Introduction

Belief system

Key practices – the five pillars of action

Importance of the Qur’an and the Sunnah

Interpretation of the sharia

The role of scholars and sharia supervisory boards in Islamic finance

Conclusion

INTRODUCTION

To understand Islamic finance it is important also to understand a little about the Islamic faith. Practitioners who have a base level of understanding of the faith will not only comprehend the various principles underpinning sharia-compliant financial transactions better, but will be tuned into the mindset of a faith-based buyer of a sharia-compliant financial product. Indeed, all too often, those involved in the Islamic finance industry have shown a lack of understanding of the considerations important to those looking at sharia-compliant products from a faith perspective, and as a result certain products and services have not achieved their potential.

BELIEF SYSTEM

Islam is a monotheistic faith and at its very heart is the belief that there is One God who has no partner, associate or offspring; that this God created everything, including mankind – the first human being Adam. Furthermore, God sent Prophets to mankind through the ages to remind them and teach them that God was their Creator, and that they were charged with the responsibility to do good, uphold justice and to reject and fight against all wrong and evil. In addition to the Prophets, Muslims believe God sent scriptures through the ages as a means of advising and instructing mankind on how to live their lives. These scriptures include the Torah, the Bible and the Qur’an. Muslims believe that after death every person will be held accountable for what they did in their lives; that one day this world will come to an end and every person will be resurrected, and there will be a Day of Judgement. At this time, God will judge the deeds of each person and those who are successful will be admitted to Heaven for ever – a place full of joy and bliss – and those who are not successful will be admitted to Hell – a place of torment and punishment.

The six pillars of faith

Indeed, the belief system of a Muslim is often summarised by reference to six key beliefs (see Figure 2.1), four of which are referred to explicitly above:

The other two key beliefs are:

Figure 2.1 Six pillars of belief

KEY PRACTICES – THE FIVE PILLARS OF ACTION

Following on from these six ‘pillars’ of faith, there are five ‘pillars’ of action for a Muslim (see Figure 2.2). These are all obligatory acts subject to having the ability and/or means to perform them:

1. To testify to the Oneness of God and to the Prophethood of Muhammad.
2. To pray five times a day at appointed times. Prayer times are staggered throughout the day, starting with the prayer just before sunrise, the second around lunchtime, the third mid-afternoon, the fourth at sunset and the fifth at night.
3. To pay a minimum amount of one’s wealth to the poor and needy every year. There are rules as to what qualifies a person to pay this and to those who are eligible to receive this type of charity.
4. To fast from dawn to sunset during a particular lunar month of the year – this month in the Muslim calendar is called Ramadan.
5. To undertake the pilgrimage to the Holy Mosque in Mecca at least once in one’s life.

These five pillars of action have a huge impact on how Muslims express their faith and live their lives on a practical basis. The five obligatory prayers, in particular, mean that Islam has a very practical impact on the daily lives of Muslims. Indeed, in the world of Islamic finance – if you are dealing with Islamic banks or go to Islamic finance conferences – there will almost always be facilities for prayers. Also you will often find Muslim work colleagues or clients requesting a place to pray so that they can fulfil their duty to pray at prescribed times.

Figure 2.2 Five pillars of action

Another key practical element of Islamic faith is the importance of the holy day, Friday. Muslims are required to attend a congregational prayer at the time of the normal daily lunchtime prayer on a Friday. Hence in Muslim countries such as Saudi Arabia, the weekend is set to include Friday and it is a day off for most people. In Europe and other non-Muslim countries, you will see Muslims making an effort to go to their local mosque during their lunch break to fulfil the obligation to pray in congregation on a Friday and hear the sermon delivered by the leader of the congregation, known as the imam. Knowing this is important if and when you engage in work related to Islamic finance as you will be mindful of the client’s/colleague’s requirement to pray, about inappropriate times to request meetings such as Friday lunchtimes, and so on.

Throughout the year there are key events and dates to be aware of. The ones with the greatest impact are Ramadan, the month of fasting, and the pilgrimage season. In both cases in Muslim countries there will be public holidays at these times; in non-Muslim countries you will find that many Muslims generally have time off or change their working patterns. Indeed, it is often commented that things become very quiet in the Muslim world in terms of work and trade during the month of Ramadan, as priorities are redirected to family and spiritual development.

The six pillars of faith and the five pillars of action referred to above start to give you a framework of the Islamic faith in terms of beliefs and key practices. In Chapter 3, we will discuss how Islam views money and wealth, which will further help you to understand the mindset of a practising Muslim when entering into commercial and financial transactions.

IMPORTANCE OF THE QUR’AN AND THE SUNNAH

An important question to answer is: ‘What are the key sources of knowledge upon which the Islamic teachings are based?’

The two foremost sources are the Qur’an, the holy book, and the Sunnah, the example of the Prophet Muhammad. Let us discuss each of these in turn.

The Qur’an

The Qur’an is the Muslim holy book. It has a very high status in Islam because Muslims believe it to be the literal word of God. Muslims believe that it was revealed to Prophet Muhammad over a period of 23 years by God through the Angel Gabriel. Angel Gabriel would visit the Prophet every so often during this period, each time revealing certain verses of the Qur’an.

Due to this belief that the Qur’an is the literal word of God and therefore in essence it is as though God is talking directly to mankind, the Qur’an is held in the highest esteem by Muslims and is regarded as the foremost source for Islamic knowledge and guidance. Indeed, a significant proportion of Muslims will make it part of their daily routine to read a portion of the Qur’an, and many millions have committed the entire book to memory.

The Qur’an is written in Arabic and its translation can be found in most languages. The key principles pertaining to Islamic finance, such as the prohibition of interest, can be seen in the teachings of the Qur’an.

The Sunnah

The Sunnah refers to the example and teachings of the Prophet Muhammad. It is very clear from the Qur’an that the believers are required to follow the example and teachings of the Prophet.

Qur’anic verses:

O believers obey Allah, obey the Messenger and those in authority among you. If you dispute about anything, refer it to Allah and the Messenger.

(Chapter 4, verse 59)

And whatever the Messenger gives you, accept it, and from whatever he forbids you, keep back, and be careful of your duty to Allah.

(Chapter 59, verse 7)

The status of the Prophet Muhammad is also very high in Islam. Muslims believe Muhammad to be the last Messenger of God. He was born in Mecca in what is now known as Saudi Arabia in 571 AD. His life history has been well documented and we see that in his youth he earned respect as being a person of integrity and truth, often referred to as ‘Al-Amin’ (the trustworthy).

It was the Prophet’s job to provide an example and practical model in terms of implementing God’s teachings. For instance, it was commanded by God to pray in the Qur’an, but it was through the example and teachings of Prophet Muhammad that Muslims know how to carry out the prayers in practice.

Given the status of the Prophet and the importance of following his example and teachings, his life and sayings have been extensively recorded and have been the subject of much scrutiny and study. His recorded sayings are referred to as the hadith and have been the subject of intense verification by scholars with respect to their authenticity. As a result, today we have books of hadith, or the Prophet’s sayings, in which the recorded sayings are categorised according to the strength of their validation.

The primary sources of teachings pertaining to Islamic finance are the Qur’an and the Sunnah, which provide the basis for Islamic finance. You will often hear the word sharia mentioned in the context of Islamic finance. Sharia refers to the framework of rules, principles and guidance derived from the Islamic teachings, primarily from the Qur’an and Sunnah. Sometimes, sharia is referred to also as Islamic law and often, in the context of Islamic finance, products are referred to as sharia-compliant.

INTERPRETATION OF THE SHARIA

Accepting that the Qur’an and the Sunnah are the prime sources of knowledge for Islamic finance does not mean that there cannot be differences in interpretation. However, it is important to appreciate that these are not usually disputes of principle but of application. It may be helpful to understand the background to these differences of interpretation.

The interpretation and detailed rulings coming out of the study of the Qur’an and Sunnah is called fiqh in Arabic. Such work falls to sharia scholars, who have studied the sharia in depth and therefore have the requisite knowledge to perform this role. The role is analogous to a lawyer who interprets statute and case law. This is relevant to the field of Islamic finance as scholars may sometimes have different opinions or views on the permissibility or otherwise of certain financial products and structures.

There are some important points to note on these differences of opinion/schools of thought:

1. The differences do not usually emanate from the key underlying principles but from the detailed rules around application.
2. Islam essentially has two broad divisions – the Sunnis and the Shias. Again the pillars of faith and action are essentially the same. The key differences relate to opposing views on the succession of leadership after the Prophet’s death. Of the world’s Muslim population, 87–90 per cent are Sunni and 10–13 per cent are Shia.²
3. Within the Sunnis there are four established schools of thought, named after the scholars who produced detailed works on their interpretation of the sharia. These school of thought are:
   • The Hanafi school of thought: named after Imam Abu Hanifa (703–767 CE). This school originates from Iraq and is the dominant school of thought in the Indian sub-continent and Turkey.
   • The Maliki school of thought: named after Imam Malik (717–801 CE). This school originates from Medina in Saudi Arabia.
   • The Sha’afi school of thought: named after Imam Shafi (769–820 CE). This school of thought emerged in Egypt.
   • The Hanbali school of thought: named after Imam Hanbal (778–855 CE). This school originates from Damascus and is particularly influential in Saudi Arabia and the Arabian Gulf region.

Imam Shafi advocated an approach to interpreting the sharia, which is widely used by contemporary scholars. He recommended that the following hierarchical order be used when interpreting the sharia:

1. The Qur’an.
2. The Sunnah.
3. Ijma – consensus of the scholars.
4. Qiyas – analogy, that is to derive rulings for a particular situation based on established rulings for other scenarios, where there is a clear analogy with the situation being considered.

These scholars were alive either at the same time or in adjacent time periods. It is well documented that they had a healthy respect for each other and the differences of opinion they had were mutually respected, and even still today one school of thought is not seen as superior to another. Within the Sunnis all of the four schools are seen as valid.

The main school of thought within the Shia sect is referred to as the Jaafri school, named after Imam Jaafar. Although Shias represent a minority in terms of the global Muslim population, it is the dominant sect in Iran, which has the largest share of the global Islamic finance market.

Outside of these schools of thought, contemporary scholars play the role of interpreting the sharia in relation to subjects, situations or topics not expressly covered in the Qur’an and the Sunnah and the established and accepted schools of thought.

In the contemporary world, it is worth noting that there is a body called the Islamic Fiqh Academy, set up by the Organisation of the Islamic Conference (OIC) in 1981. The Academy is based in Jeddah and its members comprise sharia scholars and experts in science, economic and social issues from around the world. Its role is to debate and provide guidance on contemporary issues.

In terms of Islamic finance, therefore you will find sharia scholars having differences of opinion on certain matters emanating sometimes from the differences between the established schools of thought, and other times from their interpretation of the sharia.

THE ROLE OF SCHOLARS AND SHARIA SUPERVISORY BOARDS IN ISLAMIC FINANCE

When Islamic banks and other organisations in the Islamic finance industry bring products to the market, it is necessary that they make sure that the products are sharia-compliant. Usually qualified scholars, who have the requisite level of knowledge, are engaged to verify whether the products are compliant and to sign off the products before they go to market. This opinion/certification by scholars is called a fatwa. Scholars in making their assessment and forming their opinion will rely first and foremost on the teachings within the Qur’an and the Sunnah. If no direct ruling or precedent relevant to the situation at hand can be found from these, scholars will use their knowledge of the sharia to come up with a ruling that is compatible with the principles and values underpinning the Islamic teachings.

Scholars play a key role in the Islamic finance industry. Scholars are charged with making sure that the product design, key features and legal documentation such as product prospectuses are in line with the sharia, as well as ensuring the product implementation and practice remain sharia-compliant. To this end, most Islamic finance institutions usually commission an annual sharia audit and the resulting report generally features in the institution’s published financial statements.

The model of engaging scholars is not the same across the global Islamic finance industry.

The Malaysian model

Malaysia is often cited as the most advanced nation when it comes to the legal, institutional, research/educational and regulatory framework it has built for the Islamic finance industry. A key reason for this success and progression has been the political will and commitment from the government to develop Malaysia as a world leader in Islamic finance, and to have the best-in-class infrastructure to support this. Malaysia in 1983 passed an official Islamic Banking Act creating a dual banking system in the country – the conventional banking system and the Islamic system. The fruits of this comprehensive and cohesive national approach orchestrated from the top can be seen in the increasing popularity and growth of sharia-compliant products in the country, the high quality of Islamic finance research produced in Malaysia, and Malaysia’s increasing profile and market share of the global Islamic finance market, as seen in Chapter 1. Malaysia is the only country to have a university, The Global University of Islamic Finance (INCIEF) dedicated to Islamic finance and a government research institute dedicated to Islamic finance, International Shari’ah Research Academy of Islamic Finance (ISRA).

Malaysia has tackled the need for sharia scholars by creating a national central supervisory board. If any organisation wants to launch a sharia-compliant product it needs to get approval and certification from this central board. Individual banks or other organisations can have their own sharia advisers or scholars but ultimately sign-off has to come from the central board.

Model outside of Malaysia

Outside of Malaysia the dominant model is for individual banks and other organisations to have their own respective sharia supervisory boards. These boards will typically have at least three scholars who are engaged to ensure the products and services of the bank/other organisation are sharia-compliant and remain so.

This model prevalent outside of Malaysia is reflective of Islamic finance in these countries being more of a commercial phenomenon driven by commercial organisations with limited governmental involvement and political will to create a cohesive national and institutional infrastructure. In my view the Malaysian model is far superior, with the role of scholars being a very good example. With a central board, two key advantages result:

1. There is consistency in judgement as to what scholars will approve as sharia-compliant. Without this, we have seen examples in the market whereby a particular sharia supervisory board will approve a product, while another does not.
2. It removes a potential conflict of interest. It is conceivable that if a scholar is employed and paid by a bank, he/she may be put under pressure to approve products, or that there may be the perception of a lack of impartiality, which may be equally damaging. By having a central board that is not paid or engaged by the bank/other organisation seeking product approval, this problem does not arise.

CONCLUSION

This chapter has provided a summary of the key beliefs underpinning the Islamic faith and the key sources of knowledge with respect to Islamic teachings. We discussed that Islamic law (the sharia) is subject to interpretation and that while the key principles are uniform across the faith, it is possible to have differences of opinion on matters of application. A differentiating feature of the Islamic finance industry is the central role that sharia scholars play in the industry: in ensuring products are compatible with the sharia and giving confidence to the market by providing official certification that products are sharia-compliant.

All of this knowledge is directly relevant to the foundation and practice of Islamic finance. With Islamic finance being a faith-based proposition, this background knowledge is important and will serve well those engaged in the Islamic finance industry or those undertaking any work in this space.

¹ PBUH is short for Peace Be Upon Him. Islam teaches that whenever Prophet Muhammad or any other of the prophets are mentioned, reverence and respect must be shown by invoking the Peace of God upon them. Every time any of the Prophets of God, including Prophet Muhammad is mentioned, PBUH has been implied in the rest of the book.

² Pew Research Center: ‘Religion & public life project’.