1. Definition Of Shari’a

The literal meaning of Shari’a is “way” or “path to the water source”; technically, it refers to the laws contained in or derived from The Qur’an and Sunnah of the Prophet Muhamad and embodies all aspects of Islamic faith including beliefs and practices.

In order to understand how Shari’a law operates it is necessary to have basic knowledge of the structure of Islam, and some of the main concepts and terms involved.

2. Primary sources of Shari’a

Shari’a, though understood narrowly by some as Islamic law, is in reality a complete and  comprehensive code of behavior, governing the moral, ethical, spiritual, social as well as legal dimensions of a Muslim’s private and public dealings.

Shari’a rulings are taken from the Holly Quran − the main Islamic text − and the Sunnah, the traditions and practices of the Prophet Mohamed.

Hadith is the record of the Sunnah. The name of the main Islamic denomination, Sunni, is derived from the word Sunnah, which comprises nearly 85 per cent of Muslims worldwide and has four schools of thought:

1. Hanifi
2. Maliki
3. Shafi’i
4. Hanbali.

3. Secondary sources of Shari’a

Where the analysis of legal issues is not covered precisely in the Quran and the Hadith, the following secondary sources are the basis of particular rulings:

• Ijma : consensus of scholars on a particular issue.
• Qiyas : analogical deduction from rulings already derived from the Quran, Sunnah and ijma.
• Ijtihad : rational independent deduction by qualified Islamic scholars.
• Urf : common practice and custom.

The different denominations may not agree on the applicability of all these sources, and the different schools within these denominations may interpret an issue differently based upon these sources, and it is from these differences that disparities in opinion occur when considering Islamic financial products.

The development of new financial products clearly creates situations where there are no direct references from primary sources, therefore, the acceptability of ijma, qiyas and ijtihad is of great importance to Shari’a board members in deciding whether new financial products can be Shari’a-compliant or not.

4. Fiqh al-muamalat

Fiqh a- muamalat are laws regarding relationships between human beings which include economic transactions. Many of these were established centuries ago. During Islam’s golden age, the Islamic world developed the most sophisticated system of trade and currencies the world had yet seen. The processes created during this period provide a broad basis from which to construct and extrapolate rules that can be applied to modern day financial transactions.

5. Core principles

Shari’a as applied to finance is based around two core concepts :

1. The charging of interest, commonly denoted as riba, is forbidden.

2. Activities that are not halal (permissible) in Islam are therefore not permissible to be involved in economic transactions, whether that be the granting of loans for haram (unlawful) activities or investing in companies that conduct unlawful activities. The general principle of permissibility of economic activities in Shari’a is that every economic activity is permissible unless explicitly prohibited.

The screening of investments and loans to ensure that they are not for businesses or projects that operate in Shari’a unlawful activities is also a complex and, to an extent, subjective process. Activities that are haram, or unlawful under Shari’a, but are legal under western norms are generally those activities which are also socially unacceptable to some degree or another in the West. The most obvious of these commercial activities would be pornography, alcohol and armaments. In addition to these are the food related haram activities, such as the rearing and manufacture of pork-based products.

Finally, there are also activities which are haram because they involve :

1. gharar : refers to excessive uncertainty of outcome or subject matter or date of delivery of goods/asset under contract.

2. Qimar (or maysir) : refers to gambling or games of chance, and clearly many forms of speculative business activity can come under this heading as well.

Ultimately, whether Shari’a-compliant financial products are created or not comes down to the decisions of the financial institutions’ Shari’a boards who examine the products and decide whether they are legitimate or not from the Shari’a perspective. Their opinions may differ due to nuances of
interpretation of various sources and school of thought they follow.