Islamic Accounting

Islamic Business
(Finance) Principles

Md. Harashid bin Haron, Ph.D

[email protected]; [email protected]
E-learning Portal: http://elearning.usm.my
What are the Islamic financial
principles

?
 Where are they derived from?
1 Al-Quran [Words of Allah (the God)]

2 Al-Sunnah [Al-Hadeeth (Sayings) and

conducts of Prophet Muhammad p.b.u.h]

3 Ijtima (Consensus of opinion)

4 Qiyas (Analogical deduction)

5 Istihsan (equity in Islamic Law)

6 Sadd Al Zara’i (blocking the means)

7 Maslahah mursalah (public interest/benefit)

8 ‘Urf (custom)

9 Istishab (presumption of continuity)

 Al-Quran?
Words of the God

Revealed to Prophet Muhammad pbuh

In the space of 23 years (13 Makkah 10 Madinah)

Main subject: Guidance and/or manual for human

being
• Al-Qur’an, an Arabic word, literally means
'reading' and 'recitation'.
Al-Quran is the word of Allah, the Book of
Islam and is the final divine guidance in
the line of Holy Scriptures.

• Revealed to Prophet Muhammad (PBUH)

in a period of 23 years starting 13 Before-
Hijrah (610 AD).

• A guide and beacon for all humanity till the

end of time, not bound by time, race or
nationality.
Best defined in its own verses, as:
“This is the Book, no doubt in it, guidance from
the God fearing.” (2:2)
 Al-Hadeeth
The sayings of Prophet Muhammad (pbuh).
The sayings and conduct of Prophet
Muhammad (pbuh) constitute the Sunnah.

The Hadith is a supplement of Al-Quran as a

source of the Islamic law.
Primary Sources
The Quran
The Sunnah
Secondary Sources
Ijma’ (consensus of opinion)
Qiyas (analogical deduction)
Istihsan (equity in Islamic Law)
Sadd Az-Zara’i (blocking the means)
Maslahah mursalah (public interest/benefit)
‘Urf (custom)
Istishab (presumption of continuity)
 What is Islam?
Sa la ma – ‫ ﺱ ﻝ ﻡ‬- ‫ﺴﻠﻡ‬

Peace, submit, surrender, and obey.

Submission to the will of Allah (the God),

and obedience to His laws.

Muslim – the followers (throughout times)

 What is Shariah*
Sharia means ‘way’ or ‘path’. Shari‘ah literally
means a way to the watering-place or a path
apparently to seek felicity and salvation.

The word occurs only once in the Qur’an and it

is used in contradistinction with hawa (whimsical
desire).

Thus we put you on the right way [shari‘atan] of

religion. So follow it and follow not the whimsical
desire (hawa) of those who have no knowledge.
(45:18)
 What is Shariah*
Islamic Laws

Governs all aspects of lives

Islam is a Deen (way of life).

* Some write Syari’at or Shari’at or Syari’ah.

Objectives (Maqasid) of Shariah
See slide
What is fiqh?
 Usul al-Fiqh and Ijtihad
Usul al fiqh is the methodology of deriving
fiqh. It is the knowledge of the principles
and methods leading to derivation of fiqh.
In many ways, knowledge of usul al-fiqh is
methodology in Islam since it provides the
framework and the standards to ascertain
the validity of the interpretation of the
shariah. The process of producing fiqh
from the shari’ah is called ijtihad
(intellectual assertion).
In addition to understanding and knowing usul al-
fiqh, to be able to interpret and apply Shariah,
especially to meet the legitimate needs of
contemporary society, the faqih must also have
other required knowledge and qualities such as an
understanding of the objectives of Shariah
(maqasid al-shariah) namely:

•Educating the individual

•Establishing ‘adl (justice)
•Promoting welfare (maslahah)
Islamic economists/Accountants are to
interpret correctly the Shariah so that it
can be a guide to economic behaviour and
choices made.

This requires intellectual assertion i.e.

ijtihad. Ijtihad is performed by a mujtahid
(one who performs ijtihad) or a group of
scholars called group ijtihad.
 THE SHARIAH FRAMEWORK

ISLAM

TAWHID

AQIDAH SHARI’AH AKHLAQ

IBADAT MU’AMALAT

Political Economic Social

Activities Activities Activities
Islamic-compliant Corporate Governance

‫ﺣﻭﻛﻣﺔ ﺷﺭﻛﺎﺕ ﻣﺗﻭﻓﻘﺔ ﻣﻊ ﺍﻟﺷﺭﻳﻌﺔ ﺍﻻﺳﻼﻣﻳﺔ‬

‫ﻣﺎ ﻫﻭ ﺍﺳﻼﻡ؟‬
ISLAM

AQIDAH SYARIAH AKHLAK

IBADAT MUAMALAT

POLITICAL ECONOMIC SOCIAL

ACTIVITIES ACTIVITIES ACTIVITIES

GOVERNMENT COMMERCIAL SOCIAL

SECTOR SECTOR SECTOR
Illustrate the relationship between
shariah, usul al-fiqh and fiqh
diagrammatically.
 Sciences of Islamic Legal System

• Rules of Shariah (Hukm Shar’i)

Obligatory (Wajib)
Recommended (Mandub)/Sunnat
Forbidden (Haram)
Abominable (Makruh)
Permissible (Mubah)/Harus

• Objectives(Maqasid) of Shari’ah

• Legal Maxim (not discussed)

 Wajib
1.Wajib (‫)ﻭﺍﺟﺏ‬
• obligatory, necessary, mandatory
• an act the performance of which is
obligatory for the subject and existence of
a consequential punishment for omission
Example:
• performance of solat, payment of zakat,
pilgrimage to the Kaabah, fulfilling of
promises and many other acts
 Wajib (cont.)
1. Wajib (‫( )ﻭﺍﺟﺏ‬cont.)
Rule for the Wajib
• It must be brought about by the subject
and for doing so there is reward (thawab)
for him, while omitting it, without a legal
excuse, entails a penalty
 Mandub
2. Mandub /Sunnat
• recommended, commendable
• A demand by the Lawgiver for the
commission of an act without making it
binding and without assigning any blame
for its omission
 Mandub
2. Mandub /Sunnat (cont.)
Example, in this verse,
“O you who believe, when you enter into a transaction
involving a dayn (debt), write it down (2:282)
The demand for the recording of the debt is a recommendation
and is non-binding, because of an associated evidence that
indicates this.

The evidence is found in the following verse:

“And if one of you deposits a thing on trust with
another, let the trustee faithfully discharge his trust. (2:283)
Indicating to the creditor that he may trust the debtor without
writing down the debt
 Makrooh
3. Makrooh ‫ﻣﻛﺭﻭﻩ‬
• Means disliked, hated or detested. It is
used in reference to actions and deeds
that are referred to negatively in the
Sunnah or the Quran. These actions will
not get ithim (negative points or dosa), but
avoiding them will gain thawab (reward or
pahala). Doing makrooh things is not
recommended, e.g. growing long finger
nails.
 Mubah
4. Mubah( ‫( ) ﻣﺑﺎﺡ‬harus) is one of the
classifications of an action according to
fiqh. It means 'permitted based on
individuals whim'. This category is left
undecided and without a ruling by scholar
so it is left for the person to decide for
themselves if they do things such as
eating apples or oranges. Doing or not
doing the Mubah does not count as a good
or bad deed.
 Haram
5. Haram (‫)ﺣﺭﺍﻡ‬
• Forbidden, prohibited act
• Whose omission is required by the Lawgiver in
binding and certain terms
• Jumhur (majority of the jurists), it does not
matter whether the evidence is definitive or
probable
Example: false evidence, marriage with
mothers or step mother, murder, unlawful
sexual intercourse
 Fiqh
Lexicographers termed the meaning of the
word fiqh in the sense of understanding

In the Quran, “They have hearts, but understand

not with them” ( 7:179)

In the Hadith, “He for whom Allah wishes good,

grants him understanding (fiqh) in religion”

Thus, for both cases, fiqh means understanding

 Fiqh (cont.)
• The scholars of the Shari’ah termed fiqh in
a sense close to the meaning used by the
lexicographers – applying it to the
knowledge of the rules of the Shari’ah,
whether these rules relate to the beliefs or
deeds that issue from the people
• Later termed it as the practical rules
derived by mujtahid (independent legal
thinkers) acquired from particular detailed
evidence in the sources
 Fiqh (cont.)
• practical rules – refer to laws about
actions (conduct and behaviour) of the
people and whose valuation as obligation,
recommendation, prohibition, disapproval
and permission has been classified
Thus,
• Fiqh is the end product of usul al fiqh
 Differences between
Shari’ah and Fiqh
• Shari’ah is the body of revealed laws found both
in the Quran and in the sunnah, while Fiqh is a
body of laws deduced from Shari’ah to cover
specific situations not directly treated in Shari’ah
law
• Shari’ah is fixed and unchangeable, whereas
Fiqh changes according to the circumstances
under which it is applied
• The laws of Shari’ah are, for the most part,
general: they lay down basic principles. In
contrast, the laws of Fiqh tend to be specific:
they demonstrate how the basic principles of
Shari’ah should be applied
 Usul al-Fiqh
(Islamic Jurisprudence)

Jurisprudence defined
From the Latin term juris prudentia, which
means "the study, knowledge, or science
of law"; more broadly associated with the
philosophy of law.
 Usul al-Fiqh
Islamic Jurisprudence
Definition
• Usul means foundation upon which the Fiqh is built
• Usul al-fiqh is a body of principles and methods by
which the rules of fiqh are deduced from their sources
- A science dealing with the sources of Shari’ah and the
method of extracting rules from them
Thus,
• Usul al-fiqh provides standard criteria for
the correct deduction of the rules of fiqh
from the sources of Shariah.
 Sources of Islamic Law
1. Quran
• The first source of Islamic Law in general
• Islamic commercial Law in particular
- Booming commercial centres in Medina
and Mecca led to a variety of commercial
transaction such as mudharabah,
musharakah, wadiah and practising
usurious forms of transaction with
maximum rate of interest
 Sources of Islamic Law
1. Quran (cont.)
• Did not totally abolish all the pre-Islamic
commercial practices
• The Quran prohibited transactions
(muamalat) involving usury, gharar
(uncertainty), gambling, game of chance
(maysir) and fraud
Example of prohibitions:
• Usury or interest ( 2:275-279, 30:39)
 Sources of Islamic Law
1. Quran (cont.)
Example of prohibitions (cont.)
• Gambling and game of chance (maysir) (5:90 ,
2:219),
• Bribery (2:188)
• Unlawfully possessing other’s property (4:29)
• Trading during the Friday congregational prayer
(62:9)
• False use of weights and measures (83:1-6)
(6:152), (55:8-9)
 Sources of Islamic Law
1. Quran (cont.)
In Sum:
• Every commercial transaction which is not
specifically prohibited or does not contain prohibited
elements is permissible
• Facilitating customarily practised transaction which
do not go against Shari’ah prohibition
• Encourage innovation and creativity in commercial
transactions
• Matters of ritual worship (ibadat) is considered
bid’ah (heresay) when new elements are introduced
 Sources of Islamic Law
2) Sunnah
• Literally means a clear path, a normative
practice, established course of conduct
• Technically refers to all that is narrated from the
Prophet (pbuh) in the form of acts, sayings and
whatever is tacitly approved which were later
sifted, collected and compiled by scholars in the
form of collection of books by Bukhari, Muslim,
Abu Dawood, Nasa’i, Tarmidhi and Ibn Majah
• Rules that merely confirm and reiterate what the
Quran has already stated
 Sources of Islamic Law
2) Sunnah

Example
Sunnah ‘s application on reiterating Quran’s
prohibition on Muslim to devour others’ property

The Prophet (SAW) said, “The property of a Muslim

is not lawful for another Muslim except with the
pleasure of his heart (consent)
 Sources of Islamic Law
3) Ijma’ (Consensus of Opinion)

• Literally means to resolve or to agree on an

issue
• Technically it is defined as a unanimous
agreement of the Muslim jurists of any period
following the demise of the Prophet (SAW) on an
issue on which the Quran and Sunnah are silent
• Does not suffer from subjectivity for opinions
made by the jurists
 Sources of Islamic Law
4) Qiyas (Analogical Deduction)

• Refers to analogy or deductive reasoning

• Commonly used method used by all the
Fiqh Schools
• Technically, it refers to the extension of a
Shari’ah value from an original case (asl)
to a new case (far’) because the latter has
the same effective cause (illah) as the
former
 Sources of Islamic Law
4) Qiyas (Analogical Deduction) (cont.)
Example – A case of prohibition of wine by
the Quran which did not specifically
mentioned other intoxicants.

Task – jurists are to decide the law

regarding other intoxicants

Identify the i’llah (effective cause) for

the prohibition of wine – it is intoxication
 Sources of Islamic Law
4) Qiyas (Analogical Deduction) (cont.)
Steps taken in Qiyas reasoning
1.Wine is prohibited
2.The reason for prohibition is intoxication
3.All things that are intoxicants are
prohibited
 Sources of Islamic Law
5) Juristic Preference (istihsan)
• Introduced by Hanafi school and later adopted by
other schools of Fiqh
• Essentially giving preference to one of the many
conceivable solutions to a particular problem in the
light of considerations of equity and fairness
• Refers to a method where a certain general text or
cause (‘illah) is specified to a certain issue and
exceptions are made with regards to other issues.
Example,
• sale of cars –ordered not manufactured yet!
 Sources of Islamic Law
6) Blocking the Means (Sadd al Dharai)
• Literally means blocking the ways or the
means
Therefore,
• A lawful act can be prohibited if there is a
strong likelihood that it would lead to an
unlawful act
• Leading to the lawful act to be unlawful

Example : the sale of grapes to a wine

maker, sale of saddles to race horse owners,
sale of weapons in a civil war
 Sources of Islamic Law
7) Public Interest (Maslahah Mursalah)
• Literally Maslahah means benefit
• Technically Maslahah Mursalah refers to
undefined public interest on which no textual
authority could be found for its validity or
otherwise
• Suitable method for the interest of the general
public
Example:
• Ownership of land, introduction of currency,
group watch to safe guard the interest of the
consumer etc
 Sources of Islamic Law
8) Custom (‘urf)
• Literally means common
• Technically refers to what is common or
customary among the people who have
become habituated to it whether it is a
word or deed provided it is not contrary to
the Shari’ah
Example:
• Buying of property – lawyer’s fees for the
S&P agreement
 Sources of Islamic Law
9) Presumption of Continuity (Istishab)
• Literally means accomplishment and keeping
close association and attachment
• Technically means maintenance of status quo
until proof is furnished in favour of its changes
Example:
• Debtor remains as debtor until proven that the
debt is settled
• Contracts are presumed to be permissible until
proven otherwise
 Objectives of Shari’ah
Aims at safeguarding people’s interest in
this world and in the next

Shari’ah identifies three areas:

1. Educating individual
2. Establishing justice
3. Realising and promoting benefit – maslaha
– to the people
 Educating individuals

Acts of devotion or ibadat in general are part

of educational programmes designed to
educate individuals
Eg. Prayer disciplines individuals and
teaches them about cleanliness, punctuality,
decency, unity and solidarity
Thus, purified souls/individuals are able to
free themselves from corrupt practices and
other evil deeds
 Establishing justice

‘Adl literally means placing things in their

right place
Prophets were sent down to establish
justice
Justice is the supreme goal and objectives
of Islam which is not tainted by racial, tribal
or nationalistic considerations
Realisation and Promotion of Benefit
- maslaha
• Maslaha in Arabic language, which literally translates as
benefit or interest, is defined as that which secures a
benefit or prevents harm (Imam al-Ghazali).
• The principle objective of the Shariah is the realisation of
benefit to the people, relating to their affairs both in this
world and the Hereafter.
• The Shari’ah is for the benefit of mankind both in this
world and the next and that maslahah as the only
overriding objective of the Shari’ah (Imam Shatibi)
Therefore,
• All the entire command of the Shariah concerns with the
realization of the interest (maslaha) and all of its
prohibitions are designed to prevent corruption
(mufsadah)
 Determination of Maslahah
• Imam Shatibi argues that since Shari’ah is
eternal and timeliness in its validity and
application of the interest that it seeks to
uphold must be objective and universal not
relative and subjective
• Certain maslaha is measured by its
relevance and service to the essential
masalih – then objectivity can be applied
 The Maqasid Model
Maslaha is to secure benefit and to prevent harm.
These benefits (masalih) are generally divided into
three types:

1) Essentials (Daruriyyat):
Religion
Life
Intellect
Progeny/Procreation
Property
2)The complementary (Ha.jiy.yat), and

3)The embellishments (Tah.seen.niy.yat)

 Essentials (Daruriyyat):
• These five necessities are derived from
Shari’ah as necessary and basic for
human existence. Therefore, every society
should preserve and protect these five
necessities; otherwise human life would be
harsh, brutal, poor, and miserable here
and in the hereafter.
 Essentials (Daruriyyat)(cont.)
Religion, all the required things that are needed
as beneficial tools to establish and attain the
necessity of spirituality were already contained
in the divine law, such as:
• all the principles, the rituals, the belief in angels,
messengers, the day of judgment, and so on.
• All these things were mentioned to serve the
purpose of establishing spirituality as a necessity
in the existence of humans on earth.
 Essentials (Daruriyyat)(cont.)
Life, is secured by obtaining lawful means of
sustenance such as food, marriage,
medicine, shelter, etc.
• The way to protect it is through the
enforcement of prescribed penalties
provided by the Divine Law.
For example, adultery, false accusation,
killing, and suicide are prohibited.
 Essentials (Daruriyyat)(cont.)
Intellect. It is necessary and essential to the
existence of the human race.

•The benefit of intellect to the human existence

might be beyond reason.
•Thus, it is secured by lawful means of
sustenance, and protected against destruction by
a set of rules and punishments.

For example, anything that diminishes the

intellect’s ability to function properly such as
alcohol or any similar substance is prohibited.
 Essentials (Daruriyyat)(cont.)
Property, which is very beneficial and
necessary to the human life.

• Divine law facilitates all lawful means for

its acquisition, and secures it by defending
the right of ownership through penalizing
theft.
The complementary (Ha.jiy.yat),
Matters that people need in order to
remove restrictions and difficulties in
applying the five necessities. In The
Qur’an:
“Allah does not want to place you in a
difficulty, but He wants to purify you, and
to complete His favor to you, that you may
be grateful.” (Qur’an, 5:6)
The complementary (Ha.jiy.yat),
• are intended to facilitate practicing and applying
the necessities, therefore, a great benefit reside
in them because they supplement the five
essential values.
However,
• there is no specific model for acquiring and
fulfilling them, except being lawfully obtained. If
food is complementary to preserving life as one
of the main objectives,
Thus,
• it is not necessary that it be a specific kind of
food, such as fast food. In this sense diversity of
cultures could be preserved too.
Embellishments (Tah.seen.niy.yat)
• are intended to render human affairs or
conditions more suited to the requirements
of the highest standards of moral conduct.
• They “denote interests whose realization
leads to improvement and the attainment
of that which is desirable”.
Embellishments (Tah.seen.niy.yat)
• Thus, the observance of cleanliness in
personal appearance and in spirituality,
the cultivation of moral virtues, the
avoidance of wastefulness in
consumption, and moderation in the
enforcement of penalties, fall within the
scope of embellishments
The Maqasid Model
Flexibility of Fiqh
Flexibility of Fiqh
Branches of Fiqh
General Principles of Islamic Finance
Upholding justice and avoiding

• Usury or Interest (Riba)

• Ambiguity (Gharar)

• Gambling (Maysir or Qimar)

• Prohibited (Haram) properties

 Methods in developing IA
Knowledge (concept/theory)
1) Establish objectives (and concepts/theories)
based on the principles of Islam and its
teachings and consider these objectives in
relation to contemporary accounting thought.

2) Start with the objectives (and

concepts/theories) established in contemporary
accounting thought, test them against the
Islamic Shariah, accept those that are
consistent with Shariah and reject those that
are not, and develop those that are unique.
Thank You