Introduction to Islamic Finance Review

Flashcards covering the fundamentals, sources, objectives, and prohibitions (Riba, Gharar, Maisir) of Islamic finance, as well as its development in Malaysia.

Islamic Finance

A broad term used to describe a wide range of financial transactions that have been approved by a recognized authority as compliant with Islamic law (Shariah).

Fiqh al-mu’amalat

The principles and rules of Islamic commercial jurisprudence governing the provision of financial services.

Shariah

Literally meaning ‘path to watering place’; technically the set of norms, values, and laws prescribed by Allah through the Al-Quran or As-Sunnah that governs the Islamic way of life.

Maqasid al-Shariah

The objectives or purposes behind Islamic law, primarily aimed at ensuring the welfare and protection of humanity by promoting benefits and preventing harm.

Maslahah

Public interest or welfare; a basis of law used to prohibit or permit something based on whether it serves the public's benefit, especially in cases not regulated by the Quran or Sunnah.

Five Essentials of Maqasid as-Shari'ah

The preservation and promotion of Religion, Life, Intellect, Posterity, and Wealth.

Ar-Rawaj

The principle of ensuring that wealth is circulated among as many people as possible in a fair way.

Primary Sources of Islamic Finance

The Holy Qur’an and the Sunnah of the Prophet Muhammad s.a.w.

Ijma’a

A secondary source of Shariah representing the consensus or unanimous agreed opinions of the Companions or Muslim scholars (Mujtahid) on a point of law.

Qiyas

A secondary source of Shariah meaning ‘measuring by’ or ‘judging by comparisons’; it involves analogical reasoning to derive a ruling for a new case based on an existing one.

‘Urf

Customs and social habits of people that are accepted as secondary sources of Islamic law as long as they do not contradict the Shariah.

Istishab

The principle of the presumption of continuity, where a previously established fact or condition is maintained until evidence proves otherwise.

Istihsan

Juristic preference; a secondary source used to depart from a strict analogical ruling (qiyas) to ensure fairness, practicality, or to avoid hardship.

Sadd al-Dhara'i

‘Blocking the means’; a principle aimed at preventing actions that might lead to harmful consequences, even if the actions themselves are not directly forbidden.

Riba

Literally meaning increase or growth; technically a premium paid by the borrower to the lender along with the principal as a condition for a loan or extension of maturity.

Riba Qardh

A type of Riba Duyun (debt usury) imposed from the beginning of a loan, which is proportionate to the time taken by the borrower to repay.

Riba Jahiliyyah

A type of Riba Duyun where no interest is charged at the beginning, but it is imposed or increased upon default when a debtor cannot pay at maturity.

Riba Fadhl

A type of Riba Buyun (trade usury) occurring when ribawi materials of the same kind are exchanged in unequal amounts at the same time.

Riba Nasi’ah

Also known as Riba Yad; it occurs when ribawi materials are exchanged in equal amounts but the delivery of one or both is postponed.

Ribawi Materials

Classified into two categories: Medium of exchange (Gold, Silver, Currency) and Food stuff/Staple foods (Grains, Meat, Vegetables, Fruits, Salt).

Gharar

Uncertainty, hazard, risk, or ambiguity in a contract regarding the subject matter or price that may lead to unfairness or exploitation.

Gharar Fahish

Major uncertainty that is so great it becomes unacceptable and makes a contract null and void (e.g., selling fish in the sea).

Gharar Yasir

Minor uncertainty found in nearly all contracts that does not obstruct completion or delivery, leaving the contract valid (e.g., buying a fruit without peeling it first).

‘Iwad

The requirement for all legitimate exchange to contain a counter-value or fair compensation, differentiating sale (bay’) from riba.

Components of ‘Iwad

1. Risk ($ghurm$), 2. Work and effort ($kasb$), and 3. Liability ($daman$).

Maisir

Gambling or games of pure chance where a party wishes to gain something valuable with ease and without equivalent compensation at the expense of another's loss.

Takaful

The Islamic alternative to conventional insurance based on the concept of mutual assistance and reciprocal donation ($tabarru’at$).

Sukuk

Islamic bonds; investment certificates representing ownership in an underlying asset, which grew rapidly in the $2000\text{s}$.

AAOIFI

The Accounting and Auditing Organization for Islamic Financial Institutions, established in the $1990\text{s}$ to standardize global Islamic finance practices.

Bank Islam Malaysia Berhad (BIMB)

The first full-fledged Islamic bank in Malaysia, established in $1983$ following the Islamic Banking Act $1983$.

IFSA 2013

The Islamic Financial Services Act $2013$; a regulatory framework enacted in Malaysia to strengthen Shariah governance and the regulatory environment for Islamic finance.