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Islamic Worldview and Its
Implications on Banking and
Finance
‫الر ِح ِيم‬
‫الر ْح َم ٰـ ِن َّ‬
‫ِب ْس ِم اللَّـ ِه َّ‬
‫وف َويَ ْن ََ ْو َن‬
‫ون ِإلَى ْال َخ ْي ِر َويَأ ْ ُم ُر َ‬
‫ع َ‬
‫َو ْلت َ ُكن ِ ِّمن ُك ْم أ ُ َّمةٌ يَ ْد ُ‬
‫ون ِب ْال َم ْع ُر ِ‬
‫ون ‪ .‬سورة آل عمران‪ -‬آيه ‪104‬‬
‫ع ِن ْال ُمن َك ِر ۚ َوأُولَ ٰـئِ َك ُه ُم ْال ُم ْف ِل ُح َ‬
‫َ‬
The Foundation for Islamic Finance
And let there be [arising] from you a nation
inviting to [all that is] good, enjoining what is
right and forbidding what is wrong, and those
will be the successful. (Qura’an, Al Imran.
3:104).
Islamic Worldview and Islamic Finance
• Islamic worldview has significant influence
on all aspects of Muslims’ life (Islam is addeen)
• Allah describes people who attain success as
those who are “inviting to all that is good
(khayr), enjoining what is right (ma’ruf) and
forbidding what is wrong (munkar) (Qura’an,
Al Imran. 3:104).
What is Worldview?
• Vision of reality and truth that appears before one’s mind eye,
revealing what existence is all about
• Governs way people interpret the world
• Schumpeter (1954): Analytic effort is of necessity preceded
by a pre-analytic cognitive act, called vision
• Acikgene (1994): Nature of human mind perceives problem
within a scheme of constructive unity
• J. S. Mill (1836): Political economy, therefore, reasons from
assumed premises
•Why can’t Muslims rely on conventional worldview? No human
endeavor is value free
FOUNDATION OF ISLAMIC ECONOMICS
5
Islamic Worldview
• Centered on principle of Tawhid or unity of God
• Al-Attas (1978) : “Ru’yat al-Islam Lilwujud” or “The View of Islam About
Existence”:
-Man, his aim in life, the universe, way he interacts are all inter-relate
-Man’s behavior governed by rules of Quran and Sunnah
-Pursue material gain with a view that existence in this world and hereafter
-Emphasize the importance of hereafter
FOUNDATION OF ISLAMIC ECONOMICS
6
ISLAMIC VS WESTERN WORLDVIEWS
• Islamic worldview based on Islam and its sources of knowledge
• A complete worldview at time of revelation
-fundamental concepts in Quran are not open for changes in meaning
• Based on revelation; flexible but not replaceable
•Does Islamic worldview different from conventional worldview?
• Since factors affecting worldviews differ, it is natural to also have
different worldviews
• Different theories to explain human behaviour
• Western: scientific worldview, purely relies on human
thinking/logic
7
ISLAM IS AD-DIN
•Meaning of Islam
• Al-Silm means to surrender, to submit; Salam means peace
•Achieve peace by submitting/surrendering oneself to Allah
•Term “din” used to denote “religion” in Qur’an
• Comes from root word “dana” mentioned 92 times in Qur’an
• Meaning debt, obedience, judgment / way / custom; inter-connected to
explain “religion”
• Islam is a way of life
• Not limited to rituals/faith
• Detailed code of conduct
• Willing and conscious submission to Allah in all aspects of life
• Economics and its related activities are potentially Ibadah or acts of
worship
8
ISLAM IS AD-DIN
•Al-Attas (1978) on relationship between din, Islamic worldview and
implications on ethics and morality:
•Indebtedness, submissiveness, judicious power, natural inclination
•Man is indebted to God for his existence
•Man submits himself willingly and consciously to God
•Man given the judicious power (aql) that enables him to make decisions
•Man born with a natural inclination (fitrah) to submit to God; remembers
covenant
•Based on revealed knowledge, man uses his intellect to organize
life on earth: Intention and action according to shari’ah
FOUNDATION OF ISLAMIC ECONOMICS
9
ISLAM IS AD-DIN
•Islam as a complete religion, guides a person’s life in all aspect,
moral, social, ethical, economics and political
•God entrusted man with wealth as vicegerent (khalifah) on this
earth
•As a khalifiah, man acts as a trustee to God in carrying out his
duties fairly towards human being and society following the means
permissible by the Shariah
•God has also entrusted man as a custodian of wealth. In order for
him to carry out his duties and obligations materially, he has been
given the right of possession
10
Al-Islam
Al-Shari’ah
Al-Aqidah
(Belief)
Al-Akhlaq
(Behaviour)
Al-Fiqh
(Jurisprudence)
11
2.
Islamic Economic Methodology
Developing Islamic Economics
•Islamic economic and financial disciplines are being developed
based on the Islamic economic methodology
-Derive accepted criteria from Islamic worldview
-Judge economic theory from Islamic perspective
-Conduct economic enquiries within Islamic framework
-Reduce/eliminate reliance on western methodology
•Methodology discusses
-Process of building models
-Developing theories: validate existing theory or build a new one
-Testing hypothesis
-Establishing and using criteria to evaluate our process
• How do we know that our models, theories and hypotheses are correct and on
what authority do we say so
CHANNELS OF ACQUIRING KNOWLEDGE
• Primary sources: Divine sources
1. Revelation – the Holy Quran
2. Sunnah of the Prophet (saw)
َ ‫یا أَیُّ َها الَّ ِذ‬
‫سو َل َوأُو ِلي أاْل َ أم ِر‬
ُ ‫الر‬
َّ ‫ین آ َمنُوا أ َ ِطیعُوا اللَّـهَ َوأ َ ِطیعُوا‬
َ َ‫ِمن ُك أم ۖ فَ ِإن تَن‬
‫سو ِل ِإن كُنت ُ أم‬
َ ‫از أعت ُ أم فِي‬
ُ ‫الر‬
َّ ‫ش أي ٍء فَ ُردُّوهُ ِإلَى اللَّـ ِه َو‬
َٰ ۚ ‫ون باللَّـه وا ألیوم أاْلخر‬
َ
َ
َ
‫س ُن تَأ أ ِو ا‬
َ
‫ (سورة‬. ‫یًل‬
‫ح‬
‫أ‬
‫و‬
‫ر‬
‫ی‬
‫خ‬
‫ك‬
‫ل‬
‫ذ‬
‫أ‬
‫أ‬
ِ
َ َ ٌ
ِ ‫ت ُ أؤ ِمنُ َ ِ ِ َ َ أ‬
ِ ِ
)59 ‫آیه‬-‫النساء‬
“O believers, obey Allah and obey the Prophet
and those of you who are in authority. Then if you
have a dispute concerning any matter, refer it to
Allah and the Prophet if you are the believers in
Allah and the Last Day”
• Secondary sources: Human sources
1. Ijtihad: interpretation/opinion of
scholars: can be reviewed –ijma
consensus
2. Sound senses: perception through five
senses; observation
3. Sound reason and intuition: intellect/
’aql, sound reasoning connected to
heart/ qalb /intuition or spiritual
heart and intuition
ISLAMIC ECONOMIC METHODOLOGY
•The Quran as guidance in the process of developing Islamic
economics and finance
•This entails a process of deriving answers based on the sources
of Islam
Islamic Worldview
Islamic Economic
Vision
Islamic Economic
Theory
ISLAMIC ECONOMIC METHODOLOGY
Islamic
Worldview
Islamic
Economic
Vision
Islamic
Economic
Theory
Examples
1. Based on the Islamic worldview which emphasizes the
concept of brotherhood in Islam  economic equitability 
just society distributive justice how zakat can be used in
macroeconomic management
2. Islamic banking and finance?
SHARI’AH
AND
ISLAMIC FINANCE
Islam & Al-Shari’ah
• Shari’ah is guidance in all aspects of Muslim’s
life
•Private and public
•Individual and social
•Spiritual and material
•Political, economics and finance
19
Shariah and Islamic Finance
Two concepts have important influence on :
1. Tawhidic paradigm
2. Concept of vicegerency (Khalifah)
1. Tawhidic Paradigm
•Islam means submitting to the Will of the One and Only God,
Allah: concept of tawhid - belief in the oneness of God
•Thus, every discussion of economics, business, ethics and
morality is Islam must be of necessity, precede from the
tawhidic dimensions
•Tawhid provides the answer to the question on purpose of
human existence on earth. Indeed, it is within this tawhidic
paradigm that the vision, objectives and fundamental concept
of Islam is rooted on
•It presents a picture of the kind of people and society Islam
aims to build
•A manifestation of God-consciousness (taqwa)
1. Tawhidic Paradigm
Fig 1.1
Position of Economics in Islam
ISLAM
Aqidah
(Belief)
Fiqh
Akhlak (ethics
&morality)
(Shariah)
(
Ibadah
(Worship)
Criminal
Law
Muamalah
Family
Law
Source: Introduction to Islamic Capital Market, p.21
Economics
Politics
2. Concept of Vicegerency
•Human beings have been created by Allah as His servant and
vicegerents, trustees and representatives on earth
•Thus, objective of human life is to manage and develop the
world in accordance with God’s plan, as enshrined by the
Shariah, so as to gain goodness in this world and in the
Hereafter
•Harmonizes and integrates material well-being with moralspiritual values
•Man directly responsible and accountable to Allah for all his
deeds.
Fig 1.2
Islamic Concept of Vicegerency
ALLAH
Ibadah
Concept of
Khalifah
(Vicegerency
)
Ibadah
Society
Individual
Muamalah (Human interaction)
Shariah Islamiah
INTERPRETATION OF SHARI’AH ON
ISLAMIC FINANCE
•IBF includes justice, fairness and equal distribution of wealth
which can be best achieved by means of profit and loss sharing
rather than debt financing
•Islamic financial principles share risk and rewards in wealth
creation by means of profit and loss sharing
•It promotes entrepreneurship and creativity in the economic
cycle whereby individuals put their effort to generate economic
activity
•Differs from modern capitalism where profit maximization is
the sole motive and bank is broadly content with earning
interest for financial gain regardless of real economic activity and
social benefits
3.
Major Attributes of Islamic
Economics and Islamic
Economic System
Basis for IES
•In contrast to conventional economics, the Islamic approach
to economics is holistic, offers integralistic spiritual view,
which is based on the teachings of the Quran and Sunnah,
providing a better alternative philosophical framework for
man’s interaction with nature and his fellow men.
•Many scholars have defined the activities of Islamic
economics as follow:
“Islamic economics is the knowledge of the application of the
injunctions and rules of the Shari’ah regarding acquisition and
disposal of available resources for providing satisfaction to
the individuals in order to enable them individually and
collectively to perform their obligations to Allah and the
society.”
1. PHILOSOPHICAL FOUNDATIONS
CONVENTIONAL Economic System
•
Derived from theories developed by western
scholars
•
Specific philosophical foundations
1.
Concept of scarcity: nature is niggardly and human wants
unlimited
2.
Self-interest: priority to individual goals
3.
Absolute freedom: survival of the fittest
4.
Materialism and utilitarianism
5.
Positivism (science) versus norms (religion)
1. PHILOSOPHICAL FOUNDATIONS
ISLAMIC Economic System
•
Derived from Quran and Sunnah
•
Specific philosophical foundations
1.
Tawhid: Accepting Allah as the only sovereign power
2.
Ibadah: Any act must be within shari’ah boundaries to
seek Allah’s pleasure
3.
Khilafah: Vicegerency, man recognizes his duty as servant
of God
4.
Tazkiyyah: Process of economic activity must be seen as a
process that purifies soul
2. OPERATIONAL PRINCIPLES
ISLAMIC ES
•
Philosophical foundations to a set of operating
principles
•
Specific operational principles
1.
Adl/Ihsan: adl - giving what is due, Ihsan-giving more than
what is due
2.
Takaful/Taawun: cooperation, brotherhood
3.
Responsibility/accountability: individual is responsible to
society, but ultimately to Allah
4.
Moderation: in consumption, production, distribution
3. GOALS
ISLAMIC ES
•
Value loaded, directed towards achieving maqasid
al-shariah
•
Promoting virtues and preventing harm
•
To achieve public welfare (maslahah)
•
Socio-economic justice
•
Economic development
ISLAMIC ECONOMIC SYSTEM
WV
SUB-ST
Political
Phil
-Tawhid
- Ibadah
- Khilafah
- Tazkiyah
Economic
Op-P
-‘Adl/Ihsan
- Takaful
- Resp’ty
- Accnt’ty
Social
Goals
-S-E Justice
- Econ Dev
- Efficiency
- Stability
32
4.
ISLAMIC ECONOMICS
AND
FINANCE
FOUNDATION OF ISLAMIC ECONOMICS
33
ISLAMIC ECONOMICS
•From definition of Islamic economics
•Find values/rules directly in the sources
•If not directly available, then have to “derive” the meaning
•Most economic applications will have to be derived
•Need to understand Islamic worldview especially Islamic vision
of economics
•Islamic / shari’ah boundaries of economics and finance must be
determined
•Shari’ah must be interpreted and applied
ECONOMICS AND ISLAMIC ECONOMICS
• Economics: study of human behavior in relation to the
use of scarce resource to fulfill unlimited wants
• Economics is a field that deals with management of
scarce resources (production, consumption and
distribution)
• Due to scarcity, we have to make choices
• Man interacts with other human beings and nature to
make these choices
FOUNDATION OF ISLAMIC ECONOMICS
35
ISLAMIC ECONOMICS
• Part of din
• Economic activities based on the Islamic worldview
• Make choices and decisions according to Islamic
description, analysis, prescription
•Production, consumption and distribution activities
• Approach to and process of interpreting and solving man’s
economic problems based on the values, norms, laws and
institutions found in and derived from the sources of Islam
FOUNDATION OF ISLAMIC ECONOMICS
36
Islamic Economics
•Islam provides unique prescription for economic
problems/issues
•Definition: The social science which studies the
economic problems of people while incorporating the
values of Islam.
Main objective: To achieve falah (Success, happiness &
well-being by conforming to Allah’s command)
ISLAMIC ECONOMICS
•
Major economic issues
• Conventional economics
• Unlimited wants
• Limited resources
• Achieving the highest utility
• Islamic economics
• Economic pursuit must be derived from Islamic worldview
• Economic goals do not contradict the shari’ah
• Shari’ah constraints to be observed in making choices
• Resources are unlimited
FOUNDATION OF ISLAMIC ECONOMICS
38
ISLAMIC FINANCE
• To finance economic activity in an Islamic framework
• Must have institutions using instrument according to rules and
regulations which are all bound by the shari’ah
• Observe basic prohibitions in business transaction: riba, gharar and
maysir
• Products involve must be halal
• Profit must come from trading transactions
FOUNDATION OF ISLAMIC ECONOMICS
39
Maqasid al-Shari’ah
•
Objectives and rationale of Shari’ah
–
–
–
•
Aims to protect all aspects and segments of life
–
Faith (ad-din), human self (nafs), intellect (‘aql),
posterity/descendents/generations (nasl) and wealth (mal)
Many shari’ah texts clearly state reasoning behind certain shari’ah rulings
Preserve public interest (maslahah)
Implications to IBF
–
–
–
Purely financial goals (profit, growth, market share) are insufficient
Profit-sharing vs fixed-return techniques
Need to achieve the objectives of Islamic economics: incorporate spiritual
well-being
–
–
–
distributive justice
cooperation
equitable access to economic resources
Islamic Worldview and Islamic Finance
•
In the overall context of Islamic worldview,
IBF is established to:
•
•
•
Requires financial activities which are consistent
within shariah guidelines
follow ethical principles and aim to eradicate all kinds
zulm (injustice) which are related to business
activities and financial dealings
contribute significantly to the accomplishment of the
socio-economic goals of Islam
Implications on IF
•The goals of the Maqasid al Shariah entail intense
commitment of every individuals and organizations
to justice, brotherhood and social wellbeing
•This will inevitably lead to a society whereby every
member will cooperate with each other and achieve
the success in life for ultimate happiness
•In the context of Islamic finance, this means the
products offer by financial institutions should reflect
ethical values, fairness and justice (Ahmad, 2009)
Implications on IF
The implications on Maqasid al Shariah in IF can be measured
based on the extent to which the goals in promoting justice and
fairness to individuals and society well being can being achieved.
1.
2.
3.
4.
5.
Have religious principles in the Quran and Sunnah of avoiding riba,
ghahrar and maysir be observed in product development and
transactions between the customers and bank?
Has individual need been met fairly met? Is interest still being used in
pricing the product?
Has true knowledge (intellect ) being used to benefit human kind e.g. is
the product being developed brings benefit to customers or banks?
What is the long term effect of developing the product? Does it benefit
individual or further burden them?
How is wealth being shared between the bank and customers? Is profit
sharing being practiced or it is still based on time value of money?
Important Caveat
•
Conventional knowledge should not be completely rejected
•
•
Common grounds or areas of conventional knowledge which are
acceptable to Islam
Some general concepts can be adopted and amended
 Economic growth
 Efficiency
 Productivity
4.
Objectives of Banking and Finance:
Conventional versus Islamic
Perspectives
Banking and Finance:
A Comparative Analysis
• Objectives of banking and finance
from conventional perspectives vs
Islamic perspectives
-Motivations to save and borrow
-Bank-customer relationship
-Overall objectives
Conventional Banks
Islamic Banks
1. The functions and operating
modes of conventional banks are
based on fully manmade
principles.
1. The functions and operating modes of Islamic
banks are based on the principles of Islamic
Shariah.
2. The investor is assured of a
predetermined rate of interest.
2. In contrast, it promotes risk sharing between
provider of capital (investor) and the user of
funds (entrepreneur).
3. It aims at maximizing profit
without any restriction.
3. It also aims at maximizing profit but subject
to Shariah restrictions.
4. It does not deal with Zakat.
4. In the modern Islamic banking system, it has
become one of the service-oriented functions of
the Islamic banks to be a Zakat Collection Centre
and they also pay out their Zakat.
5. Lending money and getting it
back with compounding interest is
the fundamental function of the
conventional banks.
5. Participation in partnership business is the
fundamental function of the Islamic banks. So we
have to understand our customer’s business very
well.
Conventional Banks
Islamic Banks
6. It can charge additional money
6. The Islamic banks have no provision to
(penalty and compounded interest) in charge any extra money from the
case of defaulters.
defaulters. Only small amount of
compensation and these proceeds is given
to charity. Rebates are given for early
settlement at the Bank’s discretion.
7. Very often it results in the bank’s 7. It gives due importance to the public
own interest becoming prominent. It interest. Its ultimate aim is to ensure
makes no effort to ensure growth
growth with equity.
with equity.
8. For interest-based commercial
banks, borrowing from the money
market is relatively easier.
8. For the Islamic banks, it must be based
on a Shariah approved underlying
transaction.
9. Since income from the advances is 9. Since it shares profit and loss, the
fixed, it gives little importance to
Islamic banks pay greater attention to
developing expertise in project
developing project appraisal and
appraisal and evaluations.
evaluations.
Conventional Banks
Islamic Banks
10. The conventional banks give
10. The Islamic banks, on the other hand,
greater emphasis on credit-worthiness give greater emphasis on the viability of
of the clients.
the projects (prospects of growth of
business)
11. The status of a conventional bank, 11. The status of Islamic bank in relation
in relation to its clients, is that of
to its clients is that of partners, investors
creditor and debtors.
and trader, buyer and seller.
12. A conventional bank has to
guarantee all its deposits.
12. Islamic bank can only guarantee
deposits for deposit account, which is
based on the principle of al-wadiah, thus
the depositors are guaranteed repayment
of their funds, however if the account is
based on the mudarabah concept, client
have to share in a loss position.
References
• Haron and Azmi (2009)
• Haneef (1997)
• Zaharuddin.net