Maqasid Al-Shari’ah in Islamic Finance: An Overview

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MAQASID AL-SHARI’AH IN ISLAMIC FINANCE: AN OVERVIEW
Mirza Vejzagic∗
Edib Smolo∗
ABSTRACT
Islam is a divine revelation for all people and the Prophet (s.a.w.s.) has been sent as
compassion to Muslims as well as all humanity. It embraces whole life including
economic and financial aspects that contain paths which lead to a social order along with
social justice and economic prosperity. This conception is deeply adorned in the
objectives of Shari’ah, also known as Maqasid al-Shari’ah. Islamic finance, as a part of
this extraordinary conception, could be relatively classified in three main areas: Islamic
banking, capital markets and insurance (takaful). Maqasid al-Shari’ah is considered to be
the cornerstone or the guiding principle of Islamic finance. It applies to everything: laws,
conduct, opinions, products, transactions, activities, and services. It outlines the
objectives and wisdom (hikmah) as prescribed by Shari’ah in all its rulings to protect and
preserve the benefits and interests (maslahah) of society. Furthermore, Maqasid al-
Shari’ah facilitate the needs of human being, ensure the wealth is circulated among as
many as possible in a fair way, avoid dispute and ensure stability, promote maslahah and
avoid harm, promote transparency and accountability and uphold and promote justice in
acquiring wealth. In facing or solving current issues in the aspects of social, economics,
politics and finance, the application of Maqasid al-Shari’ah is an important element that
needs to be incorporated by all Muslims. In addition, there should be continuous
emphasize on the importance of Maqasid al- Shari’ah in all Islamic finance fields. It
must be underlined through recommendation to all relevant financial bodies to promote
these gracious Shari’ah objectives in the markets and provide application for them
correspondingly in the relevant industries for better future of Islamic finance.
Keywords: Maqasid al-Shari’ah, Islamic Banking, Islamic Capital Markets (Sukuk), Takaful
 Mirza Vejzagic is a Ph.D. candidate at International Centre for Education in Islamic Finance (INCEIF),
Malaysia. He can be contacted at mirza_vejzagic@yahoo.com.
 Corresponding author – Edib Smolo is a Ph.D. candidate at INCEIF andÉ a researcher at International
Shari’ah Research Academy for Islamic Finance (ISRA). He can be contacted at edib@isra.my or
hfz.edib@gmail.com.
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1.0 INTRODUCTION
Islamic finance industry has grown both geographically and in product affluence although it
has been continuously facing the complex conditions in the universal financial markets and
the global uncertainties. It was founded as a tiny industry in the late 1960s.1 Its development
has been increasing ever since, in terms of the number of states in which it operates, as well
as the field of disciplines of finance in which it is performing. Islamic finance distinguishes
itself from conventional counterpart in its professed compliance with principles of Islamic
law, or Shari’ah. In addition, contemporary literature emphasize that Islamic finance diverges
considerably from conventional not merely based on the background it observes in
businesses performance, but also in the way in which noble principles steer Islamic finance’s
entire procedures and position. The principles which are embraced within the realm of
Shari’ah are uttered not only in the details of its transactions but in the extent of its role in
implementing the Maqasid al-Shari’ah (objectives of Shari’ah) (Soualhi, 2008).
Fundamentally, Maqasid al-Shari’ah reveals the dignified view of Islam which has to be
observed entirely, not partially, as Islam is an absolute and integrated pattern of life and its
purpose includes the complete life, personal and public; in this world and the Hereafter (Ibn
Ashur, 2006; Kamali, 1998). Therefore, a profound perception of Maqasid al-Shari’ah
involves serious obligation of each individual and organization to justice and social welfare.
The outcome of such profound perception would be society where every individual (or
group) will work together with each other rather than compete, as proper achievement in this
life is to obtain the ultimate happiness (falah) (see Kamali, 2008a). Accordingly, barely
maximization of profits cannot be the only driving goal of a Muslim society. Maximization of
profit must go hand-in-hand with attempts to ensure healthy human awareness, justice, and
fair play at all levels of human interaction (mu’amalah). Islamic finance in particular and
Islamic economics in general are supposed to be based on the maslahah prescribed by
maqasid al-Shari‘ah. Economic agents in an Islamic framework, “will seek maslahah instead
of seeking utility in the conventional sense” (Khan, 2002, p. 63). Only development
described above would be in compliance with the Maqasid al-Shari’ah (Siddiqi, 2006).
1 For detailed discussion about the development of Islamic finance industry in general see ISRA (2011),
especially Chapter 4.
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Maqasid al-Shari’ah should be underlined as one of the most imperative pillars for enhanced
improvement of the financial structure. In addition to the Shari’ah set of laws and the
regulations, it could be certainly said that Maqasid al-Shari’ah is the most complete
mechanism to improve and add value to the current Islamic finance nowadays. However,
comprehension of the concept of Maqasid al-Shari’ah and its underlying principles is vital
before applying it in the existing financial scenario. It is decisive to realize that public
interest (maslahah) is the heart of the theory of Maqasid al-Shari’ah itself. Hence, the
general objective of Shari’ah is to preserve the society order of the community and ensure
the continuity of its healthy progress. Allah (s.w.t.) says: “…I wish not, in contradiction to
you, to do that which I forbid you. I only desire reform so far as I am able, to the best of My
power, and My guidance cannot come except from Allâh, in Him I trust and unto Him I
repent.” (Al-Qur’an, Al-Hud: 88)
This paper studies the meaning, contemplation and appropriate application of Maqasid al-
Shari’ah in Islamic finance. It elaborates the ways of realizing the dignified objectives of
Shari’ah in all sectors of Islamic finance. These objectives are elaborated in various and
different aspects such us the appropriate meaning and significance of Maqasid al-Shari’ah;
the proper comprehension of Maqasid al-Shari’ah in Islamic finance; the role of Maqasid al-
Shari’ah in prohibition of riba in contemporary Islamic Finance; the methods of
implementing Maqasid al-Shari’ah in Islamic banking; challenges of realizing Maqasid al-
Shari’ah in Islamic capital markets (sukuk); and application of Maqasid al-Shari’ah in
takaful. The paper analyses all these applications and provides examples from the current
practices of Islamic finance.
2.0 THEORY OF MAQASID AL-SHARI’AH
In recent years, Maqasid al-Shari’ah received an increasing attention. However, its emphasis
within the Islamic finance industry needs to be indoctrinated into all spheres of the industry
and all parties involved need to take proactive role in implementing it on a much wider scale.
When people discuss about the underlying principle(s) and justification of particular action in
Islam, for example forbiddance of interest (riba) or obligation of payment of zakah, the
majority of the answers to the coherent rationalizations are presented by Maqasid al-
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Shari’ah (Lahsasna & Sulaiman, 2010). Every judgment comes with a reason. In case of the
payment of zakah, the main objective is to purify one’s wealth and the central justification for
it is equal allocation of wealth to everyone. Consequently, Maqasid al-Shari’ah reveals the
noble vision of Islam which must be observed entirely as Islam is an absolute and integrated
way of life. In general, its goal embraces both individuals and societies for the good in this
world and the Hereafter. It underlines benefits for both of them and its laws are devised to
shelter these benefits and support progress and rightness of the setting of human beings on
earth (Soualhi, 2008). The Holy Qur’an illustrates this notably when it underlines the leading
rationale for sending the Prophet Muhammad (s.a.w.s.) in verse: “We sent Thee not, but as a
Mercy for all creatures” (Al-Qur’an, Al-Anbiya’: 107). Furthermore, it can be also observed
in the Qur’an’s description of itself when it says “O mankind! there hath come to you a
direction from your Lord and a healing for the (diseases) In your hearts,- and for those who
believe, a guidance and a mercy.” (Al- Qur’an, Yunus: 57).
2.1 Definition of Maqasid al-Shari’ah
The word “Maqsid” (plural: Maqasid) reflects a meaning of purpose, objective, principle,
intent, goal (Kamali, 2008a; Lane, 1968).2 Maqasid comprise the wisdom and knowledge
behind rulings, the objectives of particular actions. As for the term “Shari’ah”, some scholars
define the word as following strictly the injunctions of Allah or the way of Islam (din)
(Dusuki & Abdullah, 2007).3 Hence, Maqasid al-Shari’ah represents “the objectives and the
rationale of the Shari’ah” (Dusuki & Bouheraoua, 2011). It encompasses all disciplines, laws,
regulations, policies, instructions, obligations, principles, beliefs, devotion and actions
designed to protect the interest of human beings in all segments and aspects of life.
Various scholars have tried to elucidate the purposes and the objectives of Shari’ah upon
which it is established. Among these the exceptional individuals are the Malikite Abu Ishaq
2 “Maqsid” refers to “A place to, or towards, which one tends, repairs, or betakes himself; to which one directs
his course; at which one aims; which one seeks, pursues, endeavours to reach, desires, or wishes for; [pl.
دصاقم]” See Lane (1968, p. 2532).
3 Literally, Shari’ah means a path to a watering-place, a clear path to be followed. This led to its use for the
path which the believer has to tread in order to obtain guidance in this world and deliverance in the next.
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al-Shatibi, the Shafite al-‘Izz ibn ‘Abd al-Salam, and the Hanbalite Ibn Qayyim al Jawziyyah
(Lahsasna, 2009).
According to Ibn Qayyim al-Jawziyyah (d. 1356), Shari‘ah aims at safeguarding people’s
interest in this world and the Hereafter (Ibn Qayyim, n.d., p. 1; see also Kamali, 2008b, p.
27). Referring to the maqasid al-Shari‘ah, al-Ghazali said: “The objective of the Shari‘ah is
to promote the welfare of human beings, which lies in safeguarding their faith, their life, their
intellect, their posterity, and their wealth. Whatever ensures the safeguard of these five
fundamentals serves public interest and is desirable” (Al-Ghazali, 1356/1937, pp. 139-140;
see also Chapra, 1998; Chapra, 2008). Al-Shatibi approves al-Ghazali’s list and sequence,
hereby indicating that they are the most preferable in terms of their harmony with essence of
Shari’ah (Ibn Ashur, 2006). Finally, Ibn Ashur (2006) provides a broader definition stating
that:4
Both its general rules and specific proofs indicate that the all-purpose principle
(maqsad ‘amm) of Islamic legislation is to preserve the social order of the
community and insure its healthy progress by promoting the well-being and
righteousness (salah) of that which prevails in it, namely, the human species.
The well-being and virtue of human beings consist of the soundness of their
intellect, the righteousness of their deeds as well as the goodness of the things of
the world where they live that are put at their disposal. (Ibn Ashur, 2006, p. 87)
2.2 Maqasid al-Shari’ah: An Overview
Maqasid al-Shari’ah calls for establishment of justice, elimination of unfairness and
alleviation of privation. It endorses relationship and mutual support within the family and
community in general (Dusuki, 2009a; Dusuki & Abozaid, 2007b; Dusuki & Bouheraoua,
2011). This has for outcome a preservation of public interest (maslahah) as the most
important objective of the Shari’ah. Shari’ah recognizes three areas which constitute well-
being, namely, endorsing benefits (maslahah) to people, educating individual and
establishing justice (Mohamed & Dzuljastri, 2008).
4 For more definitions of Maqasid al-Shari’ah see also Dusuki and Bouheraoua (2011).
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One of the objectives and the underlying principle of the Shari’ah is endorsing benefits
(maslahah) to the people. It is associated with people livelihood in this world and the
Hereafter. Furthermore, it also aspires to avert people against wrongdoings, such us
corruption, theft and injustice. This implication can be seen in the following Qur’anic verse:
“… and establish regular prayer: for prayer restrains from shameful and unjust deeds; and
remembrance of Allah is the greatest (thing In life) without doubt. and Allah knows the
(Deeds) that ye do.” (Al- Qur’an, Al-Ankabut: 45).
Every verdict in Shari’ah appears with reasoning and with a purpose, which is to shelter and
protect public interests (maslahah) in all aspects and segments of life. It should also be
observed that in specific occasions emergence of arguments between endorsement of benefit
and avoidance of evil arise. If none appears to be preferable, then avoidance of evil takes
precedence over the recognition of benefit (Chapra, 2008; Hasanuzzaman, 1998; Lahsasna &
Sulaiman, 2010).
Educating individuals is an essential objective of Shari’ah, too. Education encourages people
with faith and Taqwa (consciousness of Allah s.w.t.) in order to accomplish public objectives.
A truthful and moral person can emerge as representative of others and bearer of the ruling of
Shari’ah related to ibadah, mu’amalah and jinayah (Lahsasna & Sulaiman, 2010; Mohamed,
2006).
Lastly, one of the objectives of the Shari’ah is to maintain the standards of justice (‘adl). It
must be based on creation of equilibrium which accomplishes rights and responsibilities on
one side, and abolishes unfairness and inequality on the other. It must embrace both
individual and social justice, regardless whether it is a case of friend or foe, Muslim or non-
Muslim, personal or public. Illicit behaviors and wrongdoings are disapproved and punished
in order to avoid injustice as it is undesirable and contradictory with the philosophy of
Qur’an and the Maqasid al-Shari’ah (Lahsasna & Sulaiman, 2010; Mohamed, 2007).
2.3 Classification of Maqasid al-Shari’ah
Although there are different classifications of maqasid al-Shari‘ah, Muslim scholars
generally classified them into three main categories: daruriyyat (essentials), hajiyyat (needs)
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and tahsiniyyat (embellishments).5 Maslahah, according to ‘ulama, refers to “the
preservation of the objectives of Shari‘ah,” (Khan, 2002, p. 64) which is considered to be the
main objective of the Shari‘ah (Kamali, 1998, p. 1).
The essentials (daruriyyat) are particulars that are required and considered as vital for the
founding of wellbeing in this world and the Hereafter. If society in some way neglects them,
the outcome will be anarchy together with disorder of the functionality of the society which
will result in total collapse. The essential masālih (plural of maslahah) or daruriyyat are
further divided into five: (i) Preservation of faith/religion (Din); (ii) Preservation of the life
(Nafs); (iii) Preservation of lineage/descendents/procreation (Nasl); (iv) Preservation of
property (Mal); and (v) Preservation of intellect/reason (‘Aql) (Al-Ghazali, 1356/1937; see
also Ayub, 2007, pp. 22-25; Çizakça, 2007; Kamali, 1998, p. 2; Khan, 2002, p. 64).
The embracement of the mentioned values is obligatory to ensure normal functioning of
society and welfare of individuals. It is an obligation of society and people to implement all
necessary measures to prevent or eliminate all the barriers that will hinder the realization of
these values. The Shari’ah constantly seeks to embrace and endorse these values and enhance
procedures for their continuation and progression. Furthermore, Islam as religion is greatly
concerned with eradication of poverty and hardship of individuals and community, which is
in consistency with the aims of Shari’ah. This is to ensure that people have prosperous life
and that there will be no disruption to their normal life.
The needs (hajiyyat) serve as complementary to the essentials. Without the needs, people will
face hardship. However, non-existence of the needs will not create complete disruption of the
normal order of life as is the case with the essentials (Dusuki & Bouheraoua, 2011; Lahsasna
& Sulaiman, 2010; Nyazee, 2002). Ibn Ashur (2006) defined the meaning of complementary
necessities in the following manner: “It consists of what is needed by the community for the
achievement of its interest and the proper functioning of its affairs. If it is neglected, the
social order will not actually collapse but will not function well. Likewise, it is not on the
level of what is indispensable (daruri) (Ibn Ashur, 2006, p. 123).
5 For detailed discussion on different classifications see Ibn Ashur (2006, pp. 112-129), Kamali (1998; 2008b,
p. 134). See also Dusuki and Bouheraoua (2011).
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The embellishments (tahsiniyyat) relate to matters which bestow enhancement in the society
and guide to improved life. The admirable illustrations are Shari’ah’s guidelines as clean
body and attire for purpose of prayer, offering charity and avoiding lavishness and
recommendation of supererogatory prayers (‘ibadat). The rationale of all these are the
accomplishment of integrity and perfection in entire fields of a person’s behavior. However,
without these values the society will still be able to function and normal life process will not
be interrupted. The illustrations of these matters are: voluntary (sadaqah), and ethical and
moral rules, and others (Dusuki & Bouheraoua, 2011; Ibn Ashur, 2006; Lahsasna &
Sulaiman, 2010).
3.0 MAQASID AL-SHARI’AH AND ISLAMIC FINANCE
The significance of the Maqasid al-Shari’ah in Islamic finance originates from the
perspective of the wealth in Islamic law. This significance relates also to the objectives of the
Islamic law in finance and business transactions and to the overall goals of Shari’ah in
wealth (Lahsasna, 2009).
The protection and preservation of the wealth is categorized in the sphere of necessary
matters (daruriyyat). In previous section it has been elaborated that essentials necessities are
those which, without their preservation, there would be disorder and anarchy in society. The
abolishment of preservation for these matters would have for result loss of everything that we
embrace as valued (Ibn Ashur, 2006). This characterization and classification of Maqasid al-
Shari’ah demonstrates the most important position of the wealth and the substance of the
finance in Islamic law. Therefore, it must be highlighted here that the finance is recognized
by Maqasid al-Shari’ah as valuable aspect of life. Furthermore, the finance is preserved by
Islamic law in form of Islamic lawful decisions and guidelines.
It is essentially important to stress on the realization of Maqasid al-Shari’ah in the current
Islamic finance transactions because of the several important reasons. First, there is a strong
relationship between the objectives of Maqasid al-Shari’ah and the objectives of business
transactions, as can be observed from the position of the wealth within Islamic law and
Maqasid al-Shari'ah that requests the preservation of wealth in everyday business activities
and the promotion of socially responsible activities. As a result, if objectives of Maqasid al-
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Shari’ah in business transactions are neglected, it may result in poverty and anarchy. Second,
the business transactions in domestic and international trade should be based on the
principles of Islamic law, and the fundamental objectives of Maqasid al-Shari’ah in finance
and business shall be applied as core guidelines to implement all types of financial
transactions. Third, the particular objectives of Maqasid al-Shari’ah in business transactions
must have perpetuity and constant outlook of the universal objectives of Maqasid al-
Shari’ah. Last but not the least, the regulations of business transactions should be within the
rules and the requirements of Maqasid al-Shari’ah and Islamic law. In other words, Maqasid
al-Shari’ah must administer and regulate the Shari’ah principle of the Islamic finance
(Lahsasna, 2009; Lahsasna & Sulaiman, 2010).
3.1 Maqasid Al-Shari’ah in the prohibition of interest (riba)
From financial point of view, one of the most important objectives in Shari’ah is elimination
of interest (riba) in all categories of business transactions. The two main categories of
interest (riba) which are sternly prohibited in Islamic law are riba al-nasiah, which is interest
on lent money, and riba al-fadl which is literally earnings or excess acquired by exchanging
or selling commodities of superior value over other commodities given (Kahf, 2006). The
Holy Quran states: “those who devour usury will not stand except as stand one whom the evil
one by His touch hath driven to madness. That is because they say: "Trade is like usury," but
Allah hath permitted trade and forbidden usury (riba)” (Al-Qur’an, Al-Baqarah: 275).
According to Shari'ah, both types of riba cause unfairness in business transaction. It
generally provides rich individuals easy way to grow their wealth by weakening the other
member of community. The Shari’ah categorized this type of profit as illegal earnings which
are strictly disallowed. Looking from the society (maslahah) point of view riba makes the
community indolent, unproductive and lowers individuals’ contributions to the society. As a
result, all banks and financial institutions must diverge from riba and perform wholesome
business transactions excluding riba. It is an extremely challenging task; however it is a
devoting responsibility and most important obligation of Shari'ah in order to enhance
supreme Islamic products in banking and finance. In this sense, it can be further elaborated
that the distinction between the Islamic banks and the conventional banks lays in the fact that
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the Islamic banks, being Shari’ah-compliant, in all business procedures disallow riba,
whereas the conventional banks engage in all form of transactions without considering the
illicit nature of riba. Therefore, the Islamic banks assess product from several perspectives,
including value of the transaction, profit and return, as well as the nature of the products. On
the other hand, conventional bank evaluates the product from side of interest and profit only,
without taking into consideration the condition of the religion in particular transaction
(Mohamed, 2006).
3.2 Maqasid al-Shari’ah in Islamic Banking
The previous sections discussed the fundamental principles of Maqasid al-Shari’ah with
focus on ordinary dealings of individuals as well as essence of Maqasid in Islamic Finance
including view on interest (riba). This section further elaborates the importance of the
Shari’ah matters with emphasis on Maqasid al-Shari’ah and maslahah in Islamic banking.
One of the most important issues in Islamic banking business today is to develop products
and services that are Shari’ah-compliant or genuine from Islamic viewpoint without reducing
the importance of the business features of being competitive, profitable and viable in the long
run. However, there are several issues that should be addressed and one of the most pressing
is what should be the foundation in justifying whether a product is Shari’ah-compliant or
not? What are the genuine methods in fiqh when resolving whether a contract is legal and
allowed from Shari’ah perspectives? In other words, the issue of form versus substance
comes into picture here. Fiqhi scholars have diverged opinions on the concern of establishing
the base of contract legality. Some stress on its permissible structure while others underline
on its matter and the objectives of contracting sides.
This divergence of opinions could be linked to the following hadith that is used by the
scholars to justify their positions, namely “matters are determined by intention.”6 Based on
this hadith, legality of all contracts must be established by intention (niyyah). It is the
rationale or matter of the contract, not mere looking at its structure or formation alone.
However, some scholars like Imam Shafi stated that it is unreasonable to decide on the
6 Narrated by ‘Umar al-Khattab, recorded by Al-Bukhari, Sahih Al-Bukhari.
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legality of contracts by implication of intention, as it is complex and sometimes improbable
to categorize the intention of the contracting parties (Dusuki, 2007; Dusuki & Abozaid,
2007b; see also Hasanuzzaman, 1998). In addition, they stated that some Shari’ah texts
indicate that evaluating things must be based on their structure and manifestation.
To reconcile between these two conflicting texts in a practical way, scholars
distinguished between two types of hukm (ruling): hukm Qada’i and hukm
Diani. The former concerns with contract that complies with all Shari`ah
conditions and requirements pertaining to a contract in its form and structure,
while the later concerns with compliance of the substance or contract purpose
which must be in line with the Shari’ah. If the contract structure is Shari’ah
compliant, then it could be termed as a valid contract (sahih). On the other
hand if the contractors’ purpose of the contract is Shari’ah compliant, then it
is permissible (halal). Thus, a transaction is deemed to be halal when it serves
the legal purpose and intention, and sahih if the contract meets all contractual
conditions and requirements. Consequently, a sahih (valid) contract is not
necessarily halal (permissible). (Dusuki & Abozaid, 2007a, p. 16)
Therefore, a contract is considered permissible when it embraces the lawful rationale and
intention, and legal if the contract contains all contractual settings and requirements. As a
result, a legal contract is not always permissible (Dusuki & Abozaid, 2007a, 2007b; Ismail &
Tohirin, 2010). It must be stated here that the scholars of Fiqh have different views with
regard to the validity of a contract only. However, they have no issue with the permissibility
of a contact on its matter or the contracting parties’ niyyah. Even Shafi scholars expressed
examples of cases when real intention does nullify a contract such as selling fruit products to
be used for alcohol making or furnishing arms to people who will use it against the Muslims.
This indicates that the importance on the structure or expressed intention is more appropriate
when the genuine intention is hard to establish (Dusuki, 2009b).
The preceding elaboration has indicated that jurists are commonly in consent that for an
Islamic financial product to be classified as Shari’ah-compliant, the contract must be both
legal and permissible. However, based on discussion, a concern could be raised whether the
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contemporary Islamic banking products are certainly following the same principles. One of
the most debatable products of Islamic banking is buy-back sale (bay’ al-‘inah) which is
mostly applied in Malaysia. In bay’ al-‘inah approach the Islamic bank is theoretically acting
as a trader selling or buying as the word “bay’” advocate, but in actual terms the Islamic bank
simply proceeds as a financier who provides capital without exposing itself to any risk and
without taking engagement in the venture procedure. Bay’ al-‘inah here is resorted to as a
legal device to avoid riba based loan. However, financing based on bay’ al-‘inah and the
conventional riba based loan are very similar; they satisfied closely the same contracting
parties’ purposes, and apply exactly the same economic matter and outcomes, although their
form may be different (Dusuki & Abozaid, 2007b).
Thus, it can be seen that some products offered by Islamic banks are not enhancing maslahah
or in other words not fully embracing the objective of Shari’ah. Islamic banks relatively put
focus more on the form rather than substance itself as an effort to fulfil compliance with
Shari’ah. If embracing Maqasid al-Shari’ah involves observing the underlying principle of
the texts, subsequently, observing only the structure and the formation of the contracts will be
in opposition to the key principles of Maqasid al-Shari’ah. In this case, Maqasid al-Shari’ah
has been used as a rationalization for application of rather questionable transaction, even
though observing Maqasid al-Shari’ah must be the first factor to determine their prohibition
(Dusuki, 2007).
It is important to note that the conception of Maqasid al-Shari’ah not only embrace
individually entitled goals but also involve broader procedures sheltering welfare in order to
achieve justice and equity. Islamic banking must take into consideration the universal and
dynamic conception of Maqasid al-Shari’ah. Banks must develop its role by embracing
social objective, not only an individual objective. The dignified vision to endorse social
welfare of the society is related to development of a wellbeing economics oriented model
where social righteousness and principle rules can be implemented (Kamal, Yusof, &
Kashoogie, 2009). Thus, Islamic banks are expected to engage in endorsing social welfare.
This view is embraced by the various Muslim scholars who are stating that Islamic banking
is much more than providing Shari’ah-compliant products. It should be structured in such a
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way that its primarily goal is to achieve an affirmative contribution to the realization of the
socio economic objectives of the society at large (Mohamed, 2007).
In order to accomplish the social welfare of society or economic wellbeing model supported
by those Muslim scholars, Islamic banks should rely more on equity-based financing.7 The
equity financing is the way forward for realizing that stage of model as preserved in Maqasid
al-Shari’ah (Haneef & Smolo, 2010; Rosly, 2010; Usmani, 2010). As a result, equity
financing is an aspiration of Shari’ah advisors as well as academicians that has to be
enhanced further in the Islamic banking. Furthermore, equity-based financing is also not
disguise of debt-based financing contracts commonly used in the conventional banking.
Therefore, it can be freely uttered that equity financing can accomplish the objective of
Shari’ah which is realization of justice in the society (Kamal, et al., 2009).
3.3 Maqasid Al-Shari’ah in Islamic Capital Markets (Sukuk)
During the last couple of decades Islamic financial industry has developed and reached
significant results. It has found a variety of financial and business establishments, and
widened its scope from only banking industry to areas which integrate capital market
products and services. Nowadays, Islamic capital market like conventional is a noteworthy
factor of the general Islamic financial scheme. It plays a vital role in allocation of funds, from
surplus unit (savers), to deficit unit (borrowers) in daily activities. Furthermore, the Islamic
capital market basically furnishes an enormous section of liquidity to the large number of
illiquid assets. This is realized by providing a broad spectrum of products assorted from
Shari’ah-compliant securities to bond-like formation known as sukuk. As a result, one of the
most important accomplishments of Islamic capital market is in the rise of sukuk market
worldwide. The enhanced application of sukuk in recent years comes from the need of
governments and corporations to reach funds from the Islamic capital markets through a
sukuk issuance. However, the techniques and processes employed to develop and configure
the sukuk must comply with Shari’ah values and principles. The principles which are
7 This, however, does not mean that the debt-based financing should be abolished altogether. Rather, what is
meant here is that the use of the debt-based financing should be minimized and only for essential ( daruriyyat)
purposes. For detailed discussion about the debt-based financing and its role within Islamic finance, as well as,
how to approach this issue see Heneef and Smolo (2010).
13

presented within the spectrum of Shari’ah are uttered not only through its transactions but in
the extent of its comprehending the Maqasid al-Shari’ah.
Despite continuous improvements in the field of Islamic capital market through a range of
Shari’ah-compliant product innovations like sukuk, some products - which tried to mimic
conventional bonds - misrepresent the Maqasid al-Shari’ah. This misrepresentation arose
from the poor comprehension of Shari’ah, by only taking into consideration the lawful
structure of a contract rather than focusing on the substance as well when configuring a
financial product.
The best example of financial product which, somehow, overlooks Maqasid al-Shari’ah in
Islamic capital markets could be seen in equity-based sukuk. The crucial uniqueness of
equity-based sukuk, from Shari’ah viewpoint, lies in their two essential attributes: (i) the
capital cannot be guaranteed; and (ii) the periodic returns are also dependent on real profits
made and can be uneven (Dusuki, 2009b). However, the firm Shari’ah directions related to
the equity-based sukuk structure are usually not of great interest to conventional risk adverse
investors. Particularly, the incorporation of classical Islamic financial instruments like
mudarabah and musharakah with bond do not fulfill conventional investors’ requests. One of
the reasons could be their “greedy” prospect of capital protection and fixed income
instruments, which are usual characteristics of conventional bond instruments. Eventually,
the structure of equity-based sukuk has changed into debt-based (mimicking conventional
bond) instruments. Furthermore, different “conventional credit approaches” were also
integrated to the mudarabah and musharakah sukuk configuration to realize capital
protection and predict possible returns alike fixed income or bonds instruments (Dusuki,
2010; Dusuki & Mokhtar, 2010; Mokhtar, 2011). These “conventional approaches” furnished
fixed income and capital protection aspects to the equity-based sukuk as well as embraced the
conventional bond characteristics. Consequently, investors were able to attain the same
financial outcomes as if they invest in conventional bonds.
Nevertheless, these fixed-income embracing instruments entrenched into equity-based sukuk
had been the theme of strong condemnation by different parties in terms of their compliance
with the Shari’ah requirements. Above all, Shari’ah Board of Accounting and Auditing
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Organization for Islamic Financial Institutions (AAOIFI) printed a testimonial in February
2008 signifying that musharakah and mudarabah sukuk with the “credit enhancement
approach” instruments as applied by the market was not in accordance with the Shari’ah
principles (AAOIFI, 2008).
Looking into details, the AAOIFI’s proclamation underlined two core matters observed in
equity-based sukuk: First, the practice of liquidity facility; and second, the purchase
undertaking at par to redeem the sukuk. In fact, AAOIFI restated its present regulation on
investment sukuk particularly on the practice of liquidity facility and the purchase
undertaking at par (AAOIFI, 2008).
Viewed from purely Shari’ah perspective, sukuk that are based on mudarabah or
musharakah should not incorporate any structure of security for either the return or the
principal as it is observed in a mortgage bond that has solid equity attributes. Furthermore,
most of the equity-based sukuk are based either on the sale of asset with a promise to
repurchase the assets by the Sukuk manager (obligor promise principle), or sukuk holders
infuse capital into the business process of the Sukuk manager (Dusuki, 2010; Mokhtar, 2011).
In mudarabah, the obligor does not need to participate with any asset while in musharakah,
the obligor will furnish capital. For all mentioned instruments there will be promise by the
obligor to repurchase the assets from sukuk holders, for its nominal value at a specific agreed
price. This would guarantee that the capital invested by the sukuk holders remains integral
(Dusuki, 2009b). However, this may lead to the same economic results as conventional bonds
since sukuk holders shall be assured that their capital will be guaranteed at maturity due to
the purchase undertaking that allows sukuk assets to be redeemed at par.
Nevertheless, the “credit enhancement approach” embraces arrangements and commitments,
which, if taken on their own, are acceptable and permissible. The “innovative” permissibility
of such arrangements and commitments is the main reason why these structures and
arrangements had received concern by the Shari’ah jurists. If looked carefully, the total
procedure of sukuk issuance, these annual allocation payments and claims of value upon
maturity, these obvious promises and undertakings clearly reflect capital protection and
assured rate of return on investment, what is actually conventional bond characteristic, and
15

which would be impossible to achieve in pure Shari’ah based instruments like the
mudarabah and musharakah contracts (Dusuki, 2010).
As a result, the question is whether such practices are used as deception to avoid particular
unlawful instruments by embracing lawful ways and provisions? However, as elaborated
previously, the lawful structure is not enough to confirm and rationalize the permissibility of
a contract even though it may be legal. Accordingly, to declare a financial instrument
permissible based only on the legal structure of the transaction will certainly raise some
concerns over its legality and stand in opposition to the basic principles of Shari’ah. The use
of “credit approach” strategy like purchase undertaking in structuring sukuk to enable
guarantee-resemblance features of conventional bonds obviously have maintained the
legality of the form (sahih qada’an) but neglected the legality of the substance (sahih
diyanatan) (Dusuki, 2009b). If embracing Maqasid al-Shari’ah logically endows embracing
the foundations of the texts then observing only the structure of the contracts goes against the
very fundamentals of Maqasid al-Shari’ah from the contract. Actually, Maqasid al-Shari’ah
have been applied here as a rationalization for doubtfully legal transactions, even though
observing Maqasid al-Shari’ah must be the primary aspect to agree on its prohibition.
3.4 Maqasid Al-Shari’ah and Takaful
Takaful is a structure based on unity, harmony of psyche and shared protection which offers
joint financial and other forms of support to members of the society in case of explicit need,
whereby members jointly consent to give money to uphold this universal objective (Abdul
Wahab, Lewis, & Hassan, 2007). The central idea of takaful is to spread the risk among the
members. The core distinction between conventional insurance and takaful is that in
conventional insurance the risk is conveyed to the insurer while in takaful the risk is shared
jointly by the members of the takaful fund under the takaful scheme (Kwon, 2007).
Takaful can be observed as a system of joint assurance among members against loss and
damage that may be imposed upon any of them. The participants of the group consent to
pledge mutually that if any of them suffer a calamity, he will be given a certain amount of
money to meet the loss and damage.
16

As explained by Mortuza (2006), “Takaful is based on the concept of cooperation,
brotherhood and solidarity of the members of the society who voluntarily agree to contribute
money to support a common goal of providing mutual financial aid to the members of the
group under certain terms and conditions.”
Pursuing an Islamic life insurance policy does not mean that one has insured one’s own life,
but it is a righteous financial transaction created for the reimbursement of particular weak
individuals in the society (Abdul Wahab, et al., 2007). According to Ahmed Zia, “It is
obligatory that the society should be protected by offering security against “risk” for all
individual making the fund-pooling foundation. In the lack of such a security, everyone will
endure from the uncertainties and apprehension” (Ahmed, 2010b). A provision of such a
security is likely when there is fairness, righteousness and economics stability in society
(maslahah). In case of Takaful, every individual stays under the security or surety-ship
(kafalah) of the group. In practical term, takaful will provide protection to all businessmen
and persons in the society against the divine and material losses. In primordial civilization,
group lived together in form of families or tribe, where their wants were entirely fulfilled and
sheltered, through joint collaboration and mutual assistance (see Dusuki, 2006). As a result,
they were relatively protected against all types of loses. It was the previous technique of
insurance (Abdulaziz, 2010).
This said, it could be observed that main takaful application is very similar, i.e. to enhance
social cohesion, facilitate protection of the society from the harmful impact of unpleasant
conditions, raise value of life through the composure that comes from safety, and accumulate
and endow money through a joint scheme that allocates profit on payments (subscriptions)
invested by policyholders on annual basis (Maysami & Williams, 2006). The essential basics
which are emphasizing Takaful theory are identical to joint and shared principles, to the
degree that the theory of cooperation and sharing is one that is endowed under Islamic Law.
Apart from instructing humankind to believe in Allah (s.w.t.), the Divine Decree, the Will of
Allah (s.w.t.) and the Prophet Mohammad (s.a.w.s.), the Holy Qur’an, among others noble
deeds, encourages the individuals to help each other and to embrace vigilance in order to
reduce hardship, losses or wrongdoings from adverse actions (Yaquby, 2000). As could be
seen, in origins of takaful the essential references of sharing and mutuality were solely the
17

Holy Qur’an and the Hadith. However, takaful, as it is applied nowadays, is rather based on
the secondary source of Islamic jurisprudence – Ijtihad8 (Abdulaziz, 2010). Nevertheless, the
basis of the takaful system remained unchanged, i.e. not to profit but to uphold the principle
of "bear ye one another's burden" (Ahmed, 2010a).
Therefore, the distinguishing aspect of Islamic insurance is that it is not solely profit-
motivated; essential purpose is self-help through cooperation. It advanced as a collective
institution with objective to amortize the burden of an individual by splitting it among his
fellow members. From a conventional perspective, insurance emerges as set of mutual
contracts that transfer risk for the benefit of the individuals who choose to make that contract
(Kwon, 2007). On the other hand, from an Islamic perspective, insurance appears as a
foundation that amortizes or removes risk for the benefit of a social group (maslahah). This
is based on the principles of co-operation as mentioned in a Qur’anic verse in Surah al-
Ma’idah: “help ye one another in righteousness and piety, but help ye not one another in sin
and rancour...” (Al-Qur’an, Al-Ma’idah: 2).
Finally, as mentioned already earlier, all economic activities including the fundamental
principles governing contracts in general must conform to the Shari’ah. Accordingly, the
subject matter of the contract should be lawful; the intended objectives of the contract should
be in line with the principles of the Shari’ah; the contract should be free from the interest
(riba), gambling (maysir), fraud, coercion and high degree of uncertainty (gharar); the
participants to the contract should agree to co-operate actively for their common good; every
participant pays a contribution in order to help those who need assistance; and the contract
should not aim at deriving undue advantage for one participant at the expense of the other
participants (Mansuri, 2006, pp. 5-23).
4.0 CONCLUDING REMARKS
Islamic financial system has potentials to become the envoy for the implementation of the
righteous objectives of Shari’ah, as it resides within a financial path underlined by the nature
of Shari’ah rulings. These Shari’ah rulings correlate Islamic financial transactions with real
8 The word Ijtihad refers to the practice of making a verdict by independent understanding of the legal sources,
the Holy Qur'an and the Sunnah.
18

concern for just, fair and transparent society. Concurrently, Shari’ah rulings prohibit
involvement in forbidden activities which are harmful to social and environmental welfare.
Maqasid al-Shari’ah is seeking to develop Islamic finance on firm grounds which can accept
all improvement in financial transactions, whether it is related to the banking system, capital
market, or takaful industry. This firm position and prominent basis will help the Islamic
finance to achieve a better performance. It could be strongly affirmed that Maqasid al-
Shari’ah is the best elucidation for Islamic finance, particularly by looking into observation
that the Islam itself is absolute system for living in all aspects including business and finance.
From the firm ground of Maqasid al-Shari’ah, Muslim jurists and scholars, through the
growth of the business transactions and finance, have introduced a number of Shari’ah
principles in order to regulate and rule financial transactions. These principles should be
implemented by Islamic banks and financial institutions in all aspects of finance. At the same
time, this is to guarantee the consistency of the business and to smooth the progress of
achieving Maqasid al-Shari’ah in financial transactions.
Finally, limited views of understanding Shari’ah, by only highlighting on the lawful forms of
a contract, needs to be amended. Instead, the matter that has greater implications to the
implementation of Maqasid al-Shari’ah must be observed, in particular when structuring a
financial product. Therefore, Islamic finance must make sure that all of its transactions are
Shari’ah-compliant not only in its forms and lawful procedures but more significantly in its
substance and economic matters which are premised on the objectives outlined by Shari’ah.
19

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