In fulfilling maqasid al-shariah, it is not only important for individual and society, but commercial needs must be considered as well. This means here that man must fulfil obligation not only for himself but for others as well. Establishment of Islamic Banking and Finance is therefore crucial in assisting and providing others especially those who is in needs engage in financial and investment dealings. Now, Islamic Banking and Finance has been increasing in many Muslim countries. In developing new products, maqasid al-shariah must be considered to be a foundation in order to improve the Islamic financial system, Shariah rules and regulation is a different aspect that needs to be considered as well. In this assignment, we are focusing on the application of maqasid al shariah in the product of Islamic Banking and Finance such as, mudarabah, al-rahn, takaful and sukuk. We also discuss the principle and objectives of Islamic Bankin and Finance.
Classification of Maqasid al-Shariah
Muslim scholars have generally classified maqasid al shariah into three categories, which is darruriyat (essentials), hajiyyat (embellishment) and tahsiniyyat (embellishment). Darruriyat is considered vital for the wellbeing in this world and hereafter, neglect in which result in chaos and imbalance in wellbeing of all in this world and hereafter. Essentials is further divided into five categories in which lawgiver aims to protect, which is preservation of religion, preservation of life, preservation of lineage, preservation intellect and preservation of wealth. Hajiyyat is complementary to the essential. Neglect in this aspect will not lead to total disruption or chaos in human life. It aims to create ease in prevent hardship. Ibn Ashur defined the meaning complementary as "It consists of what is needed by the community for the achievement of its interest and proper functioning of its affairs". The embellishment relates to matter in enhancement and improvement in the life of a society, for example clean body and attire for ibadah purposes, offering charity and avoiding extravagance, ethical and moral rules and etc. Neglect in this part will not lead to disruption in normal order of life.
Maqasid al-Shariah in Islamic Banking and Finance
The significance of Maqasid al-Shariah in Islamic Banking and Finance is based on the perspective of the wealth in Islamic Law. This can be related to the objective of Islamic Law which is the preservation of wealth (al-mal). The protection and preservation of wealth is considered one of the essentials (darruriyat in which Lawgiver aims to protect. Neglect in this part will lead to disorder and chaos as mentioned in previous discussion. Therefore, it can be highlighted here that Maqasid al-Shariah
Therefore, it is important to give emphasize on the importance of the realization of maqasid al-Shariah in present Islamic Banking and Finance, this is because first, there is a strong correlation between the objectives of shariah and objectives of business transaction as it can be observed that from the position wealth in Maqasid al-shariah that request the preservation of it in everyday business transaction and the encouragement of socially responsible activities. As consequences, when business transaction is abandoned by society it will result to poverty and disorder. Secondly, the principle of Islamic Law and fundamental objective of Islamic Law is important in the application of business transaction domestically or internationally as they must follow the guidelines and principle laid down by Islamic Law. Third reason is the regulation of business transaction must be based on the rules and requirements of Maqasid al-Shariah that is it should administer and govern by the shariah principle of Islamic Finance.
One of the most important issues in Islamic Banking and finance today is to developed products and services that is Shariah compliant and or genuine from Islamic point of view without Shari'ah without reducingthe importance of the business features of being competitive, profitable and viable in the longrun. However, there are several issues that should be addressed and one of the most pressingis what should be the foundation in justifying whether a product Shari'ah -compliant or not? Islamic Financial System that can be considred genuine is based on Islamic principle and value that eliminates riba and ensure and ensure profit sharing mechanism.
However, having a shariah compliant product is not necessay satisfactory . Rather, they must achieve the overall objecticves of shariah. This is because Shariah compliant is only the legal requirement but in realizing the objectives of shariah is important in determining whether or not it has sucessfully achieve the objectives intent for welfare of human being .
What is Islamic Banking and Financial System
In defining Islamic Banking and Financial System, let us forst seperate the term to Islamic banking and Islamic Finance
The definition of Islamic Banking as given by Organisation of Islamic Conference (OIC) is a financial institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operations" means it is a banking activity that is consistent with the principle of shariah.
Therefore Islamic Banking and finance legal definition provided by Islamic Banking Act in 1983 is "banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam"
Islamic Banking and Finance System is a financial system that is based on islamic principle and value which is free from riba and based on ensure a profit sharing instrument and not debt financing instrument.
Islamic banking and Finance is considered genuine when it is free from interest based transaction, free from uncertainty gharar,and transaction does not involeved with unlawful or prohibited activities such as gambling, trade in wine, liquors etc.
The basis of Islamic Financial system is it is a sytem based on belief in unity of God and relate this belief with economic life of man. Allah S.W.T is the exclusive owner of all resources while man is the vicegrant of Allah who is responsible in taking care of the property and wealth provided by Allah S.W.T. The goal of Islamic Financial instutuion is to ensure that the welfare of human being is taken care of both in this world and the hereafter and also ensuring proper and equitable distribution of income and wealth among all in the society.
Principle of Islamic Banking and Finance
The basic structure of Islamic banking and Financial System is a collective set rules and laws refered as Shariah which govern the social , political and culture aspect of Islamic socities. Shariah derived the rules and law from the divine revelation which is Quran and its elaboration and explaination is derived from the Sunnah. Scholars in Islamic jurusprudence has also further elaborates it within the framework of Islamic jurisprudence.
Prohibition of Riba
Literally riba means excess, increase, expansion, growth. Technically riba means, every excess in return which no reward or equivalent countervalue is paid. Riba can also be interpret as "unjustifiable increase in capital whther in loans or sales". For example, regardless of the outcome of investment, whether profit or loss, the borrower is obliged to pay a fixed amount of interest on the amount of money borrowed even if the borrower had incurred loss. This is therefore not perceived as just and reasonable on the part of the borrower because the lender is guaranteed to get the interest rate. The prohibition is based on the argument of social justice, equality and property rights. Islam allows earning of profits but by lawful means which means without charging interest .Therefore, Islam encourage a productive dealing by hsaring loss and profit accordingly.
Risk Sharing
The prohibition of riba in Islamic banking and Finance had caused the supplier of funds to be investor instead of financier or creditors. Instead of merely lending money, the contributor of capital must get involve in risky business activity and in return they will get share of profit from the investment. Profit and loss have to be shard accordingly, Islamic Bank must take risk in the investment made by the other parties. Profit earned byIslamic Bank without taking risk in the invesment is considered unjustiified.
Prohibition of speculative behaviour
Islamic Banking and Financial System must be free from uncertainty or gahar as on of the condition for valid sales is certainty tehrefore any forms of speculative or doubt must be avoided. Transaction with extremes uncertainties, gambling and risk is prohibited as well.
Sanctity of contract
Disclosure of informaation between parties involve in transaction is necesary this is to reduce the risk of assymetric information and moral hazard.
Prohibition of illegal activities
Activities that are unlawful from Islamic perspective is not allowed. Activities involved in invetsment must not violate the rules of Shariah. For example unlawful business activities is dealing with alcohol business, gambling, casinos and etc is prohibited.
Objectives of Islamic Banking and Finance
According to the main objectives of Islamic Banking and Finance is to promote the welfare of the people through safeguarding their faith, life, lineage, intellect, property. Any means aims at prtotecting this five objectives is considered desirable.
The objective of Islamic Bank and Finnace is to conduct a banking and financial system free from interest. In order to realized the objectives of shariah all transaction must beequity based financing and debt financing. Secondly, Islamic Banking and Finance also aims at introducing welfare oriented banking system to establish equity and justice in economic system. In sural al-nahl Allah had mention;
Surely Allah enjoin justice and good to others
It is clearly stated that justice and equity need to establish in the society . The third objective is to extend the financial service to the poor and not only cater the rich. The less affluent memeber of society need more attentian and focus in terms of finacial. As current banking sysytem cater only those who are crediitworthy, as a consequence, tthose who are poor are set apart from that system. The fourth objective is to create an employment oppurtunity especially for those who are unemployed, by creating Islamic financial instituion more job oppurtunity can be offered and thus create and economic growth as unemployment decrease. The last objective is to have a balance and equitable growth in development in the country to various investment especially in the less developed areas.
Maqasid al-Shariah and Mudarabah
Mudarabah is one one party provide capotal and the other party provide his labor or entreprenuership. This is to facilitate the need of those who have money but dont have the skill and those who have the skill but dont have money. The objective of Mudarabah here is to protect and preserve the essentials which is the welath. Mudarabh also encourage both mudarib and rabbul mal to take risk in business. Profit derived from investment made by the entreprenuee must be shared accordingly among them while in case if there is any loss, the loss will be financially borne by the capital provider bt as for the entrprenuer will borne the loss of fruitless effort. It therefore can be seen that the objecticve of Mudarabah here is to encourage them to take up challenges in business activity to promote cooperation and mutual assitance among theparties involved. Helping each other out by providing the resources to each other is the clear intention from the establishment of mudarabah. Through mudarabah, interest based transaction therefore can be avoided as individual do not have to take up loans from conventional bank in which they will charge interest on the borrower on teh amount of borrwed, even if the investment made by borrower bear loss. Mudarabh therefore, is an instrument to ease the life of the society through
Maqasid al Shariah in Al-Rahn
Al-Rahn is one of the means recognized in shariah for preserving one of the essential objectives which is preservation and protection of wealth. Quran had clearly stated that Muslim who want to take up a loan or involve in credit transaction may provide evidence or security in form of written document, witnesses' testimony and by depositing the property to the pledgee who will then keep the pledge property.
The legality of al-rahn can also be found in Sunnah, in which prophet Muhamamad himself pledges his property for a loan;
The Prophet bought some foodstuff on credit from a Jew and pledged an iron armour to him
The Prophet pledged his armour to a Jew in Madinah and took barley grams for
His family
Based on the text above we therefore know that the objective of al-rahn is to create ease for the borrower to take up loans by depositing his property with the pledgee. This will encourage the borrower to pay back his loan and claim his property that has been pledged. However, if the borrower is unable to pay the debt, the lender has the right to keep the property.
The permission of depositing property as a security clearly gives benefit for the both party, as al-Rahn as it satisfy the basic need of society to make transaction based on credit . Creditor on the other hand can feel safe and secured because he holds the deposited property , in case the borrower did not repay back, he can keep the property or sell them off to earn cash.
Al-rahn can instil a sense of helping the poor and those who is in need, and eliminates the feeling of greed among the affluent member of society. This also encourages the lender to give benevolence loan which is loan without charging interest. Thus it promotes equality and justice among society.
Maqasid al- shariah in Takaful
Takaful is an insurance concept by Islamic banking and finance that is based on Islamic banking transaction that observing the rules that stated in the shariah. This takaful concept has been executed in many forms for over 1400 years. Takaful is from the root word of 'Kafal' which means to take care of one's need. So, takaful basically means mutual help among a group member to support the needy in the group. It originated from the Arabic word kafalah that means 'guaranteeing each other' or 'joint guarantee'.
During the time of Prophet Muhammad saw, they were already using the concept of takaful. Muslims contributed funds under the system Aaqilah of the tribal. The purpose of donating the funds in the Aaqilah system is to help the members of their own community in the tribe who were liable to pay diyat money or blood money. Blood money or diyat money is a compensation that is to be paid to the murder victim's family members as one of the punishment. So, if the person who is liable to pay the diyat but did not have the money, he could seek the help from the Aaqilah system.
Takaful system is a form of mutual insurance where by the system is based on mutual co-operation, protection and assistance between groups of participants. Besides that, thw operation of takaful is involving each participant giving away tabarru or donation some portion of the full amount required to be paid. The premium is to be paid as a financial assistance to one of participants that facing a loss or damage which is contributed by all the participants in the group by donation. But the takaful system does not give it all, after all the claims and benefits are paid, the balance from the donations is being paid back to the participants. Therefore, there is no element of ambiguous or unjust in the takaful system because the aim is not to take advantage on other's expenses but to help the person in dire needs. Moreover, there is no uncertainty or gharar in the contribution of the donation and also the financial assistance. The contribution or premiums which is the term used in the conventional term) by the takaful or the participants are paid in the pool of the Takaful fund on a basis of a donation and it is also a form of communal risk- sharing and surpluses are to be shared among the members of community. Besides that, the donation that contributed by the participants not involving interest or riba' as it is strictly prohibited in Islam which is the same sin as drinking alcohol and gambling that is Haram. In addition, the Takaful Operator will be paid a fee for managing the Takaful pool fund and also by investing the fund according with the principle of shariah.
The concept of Takaful is within the principle of Islamic foundation, to preserve the life and wealth of an individual from theft or misfortune. So the main objective of this takaful system is to spread out the risk among the members. This is the distinct characteristic between Takaful and conventional insurance, which in the conventional insurance, all the risk is transferred to the insurer but in Takaful, the risk is shared by the members of the Takaful Fund scheme. The aims that the Takaful want to achieve is to support the social solidarity.
Takaful is seen to protect the community from the negative aftermath of an unfavourable situation such as theft. Furthermore, Takaful is aim to improve the quality of life through security of their investment money that distributed the profit of the contribution to the participants on an annual basis.
The Quran also exhorts that individual has to help one another and to take precautions in order to prevent misfortune, losses or injury from unfortunate events. Therefore, to say that Takaful is based on profit is wrong because it is a mutual assistance and cooperation from others. Furthermore, it is important to include the fundamental of shariah in all economics activity which is as follows.
Firstly, the subject matter should not be unlawful in Islam. Besides that, the objective of the contract should not against the principles of Islam. The contract also should be free from the element of maysir (gambling), gharar (uncertainty), ikrah (coercion) and excessive price or rate of profit. The participants also have to agree in the contract for their common good and also pays contribution in order to help those who are in need. Lastly, the contract should not be aim to take advantage of one's at the expense of other participants.
Maqasid al Shariah in sukuk
Islamic capital market is also a vital element of the overall Islamic financial system. It alleviates the transfer of investible funds from economic agents in financial surplus to those requiring funds. The main thing that should be in mind is fundamental of prohibition of riba' or charging the interest. So that investors should not make money out of lending and gain some extra profit by charging an interest. Besides that, the shariah also bans the investment in the unlawful activities such as gambling, pornography, production of alcohol and tobacco.
Historically, Islamic sakk or in plural sukuk, it founded on the European root which is cheque which mean any document representing a contract, obligation or money in line with the shariah. It is also a product that is widely used during Medieval Islamic time, for transferring financial obligation and other financial activities.
Sukuk also known as Islamic bond, offers a fixed return similar to interest in conventional bond. Unlike bond holders, a sukuk holder is given an ownership interest in the assets or business being financed and the return is tied to the performance of the underlying assets. Malaysia is one of the major sukuk offering in the world. Sukuk are among the best ways to finance large companies that have abundant of ability of a single party to finance. Sukuk can be structured with different techniques. On the other hand, a conventional bond is a form of promise to repay a loan. Sukuk constitutes partial ownership in a debt asset, project, business, or investment. In the modern Islamic perspective, the essence of sukuk, are in the concept of asset monetization that is achieved through the process of issuance of sukuk (taskeek). It is a great potential in transforming a future cash flow into present cash flow. Sukuk may be issued on existing as well as specific assets that may become available at a future date.
Sukuk are widely regarded as controversial due to their perceived purpose of evading the restrictions on Riba. Conservative scholars do not believe that this is effective, citing the fact that a Sakk (Islamic bond) effectively requires payment for the time-value of money. It also can be seen as the fundamental test of interest. Sukuk offer investors fixed return on their investments which is also similar in appearance to interest in that the investor's return is not necessarily dependent on the risks of that particular venture. However, banks that issue Sukuk are investing in assets and not in currency. The return on such assets takes the form of rent, and is evenly spread over the rental period. The productivity of the asset forms the basis of the fixed income stream and the return on investment. Given that there is an asset underlying the value of the certificate, there is more security for the investors involved, accounting for the additional appeal of Sukuk as a method of financing for investors.
Conclusion
In conclusion , maqasid al-shariah is the best explaination for Islmaic Banking and Finance. Comply to shariah requirement does not necessarily mean that the objectives of shariah is realized. Objectives needs to be realized in order to achieve a free interest economy, bank for all including the poor, and ensure that wealth and resources to be distributed with justice. In order to achieve the objectives of Islamic banking and finance which is also in line with the objectives of shariah, Muslim must ensure that both substance and form must be comply
