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Foundations of Sharı‘ah

Governance of Islamic Banks

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KARIM GINENAAZHAR HAMID

Foundations of Sharı‘ah

Governance of Islamic Banks

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This edition first published 2015

© 2015 Karim Ginena and Azhar Hamid

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Library of Congress Cataloging-in-Publication Data

Ginena, Karim.

Foundations of Shari'ah governance of Islamic banks / Karim

Ginena, Azhar Hamid.

pages cm. – (The Wiley finance series)

Includes index.

ISBN 978-1-118-46077-1 (hardback)

1. Banks and banking–Islamic countries. 2. Banks and banking–Religious aspects–Islam.

I. Hamid, Azhar. II. Title.

HG3368.A6G56 2015

332.10917′67–dc23

Cover Design: Wiley

Cover Image: ©iStock.com/stereohype

Set in 10/12pt Times by Laserwords Private Limited, Chennai, India

Printed in Great Britain by TJ International Ltd, Padstow, Cornwall, UK

http://www.wiley.com

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Dedication

O Allah, You are Oft-Pardoning and You love to pardon, so pardon us, our parents, families, teachers, friends, and all those who have rights upon us.

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vii

Contents

Foreword xiii

Acknowledgements xv

Introduction xvii

PART I

By Karim Ginena 1

Chapter 1 The Roots, Characteristics, and Objectives of Sharı'ah and the Islamic Economic System 3

1.1 Sharī‘ah, the Qur’ān, and Sunnah 3

1.2 What is Fiqh? 8

1.3 Performing Ijtihād and Differences in Juristic Opinions 11

1.4 Sharī‘ah Rulings 16

1.4.1 Obligation-Creating Sharī‘ah Rulings 16

1.4.2 Declaratory Sharī‘ah Rulings 19

1.5 The Subject of a Sharī‘ah Ruling 19

1.6 Characteristics of Sharī‘ah 23

1.7 Objectives of Sharī‘ah 30

1.8 The Islamic Economic System and its Characteristics 35

1.9 Objectives of Sharī‘ah Relating to Property 50

Chapter 2 Corporate and Sharı'ah Governance of Islamic Banks 57

2.1 Corporate Governance Gains Prominence 57

2.2 Hisba System and an Islamic Perspective

on Corporate Governance 60

2.3 OECD and Islamic Principles of Corporate Governance 65

2.4 Importance of Corporate Governance to Banking Sector 67

2.5 The Financial Crisis and Corporate Governance Challenges 69

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2.6 Developing Countries and Corporate Governance Issues 70

2.7 Corporate Governance Concerns for Islamic Banks 71

2.8 IFSB and AAOIFI Issue Guidance 71

2.9 Adapted Corporate Governance Understanding 72

2.10 Stakeholders of Islamic Banks and their

Governance Responsibilities 73

2.11 Connecting Risk Management, Corporate Governance, and

Sharī‘ah Compliance 76

2.12 Sharī‘ah Governance Model 80

2.13 Importance of Sharī‘ah Governance 83

2.14 Sharī‘ah Supervision vs Governance 83

2.15 Sharī‘ah Risk Definition 84

2.16 Sharī‘ah Risk and Possible Implications 85

2.16.1 Credit Risk 85

2.16.2 Legal and Compliance Risk 85

2.16.3 Reputational Risk 86

2.16.4 Market Risk 86

2.17 Sharī‘ah Risk – Causes and Events 88

2.17.1 Internal Causes 88

2.17.2 External Causes 94

2.18 Sharī‘ah Risk Management 96

2.19 Sharī‘ah Compliance Responsibility of BOD and Senior Management 97

Appendix 2.1: Operational Risk – Loss Event Types 102

Chapter 3 Legal and Regulatory Aspects of Sharı‘ah Governance 103

3.1 Institutional Arrangements 103

3.2 Sharī‘ah and Common Law Encounters in English Courts 106

3.2.1 The Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems N.V. & others 106

3.2.2 Shamil Bank of Bahrain E.C. v Beximco Pharmaceuticals Ltd & Others 109

3.2.3 Investment Dar Co KSCC v Blom Developments Bank Sal 111

3.3 Lessons Learned from Cases and the Desirability of a

Secular Interpretation of Sharī‘ah 112

3.4 Malaysia: A Common Law Jurisdiction of Choice? 113

3.5 Role of Banking Supervisors in Sharī‘ah Governance 117

3.6 Regulatory Approaches to Sharī‘ah Governance 119

3.6.1 Hands-off 120

3.6.2 Nominal 124

3.6.3 Engaged 125

3.6.4 Proactive 132

3.6.5 Committed 143

Appendix 3.1: Legal and Regulatory Framework for IFSI in Jurisdictions

with Known IIFS presence 152

Contents ix

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Chapter 4 The Internal Sharı‘ah Control System 181

4.1 Internal Sharī‘ah Control – Definition and Objectives 181

4.2 Sharī‘ah Control System Components 182

4.2.1 Sharī‘ah Control Culture 182

4.2.2 Sharī‘ah Risk Identification and Assessment 184

4.2.3 Sharī‘ah Control Activities 185

4.2.4 Sharī‘ah Associated Information and Communication 186

4.2.5 Sharī‘ah Monitoring of Activities 188

4.2.6 Evaluation of Internal Sharī‘ah Control System

by Banking Supervisors 189

4.3 Internal Sharī‘ah Audit Function 191

4.3.1 Purpose, Responsibility, and Authority 191

4.3.2 ISAF in Practice 191

4.3.3 Importance of Independence and Objectivity 192

4.3.4 Planning for Sharī‘ah Audit 193

4.3.5 Engagement Program Execution 200

4.3.6 Communicating Findings 201

4.3.7 Following Up and Post-Engagement 202

4.3.8 Sharī‘ah Audit Quality Assurance Program 203

4.4 Proficiency and Due Professional Care of ISAF Staff 204

4.5 Professional Sharī‘ah Audit Body 205

4.6 Sharī‘ah Governance Manual 205

Appendix 4.1: Sample Sharī‘ah Governance Manual (Also available on

the book companion website at www.wiley.com/go/shariahgovernance) 207

Appendix 4.2: Sample Sharī‘ah Audit Checklists (Also available on the book

companion website at www.wiley.com/go/shariahgovernance) 223

PART II

By Azhar Hamid

Chapter 5 The Sharı'ah Supervisory Board 249

5.1 The Sharī‘ah Supervisory Board Defined 249

5.2 Multiple Titles for the SSB 252

5.3 Importance and Purpose of the Sharī‘ah Supervisory Board 254

5.4 History of SSBs in Modern Islamic Banking 256

5.4.1 Accounting and Auditing Organization for Islamic Financial Institutions 257

5.4.2 Islamic Financial Services Board 258

5.4.3 Organization of Islamic Conference Fiqh Academy 258

5.5 Key Governance Guidelines: Independence, Objectivity, Confidentiality,

Consistency, Transparency, and Disclosure 260

5.5.1 Independence 260

5.5.2 Objectivity 263

http://www.wiley.com/go/shariahgovernance


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5.5.3 Confidentiality 265

5.5.4 Consistency 267

5.5.5 Transparency and Disclosure 269

5.6 Regulating SSBs 270

5.6.1 GCC Jurisdictions 271

5.6.2 Non-GCC Jurisdictions 273

5.7 SSB Location Within the Organizational Chart 275

5.8 SSB Models 276

5.8.1 SSB at IB Model 277

5.8.2 SSB at Central Bank and IB Model 277

5.8.3 Central Authority and SSB at IB Model 279

5.8.4 Market-Driven SSB at IB Model 279

5.9 An SSB-Free Model? 280

5.9.1 Need to Understand Sharī‘ah Requirements for the Industry 281

5.9.2 Securing the Support of Key Stakeholders 281

5.9.3 Commitment to a Unified Sharī‘ah Reference 281

5.9.4 Being Highly Receptive to New Developments in Industry 282

Chapter 6 Sharı‘ah Supervisory Board Member Qualifications and Internal Regulations 283

6.1 Competence of SSB Members 283

6.1.1 Character, Professional Ethics, and Conduct 284

6.1.2 Academic Qualifications of SSB Members 289

6.1.3 Experience 294

6.1.4 Essential Skills for SSB Members 297

6.1.5 Professional SSBs 298

6.2 Establishing an SSB 299

6.2.1 Systemized SSB Application Process 299

6.3 SSB Charter 303

6.3.1 Number of SSB Members 303

6.3.2 Terms of Agreement 304

6.3.3 Reporting Line 304

6.3.4 Reappointment 304

6.3.5 Selection of SSB Chairman and Executive SSB Member 305

6.3.6 SSB Members’ Remuneration 306

6.3.7 Compensating SSB Members 308

6.3.8 Procedure for Dismissal and Resignation 308

6.3.9 Procedure for Replacing an SSB Member 310

6.3.10 SSB Meetings 311

6.3.11 Frequency of Meetings 311

6.3.12 Quorum for SSB Meetings 312

6.3.13 Decision-Making Process 312

6.3.14 Meeting Minutes 314

Contents xi

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Chapter 7 Authority of the Sharı‘ah Supervisory Board and Conflict Management 315

7.1 SSB Authority 315

7.2 Nature of SSB Decisions 317

7.3 BOD and Management Responsibility Towards the SSB 319

7.3.1 Address SSB Matters in Company Bylaws and Establish Sharī‘ah

Governance Framework 320

7.3.2 Grant SSB Access to Information 320

7.3.3 Seek SSB Guidance and Abide by its Fatawa and Resolutions 320

7.3.4 Honor SSB Independence 321

7.3.5 Provide Administrative Support 321

7.3.6 Assess SSB Performance 321

7.4 Conflict between SSB Members 322

7.5 Conflict between the BOD and the SSB 323

7.6 Conflict between Management and the SSB 323

Appendix 7.1: Performance Evaluation Form for SSB Members

(Also available on the book companion website at

www.wiley.com/go/shariahgovernance) 325

Chapter 8 Stages of Sharı‘ah Supervision and Responsibilities of the Shar-i‘ah Supervisory Board 329

8.1 Sharī‘ah Supervision 329

8.1.1 Ex-ante Sharī‘ah Supervision 330

8.1.2 Intermediate Sharī‘ah Supervision Stage 332

8.1.3 Ex-post Sharī‘ah Supervision 333

8.2 Responsibilities of SSB Members 335

8.2.1 Collective Responsibilities 335

8.2.2 Individual Responsibilities 342

8.3 Chairman and Executive SSB Member(s) and their Responsibilities 344

8.3.1 Issuing Fatawa and Ijtihād in Islamic Finance 345

8.3.2 Differences in Juristic Opinion and Conflict Resolution 349

8.3.3 Different Approaches to Issuing Fatawa 351

8.3.4 Reversal of Fatawa and Implications 351

8.4 Annual Sharī‘ah Compliance Report 352

8.4.1 AAOIFI’s Report 353

8.4.2 Possible Opinions in the Report 355

Appendix 8.1: Lease Ending with transfer of Ownership Financing

Instrument (Also available on the book companion website at

www.wiley.com/go/shariahgovernance) 357



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Chapter 9 Sharı‘ah Advisory Firms 363

9.1 Introduction to Sharī‘ah Advisory Firms 363

9.2 Services Offered by Sharī‘ah Advisory Firms 364

9.2.1 Sharī‘ah Supervision 365

9.2.2 Internal Sharī‘ah Audit 365

9.2.3 External Sharī‘ah Audit 366

9.2.4 Product Development and Transaction Structuring 367

9.2.5 Legal Document Preparation and Review 368

9.2.6 Sharī‘ah Training 368

9.3 Outsourcing Internal Sharī‘ah Functions 369

9.4 Regulation 369

9.4.1 Adherence to Directives and Guidance Issued 369

9.4.2 Competency 370

9.4.3 Monitoring 370

9.5 Liability 370

Appendix 9.1: Application Form for the Appointment of an External

Sharī‘ah Audit Office (Also available on the book companion

website at www.wiley.com/go/shariahgovernance) 371

Index 373


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xiii

Foreword

In the recent years, the instant collapse of some of the iconic AAA rated companies, along

with recurring local, regional and global financial crises, have highlighted the fragility of

corporate governance infrastructure that is meant to prevent such failure. From this failure,

one fundamental lesson that we could draw is to realize the need for principles-based internal

regulation. We need to recognize the oversights made in how companies have conducted their

business, especially financial institutions. With such a perspective, the sharī‘ah governance

system offers an important (albeit some may think experimental) building block for forming a

robust financial architecture of global relevance.

The sharī‘ah supervisory mechanism has been adopted by most Islamic finan-

cial institutions on a voluntary basis. However, some jurisdictions make the process a

legal requirement for conducting business. As early as 1980 a federal law was introduced

in Pakistan – “The Modaraba Companies and Modaraba (Floatation and Control) Ordi-

nance.” The law, for the first time in history, made the Religious Board mandatory for

any company established. The term “Sharī‘ah governance” was first introduced in 2003

by M. A. Qatan in this sentence: “the Sharī‘ah governance process is a unique build-

ing block of the Islamic financial architecture” (quoted from Khan and Muljawan, Bank

Indonesia and IDB, Islamic Financial Architecture - Risk Management and Financial Stability, 2003, p. 275). Later, the concept was institutionalized in the standards of the Account-

ing and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Finan-

cial Services Board (IFSB) and the Central Bank of Malaysia to cover the governance issues

of sharī‘ah supervision of Islamic financial institutions. This is the scope which is also rightly

being used in Foundations of Sharī‘ah Governance of Islamic Banks by Karim Ginena and

Azhar Hamid.

Sharī‘ah governance is indeed a pivotal pillar of Islamic financial architecture as it

ensures that the core principles of Islamic finance are strengthened in application so that the

architecture becomes robust. Seen as such, the sharī‘ah governance system must be consid-

ered in its holistic form as comprising the following components:

▪ Basic micro-level components – mass literacy of the correct notion of Islamic finance

by individuals, families, firms, businesses, regulators, educators, policy makers and all

stakeholders;

▪ Micro-level components – sensitivity of service providers, such as banks, Takaful,

investment funds, and financial markets products (Sukuk etc.), to provide to Sharī‘ah

requirements;

xiv FOREWORD

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▪ Messo (intermediate) components – Islamic finance related education, training, advice,

information, rating, best practice standard setters;

▪ Macro-level components – legislation as a process, laws and justice system, taxation,

regulation and supervision;

▪ Global-level components – interaction with other legal, regulatory, and supervisory

regimes through regional and global markets.

Foundations of Sharī‘ah Governance of Islamic Banks is indeed a useful addition,

having wider implications for stakeholders of all components mentioned above. We at QFIS

have already introduced a course on “Sharī‘ah Audit and Supervision of Islamic Financial

Institutions” for which this book will be useful reading material.

Dr. Tariqullah Khan Professor and Coordinator of Graduate Program in Islamic Finance

Qatar Faculty of Islamic Studies (QFIS),

Hamad bin Khalifa University, Qatar Foundation

President, International Association for Islamic Economics

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xv

Acknowledgements

This book is the product of many years of research. We are greatly indebted to Allah the Most

Gracious for making it possible for us to embark on this journey and complete it and to many

people who have been kind in supporting us along the way. We are confident that we would

not have been able to complete this project without such help.

To our beloved parents, no words of thanks will express our appreciation for your sacri-

fices, love, and encouragement. Karim is grateful to his parents, Dr. Abdel Megied Ginena and

Dr. Fatma Taha, and Azhar is grateful to his late parents, Lieutenant Muhammad Hamid Khan

and Maqber Jan, for their great contributions.

To our dear wives, Dr. Ladan Davallow Ghajar and Dr. Qurrat ul Ain Akram, thanks for

your continuous love, support, and understanding.

To our teachers who have played an instrumental role in teaching us about this discipline,

this project would have never come to existence had it not been for the knowledge that you

imparted to us. Thank you for taking us on as your students. It is a challenging task to list

all the professors who have contributed to our educational journey, but we feel an obligation

to thank the following Islamic transactional jurisprudence, economics, finance, accounting

and sharī‘ah auditing professors: Dr. Ali Mohieldin Al-Qaradaghi, Dr. Ali Al-Mohammadi,

Dr. Muhammad Shubair, Dr. Nazih Hammad, Dr. Monzer Kahf, Dr. Tariqullah Khan, Dr.

Muhammad Omar, Dr. Rodney Wilson, Dr. Abdulbari Mashal, Dr. Mahmood Ahmed Ghazi,

Dr. Sayed Tahir, Dr. Tahir Mansoori, Dr. Attique Zaffar, Dr. Abdul Rahman Yousri, and Dr.

Muhammad Tahir Hakeem.

To our reviewers who carefully scrutinized portions of this manuscript, thank you for

your time. You have played a critical role in improving this book. There are many of you,

including some names that were mentioned earlier, but we would like to thank Dr. Mehmet

Kirbasoglu, Dr. Robert Crane, Dr. Baber Johansen, Dr. Jasser Auda, Dr. Gudrun Krämer,

Dr. Ayman Shabana, Dr. Mohammed Ghaly, Dr. Zachary Wright, Dr. Haider Ala Hamoudi,

Dr. Talal Abdulla Al-Emadi, Dr. Ehsan Feroz, Dr. Mohammad Abdolmohammadi, Dr. Sha-

hul Hameed bin Mohamed Ibrahim, Dr. Christopher Leonard, Mr. Madzlan Hussain, Mr.

Abdullahi Aweis, Ms. Ruqiyyah Nu’Man, Mr. Saqib Hafiz, Ms. Caroline Quinnell, and an

anonymous reviewer.

We would also like to acknowledge the great support received from the Qatar Founda-

tion and the Qatar Science Leadership Program, as well as Hamad Bin Khalifa University, its

Qatar Faculty of Islamic Studies (QFIS), and its Center for Islamic Economics and Finance.

In particular, thanks to Dr. Hatem El-Karanshawy, Dr. Muhammad Khalifa, and to colleagues

Mr. Wijdan Tariq and Ms. Bahnaz Al-Qaradaghi. Thanks also to the library staff of QFIS and

Georgetown University School of Foreign Service in Qatar for their assistance.

xvi ACKNOWLEDGEMENTS

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Our acknowledgements would not be complete without expressing appreciation to our

publishing team. Thanks to Gemma Valler and her team for their patience, cooperation and

hard work. This has been a long journey and we are glad we finally made it together!

We hope we have not missed thanking anyone who assisted us along the way, but if we

did, then please accept our sincere apologies.

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xvii

Introduction

Islamic banks have witnessed strong growth over the past four decades. This growth has been

fuelled by consumer demand for sharī‘ah compliant financial products in different parts of

the globe. These products mainly differ from those offered by conventional banks in that they

comply with the teachings of sharī‘ah that concern the financial domain. Islamic transactional

jurisprudence thus serves as a rich resource that establishes the foundational basis of sharī‘ah

compliant financial transactions and enables innovation in this arena.

Some of the benefits that Islamic finance brings to the economy include developing a

strong association between the financial sector and real goods and services, minimizing uncer-

tainty in transactions as well as speculatory behavior, and linking entitlement to profits with

liability for assets. As interest and a handful of activities (eg. gambling) are prohibited by

sharī‘ah, Islamic finance neither contains any element of interest nor is it used as a means for

funding these prohibited activities. Instead, profit is earned in connection with an underlying

asset that is financed using sharī‘ah compliant contracts.

Despite the tremendous growth of this industry and consumer demand for it, scholarship

on the sharī‘ah dimension of Islamic finance remains quite limited. This has led to inadequate

understanding of the topic and hindered standardization efforts of sharī‘ah practices. Even

with the rise of literature on Islamic finance, some of the most fundamental questions relating

to sharī‘ah compliance mechanisms employed by Islamic banks remain unanswered. This

book thus aims to remove the ambiguity that surrounds these sharī‘ah compliance mecha-

nisms and to advance our knowledge of ways for governing the sharī‘ah dimension of Islamic

banks. The book addresses the following key research questions:

▪ What is sharī‘ah and how does it relate to Islamic finance?

▪ Why is sharī‘ah compliance of Islamic banks important and what risks do these institu-

tions face when their transactions violate the rules of Islamic transactional jurisprudence?

▪ Are directors and senior managers of Islamic banks responsible for sharī‘ah compliance?

If so, what are their responsibilities?

▪ What is sharī‘ah governance and how does it relate to corporate governance?

▪ Which entities play a role in administering sharī‘ah governance and what sort of activities

may they engage in?

▪ How have regulatory bodies in different jurisdictions handled sharī‘ah governance issues

and what are some examples of guidelines that they have issued?

▪ What are some best practices that could be leveraged to advance the standardization of

sharī‘ah governance of Islamic finance and limit the risks associated with this topic?

xviii INTRODUCTION

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▪ What internal regulations could help the sharī‘ah supervisory board and the internal

sharī‘ah audit function become more efficient in their tasks?

▪ What qualifications are necessary for those working as part of the sharī‘ah supervisory

board and the internal sharī‘ah audit function?

▪ What services do sharī‘ah advisory firms offer and is there a need to regulate their

behavior?

Stakeholders of the Islamic banking industry have expressed great concern for sharī‘ah

compliance matters and identified a strong need to better govern this dimension. In fact, in

the early stages of writing this book we had the opportunity to speak with the Governor of

the Bank of Mauritius, Mr. Rundheersing Bheenick, who strongly endorsed this publication

and wished that his team had access to this resource a few years ago when they were working

on the 2008 Guideline for Institutions Conducting Islamic Banking Business. Islamic jurists

who sit on the sharī‘ah supervisory boards of Islamic banks across the globe, such as Shaykh

Dr. Ali Mohieldin Al-Qaradaghi and Shaykh Yusuf Talal DeLorenzo, also recognized the

importance of this project and the value that it would bring to the industry. Islamic economics

and finance professors, such as Dr. Tariqullah Khan and Dr. Rodney Wilson, echoed such

enthusiasm and highlighted the need for a book of this sort to be used as reading material for

courses on the topic. Partners at some of the world’s largest law firms that cater to the Islamic

financial services industry, such as Dr. Philipp von Randow and Mr. Madzlan Hussain, also

expressed great interest in this project and acknowledged its benefits.

The heart-felt encouragement that we received from the above mentioned individuals

and many others reassured us of the pressing need to comprehensively address this topic and

tackle some of its most intricate details. In doing so, our aim is to extend academic under-

standing of the subject and assist practitioners as well as policy-makers in their duties. The

interest exhibited by consumers of the Islamic banking industry in comprehending mecha-

nisms that take place behind the scenes for their funds to be handled in a sharī‘ah compliant

manner also served as additional motivation to undertake this research.

We have divided this book into two parts, consisting of a total of nine chapters. The chap-

ters authored by Karim Ginena - Part 1 - address the following topics: The Roots, Character-

istics, and Objectives of Sharī‘ah and the Islamic Economic System, Corporate and Sharī‘ah

Governance of Islamic Banks, Legal and Regulatory Aspects of Sharī‘ah Governance, and

The Internal Sharī‘ah Control System. The chapters authored by Azhar Hamid and edited by

Karim Ginena - Part 2 - are devoted to the following topics: The Sharī‘ah Supervisory Board,

Sharī‘ah Supervisory Board Member Qualifications and Internal Regulations, Authority of

the Sharī‘ah Supervisory Board and Conflict Management, Stages of Sharī‘ah Supervision

and Responsibilities of the Sharī‘ah Supervisory Board, and Sharī‘ah Advisory Firms.

As the Islamic banking industry continues to grow and attract more funds, we hope that

the theoretical contributions presented in this book and the internal, external, and institutional

arrangements suggested receive serious consideration by stakeholders of the industry. We also

hope that the practical tools offered, such as the sample sharī‘ah governance manual and the

sharī‘ah audit checklists, assist practitioners in their profession. Our humble efforts are by no

means the last word on the topic and we encourage additional research that promotes respon-

sible sharī‘ah governance of the industry.

Karim Ginena and Azhar Hamid

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By Karim Ginena

PART

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3


CHAPTER 1The Roots, Characteristics, and

Objectives of Sharı‘ah and the Islamic Economic System

CHAPTER SUMMARY

This chapter examines the roots of sharī‘ah in order to provide a solid theoretical foundation

that is needed for understanding Islamic jurisprudence in general and Islamic transactional

law in particular. Without this minimum understanding of sharī‘ah, it would be rather difficult

to discuss sharī‘ah governance. The chapter begins by defining key terms, such as sharī‘ah,

the Qur’ān, sunnah, and fiqh. Next, it discusses ijtihād and the differences in juristic opinions

that could result from undertaking such an activity. Thereafter, the chapter explores obligation-

creating and declaratory sharī‘ah rulings and the subject of these rulings. The characteristics

and objectives of sharī‘ah are investigated in order to provide a context for these rulings.

Subsequently, the chapter explores the Islamic economic system and its characteristics, in

addition to identifying the objectives of sharī‘ah relating to property.

1.1 SHARI‘AH, THE QUR’A–N, AND SUNNAH

Sharī‘ah1 etymologically means the source of drinking water,2 and shar‘ means to ordain.3

Muslims believe that sharī‘ah is an ethical way of life revealed by God to secure the success

(falāh) of creation in this world and the next.4 It does so by promoting what will benefit beings

1 Arabic words are Romanized using the standard issued by the American Library Association and the

Library of Congress.2 Muḥammad Ibn Manẓūr, Lisān Al-‘Arab, 3rd edn (Beirut: Dār Iḥyā Al-turāth Al-‘Arabi, 1999),

Vol. 7, 86.3 Ibid.4 Ibrahim Al-Shāṭibi, Al-Muwāfaqāt fī uṣūl al-sharī’ah, ed. Abu Obaidah Al-Salmān (Saudi Arabia: Dār

Ibn Affān, 1997), Vol. 2, 9; Abdul Karim Zeidan, Al-madkhal lidirāsat al-sharī‘ah al-islāmīyah (Beirut:

Mu´assat al-Risālah, 1999), 34.

4 FOUNDATIONS OF SHARI‘AH GOVERNANCE OF ISLAMIC BANKS


and protecting against that which will harm them.5 God, the Divine, uses several derivatives of

the word sharī‘ah when addressing His final messenger to creation, prophet Muhammad (pbuh),6

in the Qur’ān.7

Qur’ān etymologically means the recited one.8 Terminologically speaking, Qur’ān is

defined as “the communication of God the Exalted, revealed to prophet Muhammad (pbuh),

whose recital is considered worship to God.”9 Muslims believe that the Qur’ān is the word

5 Al-Shāṭibi, Al-Muwāfaqāt fī uṣūl al-sharī’ah, ed. Abu Obaidah Al-Salmān, Vol. 2, 18.6 Muslims send peace and blessings by saying “peace be upon him” (pbuh). 7 One grammatical variation of the word sharī‘ah is the word sharī‘ahtin, meaning an ordained way:

“Then we put you [O Muhammad], on an ordained way [sharī‘ahtin] concerning the matter [of religion];

so follow it and do not follow the inclinations of those who do not know” (45:18). Even though a detailed

Islamic code had not been in place when this verse was revealed, the verse refers to sharī‘ah in a more

comprehensive manner as belief in Islam, i.e. submitting to the way of God rather than worshiping idols

and following whims. See Mohammad Kamali, Shari’ah Law: An introduction (Oxford: Oneworld Publi-

cations, 2008), 2. Within this same context of the word we find a similar verse: “He has ordained [shara‘a]

for you of religion what He enjoined upon Noah and that which We have revealed to you, [O Muham-

mad], and what We enjoined upon Abraham and Moses and Jesus, to [sic] establish the religion and not be

divided therein” (42:13). This verse thus instructs prophet Muhammad (pbuh) to establish religion and the

dogma of oneness of God (tawhīd) just like other prophets did. The Qur’ān acknowledges, however, that

details of Divine laws revealed to certain prophets differ from each other: “To each of you We prescribed a

law (shir‘a) and a way of life (minhāj)” (5:48). These laws are the Scriptures (87:19), revealed to prophet

Abraham (pbuh), the Torah (5:44), revealed to prophet Moses (pbuh), the Psalms (4:163), revealed to

prophet David (pbuh), the Bible (4:46), revealed to prophet Jesus, and the Qur’ān (25:1), revealed to

prophet Muhammad (pbuh). Each of these revelations clarified a manhaj, a clear way that the Divine has

chosen for mankind. See Ibn Manẓūr, (4:1 Lisān Al-‘Arab, Vol. 14, 300. The Qur’ān is also prophet

Muhammad’s (pbuh) most significant miracle.8 Ibn Manẓūr, Lisān Al-‘Arab, Vol. 11, 78; Adnan Zarzoor, Al-madkhal ila al-qur’ān wa al-ḥadīth (Beirut:

Al-Maktab Al-Islāmi, 1999), 8. The word “Qur’ān” has been used in more than 43 places in the holy book

such as in verses (17:9) and (27:6). Many other names are used to refer to the Qur’ān such as “the book”

(al-kitāb), “the criterion” (al-furqān), and “guidance” (hudá). These names point to several important attri-

butes of this holy book. It is memorized by Muslims and frequently recited by them: “the Qur’ān is distinct

verses [preserved] within the breasts of those who have been given knowledge” (21:49), it is protected as a

written document – besides being protected orally: “Indeed, it is We who sent down the Qur’ān and indeed,

We will be its guardian” (15:9), it is the criterion which differentiates truth from falsehood: “Blessed is

He who sent down the Criterion upon His Servant that he may be to the worlds a warner” (25:1), and it is

guidance in and of itself: “And there has already come to them from their Lord guidance” (53:23). It is also

considered to be prophet Muhammad’s (pbuh) greatest miracle from God.9 Adnan Zarzoor, Al-madkhal ila al-qur’ān wa al-ḥadīth, 52. Prior to being selected as a messenger of

God, the prophet lived among his people for 40 years and was well known for his simplicity and probity:

he was nicknamed the truthful and trustworthy (al-ṣādiq al-amīn). Those who chose to disbelieve in the

message of prophet Muhammad (pbuh) objected to the Qur’ān and asked him to alter its verses. But it

was not for the prophet to do so, since he was tasked with relaying the message in its original form to

humanity. Additionally, being an illiterate man, the prophet did not have the capacity to come up with

verses that were as vivid or insightful as those revealed to him. The Arabs of Quraysh were gifted lin-

guists and eloquent poets, and if anyone were to value the linguistics of the Qur’ān and recognize the

difficulty of authoring something of its magnitude, they were the ones. Hence, they were defied to come

up with a contender to the Qur’ān but were unable to do so. The Qur’ānic verses relate these events: “And

when Our verses are recited to them as clear evidences, those who do not expect the meeting with Us

say, ‘Bring us a Qur’an other than this or change it.’ Say, [O Muhammad], ‘It is not for me to change it

The Roots, Characteristics, and Objectives of Sharı ‘ah and the Islamic Economic System 5


of God, and that its words and meanings were revealed to prophet Muhammad (pbuh) over a

23-year period.10 They therefore take it to be a holy book of guidance and legislation,11 and see

an obligation to ponder over it, deduce from it, and act upon it.12

Imam Al-Shat.ibi observes that Sharī‘ah was revealed not only to illuminate a way for cre-

ation to glorify and worship their Creator, but also to stop people from aimlessly following

their whims.13 In commenting on the concept of “worship,” Ibn Taimīyah (d. 728 ah14/1327 ce)

states that it encompasses two aspects: first, abiding by sharī‘ah with humility towards the

Divine; second, doing so with a loving heart.15 Ibn Taimīyah identifies the realm of worship

as encompassing everything, whether said or performed, that pleases the Divine.16 This entails

carrying out prescribed duties and staying clear of outlined prohibitions. He gives examples

of acts of worship that extend beyond the main rituals. These include truthfulness, trustwor-

thiness, being dutiful to one’s parents, honoring covenants, being kind to neighbors, orphans,

destitute people, wayfarers, and animals, as well as patience, gratitude, being content with

God’s decree, and dependence on the Divine.17 He adds that pursuing the means necessary

for achieving God’s obligations is an act of worship in itself. In essence, every act can be

considered an act of worship as long as the individual’s intention is to please the Divine and

the act is in line with the teachings of prophet Muhammad (pbuh). For example, the brain can

contemplate, the tongue can call to good and prevent evil, the heart can love and fear God, etc.

Such a holistic understanding of worship is meant to develop a strong personal relationship

between the individual and the Divine that holistically covers the different avenues of life.18

While sharī‘ah offers guidance to creation to steer them in the direction of that which is

beneficial and to protect them from what is detrimental, it is not meant to be burdensome.19

on my own accord. I only follow what is revealed to me. Indeed I fear, if I should disobey my Lord, the

punishment of a tremendous Day. Say, ‘If Allah had willed, I would not have recited it to you, nor would

He have made it known to you, for I had remained among you a lifetime before it. Then will you not

reason?’” (10:15–16). Two key reasons why many from Quraysh objected to the prophet’s monotheistic

message were, firstly, they did not want to veer away from the beliefs of their fathers and forefathers and

adopt a new message that their predecessors had not accepted. Secondly, they did not want to adhere to

the guidelines and rituals revealed in the Qur’ān, as this meant altering their customary practices.10 Adnan Zarzoor, Al-madkhal ila al-qur’ān wa al-ḥadīth, 55.11 M. A. S. Abdel Haleem, The Qur’an: A New Translation (New York: Oxford University Press, 2010),

viiii; Zeidan, Al-madkhal lidirāsat al-sharī‘ah al-islāmīyah, 243.12 The verses read, “And this [Qur’an] is a Book We have revealed [which is] blessed, so follow it and

fear Allāh that you may receive mercy” (6:155); “Indeed, We have revealed to you, [O Muhammad], the

Book in truth so you may judge between the people by that which Allāh has shown you. And do not be

for the deceitful an advocate” (4:105).13 Ibrahim Al-Shāṭibi, Al-Muwāfaqāt fī uṣūl al-sharī’ah, ed. Abu Obaidah Al-Salmān, Vol. 2, 264.14 Anno Hegirae. The Islamic Lunar Calendar starts on 622 Common Era (CE), the year prophet

Muhammad (pbuh) and his followers emigrated from Makkah to Medina to escape persecution. 15 Taqqiyaldeen Ibn Taymīyah, Al-iboodiyah, ed. Muhammad Al-Shaweesh, 7th edn (Beirut: Al-Maktab

Al-Islāmi, 2005), Vol. 1, 48.16 Ibid., 44.17 Ibid.18 Yusuf Al-Qaradawi, Madhkal lima‘rifat al-islām, 4th edn (Cairo: Maktabat Wahba, 2008), 64–67.19 Here is a sample of verses that support this claim: “Allah intend[s] for you ease and does not intend for

you hardship” (2:186), “And Allah wants to lighten for you [your difficulties]; and mankind was created

weak” (4:28), “Allah does not charge a soul except [with that within] its capacity” (2:286), and “God



Ibn Kathīr (d. 674 ah/1372 ce) comments in his exegesis on the verse which reads, “He has

chosen you and has not placed upon you in the religion any difficulty” (22:78), by saying:

He has not given you more than you can bear and He has not obliged you to do any-thing that will cause you difficulty except that He has created for you a way out. So, the salah [prayer], which is the most important pillar of Islam after the two testimo-nies of faith, is obligatory, four rak’as [units] when one is settled, which are short-ened to two rak’as when one is traveling … And he [prophet Muhammad (pbuh)] said to Mu‘ādh and Abu Mūsa, when he sent them as governors to Yemen: Give good news and do not repel them. Make things easy for the people and do not make things difficult for them.20

This clement approach of the Divine is embraced by prophet Muhammad (pbuh), as

evident in his sayings. For example, “He who is deprived of gentleness is, in fact, deprived of

all good.”21 Attesting to this, the Divine says: “And We have not sent you, [O Muhammad],

except as mercy to the worlds” (21:107). This mercy is embodied in the prophet relieving peo-

ple from their burdens through his teachings. ‘Aishah (d. 58 ah/678 ce), the wife of the prophet

(pbuh), reported: “Whenever the prophet was given a choice between two matters, he would

[always] choose the easier as long as it was not sinful to do so; but if it was sinful he was most

strict in avoiding it.”22 After reflecting on sharī‘ah, Ibn Qayyim (d. 751 ah/1350 ce) observes:

Sharī‘ah is built and founded on wisdom and people’s welfare in this life [on earth] and the afterlife [hereafter]. It is all justice, mercy, benefits, and wisdom. So, any ruling that results in an outcome that replaces justice with injustice, mercy with its opposite, welfare with mischief, and wisdom with futility is not from sharī‘ah, even if it is interpreted in a way that tries to make it a part of it.23

Moving from the wider meaning of sharī‘ah to a more specific definition, the Islamic

sharī‘ah has been defined as the laws that God revealed to prophet Muhammad (pbuh)

in the Qur’ān and sunnah.24 Sunnah etymologically means a way.25 Terminologically, it

does not want to impose any hardship on you, but wants to make you pure, and to bestow upon you the

full measure of His blessings, so that you might have cause to be grateful” (5:6). 20 Ismāī‘l Ibn Kathīr, Tafsīr Al-qur’ān Al-‘azīm, ed. Sami Salamah, 2nd edn (Riyadh: Dār Taybah li

al-nashr wa al-tawzī‘, 1999), Vol. 5, 455.21 Muslim Ibn Al- h. ajja-j, S.ah. ı-h. Muslim, ed. Muhammad Fuad AbdulBaqi (Beirut: Dār Iḥyā Al-Turāth

Al-‘Arabi, 1954), Vol. 4, 2003.22 Malik Ibn Anas, Al-Muwatta, ed. Bashar Maroof (Beirut: Mu´assat al-Risālah, 1991), Vol. 2, 73;

Muḥammad Ibn Ismā‘īl Al-Bukhari, S.ah. ı-h. Al-Bukhari, 3rd edn (Beirut: Dār Ibn Kathīr, 1987), Vol. 5,

2269. In one instance the prophet came across a fatigued man walking alongside his camel abreast and

worriedly inquired about the man’s condition. He was informed that the man had vowed to perform

pilgrimage walking, instead of riding on his camel, as a form of sacrifice. The prophet (pbuh) then

proclaimed: “Allah is in no need of this man torturing himself in such manner.” See Ibn Al-h. ajja-j, S.ah. ı-h. Muslim, ed. Muhammad Fuad AbdulBaqi, Vol. 3, 1263. The prophet commanded the man to continue

his journey riding. 23 Muhammad Ibn Qayyim, I‘lām al-muwaqq‘īn ‘an Rabb al-‘ālamīn, ed. Muhammad Ibrahim (Beirut:

Dār Al-Kutub Al-‘ilmīyah, 1991), Vol. 3, 11.24 Zeidan, Al-madkhal lidirāsat al-sharī‘ah al-islāmīyah, 34–35; Ali Al-Qaradaghi, h. aqı-bat al-doctor ‘ali al-qaradaghi al-iqtis.a-dı-yah (Beirut: Dār Al-Basha’ir, 2010), Vol. 2, 16.25 Ibn Manz.u

-r, Lisān Al-‘Arab, Vol. 6, 399.



refers to the teachings of prophet Muhammad (pbuh), apart from the Qur’ān, communi-

cated through his sayings, actions, and tacit approvals.26 While the Qur’ān is the exact

meanings and words of God, ḥadīth is the meanings of God but in prophet Muhammad’s

words.27 Some jurists believe that the term sharī‘ah comprehensively includes revelation

relating to all topics such as creed, morals, etc., while others disagree and restrict the

term to practical rulings28 of conduct (al-ah.kām al-‘amalīyah).29 Approximately 500 out

of 6235 verses of the Qur’ān relate to these practical rulings. The majority of the Qur’ān

speaks about parables of past nations, the reality of life on earth and the hereafter, creed,

morals, and other aspects.30 Ibn ‘Abbās (d. 68 ah/687 ce) limits sharī‘ah to the Qur’ān

and minhāj to sunnah.31

Even though the Islamic sharī‘ah came with new rulings, it was not all new, as it approved

some of the rulings of society at the time, so long as they did not contradict the principles

of sharī‘ah. The Arabs, like any other people, had their own mores of social, economic, and

political dealings. Their reference in these dealings included established customs, inherited

traditions, principles from previous religions, and norms from nearby nations such as the

Persians and the Romans. They did not have a court system, but voluntarily resorted to vener-

ated leaders of tribes or to fortune tellers. These judicators ruled based on the known customs

of the people. Furthermore, if a party was convicted yet chose not to abide by the judgment,

then matters would escalate beyond retaliation against the culprit to include the individual’s

tribe. In other words the counterparty would summon their tribe and wage war against the

offender’s tribe. Inevitably, conflicts and wars arose. Injustice was imminent in an environ-

ment in which each tribe did what was best for its interests. Amidst this discord the prophet

was sent to reform society. Thus, he confirmed some customs that were in place at the time,

prohibited certain beliefs and practices, and initiated new ideas and obligations. For example,

he affirmed the Arab’s prohibition of marrying one’s mother, approved bequests, lease, part-

nership, mudārabah,32 and salam33 contracts, as well as pledges such as pawning personal

property. The prophet prohibited other types of marriage contracts that existed such as nikāh. al-shighār in which one man would marry the daughter of another on condition that the latter

would marry the daughter of the first. He also prohibited fathers from taking their daughters’

dowry, and granted women and children the right to inheritance that they were barred from

traditionally, as it was limited to male agnate relatives. The prophet banned specific forms

of transaction, such as bay‘ al-mulāmasah wherein a person who touched a garment had to

purchase it. He also established the concept of trusts, which was not known previously. Even

26 Ibid.27 Scholars have differed regarding ḥadīth qudsi. Some have said that it is Allah’s words, while others

argue that it is God’s meanings but the words of the prophet. See Zarzoor, Al-madkhal ila al-qur’ān wa al-ḥadīth, 55–56.28 Al-aḥkām is translated as rulings, although rules could also be used synonymously. Qawāid, on the

other hand, is translated as maxims. 29 Al-Qaradaghi, ḥaqībat al-doctor ‘ali al-qaradaghi al-iqtiṣādīyah, Vol. 2, 16.30 This explains why the Qur’ān has also been referred to as “remembrance” (dhikr) and “guidance”

(hudá). See Qur’ān (21:5) and Qur’ān (2:2).31 Al-Qaradaghi, ḥaqībat al-doctor ‘ali al-qaradaghi al-iqtiṣādīyah, Vol. 2, 16.32 A silent partnership with specific conditions.33 A forward contract with specific conditions.



though sharī‘ah came with many new notions and obligations, it did not ignore the ways that

existed in society at the time, as long as they were equitable and beneficial.34

1.2 WHAT IS FIQH?

Fiqh etymologically means a deep understanding of something.35 The word originally had

a very wide terminological meaning; however, scholars narrowed down its scope over time.

Initially, fiqh meant knowledge of sharī‘ah, including matters of creed, morals, and actions.

Within this context Abu H. anīfah (d. 150 ah/767 ce) defined fiqh as a soul’s knowledge of its

rights and duties; moreover, he called the fiqh of creed (‘aqīdah) the greatest type of fiqh.36

The meaning of fiqh, however, became more restricted as scholars excluded from its defini-

tion matters of creed, which are of primary importance, and limited its domain to practical

and not spiritual acts of conduct.37 The revised definition became knowledge of secondary,

practical sharī‘ah rulings pertaining to conduct that are derived from the detailed evidences of

sharī‘ah.38 While fiqh addresses the norms of Islamic law, us.u-l al-fiqh addresses the sources,

their priority, and methods for deducing legal rulings from them.39

According to us.u-l al-fiqh jurists, “sharī‘ah rulings” are Islamic legal rulings (aḥkām) that

can be terminologically defined as “communication from Allah [God], the Exalted, related to

the acts of subjects [mukallafu-n] through a demand or option or through a declaration.”40 Four

essential elements are required for a sharī‘ah ruling to exist. The first is the Lawgiver (H.a-kim). The second is the mukallaf – any individual with legal capacity upon whom worship has been

prescribed – to which the ruling pertains. The third is the actual ruling issued by the Lawgiver

concerning the act of the mukallaf. The fourth is the subject of the sharī‘ah ruling.41

Muslim scholars agree that the source of sharī‘ah rulings for mukallafūn is God the Lawgiver.

This is the case whether these rulings have been explicitly stated in the Qur’ān, revealed to the

prophet Muhammad (pbuh) in sunnah, or deduced using independent juristic reasoning (ijtihād)

that is approved by the Lawgiver and grounded in Qur’ān and sunnah.42 Because these rulings stem

from sharī‘ah and its evidences, the Qur’ān declares, “Legislation is not but for Allah” (12:40).

The second element of a sharī‘ah ruling is the mukallaf. Mukallafūn in this context

are adults who can understand God’s communication from the sources or by learning from

34 Al-Khafīf, Aḥkām al-mu‘āmalāt al-sharī‘ah (Cairo: Dār Al-Fikr Al-‘Arabi, 2008), 8–9; Zeidan, Al-madkhal lidirāsat al-sharī‘ah al-islāmīyah, 23–32.35 Ibn Manẓūr, Lisān Al-‘Arab, 3rd edn (Beirut: Dār Iḥyā Al-turāth Al-‘Arabi, 1999), Vol. 10, 305.36 Ministry of Awqaf and Islamic Affairs, Al-Mawsū‘ah Al-fiqhīyah Al-Kuwaytīyah, 2nd edn (Kuwait,

Thāt Al-Salāsil, 1983), Vol. 1, 12.37 Ibid.; examples of acts of the heart that were excluded from the realm of fiqh include arrogance,

humility, etc.38 Ministry of Awqaf and Islamic Affairs, Al-Mawsū‘ah Al-fiqhīyah Al-Kuwaytīyah, Vol. 1, 12–13; Abdul

Wahab Khilaf, Ilm us.u-l al-fiqh, 17th edn (Kuwait: Dār Al-Qalam, 1990), 11.39 Kamali, Principles of Islamic jurisprudence, 1.40 Nyazee, Islamic Jurisprudence, 47. Khilaf, ‘Ilm us.u-l al-fiqh, 96.41 Mohammad Al-Zuhayli, Alwajīz fī us.u-l al-fiqh al-islāmi, 2nd edn (Beirut: Dār Al-Khayr, 2006),

Vol. 1, 283.42 Khilaf, ‘Ilm us.u-l al-fiqh, 96.



scholars.43 Furthermore, they must possess a sufficient level of legal capacity for what they

have been commissioned to do. There are two types of legal capacity: capacity for acquisition

(ahlīyat al-wujūb)44 and capacity for execution (ahlīyat al-adā’). Through the former capacity,

a person possesses full rights and is required to execute certain obligations that are within one’s

capability such as paying for goods purchased, compensating parties for any property that one

has damaged, and almsgiving (zakāh).45

Legal capacity for execution is the “capacity of a human being to issue statements and

perform acts to which the Lawgiver has assigned certain legal effects.”46 In other words, it is

the capacity to exercise rights and obligations. Intellect is the legal basis that entitles a person

for this type of capacity, since a person with intellect has the ability to comprehend the com-

munication of God. Since intelligence is a hidden quality, an objective sign of having intellect

is the onset of puberty (bulūgh), which is evidenced by physiological changes that occur in the

body. In the absence of these changes, sharī‘ah presumes that after fifteen lunar years a minor

becomes pubescent.47 Liability for this capacity develops over the course of three stages.48

43 Ibid., 134.44 This is the capacity to acquire rights and obligations and is subdivided into deficient and complete

capacity. Being a human being entitles one to this type of capacity. A fetus before birth has deficient

capacity for acquisition on condition that it is born alive. This entitles the fetus to specific rights such

as inheritance, freedom from slavery, parentage, and bequest without prescribing on it any obligations.

After birth the human being becomes entitled to complete capacity for acquisition. After the age of dis-

cretion (tamyiz), the remaining obligations, which were not required earlier, are demanded from such a

person. However, due to the lack of capacity for execution, the minor’s parent or guardian fulfills these

obligations on his/her behalf. See Al-Zuhayli, Alwajīz fī uṣūl al-fiqh al-islāmi, 2nd edn, Vol. 1, 492–494.45 Al-Zuhayli, Alwajīz fī uṣūl al-fiqh al-islāmi, 2nd edn, Vol. 1, 485–495; Nyazee, Islamic Jurisprudence

(Malaysia: The Other Press, 2003), 109–140.46 Nyazee, Islamic Jurisprudence, 111.47 This is according to the opinion of the Shāfi‘ī and Hanbali schools, Abu Yūsuf and Muḥammad ibn

Al-Hassan of the H. an1-afı school, and Al-awzā‘ī. Mālikis believe that puberty occurs at the completion

of eighteen years. At least two other opinions are reported for them including the beginning of the

eighteenth year or at the occurrence of a wet dream. Abu H. anīfah opines that a boy reaches puberty at

eighteen years of age, and a girl at seventeen. See Ministry of Awqaf and Islamic Affairs, Al-Mawsū‘ah Al-fiqhīyah Al-Kuwaytīyah, 2nd edn, Vol. 2, 16.48 From birth to the age of discretion or seven years of age, the minor is considered lacking capacity for

execution. In this stage the non-discerning minor’s words and actions do not carry legal consequences.

Thus, no criminal offences can be held against the individual; nevertheless, he/she is liable for any

damage caused to other individuals’ property. From the age of discretion to the age of pubescence or

fifteen years of age – whichever comes first – the discerning minor has deficient capacity for execution.

During this stage the minor’s intellectual abilities develop. A discerning minor’s words and acts carry

some weight during this stage. Transactions that result in financial gains, or are merely beneficial, such

as accepting gifts, are valid. On the contrary, transactions that result in financial losses, or are merely

harmful, such as donating property, are invalid even with permission from parents or guardians, though

transactions may concurrently have financial benefits and harms. Benefit and harm here refers to look-

ing at these transactions from a pure financial perspective without considering the creedal aspect,

which encourages people to donate from their wealth within moderation and anticipate blessings from

God for doing so. Hence, these terms should not be misunderstood to mean that donating money is

harmful, but these categories have been identified in this manner to classify valid and invalid actions

of minors. If a discerning minor conducts these transactions then they are valid on condition that the

parent or guardian approves them. Again, the same rule regarding criminal offences mentioned for



An adult is accountable for his/her words and acts, with the exception of the circumstances

mentioned below in which the person’s intellectual faculties are affected.

A person’s legal capacity for execution may be impacted by natural or acquired causes

thereby invalidating it, diminishing it, or leading to a modification of some sharī‘ah rulings.

Natural causes include minority, insanity, idiocy, forgetfulness, sleep, unconsciousness, and

others. Acquired causes include ignorance, indiscretion, intoxication, coercion and others.49

Each of these causes has its own ruling. For example, insanity invalidates a person’s legal

capacity for execution since the person’s mental capabilities do not allow him/her to under-

stand God’s communication. Therefore, any transaction entered into with an insane person is

void. On the other hand, “idiocy” as a form of dementia that does not reach madness, dimin-

ishes but does not invalidate capacity for execution. Note that injunctions relating to minors

or insane individuals found in texts are not meant to address these persons per se, but are

instructions to their parents or guardians regarding the best ways to bring up these persons.50

Finally, in certain occasions a person’s actions can lead to an amendment of the original

sharī‘ah ruling, even though active legal capacity is not affected. For example, sharī‘ah grants

people the freedom to enter into lawful transactions, but if a person is feebleminded and acts

in prodigal ways that do not preserve his/her property then a new sharī‘ah ruling applies to

such an individual. In this scenario, an Islamic court may issue a judicial order to prohibit the

person from entering into financial transactions in order to protect the rights of others, such as

children and creditors.51

Although God’s communication covers many aspects, the portion we are concerned with

in fiqh is the conduct of mukallafūn. “Conduct” means actions that mukallafūn practically

perform excluding those of the heart. Thus, God’s communication relating to creed and mor-

als is excluded.52

In the definition of fiqh the term “acquired” refers to the way these rulings are

derived using different methods for ijtihād. Mujtahidūn, independent jurists who under-

take the challenge of ijtihād, deduce rulings pertaining to aspects of worship rituals

and transactions from the Qur’ān and sunnah. The most receptive domain for ijtihād is

transactions, which in the present day refers to civil law and includes commutative and

non-commutative contracts, equity, trusts, matrimony, estate administration, and court

dispute settlement rules.53 Three other areas of fiqh with a distinct corpus of law are

criminal law, constitutional and administrative law, and international relations law, as

referred to in modern taxonomy.54

non-discerning minors applies here. In the final stage, from puberty or the age of pubescence onwards,

the adult possesses complete capacity for execution. At this stage the individual becomes responsible

for all obligations such as those related to creed, transactions, manners, worship rituals, and criminal

penalties. See Al-Zuhayli, Alwajīz fī us.ūl al-fiqh al-islāmi, 2nd edn, Vol. 1, 485–495; Nyazee, Islamic Jurisprudence, 109–140; Kamali, Principles of Islamic Jurisprudence, 450–452.49 Ministry of Awqaf and Islamic Affairs, Al-Mawsū‘ah Al-fiqhīyah Al-Kuwaytīyah, 2nd edn (Kuwait,

Thāt Al-Salāsil, 1986), Vol. 7, 161–167.50 Al-Zuhayli, Alwajīz fī us.ūl al-fiqh al-islāmi, 2nd edn, Vol. 1, 290–291.51 Ibid., 492–497; Nyazee, Islamic Jurisprudence, 125–140; Kamali, Principles of Islamic Jurisprudence,

450–452.52 Al-Zuhayli, Alwajīz fī us.ūl al-fiqh al-islāmi, 2nd edn, Vol. 1, 20.53 Kamali, Shari’ah Law: An introduction, 42.54 Ibid., 42.

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