The Most Important 4 Principles of Islamic Finance

The Most Important 4 Principles of Islamic Finance

Islamic Finance is blossoming in this world from time to time. There are strong Islamic inter-bank money markets and Islamic capital markets at work. Islamic Finance had been established to avoid riba’, gharar, and maysir. In this article, we will look into the four principles of Islamic Finance. The following are the four principles of Islamic Finance:

1. The Main Sources of Islamic Finance

First and foremost, we will look into four main sources of Islamic Finance:

1. Quran – Quran is the Book containing Allah’s relation to Prophet saw transmitted to us. The Quran is the very word of Allah. It has absolute authority in deciding the legality of all legal obligations.

2. Sunnah – The Hadith is literally a method, story, narration or a report. Basically, it is all the sayings and daily practice of the Prophet saw. The scholars unanimously agree that Sunnah is a source of Shariah.

3. Ijma- is a secondary source of the Islamic law that refers to rulings obtained from the Quran and Sunnah via human reasoning and has a binding impact on all Muslims. It refers to the act of deciding or agreeing on something. Ijma literally means “unanimous agreement” among jurists after the prophet’s (s.a.w.) death.

4. Qiyas- literally means “to measure or determine the length, weight, or quality of anything by means of something else.” Technically, Muslim jurists define qiyas as applying an original hukm or ruling established in a previous case to a new case on which there is no law before because the two cases share a common effective cause (illah).

2. Avoidance of Riba’

Riba’ is any excess compensation that is oppressive. Islam prohibits riba, as stated clearly in the Quran. Some people argue about whether interest is riba or hot. This, however, has been settled by a decision reached during a number of international fuqaha conferences. The fuqaha have made it clear that interest is riba. As a result, traditional banking practices are incompatible with Islamic beliefs, which strongly prohibit riba. Among the verses in the Quran that mention the prohibition of riba is:

"… that is because they say: 'Trade is like usury', but Allah has permitted trade and forbidden usury (riba)" (Al-Baqara: 275)

3. Avoidance of Gharar

Next, Islam prohibits excessive gharar. Gharar is any transaction that is uncertain due to a lack of ignorance. The hadith provided Some of the classic examples of gharar. These include the sale of fish in the sea, birds in the sky, an unborn calf in its mother’s womb, the semen and unfertilized eggs of camels, unripened fruits on the tree, etc.

4. Avoidance of Maysir

Last not least, Maysir means gambling or speculating. For example, Islam prohibits us to involve in casinos or any other game chance. Gambling is referred to as maysir because it involves the possibility of earning money or gaining something without exerting any effort. This is one of the restrictions of gambling. The prohibition of gambling or maysir is mentioned in the Quran:

 "They will ask thee about intoxicants and games of chance; in both, there is great evil as well as some benefit for man; but the evil which they cause is greater than the benefit which they bring" (Al-Baqarah: 219)

The Concept of Financial and Social Justice

Without financial justice, Islamic Finance products cannot operate in a Shariah-compliant way. Islamic finance differs from conventional finance not only in terms of the background it sees in corporate performance; But also in terms of the way noble principles guide Islamic finance’s complete operations and position. The principles of Shariah are expressed not only in the details of its transactions but also in the scope of its function in implementing the Maqasid al-Shariah (Shariah objectives).

According to Ibn Ashur, Maqasid al-Shariah (Shariah objectives) is a term that refers to maintaining order, achieving benefit, preventing harm or corruption, establishing equality among people, making the law revered, obeyed, and effective, as well as enabling the ummah to become powerful, respected, and confident. As a result, Maqasid al-Shariah involves a serious responsibility of each individual and organisation to achieve justice and social welfare. Therefore, this strong foundation has been the main basis of Islamic Finance.

While conventional finance looks forward to profiting through interest where the beneficiary becomes liable for any risk, it paves the way for sharing net profit/ and the risk involved in a proportional manner between the lender and the beneficiary. In addition, Islamic Finance also promotes social justice. Islam permits a free-market economy in which supply and demand are determined by the market. It also directs the function of the market mechanism by enacting certain rules and ethics that promote social justice. Social justice is the balanced distribution of wealth that helps to alleviate the imbalance of welfare. The Islamic rules in promoting financial and social justice such as requiring zakat, prohibition of riba (interest), and encouraging shared risk.

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