Thursday, 7 July 2016

Sharia: Definition and Significance in the Modern World

Sharīʿa[1]Roots and Meaning of the Word

Sharīʿa in Islam has a broad and encompassing meaning.[2]  The medieval Muslim scholar al-Ṭabarī[3], in his Commentary on the Quran, interpreted the word sharia simply as ‘the religion’ and that it encompasses commandments and guidance to the path that was set down by God for believers[4].  The root of the word sharīʿa is sharʿ, which means ‘the path that leads to the spring’, in Arabic.[5]  In the Quran it is mentioned in the following verse: “Now We have set you [Muhammad] on a clear religious path, so follow it. Do not follow the desires of those who lack [true] knowledge”.[6]  It is the path that God has laid out for believers to follow or, in other words, it is 'the way to faithfulness’.[7] However, it is not merely a set of laws.  In the theoretical sense, it is an entire social, economic, cultural and intellectual system.[8]

Sharīʿa as Law

Sharīʿa is a broad, over-arching term that covers many areas of Islam and can be conceptualised in terms of four categories and they are: belief (or creed), morals, ʿibādāt (rituals) and law.[9]    It encompasses the commandments that must be followed and the prohibitions that need to be avoided by the believing Muslim. 

Commandments in Islam are not all strictly legal, in the modern Western sense.  Many commandments of the sharīʿa are designed to instruct Muslims on their moral and religious conduct that effectively show Muslims how to ‘be and remain Muslim’.[10]  For example, acts like being good to your neighbour or being kind to your parents are considered acts of servitude to God that are specifically outlined in the sharīʿa. These moral instructions are numerous in the ḥadīth literature.  For example, the prophet Muḥammad is reported to have said:

Don't nurse malice against one another, don't nurse aversion against one another and don't be inquisitive about one another and don't outbid one another (with a view to raising the price) and be fellow-brothers and servants of Allah”.[11]

Contrary to popular belief[12] only a small portion of the sharīʿa deals with penal law.  On the other hand, a significant portion of the Sharīʿa deals with ʿibādāt, or rituals of worship.  This is can be seen by looking at how much emphasis classical Islamic scholars gave to the issue of criminal law and punishment.  In the classical reference book of jurisprudence, ʿUmdah fil-Fiqh[13], written by the Palestinian scholar ibn Qudāmah[14], 123 of the book’s 346 pages are devoted to rituals such as purification, prayer and fasting while only nine pages are devoted to criminal law. Although it is the last category that gets the most emphasis in Western discourse, it is the area that is given the least amount of authorship among fiqh scholars.  An analysis of the Qurʾān yields similar results - less than 700 of the Qurʾān’s 6000 verses deal directly with legislation.[15]

The creed, or belief, aspect of Sharīʿa outlines what a Muslim must believe in order to be considered a Muslim.  This includes belief in the oneness of God, his angels, books, prophets, judgement day and destiny.   The legal aspect of Sharīʿa covers both transactional law of contracts and.  The muʿāmalāt part of fiqh deals with law of transactions.  As with many different parts of the Sharīʿa, this area also heavily focuses on morals and how a trader should and should not behave, from a moral perspective.

Sharīʿa and Fiqh

It is easy to confuse the difference between sharīʿa, the multifaceted system described above, and fiqh, the collective body of jurisprudential rulings of Islamic scholars.[16]  Fiqh is an attempt to interpret the Sharīʿa to produce rulings that can be used to solve people's day-to-day problems.  It is a human effort that attempts to interpret what Muslims believe to be God's divine will and, because it is a human effort, fiqh can evolve and change over time[17].  Muslims believe that the Sharīʿa is infallible but that human effort is mortal and prone to mistakes, although the closer views converge towards a consensus, the less likely it is that mistakes occur, and the closer mankind gets to God's will.  The prophet Muhammad is reported to have said: “My community shall never agree on a falsehood”.[18]

Contemporary applications of Sharīʿa

Sharīʿa, as an entire belief, moral, ritual and legal system is no longer fully present today.  Western colonisation of Muslim lands in the 20th centuries effectively relegated it to the personal sphere.[19]  Although many Muslim-majority countries state that Islam is the religion of state, these countries are effectively secular modern nation states.  Even countries that claim to fully implement Sharīʿa such as Saudi Arabia and Iran, only implement parts of it.  The economic system of Sharīʿa for example, is absent even in these two countries where the modern banking system prevails.[20]

The upheaval of Sharīʿa from many Muslim countries has led to the formation of groups that have called for its return.  The main reason for this is that the ideals of justice and equality called for in the Sharīʿa are seen as solution to the corruption of Arab regimes.[21]  For example, corruption in the Palestinian Authority is believed to be one of the main reasons that Hamas was elected to government in the Gaza strip in 2006.[22]  In the few situations when free democratic elections have been permitted in Muslim countries, Islamic parties have been the major victors.[23]   Some of the groups that are calling for the return of sharīʿa have been more moderate, like Muslim brotherhood in Egypt and the Ennahda party in Tunisia, while others have been extreme in both their views and methods, like Al Qaeda and the Islamic state (ISIS).

[1] This entry was an assignment I wrote for an Islamic Studies paper I did as part of a masters program.
[2]Saeed A Khan, 'Sharia Law, Islamophobia and the U.S. Constitution: New Tectonic Plates of the Culture Wars', U. Md. LJ Race, Religion, Gender & Class, 12 (2012), pp. 133.
[3] Died 923 AH in Baghdad.
[4] al-Ṭabarī, 'The Commentary on the Quran'(Islamic Library).
[5] Tariq Ramadan, Western Muslims and the Future of Islam.  (Oxford University Press, USA, 2004), p. 31.
[6] Surah al-Jāthiyah (Kneeling) 48:15, The Holy Qur'an. Trans. Abdel Haleem M.A.S.,  (Oxford Islamic Studies Online).
[7] Ramadan, p. 37.
[8] Wael B Hallaq, An Introduction to Islamic Law.  (Cambridge University Press, 2009), p. 163.
[9] Mohamed El-Moctar El-Shinqiti, 'The Implementation of Sharia in Free Societies'(Aljazeera, December 2013).
[10] Ramadan, p. 32.
[11] Ṣaḥīḥ Muslim.  (
[12] Scott Shane, 'In Islamic Law, Gingrich Sees a Mortal Threat to U.S.'(The New York Times, December 2011).
[13] Ibn Qudāmah, Al-ʿumdah Fil Fiqh (the Mainstay Concerning Juresprudence). Trans. Muhtar Holland.  (Fort Lauderdale: Al-Baz Publishing Inc., 2010).
[14] Died 620 AH in Damascus.
[15] Seema Kazi, Muslim Law and Women Living under Muslim Laws.  (Syracuse: Syracuse University Press, 1997), p. 161, cited in Maliha Masood, 'Untangling the Complex Web of Islamic Law: Revolutionizing the Sharia', Al Nakhlah, 4 (2003).
[16] Ibid. p. 3.
[17] Ramadan, p. 99.
[18] Hallaq, p. 20.
[19] Wael B Hallaq, Sharia: Theory, Practice, Transformations.  (Cambridge: Cambridge University Press, 2009), p. 2.
[20] Mohd Daud Bakar, Syed Musa Alhabshi, and Effendy Rahaman, Islamic Banking and Takaful - Products and Services.  (William Press, 2011).
[21] Noah Feldman, After Jihad.  (New York: Farrar, Straus and Giroux, 2003), p. 62.
[22] 'Ḥamās Electoral Campaign Platform (2006)'(Oxford Islamic Studies Online).
[23] Ishtiaq Hossain, 'Arab Spring'(Oxford Islamic Studies Online).


al-Ṭabarī, 'The Commentary on the Quran', Islamic Library, (<> [Accessed 22nd February 2016].
Bakar, Mohd Daud, Syed Musa Alhabshi, and Effendy Rahaman, Islamic Banking and Takaful - Products and Services, Cima Diploma in Islamic Finance (William Press, 2011).
El-Shinqiti, Mohamed El-Moctar, 'The Implementation of Sharia in Free Societies', Aljazeera, (December 2013) <> [Accessed 22nd Febuary 2016].
Feldman, Noah, After Jihad (New York: Farrar, Straus and Giroux, 2003).
Hallaq, Wael B, An Introduction to Islamic Law (Cambridge University Press, 2009).
———, Sharia: Theory, Practice, Transformations (Cambridge: Cambridge University Press, 2009).
'Ḥamās Electoral Campaign Platform (2006)', Oxford Islamic Studies Online, (<> [Accessed 25th February 2016].
The Holy Qur'an. Trans. Abdel Haleem M.A.S. (Oxford Islamic Studies Online).
Hossain, Ishtiaq, 'Arab Spring', Oxford Islamic Studies Online, (<> [Accessed 25th February 2016].
Ibn Qudāmah, Al-ʿumdah Fil Fiqh (the Mainstay Concerning Juresprudence). Trans. Muhtar Holland (Fort Lauderdale: Al-Baz Publishing Inc., 2010).
Khan, Saeed A, 'Sharia Law, Islamophobia and the U.S. Constitution: New Tectonic Plates of the Culture Wars', U. Md. LJ Race, Religion, Gender & Class, 12 (2012), pp. 123-39.
Masood, Maliha, 'Untangling the Complex Web of Islamic Law: Revolutionizing the Sharia', Al Nakhlah, 4 (2003), 1-7.
Ramadan, Tariq, Western Muslims and the Future of Islam (Oxford University Press, USA, 2004).
Ṣaḥīḥ Muslim. Vol. 45, Hadith 37. (
Shane, Scott, 'In Islamic Law, Gingrich Sees a Mortal Threat to U.S.', The New York Times, (December 2011) <> [Accessed 22nd February 2016].

Saturday, 12 December 2015

The 5 Pillars of Finance - An Islamic Investment Perspective

Notice that the title isn’t Islamic Finance.  Islamic finance mainly deals with cost-plus (Murabaha) and partnership (Musharaka) arrangements, mainly used by Islamic banks to help finance the purchase of assets like houses and cars. These are forms of finance and not investment.  True Islamic economics is based on investment and not finance.  When applied fully, it acts to promote the welfare and benefit of mankind while at the same time preventing harm (Ahmed, 2011).  It is based on Mudaraba and Musharaka in investment as opposed to finance activities (Yusof & Kan, 2010).  In this post I want to critically analyse the study of conventional finance, from an Islamic Investment perspective.  Although conventional financial studies mainly revolve around earning interest (ribā), there are plenty of good things that can be drawn from conventional finance theory that can be applied in Islamic Investment.

To begin with, I will lay out what I believe conventional finance is all about. There are five main concepts that are the cornerstone of conventional finance: 

1.    Interest as a reference point for investment.
2.    The idea of the time value of money. 
3.    The concept of risk and “risk-free”. 
4.    Annualised rates of return.
5.    Required return.

1.     Interest

Interest is what conventional finance is all about.  It is the sun at the centre of the finance galaxy.  Everything in conventional finance uses interest as its reference point.  In other words, using interest-returns as a ruler is the central idea of finance.  Let me clarify this with an example.  An investment in a company A will give you a return of 5% per annum while depositing your money in the bank will give you an interest return of 6%.  The interest returns are greater than the returns that you would get from company A.  Finance would tell you to deposit your money in the bank to earn the 6 per cent of interest.  This simple example is used in all finance investment decisions.  In fact, bank interest rates are factored in to a lot of the equations used in finance.  Of course Islam is very clear on the prohibition of interest:

O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers. [Quran 2:278]

2.     Time Value of Money

Central to the study of conventional finance is the idea of the time value of money. An example will best illustrate the meaning of this concept.  A bank deposit of $1,000 earning 5% interest per year would give $1,276.28 in 5 years.  So what finance tells you is that a future value of $1,276.28 is worth $1,000 today.  Again this is used to compare different investments to decide which one is the best investment. In other words, investments that take a longer time to give us a return are worth less today, while investments that take less time to provide a return are worth more today.  Although this concept is also associated with interest investments, it has a place in non-interest decision making too.  Instead of using it to compare an investment to a deposit, it can be used to compare two different non-interest-bearing investments, which is actually done in the finance world.  Not all finance decisions are based on comparisons to bank deposits, and it is these parts of conventional finance that have a place in Islamic investment.

3.     The Concept of Risk and “Risk-Free”

A bank will always pay depositor the exact amount of interest quoted. No ifs or buts.  From a conventional finance perspective, this is almost a risk free investment.  The only investment considered less risky is a government bond – which is essentially a loan you give to the government that it promises to pay back with interest. So interest bearing loans are considered as “risk-free” investments.  Normal business investments on the other hand are considered very risky, because they are based on profit sharing which means that the investment might make a profit, but it also might make a big loss.  From an Islamic perspective, no investment is truly risk-free.  The whole concept of no risk is very counter-productive and encourages people to shy away from investing in real projects that benefit the economy and local communities.

4.     Annualised Returns

In finance returns are calculated on an annual basis. For example, if you buy a house today for $500,000 dollars and sell it in five years’ time for $700,000 you would normally calculate your return as = 700,000-500,000 / 500,000 = 40% return on your investment.  In finance returns are quoted as annualised returns. The annualised return for this example would be calculated as 6.96% (there’s a specific equation for this).  What this means is that your $500,000 increased 6.96% yearly over the 5 years.
Annualised returns are very useful because they allow you to compare different investments with different time horizons.  For example, let’s take the example above but with a different time frame and sell price.  Let’s say you sold the house after two years for $600,000.  Calculating your return normally would get = $600,000-$500,000 / 500,000 = 20% return.  The annualised return though is 9.54%.  So in annualised terms, the second investment is a better investment.
Now, the reason conventional finance calculates annualised returns is because they want to be able to compare normal investments to interest earned from bank deposits, which is quoted in annualised rates, and which is affected by how you deposit the money for.  This doesn’t mean that it’s a completely useless concept for the Muslim investor though because a Mulsim investor can use annualised returns to compare Shariah-compliant investments that have different time horizons.

5.     Required Return

Required return is used in the Capital Asset Pricing Model (CAPM).  This is basically an equation used by finance managers in company to decide how much money should come from investors for a particular project.  In any project, the money raised comes in two forms – investment (capital) and debt (from banks).  Finance managers put a cost on each of these sources.  The cost of money that comes from banks in the form of debt is basically the interest rate of the debt.  The cost of capital however, is the required rate of return that investors expect on their investment in the project.  Finance managers then decide on the mix of these two sources, and work out the overall cost of the project using a formula called the Waited Average Cost of Capital (WACC).  This is as much detail as I will get into this process. 
The required return is THE concept that Muslim investors need to pay attention to.  It is the bridge between Islamic Investment and conventional finance and where two have a common ground without any conflict in ethics.

Further thoughts

Finance future returns are calculated very accurately – to one decimal place accuracy. This is because when you deposit your money in the bank you know exactly how much you’re going to get back.  In normal investments, however, you never know how much profit, or even loss, you’re going to earn – so I really don’t see a need to have calculations that are that detailed.  In the end they are predictions, and these can be off by ten or twenty per cent, let alone one or two decimal places!

So in summary, conventional finance has many aspects that are counter-productive, and even destructive to society and the general economies of nations, however there are aspects that can be applied in Islamic investment.  This post has highlighted some of those useful aspects.


Ahmed, H. (2011). Maqasid Al-Shariah and Islamic Financial Products:  A Framework for Assessment. ISRA International Journal of Islamic Finance, 3(1).

Yusof, E. F. E., & Kan, Z. (2010). Appraisal on End Products and Services offered by Islamic Banks from Maqasid Shari'ah Perspective. Retrieved from

Tuesday, 25 August 2015

Why Islamic Investment Should Replace Islamic Finance

Brief Introduction

Islamic finance has helped many Muslims find Shariah compliant funding to finance the purchase of essential assets like homes and cars.  Prior to the creation of Islamic Financial Institutions (IFI’s), Muslims had to either try to get personal loans from friends and family (maybe possible for a car but unlikely for the purchase of a house!), or resort to interest-bearing loans from conventional banks.

Islamic Finance has helped a lot of Muslims. There is no doubt about that.  I am not one of those people that criticise Islamic Banks by equating them to conventional banks.  There is a big difference between the two. In fact this is reminiscent of an argument mentioned in the Quran:

“…That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest” [Quran 2:275].

I do not want to get into this in detail because it isn’t the point of my post and there’s plenty that’s already been written about.  Sheikh Taqi Usmani has an excellent book about this called An Introduction to Islamic Finance.  However, just briefly, I’ll say that Islamic banks share the risk of an investment with their clients buy actually buying the asset, then selling it on to the customers. IFI’s deal with assets, while conventional banks deal with cash. There is a BIG difference between the two.  Again, refer to Sheikh Taqi Usmani book for further info on this topic.

 Criticisms of Islamic Finance

Now that I’ve outlined the benefits of Islamic finance, I’d like to get into the criticisms made against IFI’s;  I mean the genuine criticims, not the - “Islamic banks are the same as conventional banks” -criticisms.  There are many scholars and academics who have criticised IFI’s for not fulfilling the maqāṣiḍ or spirit of true Islamic economics. From a legal and business perspective, IFI's are very different to conventional banks.  However, from an econonomic perspective, IFI’s have a similar effect on the economy as conventional banks.  To understand why, you can read the excellent short book written by the late German scholar, Professor Margrit Kennedy, called Interest and Inflation Free Money (1995).  What Professor Kennedy shows is that charging interest on loans leads to inflation because businesses have to pass on the cost of interest to the consumer.  IFI’s don’t charge interest, but there is a mark-up charged to the customer, which eventually also has to be passed on to the consumer.

The issue is not with Islamic finance as a whole.  The issue is with using various contracts like Murābaah (cost-plus) and Ijāra (lease) contracts as financing contracts.  These contracts were never intended to be used as financing contracts.  The Late Ahmed Al-Najjar, one of the founding father of Islamic finance criticised this approach to Islamic Finance saying that that it is merely a patch-up job until a better solution could be found (Al-Nassir, 2009).  Unfortunately not much has changed in Islamic Finance since its inception a few decades ago.  There are a few positives in Islamic Finance like ṣukūk investment certificates which help to fund major multibillion dollar construction projects, but otherwise IFI’s are happy with just being involved in financing the purchase of assets.

The Maqāṣiḍ of Islamic Economics

The maqāṣiḍ, or overall aim, of Islamic economics is to benefit society, especially the poor and needy.  It is important to view Islamic finance is part of an ‘Islamic economic system’ that ‘has an inherent social orientation’. The overall aim of this system is to enable growth ‘growth and justice’ (Ahmed, 2011, p. 149). 

The critism directed to words IFI’s is that they fulfil the legal requirements of Islamic commercial law but not the social requirements.  The social requirement is simply to help people fulfil their financial needs, without taking advantage of their need by charging them interest (ribā).

The solution – Islamic Investment

The solution lies in two types of equity-based contracts- Muḍārabah and Mushārakah (Yusof & Kan, 2010).  This solution would need a ‘paradigm shift’ that would transform IFI’s from being lenders to being capital providers – essentially business partners or investors (Bakar, Alhabshi, & Rahaman, 2011, p. 111).

I’ll use an example to illustrate how this would work.  Let’s say a business had a project it needed to undertake that it didn’t have enough funds for.  Instead of going to the bank for the loan, they would go to the IFI and partner up with it for the project with a Muḍārabah contract.  In this type of contract one partner is the capital provider and the other partner does the work.  The profits are then shared according to a pre-agreed profit-sharing ratio.  Note that it is a pre-agreed ratio and not pre-agreed profit.  So they would basically agree on how they would split the profit between them – for example 50% each or 20% for one partner and 70% for the other partner.  There is no profit guarantee.  The project might lose money, in which case the IFI would lose its capital and the business would lose the time invested in the project.  If the project is profitable, then the profits are shared between the IFI and the business.    The economic advantage of this form of contract is that it doesn’t contribute to the cost-passing mechanism that causes inflation.  There are no additional costs to the business in doing this.  It only shares it profits.

Notice though that the IFI faces a lot more risk than it would normally do in its normal asset-based financing activities.  This is why I believe that banks are not the ideal organisations for this form of Islamic investment.  It’s too difficult and to risky for them to get involved in such activities. 

To implement Islamic Investment properly, new organisations would need to be formed with a whole new mandate and culture. These organisations could be either for-profit or non-profit organisations. For-profit organisations would be similar to modern venture capital firms. These firms invest capital in businesses and share the profits with the businesses they become partners in.  In terms of non-profit organisations, some scholars have described a solution described as a waqf-based microfinance institution (Ahmed, 2007). 

Microfinance institutions are already in existence in the developing world.  The problem with them though is that they provide interest based loans.  The waqf-based approach attains its funds from charitable endowments, and utilises Islamic contracts to fund projects and to finance the purchase of assets.  However, these models still need a lot of developing and are still not widely implemented. Watch this space for further updates!


Ahmed, H. (2007). Waqf-Based Microfinance: Realizing The Social Role of Islamic Finance. World Bank.
Ahmed, H. (2011). Maqasid Al-Shariah and Islamic Financial Products:  A Framework for Assessment. ISRA International Journal of Islamic Finance, 3(1).
Al-Nassir, L. (2009). Dr Ahmed Abdul-Aziz Al Najjar.   Retrieved from
Bakar, M. D., Alhabshi, S. M., & Rahaman, E. (2011). Accounting for Islamic Financial Institutions. London, United Kingdom: William Press.
Kennedy, M. (1995). Interest and Inflation Free Money   Retrieved from  Retrieved from
Yusof, E. F. E., & Kan, Z. (2010). Appraisal on End Products and Services offered by Islamic Banks from Maqasid Shari'ah Perspective. Retrieved from