Takaful Insights: Exploring Shariah-Compliant Finance

By, Morill Ebrahim Ndemanga

What is Islamic Banking?

Islamic Banking, also known as Islamic Finance or Shariah-compliant finance, refers to financial practices and services that adhere to Islamic law (Shariah). It is primarily guided by four key sources: the Holy Qur’an, the Sunnah (tradition of the Prophet Muhammad, peace be upon him), Ijma (consensus of Shariah scholars), and Qiyas (analogy).

A Brief History of Islamic Banking

The concept of Islamic banking began in 1963 with the establishment of Mit Ghamr Savings Bank in Egypt, founded by Ahmad al-Najjar. This was the first attempt to structure a banking system based on Islamic principles. Today, there are over 561 Islamic banks worldwide, with about 80% of them operating Islamic banking windows. This system allows conventional banks to offer Islamic banking services, such as FDH Salama in Malawi.

In addition to banks, there are approximately 1,900 Shariah-compliant mutual funds globally, making Islamic finance a substantial and growing sector within the global financial system.

How Does Islamic Banking Operate?

At the core of Islamic banking is the prohibition of interest (riba), which is explicitly forbidden in the Qur’an and the Hadith. This principle emphasizes ethical financial dealings, justice, and fairness.

Qur’anic References on the Prohibition of Interest:

• Qur’an 2:175-176:
  “Those who consume interest will stand on Judgment Day like those driven to madness by Satan’s touch. That is because they say, Trade is no different than Interest.”
• Qur’an 3:130:
  “O believers! Do not consume interest, multiplying it many times over. And be mindful of Allah, so you may prosper.”
• Qur’an 4:161:
  “Taking interest despite its prohibition, and consuming people’s wealth unjustly. We have prepared for the disbelievers among them painful punishment for taking usury though it is forbidden.”
• Qur’an 30:39:
  “Whatever loans you give only seeking interest at the expense of people’s wealth will not increase with Allah.”

Hadith Reference:
Jabir reported that the Prophet (peace be upon him) said, “Cursed is the receiver and payer of interest, the one who records it, and the two witnesses to the transaction. They are all alike in guilt.” (Muslim, Kitab al-Musaqat, Tirmidhi, and Musnad Ahmad).

Biblical View on Interest

Interestingly, the Bible also prohibits interest in certain contexts, aligning with Islamic teachings:

• Deuteronomy 23:19:
  “You shall not charge interest to your brother—interest on money or food or anything that is lent out at interest.”
• Proverbs 28:8:
  “He who increases his wealth by interest and usury gathers it for him who will pity the poor.”
• Ezekiel 18:8, 13, 17:
  These verses emphasize that charging interest is unjust and will not be blessed by God.
• Psalms 15:5:
  “He who does not put out his money at interest, nor does he take a bribe against the innocent. He who does these things shall never be moved.”

Prohibition of Haram Transactions

Islamic banking also prohibits financing activities related to haram (forbidden) industries, such as gambling, alcohol, or any other unethical business practices. Muslims are advised to avoid depositing savings with interest-based financial institutions to ensure their money does not support haram businesses.

Shariah Advisory Board

An essential feature of Islamic banking is the Shariah Advisory Committee or Board, which oversees the bank’s adherence to Shariah law in all its financial dealings. The board ensures that all contracts, investments, and business transactions comply with Islamic principles, providing ethical governance to prevent exploitation or unfair dealings.

Law of Necessity (Darurah)

The principle of Darurah (Law of Necessity) applies in cases where circumstances force one to act in a way that would normally be prohibited. In Islamic finance, this principle allows for exceptions when there is no alternative, but it becomes invalid when a lawful option is available. This rule is applicable across various areas of Islamic law, including public, criminal, and financial law.