Islam is a way of life which encompasses every aspect in a person’s daily conduct. It provides the believers who are Muslims with guidance on acts of worship to everyday dealings or muamalat. Therefore, this article serves as a basic introduction to the concept of savings that conforms to the Shariah. By conducting oneself in compliance with the Shariah, it brings one closer to protecting the 5 elements in order to achieve the Maqasid Shariah.
In ensuring that our savings are halal, we are required to firstly, understand the basic principles of halal money. The term halal, which means lawful or permissible, applies not only to food and drinks but also to the source of our income. In fact, Islam views the acquisition of halal income as one of the most important aspect of religion. If income is obtained through unacceptable ways, for example as interest earned or stealing, then spending it is considered unlawful as well.
Introduction to the concepts of Islamic finance
The principles of halal money are strongly related to the concepts of Islamic finance. Before we embark upon the guideline on savings, concepts of Islamic finance need to be appreciated.
The financial systems in general, play an important function in allocation of resources where funds are mobilized from savers/households and allocated for productive or investment purposes. In an Islamic financial system, this is done in conformance to the principles of Shariah. Additionally, it is value oriented as other than making profits, it is equally important to achieve socio-economic justice and promote social welfare.
The basic pillars of Islamic finance are as follow:
(i) The main source of reference is Islamic law or Shariah. As such, Islamic financial contracts and its principles such as mudharabah (profit-sharing) and murabahah (cost-plus) are derived from the Quran, Hadith and other Shariah sources.
(ii) Prohibition of riba (interest). Allah has mentioned in Surah Al-Baqarah [2:275]: “…Allah has permitted trade and forbidden usury” and in another verse [2:278] “O you who believe: Fear God and give up what remains of your demand for usury if you are indeed believers”. Generally, riba is prohibited due to its destructive element that can cause injustice to society.
(iii) Prohibition of gharar (uncertainty). Gharar is described as a risky or hazardous sale, where details concerning the sale item are unknown or uncertain. The Quranic verse in surah An-Nisa’ [4:29]: “O you who have believed, do not consume one another’s wealth unjustly but only [in lawful] business by mutual consent.” has impliedly shown that uncertainty is one of elements that can cause injustice. Thus, uncertainty is prohibited in any transactions.
(iv) Prohibition of maysir (gambling). Gambling is a form of excessive uncertainty and speculation. The winner is solely determined by mere chance and takes others’ property unjustly. Maysir is prohibited in the Quran, where verse in Surah An-Nisa’ [5:90] “O you who have attained to faith! Intoxicants, and games of chance, and idolatrous practices, and the divining of the future are but a loathsome evil of Satan’s doing; shun it, then, so that you might attain to a happy state.”
(v) Prohibition of non-permissible items. Items that are considered illegal under the Shariah cannot be the subject matter of trading, as it would render the whole transaction invalid. As mentioned in Hadith (Al-Bukhari & Muslim): “Surely, Allah and His Messenger have prohibited the sale of wine, the flesh of dead animals, swine and idols”. The income earned from such prohibited items is also considered sinful as highlighted in Hadith (Ahmad & Abu Daud): “When Allah prohibits a thing, He prohibits (giving and receiving) the price of it as well.”
Major Differences between Islamic and Conventional Financial System
|Money is a medium of exchange, store of value and a product in itself.
|Real Asset is a product. Money is just a medium of exchange.
|Time value is the basis for charging and earning interest.
|Sale of goods & services is the basis for earning profit.
|Risk transfer. All the risk are transferred and born by the other party.
|Risk sharing. Emphasis on risk sharing Profit and Loss-Sharing principles”
|Disbursement of cash or financing are considered or based on loan (debt-based) contract.
|Disbursement of cash or financing are made through sales (exchange with underlying assets) contract.
Continue to Part 2
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- Daud Vicary Abdullah and Keon Chee, Islamic Finance: why it makes sense. Singapore : Marshall Cavendish International (Asia) Pte Ltd, 2011.