Archive for Development of Islamic Finance
Is the Islamic banking industry developing within the realm of Maqasid Al Sharia’h? Is the whole industry Sharia’h compliant or just a few products here and there? Are non-Sharia’h compliant products proliferating without any or minimal control or regulation? Is the Islamic banking landscape looking more and more like conventional banking everyday under an ethical guise disguising a new form of greed which is just another invisible force enslaving people in debt and endangering humanity and the environment? Have you seen the Matrix? (Part 1, 2, and 3) Perhaps Islamic banking is straying from the concepts found in Islamic economics and Maqasid Al Sharia’h and is inadvertently working to sustain injustice, inequality, and promotion of the dissolution of families and the community at large along with destroying the environment.
What is Maqasid Al Sharia’h?
“Abu Hamid al-Ghazali (d. 1111 CE) defined Maqasid by stressing the Sharia’h concern with safeguarding five objectives. He said, ‘The very objective of the Sharia’h is to promote the well-being of the people, which lies in safeguarding their faith (din), their lives (nafs), their intellect (aql), their posterity (nasl) and their wealth (mal). Whatever ensures the safeguarding of these five serves public interest and is desirable and whatever hurts them is against public interest and its removal is desirable.’” 
One might say that “The ultimate objective of the Maqasid al Shariah is to serve the interests (jalb al masalih) of all human beings and to save them from harm (daf al mafasid).” 
“The uppermost objectives of the Sharia’h rests within the concepts of compassion and guidance that seek to establish justice, eliminate prejudice and alleviate hardship.”  The Sharia’h promotes cooperation and mutual support within the family and in the community as a whole. This is manifested in the realization of maslalah (public interest) alongside the all-encompassing and omnipresent value of compassion.” 
Islamic banking should be developed in accordance with Maqasid and maslalah with the public interest and compassion in mind protecting the faith, lives, intellect, posterity, and wealth of the people. Profit can be made and wealth created and protected, however, in line with the Maqasid Al Sharia’h.
Maqasid Al Shariah has four main characteristics. They are the basis of legislation, they are universal, they are inclusive, and they are definitive.  Islamic scholars have divided Maqasid Al Shariah into two main categories: general objectives (maqasid ammah) and specific objectives (maqasid khassah ).  In usul al fiqh, on which Islamic jurisprudence is based, scholars such as al-Shatibi further divide the general objectives – sometimes denoted as maslalah into three sub-categories. Al Shatibi calls these essentials (daruriyyah), the complementary (hajiyyah) and the embellishments (tahsiniyyah). 
The preservation of wealth, protection of ownership and property, preservation of wealth through acquisition and development, preservation and protection of wealth and property from damage, the preservation of wealth through its circulation, and the preservation of wealth through its value protection are highly valued concepts and objectives of the Sharia’h.
Similar to the common law, Sharia’h is equipped with provisions to allow for wealth creation and protection under specific guidelines. In addition, however, the Sharia’h maintains that such transactions should have the public interest in mind and in so doing, financial transactions should avoid harm to the public.
“The maslalah or the public interest entails the understanding of the Islamic principle of harm prevention. The principle states in essence that while engaging in economic and business activities, a firm is prohibited from inflicting injury or causing grief to others. There are two major Sharia’h axioms that address the principle of harm prevention. One is the removal of hardship (raf al haraj) and the other is prevention of harm (daf al darar). Islamic scholars classify harm or damage into two broad types: the first type is the harm or damage which occurs as a result of the deliberate action by a person upon parties or entities (i.e. the environment). The second type is an action permissible in the Sharia’h and performed by a person with an honorable intention, which, despite that, may directly or indirectly cause harm to other parties. While the former is strictly prohibited or haram, the latter has to be examined in light of differing contexts and degrees of harm in order to determine whether the action is permissible or not.” 
In order to streamline Islamic finance more in tune with Maqasid , some scholars advocate a shift towards the development of equity- financing away from debt -financing. “Evidence on the current practice of Islamic banks worldwide suggests that the majority of financing today is not based on equity but rather takes the form of debt-like instruments. This is because Islamic banks and financial institutions have opted for profitable Islamic financing such as Murabahah (debt finance) instead of Musharakah and Mudharabah (equity finance)’  to the detriment of the industry. In fact, the implementation of profit-loss sharing “PLS” contracts such as Musharakah and Mudharabah have been limited thus far. 
It is a complete contradiction to the goal of the entire industry and the Maqasid Al Sharia’h to focus primarily on profitable debt- financing and instruments.
“Currently, Islamic banks just focus on the form rather than substance itself as an attempt to meet Sharia’h compliance. The approach used by Islamic banks today, as argued by Syed Ali and Ahmad (2007), is just conventional banking in disguise. Like conventional banks, Islamic banks are still using debt-based financing contracts when they give out financing facilities to customers.” 
One of the goals of the Islamic finance industry is to optimize resource allocation for the benefit of humanity through ( i.e.) extinguishing debt-based financing. However, as stated previously, in a complete paradox, the current Islamic finance industry is focusing primarily on debt-based financing. 
Equity-financing utilizes a profit-loss sharing mechanism based on the contribution of capital in the project or investment. In equity- based financing, both the borrower and lender share profits and losses as compared to the case of debt- financing where one party is made to take all the risk. It also promotes expansion of the economy including the development of small to medium sized businesses in addition to large enterprises and promotes stability in the economy and society at large.
One of the objectives of the Sharia’h is the preservation of wealth through its circulation. ‘In the Sharia’h, circulation means the transfer of wealth in the community among as many hands as possible without causing harm to those who have acquired it lawfully. The Qu’ran has indicated the need to prevent wealth from remaining in the hands of one person or just moving from one specific person to another.’
“In order to achieve this, the Sharia’h establishes a formula that balances between personal natural desire for ownership and fair access of the whole society to a reasonable portion of wealth. This formula can be looked at on two levels: during the life of its owner and after the owner’s death. The measures include:
1. Prescribing financial measures such as zakah, zakat al-fitr, kaffarah to maintain a balanced society and provide a continuous source of income for its lower class;
2. Promoting and rewarding charitable acts such as waqf, hibah, hadiyyah, wasiyyah, etc. to ensure a healthy circulation of wealth;
3. Shifting lending to voluntary sectors as an act of charity rather than for business ;
4. Promoting investments and prohibiting hoarding of wealth;
5. Prohibiting all types of manipulation or monopolization that channel wealth to a small segment of wealthy people at the expense of the majority.
Another important means of circulation of wealth is facilitating transactions as much as possible by highlighting their benefits over the minor harm that they might entail. For this reason, the Sharia’h does not require for the validity of sale contracts that the two counter-values (iwadayn) be delivered at the same time, for it recognizes deferred payment sales in which payment of the price as a counter-value to the goods may be postponed until a certain point in future.” 
“Equity financing fulfills the essence of Sharia’h requirements in Islamic banking and finance as it fulfills the counter value (iwadh). For a contract to be valid, there should be Iwadh or counter value present. Three elements of iwadh that should exist are risk (ghorm), work and effort (ikhtiar) and liability (daman). In the majority of debt- financing contracts, one or more of these elements of Iwadh are missing. If there is no risk, effort and liability, then such a contract cannot be considered to contain any element of justice. In contrast to this, however, equity financing contracts such as Musharakah and Mudharabah contain the elements of risk, effort and liability. Therefore, equity financing contracts are more just and hence more in line with Maqasid or objectives of Sharia’h.” 
Since equity and profit- sharing financing is more beneficial to humanity than debt-financing and is more in the public interest than the use of debt financial instruments in Islamic economics, the current practice of Islamic banks may have deviated from the aspiration of standard Islamic economics and may not be in line with Maqasid. 
“An Islamic financial institution is not expected to conduct its economic, social and other worldly activities as a self-centered, utility-maximizer economic agent as idealized in neoclassical economics; rather, the firm is expected to balance between the rights and responsibilities of the individual and those of society. Essentially, the philosophy of Islamic financial institutions can be fully understood in the context of the overall objectives of the Islamic economic system as enshrined in Maqasid Al Sharia’h. Many prominent Islamic economists have asserted that Islamic banking is a subset of the overall Islamic economic system, which strives for a just, fair, and balanced society as envisioned and deeply inscribed in Maqasid Al Sharia’h. Accordingly, the many prohibitions are to provide a level playing field to protect the interests of all parties involved in the market transactions and to promote social harmony. It is now commonly acknowledged that the consequences of a lack of ethics and low morality are not only financial; they also damage society, the environment and, ultimately humanity as a whole. The recent financial crisis attested to the fact that deceit and infectious greed corrupted the financial markets. Consequently, the crisis has brought the IFI into the limelight as a possible alternative…The IFI should therefore leverage on its robust foundation and underlying principles, deeply rooted in the teachings of the Sharia’h and enshrined in its higher objectives or Maqasid Al Sharia’h” 
Imagine that the conventional banking system has taken over the world and only uses humanity in order to sustain itself. To keep the system going, the system created a matrix in which humanity exists, keeping them plugged in and unaware that they are not living for themselves but only following a certain path in order to sustain the system.
In this scenario, the conventional banking system charges exorbitant interest rates on all of its products and services. This practice cements exploitation, injustice, and speculation as the central pillars of the conventional financial structure.
People become so pre-occupied with survival that they do not have time to question or think about the system in which they are living. Why is this market crashing, why are we in crisis, why can’t I pay off my student loan, credit card, or mortgage? Why has this country been taken over? Why are we spending trillions of dollars on war? It is all to sustain the conventional banking system.
Many people don’t question the current system based on interest finance, exploitative practices, speculation, and uncertainty. People just tread along as if they were plugged into a matrix, blind to the forces controlling them and doing what the system told them to do in order to survive. They memorized the system operations and spewed it out in a standardized test created by the forces which were put in place to maintain the system by seeking out the robot like humans needed to carry the system into the future. Many of these people have been unknowingly trained to exist without empathy and compassion and to freeze their hearts into a cold, emotionless muscle. Individual gratification has become the mainstay and staple food of this society.
A lot of times your heart feels differently to what you have been programmed to do and think. If there is a pain in your heart when you are restricted by law or societal norms on what you are supposed to do or forced into a direction you would rather not go … listen to it because pain is usually an indication that something is wrong.
Within the web of humanity, in order to sustain our current banking system, people are dying and suffering from poverty, war, or losing family members to the market on a daily basis. The earth is dying. When the environment goes past the point of no return, forget your equations on how to exploit human life because plant and animal life sustain humans and the ecosystem sustains the food chain. Why have the basics been left out of Western economics? Humans are not inputs of production and the environment and women have value. Why has man left the earth, women, and God without value…the only forces which give man life? The whole system is set up to allow a certain minority to prosper while much of humanity is locked into poverty. The system controllers can pry open markets for products, artificially create markets, cement countries into producing what they need for their own economies, engineer crashes, manipulate interest rates, inflation, and currency crashes, as well as the demise of entire nations. If everything that was set up around you was a sham, nothing but layers of systems of control, whose strings were being pulled by an invisible force for its own benefit and you saw a way out would you take it? Would you like the red pill or the blue pill? Are we robots or humans?
Islamic finance is more than offering a sprinkling of Sharia’h compliant products and a Sharia’h board at a bank with some erudite scholars. It is a comprehensive system which aims at making a positive contribution to the fulfillment of the socio-economic objectives of the community at large in line with Maqasid al Sharia’h. 
“An Islamic financial institution’s characteristics should be shaped by the higher objectives of Islamic law, which emphasizes overall social and economic good and not infectious greed and individualism. The message of Islamic finance is clear that earning profits is commendable as long as it conforms to the principles of fairness and justice as deeply inscribed in the Sharia’h and furthermore, Islamic guidance, enshrining its principles of justice, brings about a balance between the rights of individuals and their duties and responsibilities towards others and between self-interest and altruistic values.” 
It would be a shame if Islamic banking strayed from Maqasid al Sharia’h and was swallowed up by the conventional banking system and became another system of control. Is the conventional banking system really going to make room for a competitor? Is there really a different way or are we all just being fooled. ‘Unplug yourself’.
 Asyraf Wajdi Dusuki and Said Bouheraoua, The Framework of the Maqasid Al Sharia’h (Objectives of the Sharia’h and Its Implications for Islamic Finance, ISRA Research Paper No. 22/2011) p. 3.
 Ibid, 4.
 Ibid, 5.
 Ibid, 8.
 Ibid, 9.
 Ibid, 10.
 Ibid, p. 27.
 Eddy Yusof, Ezry Fahmy, Kashoogie, Jhordy and Anwar Kamal, Asim, International Islamic University Malaysia (IIUM), ‘Islamic Finance: Debt versus Equity Financing in the Light of the Maqasid al-Shariah, p. 5.’
 Asyraf Wajdi Dusuki and Said Bouheraoua, The Framework of the Maqasid Al Sharia’h (Objectives of the Sharia’h and Its Implications for Islamic Finance, ISRA Research Paper No. 22/2011), 20.
 Eddy Yusof, Ezry Fahmy, Kashoogie, Jhordy and Anwar Kamal, Asim, International Islamic University Malaysia (IIUM), ‘Islamic Finance: Debt versus Equity Financing in the Light of the Maqasid al-Shariah, 11.
 Ibid, 13.
 Asyraf Wajdi Dusuki and Said Bouheraoua, The Framework of the Maqasid Al Sharia’h (Objectives of the Sharia’h and Its Implications for Islamic Finance, ISRA Research Paper No. 22/2011), 22.
 Ibid, 10.
 Ibid, p. 31.