following set of business

activities are considered prohibited in Islam.

i. Islam has not permitted producing, selling and purchasing

of goods, which are prohibited in Islamic law such as alcohol,
drugs, pork and tobacco

ii. Islam has also prohibited any kind of transaction involving

uncertainty. Such a sale is strictly prohibited in Islam because
the business contract is not known to the buyer and the
contract may give rise to disputes and disagreements
between the concerned parties.

iii. Islam has also prohibited any kind of transaction involving

gambling.

iv. Islam prohibits buying or selling what is legal if we know

that it will be used for illegal use such as weapons and
abortion drugs.

ISLAMIC FINANCIAL SYSTEM VS

CONVENTIONAL FINANCIAL
1.3 SYSTEM
Islamic finance is a basis concept in managing financial transactions
among muslims which based on Islamic law. It is said to be asset
16  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

based as opposed to currency based whereby an investment is

structured on exchange or ownership of assets, and money is simply
the payment mechanism to effect the transaction.

The main differences between Islamic financial system and

conventional financial system are:

A) Objectives and approches

Islamic financial system is guided by the specific law under the Syariah
principle which focuses on the community well being rather than
personel interest. It prohibits all activities which may cause harm to the
contracting parties either to the traders or the consumers. A muslim
businessman should avoid these prohibition practices and at the same
time distance himself from doubtful matters because one who falls into
doubtful matters is probably will fall into unlawful (haram) matters.

Islamic financial system is based on the objectives and principles

developed by Al-Quran and Al-Sunnah. It is different from conventional
financial system which has no such religious elements in their
objectives. Where Islamic financial system provide services which
comply with the religious injunctions of Islam. For instance in Malaysia,
all Islamic financial institutions are required to establish Syariah
Advisory Committee in order to advise in Syariah matters and to
ensure that their financial products comply with Syariah principles.

B) Profit vs Interest

Interest is prohibitted in any financial transaction including loans and

investment. In Islamic financial system, we deal in goods and not in
money. We use money only as a medium of exchange in the process of
purchasing goods for the purposes of trading or investment. Meanwhile
conventional financial institutions deal in money. They get money from
clients in the form of loans and pay them interest as a return. They
also give advances to clients and charge them interest.

In the absence of interest, Islam has a number of principles that can be

applied in financial and business contracts by adopting profit and loss
sharing principles such as in Mudaharabah and Musyarakah or cost
plus profit principles such as in Murabahah, Bai’ Bithaman Ajil, Bai’
Salam and others.
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  17

The major element creating imbalance and injustice in financial system

is interest. Replacing it with other principles as mentioned before
would solve many economic ills such as hunger, poverty, inflation and
other social problems. This is because interest is considered as
unjustified income where a person receives a monetary advantage in
loan transaction or trading transaction without sharing the risks.

There is a big difference between profit and interest. In a business

transaction we get profit only after we involve in the risks sharing,
even after all there always exist a fear of loss in this transaction.
Contrary to this, in the conventional system the lender gets the fixed
rate of return from the borrower in the form of interest without any
effort or fear of loss.

C) Risk

In conventional financial system, especially in interest based

transactions it is developed based on the debtor-creditor relationship.
When you deposit money in a bank, the bank is the debtor and you are
the creditor. The bank promises to pay you some return (interest) as a
condition for this deposit. Meanwhile if you borrow money from a bank,
the bank becomes is the creditor and you are the debtor

The debtor-creditor relationship in conventional financial system is

replaced by equity risk-sharing relationship in Islamic financial system.
In this position one party is a capital provider and the other party is an
enterpreuner. The idea underlying Islamic banking is that money
should be based on equity rather than debt. Instead of guaranteeing a
fixed rate of return, an Islamic financial institutions and the borrower
enter into an agreement that clearly spells out the way in which profits
or losses are to be shared between the parties.

In Islamic financial institutions, they deal also with the purchasing of

goods whether in financing or investment. In this practice it would
involve the concept of ownership and it cannot be separated from the
risk of related loss. If the assets remain with the sellers or financial
institutions, they have to bear the risk as long as they sell, the risk is
transferred to the buyers or clients.

Syariah maxim “al-kharaj bi al dhaman” is the basic principle of

permissibilty of any return on capital. It means that there can be no
18  TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS

profit without risk sharing and those who want to get profit he must
also liable for the loss if any. So in Islam all parties in the business and
financial contracts have to undertake risk for the entitlement of profit.

D) Asset based vs Debt Based

In conventional financial system, their contract is purely financial as

the debt contract is independent of the material transaction that may
take place. Consequently a debt contract may entail exploitation of the
condition of a party to the contract by the other one especially in riba.

The prohibition of riba and the permission of trading in Islam drive the
Islamic financial activities towards asset based business. This implies
that all financial and business transactions must be representative of
real business transaction. Islamic financial products relate largely to
trade-based or asset-based financial instruments. Hence, risks
associated with these businesses tend to be reflected in these financial
instruments as well.

In most methods of Islamic finance, the financial institution is at some

stage the owner of the financed goods. In a few cases, particularly
asset financing, certain risks may be attributable to legal ownership.
There may also be obligations associated with the asset/transaction
that must be assessed at the structuring stage to avoid surprises. If the
asset is destroyed or becomes unfit for use while the financier owns it,
responsibility falls on the financier, so long as the customer did not
cause the damage willfully or negligently.

• Islam is a complete way of life that covers all aspects of human

activities. Being a complete way of life, it does not recognise a
separation between spiritual and material aspects of a muslim’s
life

• Ibadat, Syariah and Akhlak are the main fundamentals in Islam

which guide muslim in all of their actions.

• Muamalat refers to the relationship between man and man in their

actions which includes business, politics, social and others.
 TOPIC 1 OVERVIEW OF ISLAMIC FINANCE AND BUSINESS  19

Muamalat in our study is focus on the business and financial

matters.

• Individuals have the right and freedom to make profit from the
business transaction and at the same time Islam prohibited all
activities which may cause harm to the contracting parties.

• The main differences between Islamic financial system and

oonventional financial system are based on their objectives,
returns, risks and approaches.

Akhlak Al-Quran
Al-Hadith Aqidah
Gharar Ibadat
Muamalat Riba
Syariah Zakat

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