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Sunday, 4 December 2011

The Place of Urf (Custom) in Islamic Law

The International Council for the OIC Fiqh Academy, in its 5th session, held in Kuwait from 1-6 Jumada al-Ula, 1409 AH (corresponding to 10-15 December, 1988) having reviewed the research presented by the members and experts on the topic of customary practice, and having listen to the deliberations about it, resolved the following:
1.      Urf (custom) is something that people have become used to and which they practise [as a matter of course]. It applies to statements and acts and also to abstentions from action. A given custom may or may not be recognized by the Shariah.
2.      If a customary practice is specific to a particular group within a society, it is taken into consideration in judgments that affect those who practice it. If it is general, then it is applicable to everyone.
3.      For a customary practice to be recognized by the Shariah, it must fulfil the following conditions:
a.       It should not violate the Shariah. If a customary practice violates a divine text or any Shariah principle, it is regarded as invalid.
b.      The customary practice should be constant or predominant.
c.       The customary practice should be in existence at the time the transaction is contracted.
d.      The two contracting parties must not have agreed to a condition contrary to the customary practice. If they have agreed to the contrary, then the customary practice is not recognized.
4.      It is not befitting for a Muslim jurist, be he a mufti or a judge, to adhere only to what is reported in the jurists' books without considering the shifting nature of customs.

Allah knows best.
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Islamic Perspective on The Global Financial Crisis

The world’s banking sector relies heavily on interest payments from money borrowers to sustain itself and generate profits.
But what happens when borrowers default on their payments in record numbers?
The system spirals downwards out of control.
In the Islamic banking system, financial institutions are forbidden from paying or charging interest.
While money can be loaned, the loan is based on an exchange of existing collateral, that is, a commodity; no interest charges are levied. Perhaps if this practice was widespread and financial institutions managed their transactions differently respecting the criteria outline in the Quran - the current fiscal crisis might have been averted.
The Problem with Interest
Money, which replaced the barter system, is considered by many to be one of society’s greatest inventions. Used as an indicator of value for goods and services worldwide, we use money to conduct transactions for the purchase of commodities and services.
Consequently, it seems neither logical nor reasonable to exchange cash without the exchange of a commodity. When people start exchanging cash for cash, money itself becomes the commodity - and the commodity is then controlled by a select few - the rich and the strong. Recognizing this reality, Islamic law forbids usury, that is, the charging of interest for monetary loans.
Interest, centralizes the control of cash in the hands of a few and limits its availability to the masses. Islamic laws strictly forbid such practices. In the Quran, God threatens that those who practice usury will suffer grave consequences:
{O ye who believe! Observe your duty to Allah, and give up what remained (due to you) from usury, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and His messenger. And if ye repent, then ye have your principal (without interest). Wrong not, and ye shall not be wronged.} (Al-Baqarah 2: 278-279)
The Quran also warns that God will ensure that money derived from the practice of usury will be lost.
{Allah destroys usury and grows alms-giving. Allah loves not the impious and guilty.} (Al-Baqara 2: 276)
When one observes the West’s financial crisis, it seems that the value of money is indeed being lost - with asset values declining by more than 95 per cent, the U.S. banks are facing a severe crisis in which their value has been reduced significantly. Usury is defined as charging exorbitant interest for the loan of money.
In Islam any fee charged for monetary loans is considered exorbitant, and consequently one is forbidden from charging a fee for a monetary loan. The natural way to generate profit is through transactions that involve an exchange of money for the purchase of goods or services. Islam recognizes that the provision of goods and services benefit a wide range of individuals, directly and indirectly. For example, a Renault car factory in France liaises with more than 200 vendors. Numerous people benefit directly and indirectly from the selling of vehicles. In today’s world, less than 10 per cent of the world’s population owns more than 90 per cent of the world’s wealth.
Generally, we find lavish lifestyles in the northern hemisphere and poverty, famine and widespread unemployment in the southern parts of the world. Countries with great imbalances of wealth, where the wealth is concentrated in the hands of a small percentage of the population while the masses live in poverty, are often plagued with conflict as well.
Economic Research
Usury, when used as a primary means of financial gain, seems to undermine the original role of cash and restricts commodity exchange. While, in the short term, it may enable commodity purchase, it creates a false reality that can have severe consequences - like those we are witnessing in global markets today. The consequences: severely limited commodity-production capacity, reduced economic efficiency, increased unemployment and the widespread practice of unreasonable and unsound financial transactions.
The French economist Maurice Allais, the 1988 winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, observed that usury-based credit processes can lead to the creation of unrealizable payments. He noted that while depositors view their deposits as readily available cash entrusted to the bank, the truth is that the bank uses the deposit as security for a loan to someone else, replacing it with an undertaking of payment that lacks true material coverage.
Transactions of this nature contributed significantly to the bankruptcy of various banks and insurance companies during the current financial crisis. Sound economic systems strive to achieve a balance between saving and investing that guarantees a certain level of income and ensures investment in non-usury activities. Economists believe that a usury based investment system weakens the motive for agricultural, commercial and industrial investment. This, in turn, leads directly to the decrease of general investments, that is, monetary transactions which are essential to generate prosperity.
Furthermore, usury-based investments by those with limited income cause them to reduce their spending; reduced consumption in turn causes markets to suffer and the money remains in the hands of a few - the rich moneylenders.
Generally, banks offer a guaranteed fixed interest rate for deposited money. Through this system, those who deposit money can earn money, without any effort and with no investment. When interest is paid to someone for simply putting their money at the bank’s disposal – that individual is earning money without contributing to employment. The current financial crisis suggests there are critical flaws in the general approach currently being used by money borrowers and lenders. It is an ideal time to consider options.
Financial transactions based on Islamic principles offer a fascinating and viable option that the world leaders must explore. As Islamic banking opportunities continue to gain momentum in the Arab world, their ability to shape a new global approach is not to be overlooked. (


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Islamic finance grows as Western debt crisis deepens

Chicago native Mariam Khan never considered Islamic banking until her husband moved the family to Dubai in 2007. But the 36-year-old housewife is a believer now as the Western debt crisis deepens. Her husband opened a family account with HSBC Amanah, the Islamic arm of international bank HSBC. 

“When I look at the damage that an interest-based system has done to the U.S. and Europe, I can see why God forbids riba (interest) in Islam,” she said.

“I’m not particularly conservative as a Muslim but I definitely feel safer within Islamic banking.”

It is a sentiment that proponents of Islamic finance, which is based on religious principles including bans on interest and pure monetary speculation, hope will spur unprecedented growth of their industry as a safer, more stable alternative to conventional finance.

Bahrain’s central bank governor Rasheed Mohammed al-Maraj said recently that Islamic finance had an opportunity to attract not only customers in its traditional areas, the Gulf and Muslim parts of Asia, but also investors around the world who had been hurt by the turmoil in mainstream capital markets.

“It should provide the industry with a sustained period of growth for the next decade,” he said. 

Ashar Nazim, Islamic financial services leader at consultants Ernst & Young, said the Occupy Wall Street movement in the U.S. showed mounting public anger about inequality in the capitalist system. This could help Islamic institutions gain market share by emphasizing Islam’s preference for an equitable distribution of wealth and dislike of excessive financial leverage, he said. 

It is still unclear, however, how much of the recent growth of Islamic finance is due to its merits — and how much is simply due to a temporary flight from conventional finance which could reverse when global markets eventually stabilize.

With its assets estimated to total nearly $1 trillion globally, Islamic finance remains tiny compared to conventional finance with its tens of trillions of dollars. The market in Islamic bonds, or sukuk, is believed to total about $50 billion, roughly 1 percent of global bond issuance.

But proponents of Islamic finance can point to impressive gains. Nazim said it had expanded at a compound annual growth rate of 20 percent over the past three years, compared to 9 percent for conventional finance. That performance gap has probably widened further in the last two months as much new business in the West has ground to a halt.

Deutsche Bank, a pillar of traditional banking, estimated in a report this month that Islamic finance would almost double to $1.8 trillion in assets by 2016 as stagnant conventional lending pushed companies to seek alternative financing methods.

As much of the international corporate bond market has frozen up over the last six months, most bond issuance by Gulf companies has been in the form of sukuk. Dubai’s fast-growing Emirates airline said it was looking at the Islamic finance market to fund aircraft deliveries as European banks backed out of plane deals because of the euro zone debt crisis.

Some big Western banks, facing tough conditions in the funding markets on which they have long relied, are also turning to sukuk. HSBC issued a $500 million sukuk in May and Goldman Sachs announced a $2 billion sukuk program last month. French bank Credit Agricole has said it is considering issuing an Islamic bond or creating a wider sukuk program that could lead to several issues.

This year’s Arab Spring uprisings in North Africa have installed governments which are expected to promote Islamic finance more enthusiastically than their authoritarian predecessors, partly because it can help them attract Islamic investment funds in the Gulf.

And Islamic finance is spreading farther afield. Senegal is expected to hold investor meetings before the end of the year to issue its first sovereign sukuk, while Nigeria said in June that it planned to issue a debut sovereign sukuk within 18 months as part of efforts to boost Islamic banking in the country. 

In September, AK Bars Bank in Tatarstan became the first Russian bank to secure an Islamic loan, using the murabaha structure, in which the borrower essentially sells an asset to the lender to obtain funds and agrees to buy it back on a later date at a higher price.

The past several years have exposed weaknesses in Islamic finance, however. The industry claims sukuk are safer than traditional bonds because they are effectively certificates of ownership in a real asset, not speculative instruments.

The Dubai debt crisis of 2009 showed this claim to be on shaky ground. Companies such as property developer Nakheel and Jebel Ali Free Zone raised funds through sukuk but were forced to restructure once they found themselves unable to repay creditors.

Similarly, deposits in Islamic banks, which do not offer interest but may invest depositors’ money in relatively risk-free investments and give them a share of the profits, are supposed to be safer because of Islam’s curbs on speculation. But Dubai Bank, an Islamic institution, ran into such serious debt problems that the Dubai government had to arrange last month for it to be taken over by a conventional bank.

“It’s still unclear whether you can really say Islamic finance has tackled the leverage aspect,” said Abdul Kadir Hussain, chief executive of Dubai-based Mashreq Capital.

“You still have companies that raise what ultimately constitutes debt at unsustainable levels through sukuk. Just because it is done in a technically Sharia-compliant manner using an asset to back it, doesn’t mean that you’re not taking the same risk as conventional finance.”

That suggests Islamic finance may have succeeded this year not so much because it is seen as safe, but because of a lucky accident: it has access to billions of dollars of Islamic funds in the Gulf and southeast Asia, which have been hit less hard than other regions by global financial turmoil.

When conventional finance eventually recovers, perhaps after reforms to make it less volatile and risky, it may regain much of the market share lost to Islamic finance even in regions such as the Gulf.

Other obstacles to Islamic finance have existed since the industry was born in its modern form in the 1970s, and will not disappear any time soon.

Tax and regulatory environments are less favorable in many countries than they are for conventional finance. Central banks have not yet developed a range of sophisticated liquidity management tools for Islamic finance. And the industry is plagued by differing, sometimes contradictory product standards set by bodies such as Malaysia’s Islamic Financial Services Board and Bahrain’s Accounting and Auditing Organization for Islamic Financial Institutions. Adding to the confusion is the fact that their rulings are guidelines rather than firm, enforceable regulations.

“Participants in conventional markets are sophisticated and there is consistency based on precedence of how things happen when things go wrong,” said Toby O’Connor, chief executive of Singapore’s Islamic Bank of Asia.

“Islamic finance is a relatively new industry...the consistency isn’t quite there yet across the regulatory framework. That consistency is very important for new investors coming into the market.”

Some also see dangers in Islamic finance’s success. As it wins new customers from the conventional financial world, they may compromise the principles on which the industry is built. That worry seems to have been behind Qatar’s decision this year to ask conventional banks to close their Islamic operations, to prevent any overlap of business with full-fledged Islamic banks.

“As conventional financial institutions increasingly fund themselves through Islamic finance, it will help drive growth going forward,” said Harris Irfan, managing partner at consultancy Cordoba Capital. “The hope is that the conventional players will do Islamic deals without violating the spirit of sharia.”

Innovators in the industry think the solution to this problem is creating new instruments that will differentiate Islamic finance more clearly from conventional finance.

Last week a consortium of banks and industry associations launched the first international Islamic interbank rate, hoping it will become a benchmark for pricing a wide range of instruments. Somehwat incongruously, the industry’s main benchmark at present is the London Interbank Offered Rate, a key interest rate used in conventional finance.

British-based investment firm Solum Asset Management, co-founded by a former head of Islamic finance at J. P. Morgan, plans to launch the first “investment sukuk” in the first quarter of next year, treating Islamic bonds as investment vehicles rather than debt instruments. Investors will be outright owners of assets underlying the sukuk, eliminating the problem of leverage, the firm says.

“Islamic finance is definitely a viable source of financing for governments and private investors,” Hussain said.

“But the danger is if the industry continues to mimic conventional products, especially complicated structures, it is walking down the same path and may be in the same place 10 to 15 years from now that conventional finance is in today.” (Reuters/Manama/2Dec2011)
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