This document provides an overview of key concepts in Islamic finance based on Shariah principles. It discusses the Shariah framework including ibadah (acts of worship), muamalat (civil transactions), and criminal law. It then covers the philosophy of Islamic finance based on concepts like tauhid (monotheism), purification, accountability on judgement day, and human stewardship. Finally, it outlines characteristics of Shariah-compliant finance and prohibitions like riba (interest), gharar (uncertainty), and maisir (gambling).

1. Chapter 3
Philosophy of islamic finance

2. 3.1 shariah framework
SHARIAH
MUNAKAHAT JINAYAT
MUAMALAT AMMAHIBADAT
ECONOMIC SOCIALPOLITIC
MUAMALAT

3. The word ibadah is derived from abd which means
‘servant and slave’. Therefore the meaning of ibadah
is servitude and slavery. It is concerned with the
practicalities of worship to Allah, in the context of
the relationship between man and his Creator.
In terms of Islam, ibadah is the obedience,
submission, and devotion to Allah (God) along with
the ultimate love for Him.

4. The rules of ritual purification, prayer, pilgrimage,
fasting, war (jihad) and some other form of
worship are dealt with under this heading. Most
of these rules deal with the rights owed to Allah
by the individuals alone or by the community as a
whole.
Muslims believe that ibadah is the reason for the
existence of all humanity. That is, Muslims believe
that all people exist only to submit to Allah.

5. Present a framework for conduct in the civil
arena. It is concerned with the practicalities of a
person’s daily life, in the context of relationship
between man and man, and other creatures
which include animal, plant and non-living things.
a) Muamalat
b) Munakahat
c) Jinayat
3.1.1 muamalah ammah

6. Muamalat is plural and the singular is
muamalah. Muamalah is from the verb
“aamala” literally meaning to interact.
Muamalat means interactions or
transactions.
Commercial transactions are concluded
through contracts which are permitted by
the Shariah as evidenced by the Quran, the
Sunnah and other sources of Islamic Law.

7. Conduct that cover human activities
related to business, trade and efforts in
accumulating wealth and means or
activities related to economic
development, in three areas:
a) political
b) economic
c) social

8. Described as Islamic Family Law or Personal Law or
Muslim Law of Personal Status.
Concerns with family matters;
1. Marriage,
2. Divorce,
3. Inheritance,
4. Maintenance,
5. Guardianship, and related matter

9. JINAYAT (criminal law)
Conduct related with offences against the
human body and tort are called jinayat.
The term jinayat also used for torts when
the offence falls under ghasb (usurpation,
misappropriation) and italf (destruction of
property)

10. Crime: consists in legal prohibitions
imposed by Allah, whose infringement
entails punishment prescribed by Him.
1. Hudud
2. Qisas
3. Ta’zir

11. 3.2 philosophy of finance
PHILOSOPHY
a) Tauhid Uluhiyyah
b) Tauhid Rububiyyah
c) Purification concept (Tazkiyyah)
d) Judgement Day
e) Human as a caliph

12. • Allah is the true existence and everything
else, including man exist because of Him.
• Thus, Man’s prayers, other acts of worship,
life and death should all be for the sake of
Allah.
• All man activities, if done for the sake of
Allah, are considered ‘Ibadah. (al-’amal
‘badah)

13.  Allah is Rab (the Authority to make regulations
to protect and sustain the lives of so
many creatures).
 This concept is explained that Allah swt is the
creator and sole owner of the entire source
in the universe. So Allah entitled to lay
down the law and regulations on human
life to be observed and obeyed.

14.  In an economic context, Rububiyyah the
Divine rules for organizing human
livelihood and economic activities in
peace. Economics must use the divine rule.

15.  This concept is a means of purification and
human development agent.
 The concept of tazkiyyah forming soul and
moral purity in a relationship with God, man
and nature.
 Purification of property is done through
charity and alms.

16.  Economic development according to this
concept can also be done by avoiding the
practice of usury.
 As a result of the concept of tazkiyyah, born
al-Falah, the success attain in this world and
the hereafter.

17.  Judgment Day is the day on which all
activities in the world will be judged and
rewarded. This makes life including economic
activity continues on the right path
(according to Shariah).
 All actions and human behavior will always be
analyzed in terms of its impact on life in the
hereafter. Therefore, people will carrying out
economic activities that do not conflict with
Islamic law.

18.  Khilafah refer to the role, status as well as
the man kind’s responsibilities to
themselves and to the ummah as a
whole.
 Khilafah are the relationship between
man and god, man and his fellow men,
man and other elements and creatures of
the universe man and his innermost self.

19.  Human principally has been assigned to safe
guard this world which belongs to Allah
(Quran, 2:30).
 On the day of judgment every human being
will be accountable for his or her conduct in
this world which will determine their true end
whether to the heaven or to the hell.

20. 3.2.1 Quranic verses relating to wealth /economic/
finance
Surah al-Nisaa’
O you who have believed, do not consume one
another's wealth unjustly but only [in lawful]
business by mutual consent. And do not kill
yourselves [or one another]. Indeed, Allah is to you
ever Merciful.

21. Surah al-Baqarah
And spend in the way of Allah and do not
throw [yourselves] with your [own] hands
into destruction [by refraining]. And do
good; indeed, Allah loves the doers of good.

22. They ask you, [O Muhammad], what they should
spend. Say, "Whatever you spend of good is [to be]
for parents and relatives and orphans and the
needy and the traveler. And whatever you do of
good - indeed, Allah is Knowing of it."
Surah al-Baqarah

23. Who is it that would loan Allah a goodly loan
so He may multiply it for him many times
over? And it is Allah who withholds and
grants abundance, and to Him you will be
returned.
Surah al-Baqarah

24. 3.2.2 islamic views on finance
The example of those who spend their wealth in the way
of Allah is like a seed [of grain] which grows seven
spikes; in each spike is a hundred grains. And Allah
multiplies [His reward] for whom He wills. And Allah is
all-Encompassing and Knowing.
Surah al-Baqarah

25. 3.2.3 Difference between islamic finance and conventional
finance
CHARACTERISTICS ISLAMIC CONVENTIONAL
Ownership of resources Allah is the sole owner;
man acts as a trustee to
utilize natural resources
Privately owned by
individuals @ the private
sector
Decision maker Individuals & producers,
based on Islamic principles
& commandments
Individual
Price determination Consumers & producers
(power of the market) based
on Islamic principles &
commandments
Price mechanism

26. CHARACTERISTICS ISLAMIC CONVENTIONAL
Freedom to reap profit Freedom to seek profit,
provided that interest is not
involved
Freedom to reap profit
resulting in high incentives
to work
Freedom of choice Individuals & producers
have freedom of choice,
provided there is no
contravention of Islamic
principles &
commandments
Individuals & producers
have freedom of choice
Production objective Priorities the accumulation
of π & social welfare based
on Islamic principles &
commandments
To maximize π by
prioritising individual
interest

27. 3.3 characteristic of shariah
1. Rabbaniyah (divine)
2. Reward in the world and
hereafter
3. Alammiyah and Ummumiyyah
4. Permanent
5. Syumul

28. 3.4 forbidden practice in islamic finance
Trade and commerce in Islam must comply with
requirements of the Shariah, which broadly speaking refer
to:
- abstinence from prohibitions, (haram matters),
and
- observing that every contract possesses all its
essential elements and that every essential element
meet the necessary conditions.

29. There are many prohibitions, but these five will make aqads
or contracts invalid:
(i) Producing and selling impure goods;
(ii) Producing and selling goods that are of no use
therefore of no value;
(iii) Riba;
(iv) Gharar, i.e. ambiguity or uncertainty; and
(v) Maisir (gambling), i.e. anything that involves
betting.
(vi)Zulm
3.4.1 Prohibition in muamalat

30. It must not be of any of the following substances:
dogs and pigs
every intoxicating liquid
Carcasses
blood, pus and vomit
droppings and urine
milk of animals not eaten by men

31. • Products that disrupt and endanger the physical and mental
health will not be released because it is forbidden.
• Products that can damage moral values ​​and humanity will
not be released because of the forbidden.
• Products that can undermine the dignity and well-being will
not be released because of the forbidden.
• Products that can lead men to evil (sin) will not be issued.
• Only good, quality products that will enhance human
values ​​will be produced as obligatory demands of fardhu
kifayah.

32. Riba has been extracted from raba. It means
addition, increase.
Riba literally means to increase, to grow, to rise, to
add, to swell. It is however, not every increase or
growth which has been prohibited by Islam.
Riba technically refers to the premium that must be
paid by the borrower to the lender along with the
principal amount as a condition for the loan or for an
extension in its maturity
Definition

33. That which you give as riba to increase the
peoples' wealth increases not with God; but
that which you give in charity, seeking the
goodwill of God, multiplies manifold. (30:39).
RIBA IN THE HOLY QUR'AN
Stage of prohibition.
1. First Revelation (Surah al-Rum, verse 39)

34. And for their taking riba even though it was
forbidden for them, and their wrongful appropriation
of other peoples' property, We have prepared for
those among them who reject faith a grievous
punishment. (4:161).
2. Second Revelation (Surah al-Nisa', verse 161)

35. O believers, take not doubled and redoubled
riba, and fear God so that you may prosper.
Fear the fire which has been prepared for those
who reject faith, and obey God and the Prophet
so that you may receive mercy. (3:130-2).
3. Third Revelation (Surah Al 'Imran, verses 130-2)

36. RIBA
RIBA
DUYUN
RIBA
NASI’AH /
RIBA YAD
RIBA
FADHL
RIBA
JAHILIYYAH
RIBA QARD
RIBA BUYU’

37. Riba duyun - Riba out of lending and borrowing. This
kind of riba is the extra amount of money over and
above the principal of the loan either:
Imposed by the lender on the borrower in the
contract; or
Promised by the borrower in the contract.
i. Riba al-Qard - Riba is imposed or promised from
the beginning.
ii. Riba al-Jahiliyyah - There is no riba at the
beginning; riba is imposed only after default

38. b. Riba buyu’ - Riba in trading transactions. This
kind of riba may occur out of an exchange between two
ribawi materials of the same kind where the necessary
rule(s) are not observed.
i. Riba al-Fadhl - The ribawi materials (of the same
basis and same kind) exchanged are of different
weights, measurements or numbers and they are
exchanged at the same time.
ii. Riba an-Nasiah - The ribawi materials exchanged are
of equal weights,measurements or numbers but
payment of the price and delivery of the goods are
made at two different times

39. Ribawi item
i. Barley
ii. Wheat
iii. Salt
iv. Dates
v. Gold
vi. Silver
Condition of exchange of ribawi item
i. Spot
ii. Equal
iii. Alike

40. TYPE
CURRENCY STAPLE FOOD
GOLD SILVER RM USD WHEAT BARLEY DATE SALT
CURRENCY
GOLD
SILVER
RM
USD
STAPLE
FOOD
WHEAT
BARLEY
DATE
SALT
On the spot and same amount, quantity or weight (at par)
On the spot basis only
Free from the above condition

41. DEFINITION
• The Arabic word gharar is a fairly broad concept that
literally means deceit, fraud, uncertainty, danger, peril,
delusion, or hazard that might lead to destruction or
loss
• Gharar refers to any transaction of probable items
whose existence or characteristics are not certain, due
to lack of information, ignorance of essential elements
in the transaction to either party, or uncertainty of the
ability of one party to honor the contract.

42. • The Prophet (s.a.w) has forbidden the purchase of
1. the unborn animal in the mother’s womb,
2. the sale of the milk in the udder without
measurement,
3. the purchase of spoils of war prior to
distribution,
4. the purchase of charities prior to their receipt,
5. and the purchase of the catch of a diver.

43. • All jurists agree that gharar should be avoided in
commercial exchange contracts.
• As Islamic Shari’a forbids riba (interest) because it
leads to exploitation and injustice in the society, it
also forbids gharar in any transaction to protect the
two parties from deceit, ignorance and uncertainty.

44. • All Islamic financial and business transactions must be
based on
1. transparency,
2. accuracy, and
3. disclosure of all necessary information
so that no one party has advantages over the other
party.
• Islam has clearly forbidden all business transactions,
which cause injustice in any form to any of the parties
such as the form of hazard leading to uncertainty in
any business, or deceit or fraud or undue advantage.

45. • The rationale of prohibition of gharar is to ensure full
consent and satisfaction of the parties in a contract.
• Without full consent, a contract may not be valid.
• Full consent can only be achieved through certainty,
full knowledge, full disclosure and transparency
• While the prohibition of riba is absolute, some
degree of gharar or uncertainty is acceptable in the
Islamic framework.

46. 1. Major Gharar
In general terms major gharar is:
 an uncertainty which is so great that it
becomes unacceptable, or
 it is so vague that there is no means of
quantifying it.
TYPES OF GHARAR

47. More specifically major gharar arises out of one of the following:
Relating to buyer or seller:
 Buyer or seller is not capable of taking responsibility not of
majority age, or drunk
 Buyer or seller is prohibited from disposing of his property:
declared bankrupt, or declared prodigal
 Buyer or seller is coerced.
Relating to asset:
 asset or property does not exist
 asset or property is not free from encumbrances or
 asset or property is not specific or not according to its
specifications.

48. Relating to price:
 Price not mentioned in absolute amount,
 Two prices in one contract , or
 Mention of ibraa’ in absolute amount or percentage of
selling price
Relating to contract:
 Contract is conditioned (in sale)
 Contract is not expressed in an absolute and decisive
language (with “shall”, “will” or “agree to”)

49. 2. Minor Gharar
 Minor gharar or minor uncertainty is
forgiven.
 Contracts involving minor gharar are
permissible and valid.
 In contracts involving minor gharar the
gharar is taken into consideration in
arriving at the price.

50. Maisir: it refers to gambling or any activity that
involves betting, involving money or any items on
the outcome of an unpredictable event.
Gambling is betting or charging something that will
be forfeited if one fails to obtain the greater gain
that one hopes for.
Speculation is not gambling. Some jurists say that
speculation is prohibited, but contracts involving
speculation are still valid.

51. A comprehensive Arabic term used to refer to all
forms of inequity, injustice, exploitation,
oppression and wrong doing, whereby a person
either deprives others of their rights or does not
fulfil his obligations towards them.
Also refers to trading in items the use of which is
prohibited in Islamic law (Shari'ah) such
as intoxicants (e.g. alcoholic drinks & illegal
recreational drugs), pork, etc

52. 3.4.1 impediment transaction in islam
The jurists determined that any consent which is
impeded is consent conditional upon the cause of
contract.
Considered the consent is impaired and invalid – no
an actual agreement.
Eg : victim of mistake, fraud or deceit – the contract
become voidable and burden of proof lies in
establishing that the consent had been induced by
misleading factors.

53. 4 Grounds of the impediments
Mistake Fraud
Duress
Effective
constraint

54. Definition
 Term use - Ghalat, which applies to both to
calculated and material error.
 In Maliki texts – jahl (ignorance) is found to replace
ghalat.
 Oxford law dictionary – define mistake as a
misunderstanding or erroneous belief about a
matter of fact or a matter of law.

55. Concept of mistake in islamic
contract
 Islamic law conceives of mistake as a substantive or
intrinsic element which capable of occurring only
during the formation of contractual agreement.
 Mistake could arise from an assumption as to the
existence, quality or quantity of the contractual object
or to the nature or existence of the contract itself.

56.  The provisions concerning mistake are scattered
and usually are to be found in the books of fiqh
among the discussion in option of description,
defect or sight.
 The Islamic concept of mistake is inextricably
bound to the notion of consent in contract.
 The law lacks in formulated theory because the
provision of mistake are in actuality, mostly
preclusions or safeguards designed to prevent its
very incidence.

57. Categories of Mistake
7) Mistake as to law
6) Mistake as to person
5) Mistake as to value
4) Mistake of non-disclosure of the will
3) Mistake with stipulation intention
2) Mistake as to meaning
1) Mistake as to object of the contract

58. Fraud is a type of criminal activity, defined as:
'abuse of position, or false representation, or prejudicing
someone's rights for personal gain'.
Put simply, fraud is an act of deception intended for
personal gain or to cause a loss to another party.
The general criminal offence of fraud can include:
 deception whereby someone knowingly makes false
representation
 or they fail to disclose information
 or they abuse a position.

59. Surah al-Baqarah
And eat up not one another's property unjustly (in
any illegal way e.g. stealing, robbing, deceiving,
etc.), nor give bribery to the rulers (judges before
presenting your cases) that you may knowingly eat
up a part of the property of others sinfully.
Transactions must be free of all types of fraud

60. "Give just measure, and cause no loss (to others by fraud).
Surah ash-Shu’ara
Among the forbidden frauds in Islam are:
i. Al-Tanajush
ii. Tadlis Al-‘Aib
iii. Al-Khilabah
iv. Al-Khiyanah

61. i) Al-Tanajush
Refers to the silent collusion between seller and
buyer, whereby the buyer pretends to buy the
seller’s goods at a higher price in order to create
the illusion of high demand. As a result, other
customers are fooled and compete to buy the same
goods at a high price.
ii) Tadlis Al-‘Aib
Occurs when the seller purposely hides the
flaws or imperfections in his goods.

62. iii) Al-Khilabah
Is a fraud perpetuated through actions or words
by one of the parties to an aqad, in order to
persuade the other party to enter into the
contract.
iv) Al-Khiyanah
Refers to fraud or deceit in stating the actual ratio
of capital utilised in purchasing goods or in
pursuing other activities that result in the same
outcome.

63. Literally, ikrah is derived from the root word ka ra ha which is
constructed as akrahahu meaning ‘to force someone to do
something against his wishes’. The word kurh is also the
antonym of hubb (love) such, these two terms are used in an
opposite sense, as in for example in the Qur’an (2:216) which
reads:
Fighting is prescribed for you, and ye dislike it. But it is possible
that ye dislike a thing which is good for you, and that ye love a
thing which is bad for you. But Allah knoweth, and ye know not.

64. Technically, jurists have offered various definitions of duress.
Sarakhsi(1978) for example, defines this as follows: “ by duress
one designates the action of one person against another
suppressing the consent of this latter person or vitiating his free
will”.
Zayla`i (1315 H) on the other hand considers duress as an action
directed against a person which suppresses his consent while
Bukhari (1995) defines it as forcing a person to perform an act
against his wishes by way of any threat of which the person
exerting duress (mukrih) is capable, so that the duressed person
(mukrah) is intimidated and deprived of free consent.

65. A more precise definition is given by Asqalani (1407 H)by
stating that duress is to force another person to do what he
does not wish while other definitions are found to be almost
identical to those previously given.
Contemporary jurists for their part give no differing
definition of duress , except by either modifying or accepting
those offered by their predecessors. For instance, Abu
Zahrah(1977) states that duress is an order from one person
to another to commit an act or utter words under