Maqasid Al Shariah in Finance

8/10/2019 Maqasid Al Shariah in Finance

1/25

1

INCEIF

The Global University in Islamic finance

Kuala Lumpur, Malaysia

CIFP

Maqasid al-Shariah is one of the very important Shariah aspects in

Islamic Finance

_________________________________________________________

SH 1002

Semester Jan 2012

Name: Kulsanofer Syed Thajudeen


2/25

2

Abstract

_________

This article discusses the importance of Maqasid al-Shariahin structuring and developing Islamic Finance products.

The technical and literal meaning of Maqasid Al-Shariah

is examined. The important elements of Maqasid Al-Shariah is

defined and further explored to explain how it may contribute

solutions for the many Islamic Finance issues and challenges.

Key terms of the research

1. Maqasid Al-Shariah 2. Islamic Finance 3. Maslahah 4. Wealth


3/25

3

Table of Contents

Introduction ................................................................................................................... 4

Maqasid al-Shariah..................................................................................................................4

Maslahah..................................................................................................................................6

Characteristics of Maqasid al-Shariah ............................................................................. 7

Classification of Maqasid al-Shariah .......................................................................................8

Maqasid al-Shariah and Islamic Finance.............................................................................. 10

Maqasid al-Shariah in the prohibition of interest (riba) ..................................................... 11

Promoting Maslahah in Economy........................................................................................ 12

Maqasid al-Shariah in Islamic Banking................................................................................ 13

Shariah Compliant : Legality vs Permissibility ...................................................................... 13

Hukum Qadai ....................................................................................................................... 14

Hukum Diani .......................................................................................................................... 14

Maslahah in Islamic Banking................................................................................................ 15

Maqasid al-Shariah in Islamic Capital Market (Sukuk)....................................................... 16

What is Sukuk ........................................................................................................................ 17

Mudharabah Sukuk ............................................................................................................... 17

Musharaka Sukuk .................................................................................................................. 18

Paradox in Structuring equity- based sukuk ......................................................................... 18

Maqasid al-Shariah in Takaful.............................................................................................. 20

The main difference between conventional insurance and takaful ..................................... 21

Conclusion and Findings....................................................................................................... 24

References............................................................................................................................ 25


4/25

4

Introduction

Islamic Finance is finance following the Islamic law (or Shariah) principles.

The basic sources of Shariah are the Quran and the Sunna, which are followed by the

consensus of the jurists and interpreters of Islamic law. The central feature of the Islamic

finance system is the prohibition in the Quran of the payment and receipt of interest (or

riba). The strong disapproval of interest by Islam and the vital role of interest in modern

commercial banking systems led Muslim thinkers to explore ways and means by which

commercial banking could be organised on an interest-free basis.

The Islamic Finance industry has grown tremendously from its inception in 1975. The

Islamic finance industry is reported to be valued at over $1 trillion, with an estimated

annual growth rate of 10 percent . The industry is continuing to grow and some market

analysts project it will be valued at anywhere from $3 to $5 trillion by 2016.1

Since the Islamic Financial Institutions must ensure that all their transactions and

services must be Shariah compliant, it is vital that it follow the objectives of Shariah also

known as Maqasid al-Shariah. The principles advocated by the Shariah ensure that the

Islamic Finance transactions are just, transparent and prohibit involvement in illegal

activities that are detrimental to society.

This article will discuss the importance of Maqasid al-Shariah in structuring the

framework of Islamic Finance institutions (IFIs) to develop financial products and

services that are Shariah compliant.

Maqasid al-Shariah

Maqasid comes from an Arab plural word which is maqsad, the root word is qasd

which mean of intuition, aim or objective in an actions. Maqasid, The Arabic root word

of Shariah is the verb sharaa. The literal meaning of sharaa is to open upon a street,

like to open a door upon a street. In legal term sharaa means to make or establish1Humayon Dar, Global Islamic Finance Report 2011, 34


5/25

5

laws. From sharaa also comes Shariah which in legal term means laws relating to all

aspects of human life established by Allah S.W.T for his servants. Maqasid al-shariah is

refered to as the goal or objective to be achieved in an Islamic law.2

Several renowned Muslim scholars have given their own definitions for Maqasid al-

Shariah:-

Abu Hamid al-Ghazali (d.1111 CE) as:

The very objective of the Shariah is to promote the well-being of the people,

which lies in safeguarding their faith (deen), their lives (nafs), their intellect

(aql), their posterity (nasl), and their wealth (mal). Whatever ensures the

safeguarding of these five serves public interest and is desirable, and whatever

hurts them is against public interest and its removal is desirable.

Imam al-Shatibi (d. 1388 CE), defined Maqasid al-Shariah as

The primary goal of the Shariah is to free man from the grip of his own

whims, so that he may be the servant of Allah by choice, just as he is His

slave [in matters about which he has] no choice.

Ibn Ashur (1973) defined Maqasid al-Shariah as

2Mohammad Hashim Kamili, Maqasid Al-Shariah Made Simple, IIIT 2009, 1


6/25

6

The overall objective (Maqsad Amm) of Islamic legislation is to preserve

the social order of the community and insure its healthy progress by

promoting the well-being and virtue (Salah) of the human being. The

salah of human beings consists of the soundness of their intellects and the

righteousness of their deeds, as well as the goodness of the things of the

world in which they live that are put at their disposal.

The main objectives of Shariah is to advocate concepts of compassion and guidance

to establish justice, eliminate prejudice, and alleviate hardship in society.

This is manifested in the realisation of maslahah (public interest), which Islamic scholars

have generally considered to be the all-pervasive value and objective of the Shariah

which is to all intents and purposes synonymous with compassion.3

Maslahah (Concerns of Public Interest)

Maslahahis one of the juristic devices that have always been used in Islamic legal

theory to promote public benefit and prevent social evils or corruption. The plural of

the Arabic word maslahahis masalih which means welfare, interest or benefit.Literally, maslahahis defined as seeking the benefit and repelling harm. The words

maslahahand manfa`ahare treated as synonyms.Manfa`ah(benefit or utility),

however, is not technical meaning of maslahah. What Muslim jurists mean by

maslahahis the seeking of benefit and the repelling of harm as directed by the

Lawgiver or Shariah.4

Al-Ghazali has defined maslahah as :-

3

Dr. Asyraf Wajdi Dusuki & Dr.Nurdianawati Abdullah, Maqasid al-Shariah,, Maslahah and CorporateSocial Responsibility, 314Mirza Vejzagic and Edib Smolo, Maqasid al Shariah in Islamic Finance: An Overview, 4


7/25

7

As for Maslahah, it is essentially an expression referring to the acquisition

of benefit or the repulsion of injury or harm, but that is not what we mean

by it because acquisition of benefits and the repulsion of harm represent

human goals, that is, the welfare of humans through the attainment of these

goals. What we mean by maslahah, however, is the preservation of the ends

of the Shariah.

The underlying theme in virtually the entire broad spectrum of the shariah is realisation

of benefit (maslahah) which is regarded as the summa of the maqasid. The masalih(pl.

of maslahah) thus become another name for the maqasidand the ulamahave used the

two terms almost interchangeably.5

Characteristics of Maqasid Al-Shariah

The Maqasid Al-Shariah has four main characteristics

1) Basis of legislation

Legislation has to serve the interest of all human beings and save them from

harm.

2) Universal

Aiming to serve the interests of mankind and requiring the adherence of all

human beings. This is because the Quran is the last revelation, applicable to the

all mankind till the end of time.

3) Inclusive

They encompass all human acts whether they are related to Ibadat

(responsibilities to God) or muamalat (responsibilities towards other human

beings).

4) Definitive

They have not been derived from a single text or item of evidence, but from a

multiplicity of texts and different aspects of evidence.6

5Mohammad Kamili, 2

6Dr.Mashhad Al-Allaf, The Objectives of the Islamic Divine Law,2003,2


8/25

8

Classification of Maqasid Al-Shariah

In usul al-fiqh, on which Islamic jurisprudence is based, scholars such as al-

Shatibi further divide the general objectivessometimes denoted as maslahahinto

three sub-categories. Al-Shatibi calls these the essentials (Daruriyah), the

complementary (Hajiyyah) and the embellishments (Tahsiniyyah).

The categories are briefly discussed below:

1) Daruriyah (Essential)

It is known as the essential interests of life which people essentially depend

upon, comprising the five objectives of Shariah: religion(deen); life (nafs),

intellect (aql), procreation (nasl) and wealth (mal). These are essentials

serving as bases for the establishment of welfare in this world and the

hereafter. If they are ignored then coherence and order cannot be established,

fasad (chaos and disorder) shall prevail in this world, and there will be

obvious loss in the hereafter. Some scholars argued that though the five

daruriyat are essential for human welfare, necessities are not confined to

these five maqasid; hence, they proposed additional daruriyah such as

equality, freedom and protection of the environment.7

2) Hajiyyah(need or complimentary)

Complementary interests are defined as benefits which seek to remove

severity and hardship that do not pose a threat to the very survival of normal

order.The term refers to interests, the neglect of which will lead to hardship

but not to total disruption of the normal order of life. In other words, these

interests, which are a level below the five essentials, are needed in order to

alleviate hardship, so that life may be free from distress and predicament.

They are also reflected in provisions that aim to remove hardships and/or

facilitate life. An example is seen in the sphere of economic transactions; the

Shariah has validated certain contracts such as the salam sale and lease and

7Mohammad Hashim Kamili, 3


9/25

9

hire contracts (Ijarah) because of peoples need for them, notwithstanding a

certain anomaly that is attendant in both.8

3)

Tahsiniyyah(embellishments)

The embellishments refer to interests whose realisation leads to refinement

and perfection in the customs and conduct of people at all levels of

achievement. For example, the Shariah encourages charity to those in need,

beyond the level of the obligatory zakah. In customary matters and relations

among people, the Shariah encourages gentleness, pleasant speech and

manner, and fair dealing. Other examples include permission to use beautiful,comfortable things; to eat delicious food; to wear fine clothing and so on.9

Fig 1 :The Maqasid Model10

8

Mohammad Hashim Kamili, 39Mohammad Hashim Kamili, 4

10Dr.Mashhad Al Allaf,3


10/25

10

Maqasid Al-Shariah and Islamic Finance

The earlier sections have discussed on the fundamental principles on the objectives of

Shariàh particularly in dealing with everyday life. The next focus is to apply evaluate

maqasid alshariàh and maslahah in Islamic banking and finance. In fact, one of the

biggest challenges of Islamic banking and finance industry today is to come up with

products and services that is Shariàh compliant or legitimate from Islamic point of view

without undermining the business aspects of being competitive, profitable and viable

in the long run.11

The major components of Islamic Financial Services are12

1)

Islamic Banking

a. Financing

b. Deposit

c.

Investment

2) Islamic Capital Market

a. Equity

b.

Islamic Securities

c. Funds and Unit Trusts

d.

I-REITS

e.

Venture Capital / Private Equity

f. Derivatives

3) Takaful/Islamic Insurance

a.

Takaful

b. Retakaful

According to Chapra (1985) the main objectives of the Islamic Financial Institution (IFI)

are abolition of interest, adherence to public interest, catalyst for development, promotion

of economic well-being, establishment of social and economic justice, and equitable

distribution of income.

The Quran has laid down several premises for economic justice. For example, people

are not allowed to devour their wealth unjustly except through mutual consent. All

11

Dr.Asyraf Dusuki, Challenges of Realizing Maqasid al Shariah in Islamic Capital Market: SpeacialFocus on Equity-Based Sukuk,612

Dr.Asyraf Dusuki, An overview of Islamic Finance:Funadamentals and Prospects,presentation slide, 4


11/25

11

forms of elements that would create economic injustices such as bribery (al-Rishwa)

fraud or deception (al-Ghish), gambling (al-Maysir), dubious contracts (al-Gharar) and

riba are condemned in the highest term. Interest is considered as a major destabilizing

factor that contributes to cyclical fluctuations in the economy and it transfers resources

from the poor to the rich.13

Other forms of activities are encouraged by the Shari'ah to ensure economic

justice such as wealth circulation (al-Tadawul or al-Riwaj) that should not only

be confined to the rich, fair share of returns (al-Shirkah) among the contracting

parties and fair pricing (Tas'ir) while avoiding profiteering that burdens the public.14

Hassan (2003) observes that the Islamic Financial Institute (IFI) must seek to realize

economic justice through wealth circulation, elimination of absolute poverty and

efficiency in the utilization of resources available.15

The profit and loss sharing arrangements on the pattern of equity are more just than the

conventional contracts as closest to the Islamic ethos than the predetermined fixed

interest debt which is unjust and a taboo. IFIs must seek to realize economic justice

that would result in permanent contribution to economic efficiency, productivity,

growth and stability . To ensure social justice as enjoined in the Quran, Islamic banks

must strike effective balance between profitability and social justice.16

Maqasid Al-Shariah in the prohibition of interest (riba)

One of the most important objectives in Shariah from the financial point of view is

elimination of interest (riba) in all categories of business transactions. The two main

categories of interest (riba) which are sternly prohibited in Islamic law are riba al-nasiah,

which is interest on lent money, and riba al-fadl which is literally earnings or excess

13Minsky, H.P., 1982, Inflation, Recession and Economic Policy (London:Wheatsheaf Books), 10

14Mustapha Omar Muhammad, Objectives of Islamic Banking: Maqasid Approach, 253

15

Nik Hassan hj Nik Mustapha, An Evaluation of the Islamic Banking Development, 2003,5

16Ataul Huq Pramanik, Islamic Banking : How Far Have We Gone, KL 2009,


12/25

12

acquired by exchanging or selling commodities of superior value over other commodities

given.17

It is stated in the Holy Quran: those who devour usury will not stand except as stand one

whom the evil one by His touch hath driven to madness. That is because they say: "Trade

is like usury," but Allah hath permitted trade and forbidden usury (riba) (Al-Quran, Al-

Baqarah: 275).

Riba is prohibited because it causes unfairness in business transaction. It makes it easy

for the rich to make easy money and oppress the poor. This makes only a small number

of the community powerful while weakening the rest of the community. The Shariah has

made this type of profit illegal and strongly prohibited it. Taking into consideration of

maslahah of society, riba makes a community unproductive as one can earn easy money

without working hard.

Promoting Maslahah in Economy

The Shariah encourages that the wealth from individuals, firms and governments are trust

from Allah and therefore be directed towards achieving the common social goals.(Al-

AnAm:165). Redistributing wealth is not a favour by the rich to the poor butit is the

right of the latter. In their wealth, there is a due right for the poor and the deprived (Al-

Marij:24-25).

All excessive wealth held beyond one's legitimate needs should be held as a trust

(Amanah) and surrendered to the members of the society. The Shari'ah has provided

several measures for spending wealth on the society. These include Zakah,

endowment (Waqf), voluntary charity (Sadaqat), inheritance (Faraid), Will

(Wasiyyah) , donations and grants (`ltiyyah), and social security (al- Takaful al-

Ijtima'i).18

17Anwar Iqbal Qureshi, Islam and the Theory of Interest,Kitab Bhavan, 1945, 68

18Mustafa Omar Mohammed, 257


13/25

13

Investments can be carried out by individuals, firms and governments. In Islamic banks,

deposits are public money, thus must be directed towards the public interest.Islamic

banks in Sudan are required by law to contribute to community development

projects. Needless to say, in the Islamic economic system, the state plays a much

bigger and wider role towards public interest. Such roles include provision of basic

needs, arrange social include provision of basic needs, arrange social security and foster

equitable distribution of income, wealth and fulfillment of social obligation.19

Maqasid al-Shariah in Islamic Banking

The earlier sections have defined Maqasid al-Shariah, and discussed the prohibition of

riba. This section will discuss on the importance of Maqasid al-Shariah and maslahah in

Islamic Banking. It is of crucial importance to the Islamic banks to develop financial

products that are Shariah-compliant without jeopardizing their competitiveness and

profitability in the long run. The pressing question is how to determine whether a product

is Shariah compliant or otherwise? How to resolve the legality of a contract from

Shariah perspectives?

Shariah- Compliant : Legality vs Permissibility

The Fiqhi scholars have two different views on this matter .Some of them emphasize on

whether the structure of the product is permissible while the other group prefers to look

into the underlying objectives of the contracting parties. They do not want the products

cleverly disguised as a shariahcompliant product when in actual case it is not.

The difference in opinion is due to the hadith that mentions matters are determined by

intention.Based on this hadith, the legality of the contracts must be established by

intention (niyyah) not merely by its structure alone.20

19Khaleefa, Islamic Banking in Sudans Rural Sector, Jeddah: Islamic Economics Studies, Vol.1, No.1, 37 -

5520Dusuki Asyraf Wajdi and Abdulazeem Abozaid, The Challenges of Realizing Maqasid al-Shariah in

Islamic Banking and Finance, 2007, 15


14/25

14

On the other hand, Imam Shafi stated that it is unreasonable to decide on the legality of

contracts by implication of intention, as it is complex and sometimes improbable to

categorize the intention of the contracting parties. In addition, they stated that some

Shariah textsindicate that evaluating things must be based on their structure and

manifestation.21

The scholars decided to reconcile the two conflicting opinions by introducing the two

types of hukm (ruling): Hukum Qadai and Hukm Diani.

1) Hukum Qadai

This hukm is to determine if the contract complies with all the Shariahconditions and requirements pertaining to its form and structure. If the contract

structure is Shariah-compliant then it is termed as valid contract (sahih).

2) Hukum Diani

This hukm is to determine whether the purpose of the contract is Shariah

compliant and if it is then the contract is permissible (halal).

Thus, a transaction is deemed to be halal when it serves the legal purpose and intention,

and sahih if the contract meets all contractual conditions and requirements.

Consequently, a sahih (valid) contract is not necessarily halal (permissible).22

It must be stated here that the scholars of Fiqh have different views with regard to the

validity of a contract only. However, they have no issue with the permissibility of a

contact on its matter or the contracting parties niyyah. Even Shafi scholars expressed

examples of cases when real intention does nullify a contract such as selling fruit

products to be used for alcohol making or furnishing arms to people who will use it

against the Muslims. This indicates that the importance on the structure or expressed

intention is more appropriate when the genuine intention is hard to establish.

For an Islamic product to be classified as Shariahcompliant by the jurists, the contract

must commonly be both valid and permissible. The pertinent question is, are

21Dusuki , 15

22Dusuki, 16


15/25

15

contemporary Islamic banking following the same principles One of the most debatable

products of Islamic banking is buy-back sale (bay al-inah) which ismostly applied in

Malaysia. In bay al-inah approach the Islamic bank is theoretically actingas a trader

selling or buying as the word bay means sale, but in actual terms the Islamic bank

simply proceeds as a financier who provides capital without exposing itself to any risk

and without taking engagement in the venture procedure. Bay al-inah here is resorted to

as a legal device to avoid riba based loan. However, financing based on bay al-inah and

the conventional riba based loan are very similar; they satisfied closely the same

contractingparties purposes, and apply exactly the same economic matter and outcomes,

although their form may be different.23

Thus not all products offered by Islamic banks are enhancing maslahah or fully

embracing the objective of Shariah. If Islamic banks focus only on the structure or

validity of a contract instead of focusing also on the underlying purpose or the

permissibility then the bank is in opposition to the key principles of Maqasid al-Shariah.

In the case of Bay Al-Inah, Maqasid al-Shariah has been used as a rationalization for

application of rather questionable transaction, even though observing Maqasid al-Shariah

must be the first factor to determine their prohibition.24

Maslahah in Islamic Banking

Islamic banks must take into consideration the universal and dynamic conception of

Maqasid al-Shariah. Islamic banks must ensure that their policies and programs on

public interest take into consideration the preservation of the five essential elements.

For example, Islamic Banks should give priorities in their business activities to those

areas related to the basic needs of the public such the public such as investments in

vital sectors and financing of housing projects. The last priority should be those areas

whose activities involve luxury goods. However lucrative it may be, usually such

areas are related to the few rich at the expense of the general public. Such

resources should be relocated to benefit the general public.25

23

Dusuki and Abozaid, 200724Dusuki and Abozaid, 2007

25 Dusuki and Abozaid, 2007


16/25

16

Thus, Islamic banks are expected to engage in endorsing social welfare. This view is

embraced by the various Muslim scholars who are stating that Islamic banking is much

more than providing Shariah-compliant products. It should be structured in such a way

that itsprimarily goal is to achieve an affirmative contribution to the realization of the

socio economic objectives of the society at large.26

In order to accomplish the social welfare of society or economic well-being model

supported by those Muslim scholars, Islamic banks should rely more on equity-based

financing. The equity financing is the way forward for realizing that stage of model as

preserved in Maqasid al-Shariah.27 (Haneef & Smolo, 2010; Rosly, 2010; Usmani,

2010).

As a result, equity financing is an aspiration of Shariah advisors as well as academicians

that has to be enhanced further in the Islamic banking. Furthermore, equity-based

financing is also not disguise of debt-based financing contracts commonly used in the

conventional banking. Therefore, it can be freely uttered that equity financing can

accomplish the objective of Shariah which is realization of justice in the society .

28(Kamal, et al., 2009).

Maqasid al-Shariah in Islamic Capital Markets (Sukuk)

Over the past decade or so Islamic financial sector has grown and gained strength by

the creation of various support and infrastructure institutions, and expanded from

being a banking-based industry to more wider areas incorporating capital market based

products and services. Indeed Islamic capital market like its conventional

counterpart is an important component of the overall Islamic financial system. It

facilitates the transfer of investible funds from economic agents in financial surplus to

those requiring funds . In other words, the Islamic capital market provides

an element of liquidity to the otherwise illiquid assets. This is achieved by selling a

26Mirza Vejzagic & Edib Smolo, Maqasid Al-Shariah in Islamic Finance : An Overview,

27Haneef & Smolo, 2010

28Kamal 2009


17/25

17

wide array of products ranging from Shariah-compliant securities to bond-like

structures known as Sukuk.29

What is Sukuk?

Literally sukuk means certificates. Technically,sukukrefer to securities, notes, papers

or certificates, with features of liquidity and tradability. Accounting and Auditing

Organization for Islamic Financial Institutions (AAOIFI) defines

Investment sukuk are certificates of equal value representing undivided shares in

ownership of tangible assets, usufructs and services (in the ownership of) the assets of

particular projects or special investment activity, however, this is true after receipt of the

value of the sukuk, the closing of subscription and the employment of funds received for

the purpose for which the sukuk were issued.30(Accounting and Auditing Organization

for Islamic Financial Institutions, 2008b)

Sukuk can be structured in various forms. The types of Sukuk issued can take various

structures depending on the underlying Shariahprinciples such asBai Bithamin Ajil,

Murabaha,Salam,Istisna,Ijarah,Musharakah,Mudharabahand Wakalah (Kamil,

2008). These can be further grouped into three main clustersSale-based sukuk

(comprising of Bai Bithamin Ajil, Murabaha, Salam, Istisnaa), lease-based sukuk

(Ijarah) and equity based sukuk (Musharaka, Mudaraba and Wakala). 31(Dusuki,

challenges of realizing maq,pg10)

Mudharabah Sukuk

The issuer will first call for investors to participate in the mudharabahcontract. The

issuer acts as the manager or mudharib, and the investors is the capital provider or rabb

al-mal. The mudharabah sukukare issued by the issuer to evidence the proportionate

capital contribution by the investors (rabb al-mal) to the mudharabahand their

29

Dusuki, Challenges of realizing , 230AAOIFI, 2008

31Dusuki, Challenges of realizing , 10


18/25

18

subsequent rights in the mudharabahproject or investment activities. The issuer as

mudharibwill then invest the mudharabahcapital into an agreed project. Normally, the

mudharabahproject has already identified projected cash flow, and this allows the issuer

to indicate an expected rate of profit to the investors upon initial issuance of the

mudharabah sukuk. The expected rate of profit should be calculated based on a pre-

agreed profit sharing ratio that is tentatively applied to the projected return of the project.

After the project starts to generate profit, the issuer will apply the profit sharing ratio and

pay the profit share of the investors as periodic coupon distribution, normally at the

expected profit rate. However, if the project suffers loss, it will be borne solely by the

investors except when the loss is caused by the negligence or mismanagement of the

mudharib.32

Musharaka Sukuk

In a musharakahsukuk transaction, both the issuer and investors will contribute to the

capital of the musharakahproject. The musharakahproject is normally managed by

either the issuer or a third party as the case may be. Alternatively, a musharakah

sukuk transaction can also be structured with all investors contribute capital in a

musharakahproject and then appoint the issuer as their agent to manage the

musharakah. This structure can also be classified as investment agency sukuk (sukuk

wakalah bi istithmar)33(Engku Rabiah, 2009).

Paradox in structuring equity-based sukuk

Based on the explanation above, it is clear that mudharabah and musharakahsukuk are

conceptually equity-based and are not debt instruments. The mudharabah and

musharakahsukuk represent the sukuk holders proportionate rights over the

investment project and revenue.

The fundamental characteristics of equity-based sukuk are based on two basic features;

1) The capital cannot be guaranteed

2) The periodic returns are also dependent on actual profits made and can be

32Engku Rabiah, The Islamic Securities (Sukuk) Market, 2009,10

33Engku Rabiah, 2009,11


19/25

19

variable.

However, the firm Shariah directions related tothe equity-based sukuk structure are

usually not of great interest to conventional risk adverse investors. Particularly, the

incorporation of classical Islamic financial instruments like mudarabah and musharakah

with bond do not fulfil conventional investors requests. The investors demanded capital

protection and fixed incomes which are usual characteristics of conventional bond

instruments. In order to satisfy customers the structure of equity-based sukuk evolved

into debt-based instrument. 34

In mudarabah, the obligor does not need to participate with any asset while in

musharakah, the obligor will furnish capital. For all mentioned instruments there will be

promise by the obligor to repurchase the assets from sukuk holders, for its nominal value

at a specific agreed price. This would guarantee that the capital invested by the sukuk

holders remains integral. However, this may lead to the same economic results as

conventional bonds since sukuk holders shall be assured that their capital will be

guaranteed at maturity due to the purchase undertaking that allows sukuk assets to be

redeemed at par.35

Nevertheless, the credit enhancement approach embraces arrangements and

commitments, which, if taken on their own, are acceptable and permissible. The

innovative permissibility of such arrangements and commitments is the main reason

why these structures and arrangements had received concern by the Shariah jurists. If

looked carefully, the total procedure of sukuk issuance, these annual allocation payments

and claims of value upon maturity, these obvious promises and undertakings clearly

reflect capital protection and assured rate of return on investment, what is actually

conventional bond characteristic, and which would be impossible to achieve in pure

Shariah based instruments like themudarabah and musharakah contracts.36(Dusuki,

2010).

34Dusuki, Challenges of RealizingMaqasid al-Shariah (Objectives of Shariah) in IslamicCapital Market: Special Focus on Equity-Based Sukuk , 2010,15

35Dusuki, 2010, 16

36Dusuki, 2010, 16


20/25

20

Nevertheless, these fixed-income embracing instruments entrenched into equity-based

sukuk had been the theme of strong condemnation by different parties in terms of their

compliance with the Shariah requirements. Above all, Shariah Board of Accounting

and Auditing Organization for Islamic Financial Institutions (AAOIFI) printed a

testimonial in February 2008 signifying that musharakah and mudarabah sukuk with the

credit enhancementapproach instruments as applied by the market was not in

accordance with the Shariahprinciples.37

Looking into details, the AAOIFIs proclamation underlined two core matters observed

in equity-based sukuk: First, the practice of liquidity facility; and second, the purchase

undertaking at par to redeem the sukuk. In fact, AAOIFI restated its present regulation on

investment sukuk particularly on the practice of liquidity facility and the purchase

undertaking at par.38

The use of credit approach strategy like purchase undertaking in structuring sukuk to

enable guarantee-resemblance features of conventional bonds obviously have maintained

the legality of the form (sahih qadaan) but neglected the legality of the substance (sahih

diyanatan).39

In order to apply Maqasid al Shariah in the financial products, it is essential to embrace it

fully and not only part of it for then it is clearly not shariahcompliant.

Maqasid al-Shariah in Takaful

Takaful is derived from the Arabic root word Kafal meaning to take care of ones

needs. Takaful simply means mutual help among a group. The concept of takaful had

already existed during the time of Prophet Muhammad where the Muslims contributed to

a fund under the tribal system ofAaqilah for the purpose of helping members of

their own community who were liable to pay diyat (blood money).40

37AAOIFI, 2008

38

AAOIFI, 200839Dusuki, 2010, 20

40Zia Ahmed, Achieving Maqasid Al Shariah through Takaful, 2010, 9


21/25

21

During 7thcentury Muslim traders were sailing to perform trade as far as India, China

and Malaya. It is during these voyages that the merchants felt the need for insurance to

cover their losses through the perils in the sea. Based on the principle of helping one

another in the Quran (Surah Al-Maidah 5: 3) they contributed to a fund prior to starting

their voyage and use it to compensate any of them who incur losses. This was the start of

the marine insurance which of course has been much modified today.41

The Main Difference between Conventional Insurance and Takaful

In conventional insurance, the company sells a policy to the insured that would pay a

premium for the risk he agrees to be indemnified by the company or insurer.

The principals of conventional insurance are as listed below, the policy will determine:

1)

the kind of risk that is covered.

2) the risks that are excluded

3) the period of coverage for the indemnity

4)

the limit of compensation that the insured will get

5) the limit of damage or loss the company will be responsible for

6)

payment to insurer if loss arises from an event defined by the policy, during the

period under cover

7) the company takes all the money or premium that has been paid up front , in case

nothing happens during the period under cover

Based on the above principles, the Muslim jurists concluded that insurance is not

Shariah- compliant. The first objection is the presence of the element of chance taken by

the company. There is no certainty in the outcome of the contract. Ambiguity is

something that is not acceptable in Islam mainly because any of the two parties will be

exposed to injustices. Ambiguity and uncertainty of this type is called al-Gharar which

when present in any contract will cause the contract to be void. 42(takaful, syed Othman

Alhabshi.

41

Zia Ahmed, 2010, 1142Syed Othman Al-Habshi, Takaful : concept, history, development and future challenges of its

industry,2009,17


22/25

22

The second objection is the element of al-Maisir or gambling that arises out of the

chance phenomenon that exists in the contract. The insured takes a chance to protect

himself from the risk that he is facing. He is quite prepared to lose the premium if the

risk does not materialize. But if the risk materializes, he will get much more than the

premium he has paid. This situation of getting something more than what one pays for

that is based on chance is called gambling and is prohibited by Shariah. 43

The third element is riba or usury that is present in the form of returns from the

investment of the insurance fund. Obviously, most of the investments are placed in

interest-based instruments and hence is prohibited by the Shariah.

These are the three main objections raised by the Muslim jurists which make it necessary

for them to formulate models that will be Shariah-compliant.44

As for takaful the main principles are as below:

1) Policyholders co-operate among themselves for their common good.

2)

Every policyholder pays his subscription to help those that need assistance.

3) Losses are divided and liabilities spread according to the community pooling

system.

4)

Uncertainty is eliminated in respect of subscription and compensation.

5) It does not derive advantage at the cost of others.

The takaful is based on theprinciple of Taawun which is to help one another in

righteousness and piety; we then can invite people, especially those who face

the same danger or take the same risk to come together and form a group that will be

willing to help one another. In other words, if anyone among them incurs a loss caused

by an event that has been agreed upon, all the members of the group will contribute to

compensate this unfortunate individual. Based on this understanding, a fund can be

created from the contributions of each member on the basis of donation or tabarru

43

Syed Othman Al-Habshi, 2009,1544Syed Othman Al-Habshi, 2009, 15


23/25

23

which comes from the same root word as albirr or righteousness.45(Takful, syed

Othman alhabshi)

This probably is the most important concept that has been applied in all takaful models.

Based on the above concept and the principles of Taawun and tabarru, the

company then is simply the operator who invites people who face the same risk to form

that group. The company is not selling a policy as such which will give rise to the

prohibited elements of al Gharar and al-Maisir. Rather the company is an operator who

makes arrangements for the group to come together and agrees not only to contribute to

the fund and at the same time agree to donate at least part of the fund to any member of

the group who has become victims of any peril or mishap that has been identified earlier.

In this sense, the company is not taking the risk, but it is the group of participants who

bear the risk and are mutually covering each other. The company is only a trustee acting

on behalf of the participants to manage the operation of the takaful business. As such, the

company does not have any right to the takaful benefits. However, as an operator or

manager of the takaful business, the company is the entrepreneur or mudharib whilst the

participants are the provider of capital or rabbul mal as in the case of the mudharabah

concept. In this sense, the profits made from the business can be shared by both parties at

a pre-agreed ratio.46

There are several models in takaful, as mentioned below47:

1) Mudarabah Model

2)

Wakala Model

3) Wakala-Wakf Model

The takaful is a shariah-compliant alternative to insurance. It allows Muslims to plan for

misfortune in case it happens to protect family and property from destitution, which is

one of the objectives of Maqasid al-Shariah.

45Syed Othman Al-Habshi, 2009, 17

46

Syed Othman Al-Habshi, 2009, 1847Syed Othman Al-Habshi, 2009, 20


24/25

24

Conclusion and finding

Banking and finance are important elements in our lives. Unfortunately the world

banking and finance system is based primarily on riba which is strictly prohibited in

Islam. In order to cater for Muslim needs and also introduce a fairer and just banking

system , Islamic finance was introduced. Providing financial products that are shariah

compliant is the biggest challenge for the Islamic Finance Institution. The Financial

Institutions have responsibility to fulfil the objectives of the Shariah; the Maqasid al-

Shariah and serve the public interest. The financial product must be shariah-compliant

not only in structure but also in purpose; the contract must be valid and also permissible.

If emphasis is not given into providing products that comply with the Maqasid al-Shariah

then it defeats the purpose of having Islamic Financial Institutions in the first place.

Islamic Financial products will eventually just be foreign sounding products that are

actually a copy of the conventional banking products with shariah-compliant stamp on it.


25/25

REFERENCES:

Humayon Dar, Global Islamic Finance Report 2011, 34

Mohammad Hashim Kamili, Maqasid Al-Shariah Made Simple, IIIT 2009, 1

Dr. Asyraf Wajdi Dusuki & Dr.Nurdianawati Abdullah, Maqasid al-Shariah,, Maslahah

and Corporate Social Responsibility, 31

Mirza Vejzagic and Edib Smolo, Maqasid al Shariah in Islamic Finance: An Overview, 4

Dr.Mashhad Al-Allaf, The Objectives of the Islamic Divine Law,2003, 2

Dr.Asyraf Dusuki, Challenges of Realizing Maqasid al Shariah in Islamic Capital

Market: Speacial Focus on Equity-Based Sukuk, 6

Minsky, H.P., 1982, Inflation, Recession and Economic Policy (London:Wheatsheaf

Books), 10

Mustapha Omar Muhammad, Objectives of Islamic Banking: Maqasid Approach, 253

Nik Hassan hj Nik Mustapha, An Evaluation of the Islamic Banking Development,

2003, 5

Ataul Huq Pramanik, Islamic Banking: How Far Have We Gone, KL 2009,

Anwar Iqbal Qureshi, Islam and the Theory of Interest,Kitab Bhavan, 1945, 68

Khaleefa, Islamic Banking in Sudans Rural Sector, Jeddah: Islamic Economics Studies,

Vol.1, No.1, 37-55

Dusuki Asyraf Wajdi and Abdulazeem Abozaid, The Challenges of Realizing Maqasid

al-Shariah in Islamic Banking and Finance, 2007, 15

Mirza Vejzagic & Edib Smolo, Maqasid Al-Shariah in Islamic Finance : An Overview,

Haneef & Smolo, 2010

Kamal 2009

AAOIFI, 2008

Engku Rabiah, The Islamic Securities (Sukuk) Market, 2009,10

Dusuki, Challenges of RealizingMaqasid al-Shariah (Objectives of Shariah) in IslamicCapital Market: Special Focus on Equity-Based Sukuk , 2010,15

Zia Ahmed, Achieving Maqasid Al Shariah through Takaful, 2010, 9

Syed Othman Al-Habshi, Takaful: concept, history, development and future challenges

in its industry,2009 ,17

Maqasid Al Shariah in Finance

Documents

Transcript of Maqasid Al Shariah in Finance