Banking and Finance

Topics: Sharia, Qur'an, Riba Pages: 56 (16646 words) Published: March 9, 2013
Mirza Vejzagic∗

In an Islamic financial system, leading regulations are derived from the Quran and Sunnah. The Shariah embraces the Quranic philosophy in three magnitudes, explicitly Aqidah (faith and believe), Akhlak (ethics and morality) and Muamalat (transactions). The latest one, Islamic law of transactions (fiqh muamalat) has become inevitable in contemporary Islamic finance. The main rationale could be found in the fact that to some level, companies engaging in the business of Islamic finance act upon on the foundation of profit maximization. This must be practiced by embracing the Shariah doctrine, one of which is the disallowance of interest or usury as riba. By doing so, profit maximization will be free of unethical practices, and will put Islamic banking business in the vanguard of ethical distinction. Although the central idea of Islamic banking and finance has been the elimination of interest, the comprehension of trade and commerce (al-bay’) in Islamic financing activities has not be recognized in a similar capacity as had the interest (riba) feature. This has directed many people to believe that Islamic bank is a banking firm that operates without interest, without further elaboration. Even though this evolves a right concept of thinking, it does not precisely portray what actually an Islamic bank stands for. In fact, it would be more truthful to utter that Islamic banking industry runs on the basis of commercial and trading doctrine (al-bay’) where acquired profit embrace valueaddition (kasb) and risk-taking (ghorm) activities. It is important to emphasize that Shariah requires all genuine exchange to contain ‘iwad – an equal counter value. According to Rosly ”Every increase, which is without ‘iwad or an equal counter-value, is riba. ‘Iwad is therefore the basic trait or condition sine qua non of the lawful (halal) sale”1. This is because a sale is inevitably an exchange of a value against an equivalent value. It is therefore decisive to underline the significance of al-bay’ and consequently the conception of ‘iwad, when a person wishes to comprehend issues regarding Shariah authenticity in Islamic banking and finance. It would be inappropriate to elaborate riba matter without positioning the al-bay’ and ‘iwad issues in their appropriate places. By doing so, the outcome may yield to one side approach, i.e., focusing on riba alone, and forgone the significance of al-bay’ and ‘iwad in elaboration of the conception of Islamic financial transactions (mu’amalat) to general public.

Mirza Vejzagic is a Ph.D. candidate at International Centre for Education in Islamic Finance (INCEIF) Malaysia, and finance lecturer at Limkokwing University of Creative Technology Malaysia (LUCT). He can be contacted at or

Saiful Azhar Rosly, Iwad as a Requirement of Lawful Sale: A Critical Analysis. IIUM Journal of Economics and Management 9, no. 2, 2001, pp: 187-201.




In the Quran, pre-Islamic Arabic peninsula profit-making society proclaimed that “Trade (albay’) is like usury (riba)”. Holly Quran responded with enlightening verse that “Allah hath permitted trade and forbidden riba”2. Taking in consideration written Quranic verse, the focal question that could be raised is why riba is made prohibited while trade (al-bay’) is permissible? What is justly exceptional about al-bay’ that Allah has made it the alternative to riba? In the Quran, riba is proclaimed as the amplifying of the loan over time, “O ye who believe, devour not in usury doubled and multiplied…”3 This method, which lead to rise of profit, is considered an unjust business practice because profit is created without mutual risk taking. In other words, there is an absence of risk sharing between “creditors” and “debtors”. That is, debtors are made to pay higher spreads on “financing”. Furthermore, due to...
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