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)
ÉIjma (Unanimous  decision  of  the  Ulama)
ÉQiyas (analogy)
ÉIstishan/  Istihab (equity  in  Islamic  law)
ÉMaslahah (necessity  of  the  people)
ÉSurdul Dara’ih (Blocking  the  means)
ÉU’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  
üAdditional  Shariah
relationships
governance
• Equity-­‐based
üUnique  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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