Did you know what is usul al-fiqh and its role in Islamic finance? If you did not, we will briefly explain it to you. Islamic law comes up with five legal matrixes: obligation, favorable, permissible, detestable, and prohibition. Muslims are subject to accord their conscious activities, including financial transactions, to these matrixes. With the rapid growth of Islamic finance investment products, we have seen scholars frequently discuss and argue about Shariah-compliant matters. Often, the discussions result in different opinions of the same Islamic finance product, such as tawarruq. How come it occurs? The answer this question, you should know the role of usul al-fiqh.
What is Usul al-Fiqh all about?
The field of usul al-fiqh includes theoretical discussions of the essence of Islamic law. It also links to reason and ethics, and its derivations of law from the Sharia sources. Unanimous sharia sources are the Quran, the Prophet’s Sunnah (the Prophet Muhammad’s practise as conveyed by his words, actions, and tacit approbation), ijma’ (scholarly consensus), and qiyas (analogical deductions from these three).
The basic example of the use of usul al-fiqh in Islamic Finance is the permissibility of sale and prohibition of riba. This law’s basis is the Quran’s chapter 2 verse 275. In the verse, Arabic people understand that the word “ahalla” indicates permissibility and “harrama” means to prohibit.
2 Apparent Roles of Usul al-Fiqh in Islamic Finance
First, it is an Ijtihad Method for the Sharia Advisory Body to figure out the legal form of a particular Islamic finance product. Before the products can be accessible publicly, they must comply with sharia principles in finance. For example, usul al-Fiqh become a method to justify the permissibility of Islamic finance products or their contractual stipulations. A great practical example of it is that AAOIFI view of rebate in financing facility must be free in the master agreement based on preventing gharar (uncertainty). On the other hand, Malaysian views that rebate should be included in the agreement to prevent dispute. This is based on maslahah (public interest).
Secondly, usul al-Fiqh helps in observing the Maqasid Syariah (The Ultimate Objective of Sharia) of offered products in Islamic Financial Institution (IFI). Islamic Law comes not only to prevent or allow a human being to conduct particular actions. There are several pearls of wisdom beyond the law and they represent the objectives of imposing laws. In the Islamic finance context, Sharia Bodies who view the prohibition of organized tawarruq for example observed the maqasid shariah of it. They opine that tawarruq is an emerging tool for people need in urgent liquidity. Hence, if organized-tawarruq is practiced massively, its nature of the apparent transfer of money from an Islamic bank to the customer will be tantamount to a conventional loan consisting of interest (riba).
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