Shari'ah Council in Islamic Financial Activities

Functions of the Shari’ah Council in Islamic Financial Activities By: Prof. Dr. Mohd. Ma’sum Billah masum2001@yahoo.com applied-islamicfinance@yahoo.com

006-019-3699542 006 019-2790542

Introduction

In this paper, we will discuss about the role and function of the Shari’ah Council in Islamic financial activities. Islamic finance is rising as a quickly increasing part of the financial division in the Islamic world. Islamic finance is not limited to Islamic countries, but is scattering wherever there is a widespread Muslim community.

Islamic finance is an important key to the Muslim society specifically as well as the world generally in executing daily economic activities. The purpose of introducing Islamic finance is to serve justice and equity to the nations. The conventional finance seems to burden the people therefore the Islamic finance is the result to the problem.

At the beginning of this paper, we will try to clarify the definition of Islamic finance. By knowing the definition of Islamic finance later we can evaluate the activities those relate to Islamic finance. The principles of the Islamic finance will be discussed as to portray the stand of Shariah.

As far as the role of Shariah Council is concerned, this paper also tries to stress what is Shariah Council basically. The objectives of establishment Shariah Council as well as the challenges that the Shariah Council faces in handling the Islamic financial activities will be clearly defined.

Conducting the Islamic finance in the economic activities throughout the world will be benefited more to the Muslim society. The Shariah Council has to constantly play its role to ensure the equity and justice serve to the nation.

What Are Islamic Financial Activities

What is Islamic finance? Definitions range from the very narrow which is interest-free banking whereas to the very broad it can be defined as financial operations conducted by Muslims. The Islamic financial activities are the activities those involve in interest-free banking that conducted by the Muslims.

“The word “Finance” in one of its different meanings refers to the supply of money capital or credit, provided by either a person (household), or an organization (private or public – financial or non financial). The word “Islamic” is inserted in the above expression to restrict the type of rules that can govern different modes of finance to the Shariah rules”.[1]

Islamic financial activities were used by the Muslims since centuries ago. However, the issue of applying the Islamic finance system in economic activities in Islamic countries just arose recently. In fact, it was not only executed in the Islamic neighborhoods but also was practiced by the European.

“Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities with the development of credit. In Spain and the Mediterranean and Baltic states, Islamic merchants became indispensable middlemen for trading activities. In fact, many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen”.[2]

Two aspects of Islamic finance must be singled out. First is the risk- sharing philosophy: the lender must share in the borrower's risk. Since fixed, predetermined interest rates guarantee a return to the lender and fall disproportionately on the borrower, they are seen as exploitative, socially unproductive and economically wasteful. The preferred mode of financing is profit and loss sharing (PLS).

Second is the promotion of economic and social development through specific business practices and through zakat (almsgiving). Most but not all Islamic institutions have a Shariah board: a committee of religious advisers whose opinion is sought on the acceptability of new instruments, and which conduct a religious audit of the bank's activities as well as other features reflecting their religious status. In sum, the defining difference is that while "conventional" finance usually seeks profit- maximization within a given regulatory framework, Islamic finance is also guided by other, religiously-inspired, goals.

Islamic financial activities involve more than banking. They include mutual funds, securities firms, insurance companies and other non-banks. The some actions related to the Islamic financial activities are[3]: 1. Bai-Murabaha 2. Musharaka (partnership) 3. Mudaraba 4. Bai-Salam 5. Istina’a Sale 6. Qard Hasan (benevolent loan) 7. Bai-Muajjal (deferred sale) 8. Ijrah 9. Hire Purchase under Shirkatul Melk or Ijarah Muntahib Bil Tamlek 10. Some Islamic financial instruments i. Participation Term Certificates (PTCs) ii.

Mudaraba Certificates iii. Government Investment Certificates iv. Islamic Deposit Certificates (IDCs), Islamic Investment Certificates (IICs)

and Muqarada Bonds (MBs)

The Principles of Islamic Financial Activities

There are several reasons behind the establishment of the Islamic finance by the Muslim theoreticians and practitioners. To be inline with the Shariah could be the major answer of the aggressively implementing of the Islamic financial activities by the Muslim countries. In approaching the Islamic finance rather than the conventional one, there must have the guidance. The guidance means the principles itself. The principles regarding the Islamic finance are based on the holy Quran and the Sunnah from Rasulullah s.a.w.

The first principle that is highlited by the Quran and the Sunnah is the prohibition of interest or riba’. Zamir Iqbal in his article said that interest or riba’ can be defined as follows “a term literally meaning "an excess" and interpreted as "any unjustifiable increase of capital whether in loans or sales" is the central tenet of the system”.[4] Instead of imposing interest the Shariah introduces profit and loss sharing. The interest does not care about the performance of the investment. When it comes to the maturity time then the recipients might get the money invested including the interest as agreed at predetermined date regardless there is a loss.

It sounds like injustice to another side since they have to bear the loss lonely. Hence, the interest or riba’ is prohibition.

“This prohibition is based on arguments of social justice, equality, and property rights. Islam encourages the earning of profits but forbids the charging of interest because profits, determined ex post, symbolize successful entrepreneurship and creation of additional wealth whereas interest, determined ex ante, is a cost that is accrued irrespective of the outcome of business operations and may not create wealth if there are business losses. Social justice demands that borrowers and lenders share rewards as well as losses in an equitable fashion and that the process of wealth accumulation and distribution in the economy be fair and representative of true productivity.”[5]

Allah s.w.t has warned the believers to prevent themselves from practicing interest or riba’. This is clearly explained in the surah al- baqarah, verse 275:

“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 God hath permitted trade and forbidden usury. Those who after receiving direction from heir Lord, desist, shall be pardoned for the past; their case is for God (to judge); but those who repeat (the offence) are Companions of the Fire: they will abide therein (forever)”.[6]

Second principle is the risk sharing. The risk sharing gives the meaning of both called as the provider of funds and the entrepreneur may share the business risks. Whether there is profit or loss, they have to share the risk. As the absence of interest or riba’ the provider of financial capital no longer becomes a creditor in stead of an investor.

Money as ‘potential capital’ is third principle. “Money is treated as "potential" capital--that is, it becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam recognizes the time value of money, but only when it acts as capital, not when it is "potential" capital”.[7]

In financial activities, they might be hoarding and transactions featuring extreme uncertainties, gambling, and risks. In impeding such activities, Islamic teachings put a principle to the extent of that kind of actions. The principle that governs this problem is prohibition of speculator behavior.

Sanctity of contract is also the principle used in Islamic financial activities. The financial activities are bound by the contract. Contract has to be respected. The information provided also need to be revealed as sacred duty. The purpose of doing this is to decrease the risk of different information and ethical exposure. The last but not least is the principle of Shariah-approved activities. This relate to the activities that are endorsed by the Shariah. All activities must according to the Shariah as Shariah provides guidelines in doing such activities.

Those are classified as prohibited should not be introduced in the Islamic financial activities. Investment in alcohol, gambling, and casino are some of the examples out of the guidelines of Shariah.

What is Shariah Council The Shariah Council is the body that mentor the activities related to Muslims. To the extent of Islamic financial activities, Shariah Council is a body which formed by several Islamic qualified scholars. They are responsible in determining any Islamic financial issues in the organization that appointed them. In fact, all matters concerning religion are the responsibility of the Shariah Council. The main function of the council is to guide the organizations in matters related to religious issues.

The objectives of the Council are: To advance the Islamic Religion by: • Fostering and encouraging the practice of the Muslim faith according to the Quran and the Sunnah.

• Doing all such other lawful things as may be in the interest of promoting the proper practice of the Muslim faith.

The Role and Function of Shariah Council

Basically Shariah council is responsible of the whole ummah well being. They are responsible to ensure that organization is complied with Shariah principles as described before. Islamic financial activities are free from any usufruct items. They are form based on the profit and loss sharing mechanism. Allah s.w.t has prohibited riba’ as it burdening one side and left the other in upper hand. Such case will exploit other people wealth. This is harmful and yet Allah s.w.t prohibited it. For instant, in the conventional loan system, bank will impose interest at fixed rate while in the reality the rate is fluctuate in accordance time value of money plus based lending rate.

Furthermore, late payment also will be penalized by extra interest charged. The effect from this will not be received by rich people, but to the poor an extra RM1 of payment is trouble to them. So by avoiding this unfair system, Shariah Council can uphold justice to poor people and provide them more peaceful life.

Next, the Shariah Council also responsible in determining the economic activity executed by the organization is legal in the eye of Islam. The activity must be free from any non-halal activity. Furthermore, any kinds of non-halal business trade cannot mix with halal business. For example, a company cannot be approved by the Shariah Council if the subsidiary is involved with liquor or gambling business. This is to ensure that any earning gain from the organization purified. Unpurified earning will affect Muslims behavior in way that they are easy to involve in misleading activities especially the children.

This based on the prophet hadist, which mean that any flesh that come from non-halal source, hell fire is prioritized on him.

Shariah Council also carries amanah from Allah to ensure that divine law is observed entirely. As Islamic scholars, their ruling is very important. Muslims is depending on them to determine the best answer any skeptical issues in the financial activity. If they ruling is mislead, Muslims will also follow their step. For the new issue arose, they are accountable to come up with the true and fair ruling. The ruling must be taken from the Quran and hadist if applicable. If there is no providence then analogy and collective opinion of scholars must be used.

Besides, Shariah Council must be free from any conflict of interest with the organization. Any sense of conflict of interest may lead to bias and unfair ruling. For instance, if the Shariah Council is consisted by relatives or friends of the organization management, they might lenient and approved unIslamic or doubtful financial activities. In this case, the Shariah Council may not look into the new case deeply.

Challenges in Shariah Council

The challenges might come from the competition between conventional financial system and Islamic financial system. Conventional financial system can be changed so it will be likely the same to Islamic financial system. The Conventional financial organization may look like the same but they are involved with the non-halal business activities. This will confuse Muslims whether to choose between them. Furthermore, the conventional financial system can provide more profitable option to their customers. This will attract Muslims to invest on them.

The issue Amanah or accountability of the scholars also can be questioned. Gigantic organization may bribe the Shariah Council members, so that they will manipulate the ruling. Non-halal or doubtful financial activities can be approved easily if the Shariah Council is not independent anymore. Political and legal interference seems to ruin or destroy the structure of Shariah Council. Powerful politicians might influence the Shariah Council to reverse the ruling by their power.

The challenge also may come from new financial matter in which there is no precedent case happened before. The scholars need to refer to the source of Islamic jurisprudence which is the Quran and the Sunnah. The challenge is when the sources cannot provide any justifiable answer. Then they have to conduct collective opinion in order to find the best ruling to be imposed. Collective opinion is merely questionable because it comes from human. Human is exposed to any mistakes except the prophets. So their ruling might be mislead or totally wrong.

Conclusion

The structure of the Shariah Council must be formed by the intellectual and those who are really sincere to Islam. To be a scholar as the one who reveals the ruling that being used as reference to Muslims should have high degree of piety towards Allah s.w.t. This is because they deal with the Amanah of Allah s.w.t. Amanah is the responsibility that can not be bear by anyone except the one who is really close to Allah s.w.t. On the other hand, the selection of members of Islamic Council so-called scholars must be free from any conflict of interest.

The duties of the Shariah Council restricted at certain point. For example, if a Muslim committed immoral attitude such as involving in gambling, the Shariah Council can do nothing. In fact, they are the body which provide ruling. In this case, the Shariah Council should be empowered to guarantee the Shariah is the backbone in all scope of activities especially related to financial activities. By the broaden power, Shariah Council can even penalize to those against the Shariah and be the lesson to the other Muslims.

In all aspects Muslims have to refer to the Shariah. Why the non- Muslims can follow their own ‘Shariah’ and why the Muslims themselves cannot follow their own Shariah? Muslims should not let the Shariah Council just great in its name but in reality it is own nothing. As a result the Shariah Council must play its role enormously and at the same time Muslims have to give support so that successful and peaceful can be achieved.

----------------------- [1] Concept and Ideology : www.islamonline.net [2] Islamic Financial System – Finance and Development : www.islamonline.net [3] Concept and Ideology : www.islamonline.net [4] Islamic Financial System – Finance and Development : www.islamonline.net [5] Islamic Financial System – Finance and Development : www.islamonline.net [6] The Holy Quran, Text and Translation [7] Islmic Financial System – Finance and Development : www.islamonlline.net