FIQH FOR ISLAMIC BANKING AND FINANCE

[MIFB 6043]

ASSIGNMENT

TITLE

The Application of Islamic Legal Maxims to Islamic Banking and Finance

Prepared by

Nuradin Abdi Elmi [A1020624M04]

Submitted to

Haji Dziyauddin b. Ahmad

Contents

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Introduction

- Definition of Islamic legal maxim- Differences between Usul al fiqh and qawa’id al fiqhiyah

Legal Maxims and development of Islamic Finance

Leading Islamic legal maxims

1. Matters are determined according to their intentions ( صدها بمقا األمور )2. Certainty cannot be overruled by doubt ) ( بالشك يزال ال اليقين3. Hardship brings easiness ( التيسر تجلب المشقة )4. Freedom from liability is the fundamental principle ( الذمة براءة األصل )5. The origin of all rules is permissibility ( اإلباحة األشياء في األصل )6. Revenue goes with liability ( باالضمان الخراج )7. Harm should not be inflicted nor reciprocated ( ضرار وال ضر ال )8. Customary usage is the basis of judgement ( العادة محكمة )

Conclusion

Reference

Introduction

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Legal maxims are “general rules which apply to all of their related particulars. They are abstract statements of the rules and principles of Islamic legal system”.1 They stem from the detailed reading of the rules of Islamic jurisprudence on particular themes and issues developed by the jurists in the course of history. They differ from modern statutory rules which are concise and devoid of detail. They are expressive of the goals and objectives of the Shariah.

The contents of the maxims are occasionally extracted from the Qur’an or the Sunnah but the wording of certain maxims are taken to greater refinement and perfection. Some legal maxims are of general application, whereas others might apply to a particular area of Islamic jurisprudence, such as devotional matters, civil transactions, contracts, litigation and court proceedings.2 However, due to the limited scope of the study it will discuss only the maxims related to the financial transactions in Islamic banking practice.

The interpretation and application of the Islamic legal maxims may be made only by the Shari`ah scholars along the lines of need of time if the Qur’an, the Sunnah as well as the consensus of early jurists do not provide any ruling on that specific issue. For example, the legal opinion in regard to profit-sharing in a joint venture is that:

Profit is to be distributed according to the agreement but loss is to be borne in proportion to capital contribution.3

In this ruling the ratio of the distribution of profit according to agreement can be reviewed in light of business conditions. It may be left to the partners to decide the ratios of profit-sharing. The liability of loss, however, has to be borne strictly in proportion of capital contribution since this rule enjoys the juristic consensus.

The rulings of the Shari`ah aim at doing well to human beings and removing harm. The Qur’an and the Sunnah should be the criteria of judgment with regard to those benefits and harms and they are not entirely left to the judgment of man. “In cases where benefits and harms are not pointed out in these two primary sources of the Shari`ah human intellect guided by sound reasoning, experience, prevalent practice and sound judgment of scholars will judge the virtue or vice of any act”4. It is sound judgment based on in depth knowledge of the Shari`ah that will decide for instance, which forms of present day trades and activities should be prohibited and which should be allowed and protected by law.

1 See Mahmassani, Subhi, 1961, Falsafat Al tashri’I fil Islam: The philosophy of jurisprudence in Islam ( Farhat I. Siadeh trans.), Lielden: E.J. Brill. P. 1512 See Faruq (2010), Shari’ah Maxims and their Implication on Modern Financial Transactions, Journal of Islamic Economics, Banking and Finance (JIEBF), Volume - 6, Number - 3, July - August 2010.3 See M. Taqi Usmani. 1999. “The Concept of Musharakah and Its Application as an Islamic Method of Financing”, Arab Law Quarterly, vol. 14, No. 3, pp. 210.4 Ibid (Faruq 2010)

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The general Shariah legal maxim is that a particular activity is permissible unless there is a clear prohibition against it. This is reflected in the law on financial transactions. The Shariah compliant financial services emphasize the ethical, social and religious dimensions of financial transactions to enhance equity and fairness for the general good of society. In this brief study, the leading maxims that seem to be relevant to the financial transactions in Islamic banking practice would be discussed.

Definition of Islamic Legal Maxim ( Al qawa’id al fiqh)

One of the most prominent contemporary scholars, Mustafa Al – Zarqa’ gave this modern definition: “legal maxims are the general fiqh principles which are presented in simple format consisting of the general rules of Shariah in a particular field related to it”.5

Another definition given by Mohamed H. Kamali is that: “Legal maxims (qawa‘id al-kulliyah al-fiqhiyyah) are theoretical abstractions, usually in the form of short epithetical statements, that are expressive, often in a few words, of the goals and objectives of the Shari‘ah.”6

Differences between Usul al fiqh and qawa’id al fiqhiyah

A brief word may be added here regarding the difference between the usul, and the maxims of fiqh (alqawa'id al-fiqhiyyah), as the two are sometimes confused with one another. The name 'al-qawa'id al-fiqhiyyah' may resemble the expression usul al-fiqh, but the former is not a part of the latter and the two are totally different from one another. The maxims of fiqh refer to a body of abstract rules which are derived from the detailed study of the fiqh itself. They consist of theoretical guidelines in the different areas of fiqh such as evidence, transactions, matrimonial law, etc. As such they are an integral part of fiqh and are totally separate from usul al-fiqh.7

The discipline of legal maxims (qawa`id fiqhiyya) teaches us the underlying structure and patterns of the rulings that have been derived from the primary sources. These maxims are madhab-specific and are used by scholars to extrapolate existing rulings of Islamic law to apply to new cases. This extrapolation is a complex procedure that often involves the interplay of many different maxims.8

5 See Securities Commission Malaysia (2009), Islamic Commercial Law (Fiqh al-Muamalat): Islamic Capital Market Series of books, Malaysia: Lexis Nexis Sdn Bhd, p. 706 Mohammad Hashim Kamali. Qawa’id al fiqh: The legal maxims of Islamic Law. The Association of Muslim Lawyers. http://www.sunnah.org/fiqh/usul/Kamali_ Qawaid_al-Fiqh.pdf, viewed at 02.9.20117 Ibid. 8 Karamali Hamza (2007), Difference Between Usul al-Fiqh and al Qawaid Fiqhiyya, available at http://qa.sunnipath.com/issue_view.asp?HD=7&ID, viewed at 03. 09. 2011

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On the other hand, the discipline of legal methodology (usul al-fiqh) teaches us how to derive legal rulings from the primary sources of Islamic Law, such as the Quran and the prophetic Sunnah. It teaches us how to read the primary sources in an honest and unbiased manner to figure out what Allah Most High really wants from us.9

Legal Maxims and development of Islamic Finance

The theory of Islamic finance is an old notion though today’s form of Islamic finance is a very young discipline. From a modern perspective, Islamic finance refers to financial market transactions, operations and services that comply with Islamic ethics and principles. The Islamic laws on financial transactions are part of the branch of the Shariah known as fiqh al-muamalat.10

The development of the Islamic banking and finance industry has raised many contemporary issues regarding Islamic commercial contracts and more in general the Islamic commercial law. These issues are needed to be in accordance with Islamic rulings. Most of the time, direct rulings from the texts could not be found as the nature of the texts itself has left the issues for different considerations. Hence, as a solution, application of legal maxims would help to develop the parameters of Islamic banking and finance and its general principles.11

The understanding of the objectives of Shari`ah is essential for the development of human being in all areas of life, particularly in the area of financial transactions including the Islamic financing and banking practice. Accordingly, the Shari`ah has laid down a good foundation, as has been provided by the legal maxim: “a particular activity is permissible unless there is a clear prohibition against it”. Based on this premise, as a general principle, practices of financial transactions are originally permissible in Islam unless there is an evidence of some prohibited elements involved in such activities, which would then effectively change the original ruling.

Islamic financial system has been closely attached to various forms of transactions available in Islamic legal theory in general and in Islamic legal maxims for financial transactions in particular. Also, the system has been working quite well since the Islamic finance practices come of the ages as it has been able to meet various needs of the parties concerned with Islamic financial transactions. However, current practices of Islamic finance might have been mounted with criticisms due to the fact they do not offer a fully-developed alternative model to the conventional system. Also, largely due to competitive pressures, regulatory constraints, and customer expectations Islamic financial practices today often seek to replicate conventional ones in many ways. In doing so, they lose several of the benefits and strengths which would come from following the spirit of Islamic legal maxims more closely.

9 Ibid (Karamali 2007)10 Ibid (H. Kamali)11 Ibid (Securties Commission 2009)

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Given the above, the criticisms should encourage the Islamic finance Industry to recommit the spirit of the Shariah maxims and incorporating the maqasid of Shariah it was created to serve. On the other hand, in the process of identifying the legality or compliance of financial instruments with Shariah, those Islamic scholars involved with the Islamic finance industry must have the understanding of the conceptual and implementation aspects of the instruments are in use in financial transactions. This is in line with a Shariah maxim that states a ruling is decided based on the understanding (of the issue at hand).12 It is thus suggested that a close collaboration be made between the practitioners of the industry and Shariah scholars who would collectively assess the Shariah-compliance aspect of any product and instrument of a financial transaction.

Leading Islamic legal Maxims

Over 200 legal maxims have been collected and compiled in works known as al-ashbah wa al-naza'ir.13 one hundred of these, have been adopted in the introductory section (i.e. the first 100 articles) of the Ottoman Majallah.14 Sometimes these legal maxims are summarised under the five universal maxims of Islamic Law (Al qawa’id al Kuliyah al khamsah). However, the maxims that seem to be relevant to the modern Islamic finance practice would be briefly discussed as follows.

1. Matters are determined according to their intentions ( صدها بمقا األمور )

There is evidence for this principle in the Prophet's statement: “Actions are but by intention and a man will have only what he intended.” All human action will be judged through his or her intention. Good intention can guide someone to do the right thing while bad intention can give more harm and negative impact to others. Intention and effect of an action will determine whether the action is permitted or prohibited in Islam15. For example, someone is growing grapes which is a halal product. However, his intention is to sell grapes to the consumer or to the manufacturer of wine. Now because of his intention this renders his activity haram. It is the intention that determines the legality or illegality of the act.

The hadith used as a proof text and noted above is as follows:

صلى الله رسول سمعت : قال ، عنه الله رضي الخطاب بن عمر حفص أبي المؤمنين أمير عن

�ات األعمال إنما : ( يقول وسلم عليه الله إلى هجرته كانت فمن ، مانوى امريء لكل وإنما ، بالني

12 Ibid (Faruq 2010)13 Two well known works both bearing the title Al-Ashbah wa al-Naza'ir are authored by Jalal al-Din al-Suyuti and Ibn Nujaym al-Hanafi respectively14 Ibid ( H. Kamali)15 Mohamad Akram Laldin. 2006. Islamic law: An introduction. International Islamic University Malaysia.

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، ينكحها امرأة أو ، يصيبها لدنيا هجرته كانت ومن ، ورسوله الله إلى فهجرته ، ورسوله الله

صحيحهما في مسلم و البخاري رواه ) . إليه هاجر ما إلى فهجرته

This is a comprehensive maxim that has implications that the scholars have discussed in various areas, including devotional matters, commercial transactions and crimes. The element of intent often plays a crucial role in differentiating, for example a murder from erroneous killing, theft from in culpable appropriation of property, and the figurative words that a husband may utter to conclude the occurrence or otherwise of a divorce.

The rule embodied in this maxim although been applied by early jurists mostly on acts of rituals, it is equally applicable to other spheres of activity including Islamic finance. It is actual acts and policies rather than proclamations that determine the intention. This is so because of a sub-rule which governs contractual obligation. This reads as follow:

والمباني لاللفاظ ال والمعاني للمقاصد العقود في العبرة ” ”

“Contracts are to be understood in relation to their intention and substance, not by the words and phrases used”.

For example, the kafalah implies coextensive liability while transfer of debt implies discharge of the principal debtor.16 If a contract of transfer of debt is made with the condition to hold the principal debtor liable in case the transferee fails to discharge the debt, contract even though termed as a contract of transfer of debt will be treated as a contract of kafalah. Similar will be the treatment of a contract of kafalah in case the principal debtor is discharged after contract of kafalah is signed.

In case the banks declare their policy of financing customers on non-interest bases it would be necessary to do so and not merely continue the same practice and seeking to rationalise it in Islamic terms by changing the relevant nomenclature such as calling it “buy-back” or “mark-up”. Likewise, it will not be permissible for the banks to practice Musharaka and Mudaraba in such a way as to ensure a fixed rate of return for the banks while the liability of bearing loss or an uncertain amount of remaining profit is transferred to the working partner.

Another example,17 on the application of this maxim is in the case of imposition of ta’widh or compensation on a defaulting bank customer who intentionally or negligently refused to pay his obligations to the bank. Bank Negara Malaysia allows banks to charge compensation although initially this is not allowed in Shariah as it would resemble to the prohibited riba.

16 In kafalah a person joins another person in undertaking certain obligation. Consequently, both persons become jointly liable to meet any claim that may arise from this obligation.17 Ibid (Securities Commission 2009)

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However, the absence of a proper mechanism to overcome the issue of default may trigger moral hazard on the part of the customer who may deliberately delay the payment.18 Therefore imposition of ta’widh is allowed on the basis of preventing intentional default by customers.

2. Certainty cannot be overruled by doubt ) ( بالشك يزال ال اليقين

This important principle is applied in every area of Islamic Law. It is estimated that the questions that are derived on its basis comprise three-fourths of all legal rulings.19

The evidence is there both in the Quran and hadith of the prophet (Alaihi Salatu wa salam). This is shown by the following Quranic verses:

�ُع� و�م�ا �ب �ت ه�م� ي �ر� �َث ك� �ال� أ �ا إ �ن� َظ�ن �ْغ�ن�ي ال� الَّظ�ن� إ �ح�ِّق  م�ن� ي ¢ا ال �ًئ ي �ن� ش� �ه� إ �يم¤ الل �م�ا ع�ل �ون� ب �ف�ع�ل 36:يونس" ]ي "

“Most of them follow naught but conjecture. Assuredly, conjecture can by no means takethe place of truth. Verily Allah is well aware of all that they do.” (Yunus: 36).20

The prophet (Alaihi salatu wa salam) has also said the following hadith:

إليه يخيل الذي الرجل وسلم عليه الله صلى الله رسول إلى شكا أنه عمه عن تميم بن عباد عن صحيح (ريحا يجد أو صوتا يسمُع حتى ينصرف ال أو ينفتل ال فقال الصالة في الشيء يجد أنه

البخاري

“.... he should not leave (the mosque) until he either hears or smells something”21

Imam Nawawi comments:

This hadîth sets forth a principle of Islam and a major axiom of Islamic Law, which is that things are legally assumed to remain as they are unless and until it is established with certainty that they are otherwise. Extraneous doubts are of no consequence.22

The rule thus discards the effect of doubt that disturbs the original position. This provides guidance where discretion or personal judgement and subjective evidence are relied upon; the rule is of great significance in the event of controversy on rights and obligations of contending parties in the absence of a proof on either side.

18 Shariah resolutions in Islamic Finance (2007, Bank Negara Malaysia) p. 37.19 Al-Suyûtî, al-Ashb wa al-Nazâ'ir (51). See also: al-Bûrnû, al-Wajîz fî al-Qawâ'id al-Fiqhiyyah al-Kulliyah (169)20 Translation is quoted from http://quran.muslim-web.com/, viewed at 04.09.201121 Sahih Bukhari, Kitab Wudu’: 137, p. 28622 Sharh Sahîh Muslim (4/49)

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The rule, if read with its following sub rules, provides a broader canvas of its application23.

a) “ العدم العارضة الصفات في األصل ”

“As to incorporeal matters that do not prove themselves, the basic principle (presumption) is that they do not exist”

So, that if between the active partner and the financier there be a dispute as to profit, the word of the active partner will be taken, and the financier may lead evidence to prove the actual profit”.

In the case of a dispute over defective merchandise the above sub-rule requires presumption of defect occurrence after sale unless the buyer could prove prior presence thereof. Similarly, a partner has no right to assume a minimum rate of profit earned by his business partner and claim his share in that profit as different from the amount stated to have been actually earned by the partner. The sub-rule provides that in case the working partner declares a certain amount of profit no more will be presumed unless the contrary is proved to be a fact.

b) The above sub-rule is further strengthened by another sub-rule that:

“ للتوهم عبرة ال ”

“No reliance (should be made) on mere imagination”24

Another example25 of the application of this maxim is that if a person has entered into a contract with another and he is in doubt whether he has performed the obligation arising from the contract or not, he is considered as still liable to perform until there is proof to show otherwise.

3. Hardship brings easiness ( التيسر تجلب المشقة )

This principle embodies the fact that Islamic Law is built upon achieving ease and not upon imposing hardships. Whenever difficulties present themselves, the Law makes provisions to facilitate matters. The jurists have used this evidence in support of the many concessions 23 S.M. Hasanuzzaman (2007), The economic relevance of Shariah maxims, Jeddah: Scientific Publishing Centre, King Abdul Aziz Unversity, p. 1124 Majalla, Art. 74. See also ibid (Hasanuzzaman, 2007)25 Ibid (Securities Commission 2009)

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that are granted to the disabled and the sick in the sphere of religious duties as well as modern financial transactions.

The maxim is a rewording of the Quranic verses that state:

�ر�يد� �ه� ي �م� الل �ك ر� ب �س� �ي �ر�يد� و�ال� ال �م� ي �ك ر� ب �ع�س� 185:البقرة[ ال [

“Allah intends every facility for you; He does not want to put to difficulties.” [Baqarah, 185]

�ر�يد� م�ا �ه� ي �ج�ع�ل� الل �ي �م� ل �ك �ي ج¬ م�ن� ع�ل 6:المائدة[ ح�ر� [

” Allah does not wish to place you in a difficulty” [Ma’idah, 6]

Also the following narrations of the prophet (peace be upon him) are evidences of the maxim.

...)معسرين تبعَثوا ولم ميسرين بعَثتم فإنما (البخاري رواه

“You have been sent forth to make things easy, not to impose difficulties.” [Sahih Bukhari]

In another hadith the prophet (peace be upon him) says:

[ السمحة بالحنیفیة بعَثت]26 احمد رواه

There are cases in which the Quran and/or the Hadith have outlined the nature of hardship which forms the basis/cause of relief. In such cases no other hardship is taken into account for claiming similar or further relief. There are, however, situations where the Quran and the Hadith have not laid down the hardship which calls for relief or relaxation while acting upon some injunctions. It is here that Shariah scholars may determine whether this really deserves relief.

Similarly, there are situations in which the Quran or the Hadith grant a relaxation in principle. In such cases the relief is restricted to those laid down in the text and only to that extent, but no further.

It is known that a contract to sell a commodity which one does not possess at the time of making the sale contract is not lawful.27 Bay’ Salam which technically means forward sale for a commodity that the seller does not possess is permissible in the case of producers who need finance for inputs. If finance is not forthcoming at the time of sowing, production will

ج 26 حنبل احمد 116ص 4مسند 27 Bukhari, Kitab-al-Buyu, (Chapter Bay al-taam qabl)

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cease which will be harmful for the entire community. To ensure productive activity is not hampered the cultivator is allowed to sell his expected produce against advance payment. In this particular case, however, the Prophet (peace be upon him) made a relaxation in the law of sale of goods. Thus the relaxation in the principle of “sale before possession” will remain confined to Bay’ Salam only and cannot be used in other sale transactions.

It is important to mention that relaxations are amenable to the situation of necessity. But any necessity cannot qualify for relaxation. This requires defining the Sharia concept of necessity which plays a very important role in elaborating the main rule. The concept not only forms the basis of many subsidiary rules but also lays down the limitations within which the main rule has to operate. The rule:

“ المحضورات تبيح الضرورات ”

“necessities (addarurat) justify that which may be unlawful”28

This is the most important principle that provides us with guideline to bypass the impasse or deadlock in practising upon the principles of the Sharia. The scholars, while defining necessity, have distinguished between darura (compulsive necessity), and haja (need). For them darura is an indispensable necessity which, if not met, may cause severe hardship resulting in loss of life. Haja on the other hand, is a need which when unsatisfied, does not cause hardship. It affects convenience and efficient performance of an act. In addition to the compulsive character of necessity jurists have laid down certain conditions which should be met before relaxation is sought.29

It should be noted carefully that there is a basic difference between the extent of relaxation on account of darura and on account of haja. Similarly, there is a difference between relaxation for individuals and for society. Hardship falling in the category of darura facing individuals involves loss of life or limb, and hence rightly calls for relaxation in basic principles of the Quran or Sunna. On the other hand, hardship faced by society which is not of the class of darura but is treated as haja is less severe and only affects smooth and efficient performance of social institutions. It does not claim relaxation in subsidiary rules that are based on analogical reasoning of the fuqaha. The former relaxation is purely temporary and ends with relief in hardship. The later relaxation continues for as long as it is found beneficial to the society.30

An example of contemporary application of this legal maxim in Islamic finance is in the case of Muslim minority who live in non Muslim countries whereby no Islamic financial

28 Majalla, Art. 21, See also Ibid (Hasanuzzaman 2007)29 Az-Zuhayli(1996), Fiqh Al Islami wa Adilatuh: 3, Damascus: Darul Fikr p. 516-17 30 Zarqa, 2, 993. See also Ibid (Hasanuzzaman 2007)

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institutions facilities available. In this case, they might be allowed to use conventional banking due to the compelling need like residential financing.31

Another example is if a person entered into a lease or ijarah agreement of a ship and later found that the goods he wanted to send by the ship could not be delivered due to some reasons, he is allowed to cancel the lease. Under normal circumstances, he is not allowed to cancel the contract unless by mutual agreement with the lessor. However, forcing him to pay for the lease without occupying the ship will amount to hardship. Therefore under the legal maxim, he could be allowed to cancel under this specific circumstance in order to avoid hardship.32

4. Freedom from liability is the fundamental principle ( الذمة براءة األصل )

The origin of this maxim goes to the Quranic verse declaring the original permissibility of all things:33

د� ال� قل� ج�� �وح�ي� م�ا ف�ي أ �ي� أ �ل م¢ا إ �ى² م�ح�ر� ¬ ع�ل �ط�ع�م�ه� َط�اع�م �ال� ي �ن� إ �ون� أ �ك �ة¢ ي �ت و� م�ي

� ا د�م¢ا أ ف�وح¢ و� م�س�� �ح�م� أ ل

�ز�ير¬ ن 145:االنعام[ ِخ� [

“Say: "I find not in the message received by me by inspiration any (meat) forbidden to be eaten by one who wishes to eat it, unless it be dead meat, or blood poured forth, or the flesh of

swine” [Al-An’am:145]

In this Quranic verse it is understood that everything is presumed to be permissible unless otherwise prescribed in the Shariah. Similarly a person is deemed to be free from any liability unless there is evidence to show otherwise as the origin of man is free from any liability.

Thus in case of loss in business for example, a partner cannot allege wilful neglect and require the latter to indemnify him for the loss, unless he proves the contrary. Failing this proof the partner will not be personally made liable to the loss nor to indemnify the other partner. Any doubt affecting his position of freedom from liability will be untenable. No arbitrary judgement of the contender would be acceptable.

5. The origin of all rules is permissibility ( اإلباحة األشياء في األصل )

The evidence of this principle is found on the Quran and the sunnah. The Quran says:

31 Ibid (Securities Commission 2009) 32 Ibid33 Ibid

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�م� و�م�ا) �ك � ل �ال � أ �وا �ل �ك �ْأ �ر� م�م�ا ت م� ُذ�ك �ه� اس� �ه� الل �ي �ك�م ف�ص�ل� و�ق�د� ع�ل م� م�ا ل �م� ح�ر� �ك �ي � ع�ل �ال �م� م�ا إ ت �ه� اض�ط�ر�ر� �ي �ل إ

119:االنعام(

“Why should you not eat of (meats) on which Allah's name has been pronounced, when He has explained to you in detail what is forbidden to you - except under compulsion of

necessity?” [Al-ana’m:119]

( م� م�ن� ق�ل� �ة� ح�ر� �ه� ِز�ين �ي� الل �ت ج� ال �ِخ�ر� �اد�ه� أ �ع�ب �ات� ل  ب �ط�ي ِق� م�ن� و�ال ِز� �ذ�ين� ه�ي ق�ل� الر  �ل � ل �وا �اة� ف�ي آم�ن ي �ح� �ا ال �ي الدºن

�ص�ة¢ ال �و�م� ِخ� �ام�ة� ي �ق�ي ال 32:االعراف (

“Say: Who has forbidden the beautiful (gifts) of Allah, which He has produced for His servants, and the things, clean and pure, (which He has provided) for sustenance? Say: They

are, in the life of this world, for those who believe, (and) purely for them on the Day of Judgment” [Al-a’raf: 32]

The following ahadith also show the evidence of the maxim. The prophet (peace be upon him) says:

] فإن عافيته الله من فاقبلوا ، عفو فهو عنه سكت وما حرام فهو حرم وما حالل فهو الله أحل ما

شيًئا لينسى يكن لم الله [حسن بسند الدرداء أبي حديث من والطبراني البزار أِخرجه

فهو عنه سكت وما كتابه في الله حرمه ما والحرام كتابه في الله أحله ما الحالل (الترمذي أِخرجه

)عنه عفا مما

The conclusion that is drawn from the above Quranic verses and narrations is that we are allowed to utilise the resources of the earth for our benefit, and that unless something is specifically declared forbidden, it is presumed to be permissible. Based on this maxim, as a general principle, practices of financial transactions in Islamic finance are originally permissible in Islam unless there is an evidence of some prohibited elements involved in such activities, which would then effectively change the original ruling.

6. Revenue goes with liability ( باالضمان الخراج ) The maxim is a direct rendering of a hadith in identical words. The Prophet (peace be upon him) says:

} { : ، البخاري وضعفه ، الخمسة رواه بالضمان الخراج وسلم عليه الله صلى الله رسول قالالقطان وابن ، والحاكم ، حبان وابن ، الجارود وابن ، ِخزيمة وابن ، الترمذي وصححه ، داود وأبو

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This means that any benefits (i.e. profit) derived from a transaction must be accompanied with the liability arising from a potential loss. Given this maxim, the yields of trees, animals, etc., belong to those who are responsible for their upkeep and maintenance.

Another principle that also has the same bearing is:

" النقمة بقدر النمعة "

“The blessings of a thing are in proportion to the evils thereof and vice versa”

This principle implies that if the commodity which is not yet possessed by the buyer is lost, it is the seller but not the buyer who would have to bear the loss because the former enjoys possession. Likewise, renting out one’s house on the condition that the tenant would be liable to the value of the house, if the house is damaged due to flood or earthquake, is also a contravention of the rule because the owner who is earning its rent should also bear the loss.

The principle is that ownership cannot be separated from the risk of related loss. This has important implications for various transactions. In loans, there is no entitlement to any profit because the creditor gets back the full amount, irrespective of the nature of use by the debtor or the fact the debtor incurred loss in his business which he undertook with the borrowed money. In trade, so long as the asset remains with the seller, he has to bear the risk of its destruction; as soon as he sells it, the risk is transferred to the buyer and in the case of a credit sale, the buyer has to pay the price at the settled time even if the asset is destroyed for any reason. He can mitigate the risk by way of Takaful but it will have no link with his liability to pay the price. In Ijarah, the lessor is entitled to rent only when he keeps the asset in usable form by incurring ownership-related expenses and undertakes the risks associated with the asset.34

The business risk involved in Shirkah-based modes is far more than that involved in trading modes like Murabaha, Salam and Ijarah, because in Shirkah, all business loss has to be borne by the capital provider while the manager or the entrepreneur loses his labour in the case of loss in a joint business. For depositors in Islamic banks, risk stems from the failure of business and uncertainty regarding the level of profit to be shared. This risk does not discourage depositors; rather it justifies the profit and as such we see that Islamic banks’ deposits are increasing continuously. For banks, financing on the basis of Shirkah involves risk because clients could disguise the profits and they may lose even the principal, because loss in Islamic finance means loss of capital and not any decrease in the expected profit.35

7. Harm should not be inflicted nor reciprocated ( ضرار وال ضر ال )

34 Muhammad Ayub (2007), Understanding Islamic Finance, England: John Wiley & Sons Ltd, pp 82/8335 Ibid (Mohammed Ayub 2007)

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This most important rule of the Sharia is based on a Hadith with similar wording. The prophet (be be upon him) says:

امسند وغيرهما الدارقطني و ماجة ابن رواه ، حسن حديث ، ) ضرار وال ضرر ال )

Islamic Law completely forbids that which causes harm. That which is harmful must be completely avoided whenever possible. When it is not possible, then the lesser of two evils should be perpetrated to avoid the greater. That which brings harm on a smaller scale is to be preferred to that which visits general harm to society. Likewise, the avoidance of harm takes priority over the attainment of some benefit.

This guiding rule is read with its sub-rule:

“Wrong is to be undone”36 “ يزال الضرر ”

This provides a guideline to regulate the entire economic and financial system in such a way that prohibits harm imposition and discourages retaliation. This basic rule is treated as a pillar of Islamic law. The rule forms the basis of the laws of option, inhibition, return of defective merchandise, pre-emption, requital, Hudud37, compensation and indemnity, etc.38

This also allows individuals to act unilaterally to protect themselves or others from harm. It is, therefore, necessary that an Islamic state should legislate and manage in such a way that would plug the sources of causing harm or damage.

The application of the above principle has the following prerequisites:

a. “Let the ancient rest on its age” “ قديمه على يترك القديم ”

It is not thus permissible based on this to prevent the livestock from grazing in public pasture which has been in use since a long time. These rights have to be guaranteed unless their exercise is harmful to general interest. This is so because of the operation of another rule that reads: “Harm is harm even though it be ancient”39.

b. “Unlawful things are to be prevented irrespective of benefit” “ جلب من اولى المفاسد درء

” المنافُع

There may be situations in which an act might have certain benefits while it produces corruption and inequity. In such a case the Shari`ah would ban that act despite the benefits

36 Majalla, Art. 20. See also, Ibid (Hasanuzzaman 2007)37 Hudud are punishments for killing, theft, fornication, dacoity, and rebellion as prescribed in the Qur’an.38 Ibn Nujaym, 58. See also Ibid (Hasanuzzaman 2007) 39 Majalla, Art. 7. See also, Ibid (Hasanuzzaman 2007)

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that it might apparently yield. Thus if an age-old canal is causing water logging and salinity; it should not be allowed to flow simply on account of previously held rights.

In situations in which a trade, technique or a policy is not unlawful but involves both benefit and harm; such situations are governed by the following subsidiary rules:

1. “Harm is eliminated to the extent that is possible” “ االمكان بقدر يدافُع الضرر ”

A practical manifestation of this maxim is the validation of the option of defect (khiyar al ‘ayb) in Islamic law, which is designed to protect the buyer against harm.

The following further rules present the practical guidelines:

2. “Harm is not eliminated by another harm” “ بمَثله يزال ال الضرر ”

For instance, if a buyer gets a faulty article he is given the option to return the goods. But if the purchased article has developed similar fault while in possession of the purchaser he will lose his option to return the goods because, in order to protect himself from harm, he will also be harming the seller. This would amount to repelling harm by causing a similar harm.

3. “A greater harm is eliminated by means of a lesser harm” “ بضرر يزال االشد الضرر

”االِخف

The rule also provides some important choices in order to endure a minor harm to counteract a major harm. For example, in case a customer loses his coin in a slot, his coin may be allowed to go waste rather than to dismantle the machine which has much greater value than the coin. But in case a very expensive piece of jewellery is lost in a less expensive washing machine of a laundry its recovery then, requires damage to the machine; the same will be effected to recover the piece of jewellery that is more expensive than the machine.

c. The rule in the case of conflict between a particular harm and a general harm is that:

“To avoid public injury, a private injury may be suffered ”40 “ ضرر لدفُع الخاص الضرر يتحمل

”العام

In addition, there is another rule which contains the same spirit but is laid down in different words. It reads as:

“The lesser of two evils is to be chosen”41 “ الشرين اهون يختار ”

40 Majalla, Art. 26. See also, Ibid (Hasanuzzaman 2007)41 Majalla, Art. 29

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The maxim ‘harm should not inflicted nor reciprocated’ is cited in as one of the basis for imposition of ta’widh or compensation for late payment as allowed by Bank Negara Malaysia (BNM) as well as Securities Commission. Based on this principle, the debtor’s act of delaying payment which could harm the creditor must be avoided by having a compensation clause.42

8. Customary usage is the basis of judgement ( العادة محكمة )

"Custom refers to the prevailing practices of society with respect to their choice of words and their mode of action”43

Among the evidence for the recognition of custom in Islamic Law is the following hadith related by `A'ishah:

ما يعطيني وليس شحيح رجل سفيان أبا إن الله رسول يا قالت عتبة بنت هند أن عائشة عن صحيح" ]بالمعروف وولدك يكفيك ما ِخذي فقال يعلم ال وهو منه أِخذت ما إال وولدي يكفيني

5049:النفقات كتاب البخاري،

Hind, the wife of Mu`awiyah, said to the Prophet (peace be upon him): “Abu Sufyan (Hind's husband) is a tight-fisted man. Is there anything wrong if I take money from him secretly?” The Prophet (peace be upon him) said: “Take for yourself and your children to suffice your

needs according to what is customary.” [ Sahih al-Bukhari ]

Ibn Hajar al-`Asqalani, in his commentary on Sahih al-Bukhari , observes: “He referred her to customary usage in a matter that was not precisely defined in Islamic Law.”44

The principle that customary usage is the determining factor basically means that the customs of the people are recognized and acknowledged by Islamic Law as long as certain conditions are met. The most important of these conditions is that:

- The custom in question does not violate the dictates of the primary sources of Shariah; Quran and Sunnah.

- The custom is indeed the prevailing practice in society and is applied in that society on a consistent basis.

- That the custom must have been in effect at the time when a given activity was initially entered into without there having been any clear expression on the part of the concerned parties indicating something to the contrary.

42 ISRA (2011), Islamic Financial system: principles and practices, Malaysia: ISRA, p. 17143 Ibn Abdallah (n.d), The universal maxims of Islamic law, available at http://inceif-students.lefora.com /2010/04/16/ five-legal-maxims, viewed at: 31. 08. 201144 Fath al-Bârî (4/407)

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- Finally, the custom must be of a nature that its application can be considered binding on the parties concerned.

With reference to contemporary Islamic financial transactions, a good example which is deemed to be a valid customary practice by scholars is the acceptance of the definition used in spot trading for cross border transactions. Even though the common understanding for spot trading from the Islamic financial transactions’ perspective is on the same day and within the contractual session (majlis al-aqd), the delay of two business days has now been recognised as spot transaction due to the prevalent market practice to facilitate the transfer of fund from one country to another.45

Conclusion

It has to be fully kept in mind that all the injunctions of the Sharia seek to benefit human beings and eliminate harm. But those benefits and harms are not entirely left to the judgement of man. In a large number of cases those benefits and harms have been specified in the Qur’an and Hadith and should be made the criteria of judgement. In cases where benefits and harms are not pointed out human intellect will judge the virtue or vice of any act. Thus intellect would be guided by sound reasoning, experience, prevalent practice and sound judgement of scholars who have well understood the spirit of the Sharia and are scrupulous. Thus, in the cases where the primary sources of Shariah are silent about a certain issue, legal maxims provide guidance particularly in many contemporary issues in different aspects including the modern Islamic Finance and banking practice.

Some of the maxims are wide enough to cover almost all issues by their general applications, whereas some others are applicable in certain fields and issues only. Legal maxims which provide for the general rules of fiqh indeed, have a big role in modern Islamic banking and finance. Modern issues in Islamic finance which have no precedent from the classical texts arise from time to time and these issues need to be addressed according to Islamic rulings. Thus the solution is founded in the application of legal maxims to develop the parameters of Islamic banking and finance and its general principles.

The study was an attempt at selecting the largely accepted rules (legal maxims) that are relevant to Islamic Finance, and applying them to contemporary situations. The leading maxims have been discussed with contemporary examples prevalent in the industry.

45 Ibid (ISRA 2011)

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Translation is quoted from: http://quran.muslim-web.com

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Appendix

Legal Maxims used in the study

صدها بمقا األمور

والمباني لاللفاظ ال والمعاني للمقاصد العقود في العبرة

بالشك يزال ال اليقين

العدم العارضة الصفات في األصل

للتوهم عبرة ال

التيسر تجلب المشقة

المحضورات تبيح الضرورات

الذمة براءة األصل

اإلباحة األشياء في األصل

باالضمان الخراج

النقمة بقدر النمعة

ضرار وال ضر ال

يزال الضرر

قديمه على يترك القديم

المنافُع جلب من اولى المفاسد درء

االمكان بقدر يدافُع الضرر

بمَثله يزال ال الضرر

االِخف بضرر يزال االشد الضرر

العام ضرر لدفُع الخاص الضرر يتحمل

الشرين اهون يختار

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