THE METHODOLOGY OF IJTIHAD IN ISLAMIC FINANCEicib.riphah.edu.pk/sites/default/files/files/Dr Akram...

THE METHODOLOGY OF IJTIHAD IN ISLAMIC FINANCE

PROF. DR. MOHAMAD AKRAM LALDIN

◻ Islamic Finance is a new field in contemporary context of Islamic society.

◻ Islamic Finance emerges in contemporary times after centuries of Muslim society practicing secular financial system which is based on riba.

◻ Islamic finance aims to release Muslims from practicing ribā and other prohibited elements in financial transactions.

◻ It attempts to establish financial system based on the principles of Shari’ah.

◻ Nevertheless, in this effort, there are challenges in coming up with the financial system model and products that would truly reflect its spirit and comply with the rules of Shari’ah while at the same time able to fulfill the needs of society.

◻ The role of Shari’ah Scholars is very important to do do ijtihad in order to settle juristic positions with regard to certain issues arising in commercial and financial matters and to do innovation in financial market.

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ISRA األكادیمیة العالمیة للبحوث الشرعیةInternational Syariah Research Academy for Islamic Finance

SHARI’AH AND THE FOUNDATIONS OF ISLAMIC

FINANCE

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I`tiqadiyah(Belief)

`Amaliyah(Dealings)

Akhlaqiah(Morality)

Ibadah(Human with Creator)

Muamalah(Human with human)

Economics / Finance

Issues in Islamic finance

Islam & Components of Shari’ah

Family Law Criminal Law Politics

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Shari’ah and Fiqh

Shariah FiqhShari’ah is revealed /Divine Fiqh is constructed from raw materials

which are given and revealedShariah is given, ready made and unchanging/fixed

Fiqh is not given, not ready made and open for changes/flexible

Shari’ah provides guiding principles in general terms

Fiqh is derived from Shariah principles through human interpretation and reasoning

Shariah is wide and encompassing various branches of Islam

Fiqh is details/specific rulings on human actions

SOURCES OF ISLAMIC LAW

Primary Sources:❑ Qur’an❑ Sunnah:❑ Sayings (Sunnah Qawliyyah)❑ Practices (Sunnah Fi’liyyah)❑ Tacit Approvals

(Sunnah Taqririyyah)

❑ Ijma’ (Consensus of Opinion)

❑ Qiyas (Analogical deductions)

Secondary Sources:

❑ Juristic preference (Istihsan)

❑ Presumption of continuity (Istishab)

❑ Custom (Urf)

❑ Consideration of public interest

(Masalih al-Mursalah)

❑ Blocking the means (Sadd al-Dharai’)

❑ Practice of the people of al-Madinah

(‘Amal ahl al-Madinah).


IJTIHAD IN ISLAMIC FINANCE: MEANING

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What is Ijtihad?

◻ Literal: “Tremendous exertion; great striving; expending maximum effort”

◻ Technical: “Applying maximum effort, with due process, to ascertain the law of Shari’ah by one who is competent to do so”

◻ Al-Shirazi → Ijtihad: “the exertion to the utmost and the full exercise of one’s capacity in arriving at a legal value”.

◻ Ijtihad is not a source of law. Instead it is an aptitude, process, instrument or methodology of interpretation to ascertain certain law on human action.

◻ Its legitimacy is established by hadith of Mu ‘adh ibn Jabal

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Various Forms of Ijtihad

◻ Ijtihad in Islamic law covers:

⬜ Fatwas (legal opinion of Juristconsults),

⬜ Qada’ (judicial judgment of the court) and

⬜ Fiqh (academy writings of jurist and scholars). They are interpretative in character.

◻ Interpretation renders Islamic law (Fiqh, Fatwa and Qada’ ) ‘plural’.

◻ Interpretation is undertaken by qualified jurist, scholars, jurisconsults and judges as the case may be.

Requirements in the Ijtihad

◻ Ijtihad is an endeavor of qualified jurist to ascertain Shariah ruling on a legal issue through utmost intellectual exertion.

◻ Interpretation could be null and void if the effort does not satisfy the academic investigation standard.

⬜ Negligence and non-professional conduct of interpreter.

◻ Involves the analytical study of texts with a view to infer principles, rules & precedents for application to new situations⬜ Professional Requirements: the Mujtahid must have the capacity

in term of knowledge and expertise n understanding the sources of Shariah and society contexts

⬜ Ethical requirements: the Mujtahid must observe the ethics of deriving law from the sources and the ethics of disagreement

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The result of the exercise of

opinion is always “right” with

respect to ijtihad

A scholar can be ‘right’ in his professional

conduct as a scholar without necessarily being ‘right’ in his

conclusions.

إذا حكم الحاكم فاجتھد ثم أصاب فلھ أجران وإذا حكم فاجتھد ثم أخطأ فلھ

أجرا“ If a judge makes the right decision through

ijtihad, he shall be doubly compensated. However, if

he err, he shall be compensated once”.


IJTIHAD IN ISLAMIC FINANCE: GUIDELINES

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©Copyrights reserved Amanie 2006 14

Ijtihad: Formulation Of Legal Rulings In Islamic Law

Shari`ah(Qur’an and Sunnah)

Decisive texts Non-decisive texts

Islamic Law

The primary sources

Secondary sources

Applied directly as legal rulings

(hukm shari`i)

Undergo interpretation (ijtihad) according to recognised methodology (usul al fiqh)

Legal rulings(hukm fiqhi)

Ijtihad Decision –

Making

1. Understanding

the Texts (nusus)

2. Comprehending

the modern financial practices

Understanding the context of

Muslim Society

1. Understanding the texts (nusus) and current practices of banking and finance

2. Understanding the Objective of Shari’ah (Maqasid al-Shari’ah)

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2. Understanding the Objective of Shari’ah (Maqasid al-Shari’ah) (Cont’d)

3. Understanding the Differences of Opinions (ikhtilaf) and its Ethics (Adab al-ikhtilaf)

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◻

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Sources of Differences in Ijtihad

◻ Al-Tantawi identify six factors for differences in juristic views:

1) Distinctive interpretations of the meaning and intent of some quranic texts;

2) Distinctive interpretations of the meaning of hadith;

3) Disagreement on the legal weight of fatwas from companions;

4) Disparities in understanding hikmah (wisdom) behind laws, their ‘ilal (causes) and maqasid (purposes);

5) Differences of environment and customs;

6) Different views in the way to harmonize apparently contradictory legal texts or make preference (tarjih)

Ethics of Disagreement (Adab al-ikhtilaf)

◻ Ethics of Disagreement:⬜ Toleration is important. The differences should be

faced in a positive way that would open reconciliation and convergence.

⬜ This is because differences is a rahmah that offers wider choice to different segments of the society in different time or place.

⬜ Negative attitude to the differences lead irreconcilable opinions and untolerable understanding and conflict in society.

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4. Exercising Ijtihad: Taking a Moderate Approach in Decision Making Process

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Faktors for al-tadyiq wa al-tashaddud

Fanaticism towards a particular

mazhab, views or scholars

Depending on the literal

meaning of the text (al-Qur’an and Sunnah)

without referring to its

objectives (maqasid).

Unnecessarily propagating the usage of sadd

al-dharai’i (blocking the

means to evil) in disputed issues

The concept of “al-yusr” (choosing the simple and accurate decision):

“And We have sent you (O Muhammad SAW) not but as a mercy for the 'Alamîn (mankind, jin and all that exists)” Al-Anbiya’: 107

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It is important for all scholars to understand the true meaning and spirit of

ijtihad…

Excessive utilisation of the principle of maslahah and darurah which might lead to misusing these two

principles.

Choosing the facility (tatabbu’ al-rukhas) and taking the easiest view of the mazahib (al-talfiq bayn al-

mazahib).

Finding legal devices (al-tahayul al-fiqhiyyah) in order to justify certain rulings.

◻ Moderation: taking a middle bay between the two extremes (Tashaddud vs Tasahhul)

◻ Al-Shatibi in his al-Muwafaqat (5/276) emphasised the importance of moderation when he says:

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المفتي البالغ ذروة الدرجة ھو الذي یحمل الناس على المعھود الوسط فیما یلیق بالجمھور؛ فال یذھب بھم مذھب الشدة، وال یمیل

.بھم إلى طرف االنحالل

Guidelines for al-wasatiyyah in Ijtihad

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✓ It is important for the Shari’ah scholars to follow the Qa’idah al-wasatiyyah in producing ijtihadi rulings

✓ It is important for the Shari’ah scholars to study and understand the suitable Shari’ah Principles to be applied in Islamic finance products structuring as well as understanding the real situations and market needs

✓ The Shari’ah Decisions should not be limited to rulings and laws (ahkam), but also take into consideration all maqasid aspects to ensure the decisions is in line with the Qaidah “jalb al-masalaih wa dar’ al-mafasid”.


IJTIHAD AND ISLAMIC FINANCE PRODUCT

STRUCTURING

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Islamic Finance is developed based on the rules of permissibility and innovation…

◻ Original rule of permissibility: ▪ Initial legal ruling in commercial contract (mu’amalat) is

permissibility

▪ Contrary to acts of devotion (Ibadat).

▪ Every contract is considered lawful and acceptable if no principle of shari’ah is violated.

◻ Encouragement for Innovation:▪ Given the permissibility principle, Islamic commercial law (fiqh)

can evolve within the boundaries set by Shari’ah

▪ The body of Islamic commercial law has expanded through ijtihad

▪ Open a very wide door for further innovations.

▪ Shari’ah provides guiding principles that cannot be violated in making new laws (fiqh)

▪ In this regard, in Islamic Law—Shariah and fiqh reinforce each-other to achieve welfare/benefit of people (maslahah)

Islamic Finance is developed on the basis of Shariah principles, observing its rulings, and aims to achieve its objectives …

1. BASIS:

2. PRACTICE:

3. GOAL:

• Adhering the principles

• Observing the pillars of Contract (‘Aqad)

• Maqasid Shari’ah Realization

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No Riba

No Gharar

No Maysir

No Dhara

r

No Dzulm

No Hara

m

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▪▪▪▪▪▪▪▪▪▪

▪

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Don'ts Do’s

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Rukun (Pillars)

Sharat(Conditions)

TRANSACTION

Religion

Life

Intelect

Posterity

Wealth

Preservation and Promotion

وما ارسلناك إال رحمة للعالمین“And We have sent you (O Muhammad) not but a mercy to the whole

universe” (Al-Ambiya:107)

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•

•

Islamic Finance is developed on the basis of Conventional Finance by modifying the ‘un-islamic’ structure to meet the requirement of Shari’ah...

EXPECTATION: Developing genuine Islamic finance framework and attempt to develop

financial System and practices based on the foundations of Shari’

ah (not capitalist foundations)

MAINSTREAM APPROACH: Accepting conventional finance framework and attempt to do

Islamization in product structuring Working within the paradigm of

conventional finance with Shari’ah compliance framework

Shariah Guidelines

Ijtihad of Scholars

Modern Finance

Practices

Modified Shariah

ContractsTo suit current

need and modern finance practices a). Removing undesirable

prohibited elements in Contemporary financial products

b). Adapting traditional contracts to contemporary transaction to meet Shari’ah Compliant requirements

SHARIAH APPROVED CONTRACTS

IFI RISK RETURN EXPECTATIONS CUSTOMER EXPECTATIONS

REGULATORY ENVIRONMENT

PRODUCT REQUIREMEN

TS

CONTRACT REQUIREMENTS

PRODUCTFUNDING

REQUIREMENTS

REGULATORY REQUIREMENTS

Ex-Ante

Ex-Post

36IFI’s

• Identify the need• Identify the appropriate

contract• Structuring the

mechanism

• Supervising product applications in the market

• Ensuring the bank follow the mechanism approved by shari’ah board

• Preparing annual report


CHALLENGES IN IJTIHAD IN ISLAMIC FINANCE

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◻ Conventional finance is operated on the contracts which are:

⬜ In compliance with Shari’ah (hence can be accepted and adopted)

⬜ Non incompliance with Shariah (hence should be replaced or modified)

◻ While it is believed that Islamic law is the best law to govern Islamic finance transactions.

◻ However,

⬜ Islamic Law is underdeveloped, not codified and restricted in most jurisdictions.

⬜ Islamic law is a non-national law; cannot satisfy as choice of law in contract.

⬜ Most Muslim countries have Western legal systems.

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•

•

3. The contract beside having a legally valid structure, should also ethically sound, socially responsible, and on the basis of public interest (maslahah)…

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āṣ

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Shari’ah Compliance

Maqasid Realization

4. Clear and transparent procedures in decision-making

◻ Islamic finance is an open enterprise.

◻ It is not only the interest or responsibility of Shari’ah scholars but also the ummah at large.

◻ Therefore, it is important to ensure the procedures for decision-making by Shari’ah scholars should be clear and transparent.

◻ This is important in order to preserve the integrity of the Shari’ah scholars committee and the decisions made.

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•Maslahah vs mafsadah

•Ends & Means

Fiqh al-Maqasid

•Context•Reality

Fiqh al-Waqi’ •Priority

•Short vs Long Term analysis

Fiqh Awlawiyyat

•Rigorous discussion/meeting

•Group fatwa

Ijtihad Jama’i

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5. For a better Shari’ah decision making in Islamic finance . . .

Moving forward: Ijtihad Jama’i

Ijtihad Jama’i

Institutional/organizational Ijtihad/fatwa

Fatwa Setting Bodies

Authorities Appointed by Government for fatwa/ijtihad

Leading Shariah Authorities for fatwas in Islamic Finance:

❑ Fatwas of SAC-BNM and SC

❑ Int’l Fiqh Academy –OIC; (MF) & Rabitah Alam Islami

❑ Shariah Standard-AAOIFI (AAOIFI)

❑ Fatwas-Kuwait Finance House (KFH)

❑ Fatwas-Dallah al-Baraka (DAB)

❑ Fatwas-Dubai Islamic Bank (DIB)


FATWA COMPARISON IN ISLAMIC FINANCE

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Selected Shariah Principles

Musharakah

mutanaqisah

Wa’d mulzim

Kafalah bi al-ajr

Tawarruq

Ta‘wid

Bay’ al-inah

Ibra’

ISRA has conducted a research to measure the degree of fatwa similarities and differences across the region of Southeast Asia and Middle East.

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100% Fatwa Similarities

MUSHARAKAH MUTANAQISAHFatwas BNM/SC

-SACAAOIFI

DAB

MF KFH DIB

Permissible

Impermissible

Permissible with conditions

X X X X X X

Justification Agreed unanimously

Similarities 100%

Dissimilarities

0%

Musharakah mutanaqisahAll fatwa-issuing bodies agree on the permissibility of musharakah mutanaqisah with some conditions that must be completely met.

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WA’D MULZIM

FATWAS SAC AAOIFI

DAB MF KFH DIB

Permissible

Impermissible


X X X X X X

Justification Promise creates obligation

Similarities 0%

Dissimilarities 0%

Wa’d al-mulzim: None of the fatwa-issuing bodies prohibits the implementation of binding promise in Islamic banking. They are of the opinion that the promise becomes binding if it creates an obligation.


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KAFALAH BI AL-AJR

Fatwas SAC AAOIFI DAB MF KFH DIB

Permissible X

Impermissible

Permissible with condition

X X X X X

Justification Maslahah & Madarah

Similarities 100%

Dissimilarities

0%

Kafalah bi al-ajrBNM allows charging a fee for the guarantee without stating any condition that the fee should not exceed the actual expenses.Other fatwa-issuing bodies (KFH, DAB,AAOIFI,Majma’ al-Fiqh al-Islami, and DIB) also allow the guarantor to stipulate a certain fee and then acknowledge it as income on the condition that the fee should not exceed the actual expenses.


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TAWARRUQ

Fatwas SAC

AAOIFI

DAB MF KFH DIB

Permissible X

Impermissible


Justification Need and classical juristic view

Similarities 100%

Dissimilarities 0%

TawarruqFive fatwa-issuing bodies, namely: BNM, AAOIFI, DAB, DIB, and KFH, resolved that tawarruq is permissible. This reflects the degree of similarities of SAC BNM with the GCC is 100%.


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TA‘WID

Fatwas SAC AAOIFI

DAB MF KFH

DIB

Permissible

Impermissible


X

Similarities 100%

Dissimilarities 0%

Ta’widAll fatwa-issuing bodies in both Malaysia and the Middle East agreed on the permissibility of ta’wid. They resolved that Islamic banks may impose compensation on defaulters who fail to meet their obligations to pay back the financing amount as agreed in the contract. However, the amount of ta’wid should not exceed the actual loss suffered by the financier.


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BAY’ AL-INAH

Fatwas SAC AAOIFI DAB MF KFH DIB

Permissible

Impermissible X X X X X


X

Justification Shafi’I’s view

Hilah to riba

Similarities 0%

Dissimilarities 99.9%

Inah contractOnly SAC BNM allows Bay’ inah and hence the degree of differences with the GCC is 100%.

100% Fatwa Differences

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IBRA’

Fatwas SAC AAOIFI DAB

MF

KFH

DIB

Permissible X

Impermissible X X X X X


Justification Maslahah

Stipulation is tantamount to riba

Similarities 0%

Dissimilarities 99.9%

Stipulation of Ibra’ in the ContractSAC BNM Justification for ibra’ clause in Islamic financing agreements for customers who make early settlement is justified on the basis of public interest (maslahah). Such a clause may remove confusion on the issue of uncertainty in price (gharar). In contrast, all fatwa-issuing bodies in the Middle East do not allow the stipulation of ibra’ up-front in the contract as it will be tantamount to riba. Early settlement must come solely from the willingness of the customer without any oral or written condition stipulated upfront. In addition, the customer should not request for a certain amount to be deducted on account of his early settlement of the debt.

100% Fatwa Differences

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Equal Fatwa Similarities and Differences

HIBAH ON DEPOSIT


MF KFH

DIB

Permissible

Impermissible X X X


X X X

Justification It is voluntary One with responsibility deserves profit

Similarities 50%

Dissimilarities

50%

Hibah on bank depositBNM, AAOIFI and DAB, argue for its permissibility with condition there must be no pre-existing agreement and nor any required conditions, the distribution should not become customary, it is not an obligation on the bank, and the customers have no right to ask for it, the distributed amounts should be taken from the profit of the shareholders with the approval of the management board as their representative. The opponents of this Shari’ah principle are KFH and DIB. The latter (DIB) argues that the one who bears responsibility is the one who deserves the profit, based on the maxim “al-kharaj bi al-daman” ([the right to] revenue goes with liability). Since the customer does not bear any liability for loss, the bank should not give hibah on the customer’s deposit

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HIBAH IN INVESTMENT DEPOSIT

Fatwas SAC AAOIFI DAB MF KFH

DIB

Permissible

Impermissible X - X - - -


Similarities 20%

Dissimilarities -

Hibah in Mudarabah ContractBNM and DAB resolved that hibah on a mudarabah contract is impermissible with justification that the mudarabah contract is based on profit sharing. If the practice of offering hibah is allowed, it can affect the very nature of the mudarabah contract.The other fatwa-issuing bodies, namely: AAOIFI, MF, KFH and DIB, have not commented on this issue.


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Gharraamah on debt


MF KFH

DIB

Permissible

Impermissible X X


X X X X

Justification Not taken as income

Similarities 60%

Dissimilarities 40%

Gharamah (penalty) on DebtBNM, AAOIFI, DAB and KFH allow gharamah provided it Is not acknowledged as income, and it must be channelled to charity. Moreover, the bank may not utilize it to pay any tax imposed on its asset as that will protect the assets.In contrast, MF and DIB view that imposing gharaamah (penalty) on debt is not allowed. The practice is tantamount to ribā.


Findings Summary

➢ There is 100% similarity of fatwa resolved by the respected fatwa-issuing bodies in GCC countries and Malaysia on five of the twelve Shariah principles, namely wa‘d al-mulzim, kafalah bi al-ajr, tawarruq, musharakah mutanaqisah, ta’wid.

➢ There is 100% difference in fatwa resolved by the respected fatwa-issuing bodies in the Middle East and Malaysia in relation to three Shari’ah principles, namely: ‘inah, and stipulation of ibra’ in the contract.

➢ There is an equal degree of similarities and differences between SAC BNM fatwas and other fatwa body’s institutions with regard to hibah on bank deposit, hibah in a mudarabah, and gharamah on debt.

➢ It is undeniable that disagreement of fatwas is an inevitable phenomenon that has been present since the time of the Prophet (peace be upon him).

➢ However, this may not be desirable for Islamic banks as commercial institutions that need certainty and consistency to run their businesses smoothly. Therefore, harmonisation or standardization might be attempted if it really brings benefit to the industry.

Conclusion

◻ Islamic law is dynamic due to the continuous interaction between fiqh and Shari`ah

◻ Ijtihad is the important tool need to be utilise to explore the dynamicity of Islamic law.

◻ Islamic finance is developed on the foundations of Shari’ah by observing the rules of contracts and pursuing the objectives of Shariah.

◻ Differences in Islamic finance theory and practices is normal due to ijtihadi process.

◻ The differences should be respected, as long as these differences are grounded by valid evidence, produced by capable personnel, done according to the right methodology.

- Wallahu a’lam -

THE METHODOLOGY OF IJTIHAD IN ISLAMIC FINANCEicib.riphah.edu.pk/sites/default/files/files/Dr Akram...

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