Introduction to Islamic Banking and Finance
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 Introduction To Islamic Banking And Finance
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Brian Kettell
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A good illustration of the application of the Sharia’a is to look at Islamic investment prohi- bitions. It is forbidden for any Islamic institution or investment fund to deal in the following goods:

  • alcoholic drinks and related activities;
  • pork, ham, bacon and related by-products;
  • dead animals (or those not slaughtered according to the rules of the Sharia’a);
  • products associated with gambling such as gambling machines;
  • tobacco and other drugs;
  • activities associated with pornography;
  • gold and silver except for spot cash;
  • armaments and destructive weapons.

According to the principles of Islamic jurisprudence the payment and receipt of interest is a grave sinful act, for which the participant is responsible in the Hereafter. Since almost all companies deal with some form of interest or otherwise prohibited activity, some Sharia’a advisory boards have determined an upper limit as to what percentage of a company’s income can be earned through interest and/or such activities. It would be unacceptable to invest in a firm that exceeds these limits, which are evolving and, as a result, becoming more sophisticated and nuanced. Companies that may have been excluded under simplistic models a few years ago (for example, due to large cash holdings) may now be acceptable under newer Sharia’a odels.


In the light of the foregoing discussion, dealing in equity shares can be acceptable in Sharia’a subject to the following conditions:

  • The main business of the company is not in violation of Sharia’a. This means that it is not permissible to acquire the shares of companies providing financial services associated with interest, such as conventional banks and insurance companies. Companies involved in some other business not approved by the Sharia’a, such as those manufacturing, selling or offering alcohol, pork or haram (forbidden) meat, or involved in gambling, night club activities, pornography and so on are forbidden.
  • If the main business of the company is halal (permitted), such as computers, cars and house building, but the company involved deposits its surplus cash in an interest-bearing account or borrows money paying interest, Muslim shareholders must express their disapproval against such dealings. This should preferably be done by raising their voice against such activities in the annual general meeting of the company.
  • If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the shareholder must be given to charity, and must not be retained by the investor. For example if 5% of the total income of a company has come out of interest-bearing deposits, then 5% of the dividend must be given to charity. In other words, where profits are earned through dividends a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given to charity. Islamic scholars have termed this process ‘purification’.

Sharia’a scholars have different views about whether purification is necessary where profits are made through capital gains (such as by purchasing the shares at one price and selling them at a higher price). Some scholars are of the view that, even in the case of capital gains, the process of purification is necessary because the market price of the share may reflect an element of interest related leverage and so interest payments have boosted the performance of the company. Other scholars reason that no purification is required if the share is sold, even if the activity results in a capital gain.

  • The shares of a company are negotiable (and can be freely invested in) only if the company owns some nonliquid assets. If all the assets of a company are in liquid form, or in the form of money that cannot be purchased or sold, except at par value, then these shares cannot be purchased. In this case the shares represent money only and, Islamically, money cannot be traded except at par.

What should be the exact proportion of nonliquid assets of a company enabling the negotiability of its shares? Contemporary scholars have different views about this question. Some scholars are of the view that the ratio of nonliquid assets must be 51% at the very least. They argue that if such assets are less than 50%, most of the assets are in liquid form, and therefore, all its assets should be treated as liquid, on the basis of the Juristic principle ‘the majority deserves to be treated as the whole of a thing’. Other scholars have opined that even if the nonliquid assets of a company are 33%, its shares can be treated as negotiable.


As mentioned earlier in Section 2.3.1, to ensure conformity with Sharia’a law and that Islamic beliefs are being implemented, Sharia’a Supervisory Boards (SSB) are mandatory.

2.7.1 Function and Responsibilities

The three central responsibilities of an SSB are

  • to make sure that banking facilities and services offered are in accordance with Islam;
  • to guarantee that the bank’s investments and involvement in projects are Sharia’a-compliant;
  • to ensure that the bank is managed in concordance with Islamic values.

In its articles of association, the Faisal Bank of Egypt states that ‘A Religious Supervisory Board shall be formed within the Bank to observe conformance of its dealings and actions with the principles and rulings of the Sharia’a’.

The International Association of Islamic Banks (IAIB) has chosen a more scrupulous clarification of the duties imposed on its supervisory committee.

In Article 2 of the Board’s Statute, the IAIB has entrusted its SSB with the following duties:

  • to study previously issued Fatawa  (religious rulings), assess its constituency with the
  • Sharia’a and, when appropriate, base its own rulings on these decisions;

to supervise the activities of the bank in order to guarantee conformity with the Sharia’a law;

  • to issue religious opinions on banking and financial questions;
  • to clarify legal religious rulings on new economic issues.

Sharia’a Boards: Roles and Scope of Responsibilities

Sharia’a advisers have both supervisory and consultancy functions. Categorically, the overall applications of the Sharia’a by these advisors have a two-fold objective. Firstly, the Sharia’a advisers review the operations of the institutions participating in the Islamic financial markets, ensuring that they comply with the requirements of the Sharia’a. This is, to a large extent, equivalent to a supervisory role.

Secondly, in the increasingly complex and sophisticated world of modern and dynamic Islamic finance, Sharia’a advisers endeavour to answer any issues or concerns for a partic- ular transaction or product conformation with the Sharia’a. Where deemed necessary, they offer constructive, creative and/or alternative recommendations. This is, to a large extent, a consultancy role.

Institutions participating in the Islamic financial markets are required to establish operating policies and procedures to ensure that their activities, investments and operations are under- taken in line with Sharia’a requirements. Sharia’a advisers are expected to participate and engage themselves actively in deliberating the Sharia’a issues put before them. Among the duties and responsibilities of the Sharia’a advisers that are prevalent in the Islamic financial markets are the following:

  • Review the products and services to ensure conformity with Sharia’a requirements. In the Islamic investment industry, Sharia’a advisers are responsible for ensuring that the funds they oversee are managed and administered in accordance with the principles of the Sharia’a. This also includes the responsibility to provide expertise and guidance to the investment management companies and fund managers in all matters relating to the principles of the

 Sharia’a Law and Sharia’a Boards: Roles, Responsibility and Membership 25

Sharia’a pertaining to the fund, including the trust deed, the prospectus, the investments of the fund and other operational and administrative matters.

  • Review and endorse relevant documents. In order to be Sharia’a-compliant, Islamic financial market products and services need to undergo a pre-defined vetting and endorsement process by Sharia’a advisers. The adviser’s role is to advise on all aspects of Islamic securities, including documentation, structuring and investment as well as other administrative and operational matters, and to ensure compliance with applicable Sharia’a principles and relevant resolutions. A basic principle which must be adhered to in the course of reviewing and endorsing the documentation is that no other person is competent enough to ensure that the documentation conforms and is consistent with the contemplated Sharia’a transaction, other than the Sharia’a adviser.
  • Supervise investments made by the institutions in the Islamic financial markets. The Sharia’a adviser supervises and ensures that the investments made by these institutions comply with the Sharia’a. In this case, the Sharia’a adviser must ensure that the fund managers invest only in securities classified as Sharia’a-approved by the Sharia’a board.
  • Deliberate on Sharia’a issues pertaining to the day-to-day operations of the institutions and provide advice accordingly. In the everyday operations of these institutions, there are various Sharia’a issues that practitioners will come across, particularly with regard to the practice and implementation of financial transactions. These issues are usually not covered by text books or the theoretical framework of a particular transaction. Thus, Sharia’a advisers are compelled to understand and resolve these issues. By and large, this requires them to be closely involved with the actual practice and implementation side, because this gives them a more comprehensive and deeper understanding of the issues with which they are dealing.
  • Conduct research and development of new products. As the financial system advances, the need for Islamic financial institutions to compete, not only with existing but also upcoming conventional products, requires Sharia’a advisers to develop or approve innovative new products that are competitive and acceptable to all the stakeholders. Some of the more com- plex financial areas requiring Sharia’a-compliant innovation are risk management, hedging tools, derivatives and hybrid financing facilities. When Sharia’a advisers are equipped with the essentials of both the Fiqh (Islamic law) and the Muamalat, especially concerning capi- tal and asset management principles, it is intended that they develop Islamically-acceptable financial products.
  • Provide training and education on Muamalat, based on Sharia’a contracts. The large growing pool of Islamic-finance practitioners must be well informed and systematically educated in order to prepare them with the necessary knowledge for managing Islamic financing activities. In the course of developing the Islamic financial market its dynamic nature must be recognised and complacency should be avoided. The dissemination process must be continuous, in order to train as many practitioners as possible, so as to provide successors who are well trained prior to succeeding their superiors. Since the Sharia’a advisers possess the knowledge in Muamalat, it is pertinent that they lead the way in imparting knowledge to these practitioners as well as to society in general. This is vital towards achieving a true and accurate understanding of the Sharia’a and the application of the nominate contracts in Muamalat.
  • Assist related parties on Sharia’a matters and provide advice upon request. The related

parties of the institutions in the Islamic financial market, such as their legal counsels, auditors and consultants, may seek advice on Sharia’a matters from the advisers. The latter are expected to provide the necessary assistance so that full compliance with Sharia’a principles can be assured. Over and above this, they must also explain the Sharia’a issues and the recommendations offered for a particular decision. These opinions must be supported by the relevant Sharia’a jurisprudential literature from established sources.

Dubai Islamic Bank (DIB)

At DIB, the Fatwa and Sharia’a supervision board oversees the application of different aspects of the Sharia’a and also ensures that all the transactions are in strict compliance with the Sharia’a principles. The board is further empowered with the right of reversing any violating procedures, if found. The board of directors is obligated to obey the Fatawa, irrespective of whether a unanimous or a majority consensus secured the decision (clause 78 of the Bank’s Memorandum & Articles of Association). Sharia’a board meetings are held periodically or whenever the need arises. The rights of the board are enshrined in Article Seven of the Bank’s Memorandum & Articles of Association (Clauses 74–84). Box 2.2 provides details of the functions of the DIB’s Sharia’a board.

Box 2.2 Duties of the DIB Sharia’a board

  • As an expert source on Islamic principles (including Fatawa), the board, through a repre- sentative (usually the general secretary of the board), supervises the Sharia’a compliance of all the transactions in the bank.
  • To devote time and effort to devising more Sharia’a-compliant transactional procedures, templates and banking products that enable the bank to adapt to market trends, while maintaining a competitive edge in deposit procedures, investments, and banking services. At the same time, the board gives its opinion on proposed new templates and banking transactions.
  • Analysing unprecedented situations that are not covered by Fatawa in the bank’s trans- actional procedures or those reported by different departments, branches and sometimes the customers. This is to ensure Sharia’a compliance before the bank develops any new products or implements any new procedures.
  • Analysing contracts and agreements concerning the bank’s transactions, as submitted by the chairman of the board of directors or any department or branch within the bank or requested by the board itself in order that Sharia’a compliance can be evaluated and maintained.
  • Ensuring Sharia’a compliance in the implementation of all banking transactions and correcting any breaches.
  • Analysing administrative decisions, issues and matters that require the board’s approval.
  • Supervising Sharia’a training programmes for the bank’s staff.
  • Preparing an annual report on the bank’s balance sheet, with respect to its Sharia’a


  • The Fatwa and Sharia’a board submits a complete annual report for the board of directors, summarising all the issues referred to the board, as well as its opinion on the bank’s transactional procedures.


The qualifications necessary to become a Sharia’a scholar are not defined in any formalised manner from, say, some central institution, as one would find in most professional bodies such as solicitors, architects and so on. A glance, however, at the CVs of some of the better known scholars, listed in this section, provides a flavour of the qualifications needed to be a Sharia’a board scholar. The following nine abbreviated CVs of prominent Sharia’a board scholars indicate the depth of experience needed by Sharia’a board members. The Sharia’a board requirements for the State Bank of Pakistan are also described.

Dr Hussain Hamid Hassan

Dr Hussain Hamid Hassan received his PhD from the Faculty of Sharia’a at Al Azhar Uni- versity in Cairo, Egypt, in 1965. He also holds two degrees in law from the International Institute of Comparative Law, University of New York and two degrees in Law and Economics from Cairo University. He served as Assistant Professor, Associate Professor and Professor of Sharia’a in the Faculty of Law and Economics at Cairo University between 1960 and 2002.

Dr Hassan chairs, or is member of, the Sharia’a supervisory committees of many Islamic financial institutions, including Emirates Islamic Bank, DIB, National Bank of Sharjah, Islamic Development Bank, Dubai Islamic Insurance and Re-Insurance (Aman), Tamweel, AMLAK, the Liquidity Management Centre and the Accounting and Auditing Organisation for Islamic Financial Institutions. Dr Hassan is the author of 21 books on Islamic law, finance, economics, social studies and art. In addition, he has also written more than 400 research articles on these subjects.

Dr Ali AlQaradaghi

Dr Ali AlQaradaghi received his PhD in the area of contracts and financial transactions from Al Azhar University in Cairo, Egypt, in 1985. He is currently a Professor of Islamic financial contracts and heads the Department of Islamic jurisprudence in the College of Sharia’a and Islamic studies at the University of Qatar.

Dr Ali AlQaradaghi presently serves on the Sharia’a boards of many Islamic financial institutions in and outside Qatar including Emirates Islamic Bank and DIB in the UAE, Investment House and Investors Bank in Bahrain and First Investment in Kuwait.

He is a founding member of numerous charitable organisations and international Islamic jurisprudence bodies and the author of many research articles in contemporary issues in Islamic finance and banking. He has more than eight books published.

Dr Mohamed Elgari

Dr Elgari received his PhD in economics from University of California (USA), and is currently serving as a Professor of Islamic economics at King Abdulaziz University (Jeddah), Saudi Arabia. He is a Sharia’a advisor to many Islamic financial institutions including HSBC Amanah, Abu Dhabi Islamic Bank, Bahrain Islamic Bank, Dow Jones Islamic Index, National Commercial Bank, Saudi American Bank and Saudi Fransi Bank. He is a prolific writer and has published in a number of scholarly journals and authored several books.

Dr Mohd. Daud Bakar

Dr Mohd. Daud Bakar received his PhD from the University of St Andrews, UK. He was the former Associate Professor in Islamic law and Deputy Rector at the International Islamic University, Malaysia. Dr Bakar is the Chief Executive Officer of the International Institute of Islamic Finance. His areas of specialisation include Islamic legal theory, Banking and Finance, Law of Zakat and Medieval Law. Dr Bakar is a member of the Sharia’a supervisory committees of many financial institutions in Malaysia and around the world, including the Central Bank of Malaysia, Securities Commission of Malaysia, International Islamic Financial Market, Accounting and Auditing Organisation for Islamic Financial Institutions and numerous other institutions. He has published more than 30 articles in academic journals and presented more than 120 papers in various conferences.

Sheikh Nizam M.S. Yaquby

Sheikh Nizam M.S. Yaquby received a BA from McGill University Montreal, Canada, in Economics and Comparative Religion. He has studied traditional Islamic studies under the guidance of eminent scholars, including Sheikh Abdulla al-Farisi, Sheikh Yusuf al-Siddiqi, Sheikh Muhammed Saleh al-Abbasi, Sheikh Muhhamed Yasin al Fadani (Makkah), Sheikh Habib-ur-Rahman A. Zaini (India), Sheikh Abdulla bin Al-Siddiq Al-Ghumar (Morocco) and others.

His areas of specialisation include Khatib in Bahrain Mosques (1981–1990). He also taught Tafsir, Hadith and Fiqh in Bahrain. He is a member of the Sharia’a supervisory boards for the Islamic Investment Banking Unit of The Ahli United Bank (UK) PLC London, Abu Dhabi Islamic Bank and numerous other Islamic banks and institutions. He has participated in many Islamic Da’wah and Fiqh international meetings. His publications include Risalah fi al Tawbah (in Arabic), Qurrat al-Ainayn fi Fada il Birr al-Walidayn (in Arabic) and Irshad al-Uqala ila Hukm al Qira h min al-Mushaf fi al-Salah (in Arabic). He has also participated in over 500 lectures, sermons and training sessions and audio cassette recordings. He speaks Arabic, English and Persian.

Sheikh Muhammed Taqi Usmani

Sheikh Muhammed Taqi Usmani earned an MA in Arabic with distinction from the Punjab University in 1970 and was awarded an LLB with distinction from Karachi University in 1967. His BA is from Karachi University in 1964. In 1961 he earned Takhassus in Ifta from Darul Uloom Karachi. He was awarded an Alimiyyah from Darul Uloom Karachi in 1959 and the Fazil-e-Arabi with distinction from the Punjab University in 1958.

He recently retired as Judge Sharia’a Appellate Bench, Supreme Court of Pakistan (where he had been since 1982). He is deputy chairman/permanent member of the International Islamic Fiqh Academy Jeddah (sponsored by the Organisation of Islamic Conference (OIC)) and Vice President of Darul Uloom Karachi. He has been chairman of the Centre for Islamic Economics Pakistan since 1991 and the chairman of the Sharia’a boards for Saudi American Bank, Jeddah; Robert Fleming Oasis Fund, Luxembourg; and Sharia’a Council, AAOIFI.

He also worked for the Citi Islamic Investment Bank, Bahrain and Amana Investments Ltd, Sri Lanka. He was vice chairman of the Sharia’a board of the Abu Dhabi Islamic Bank, Abu Dhabi. He was also a member of the Sharia’a boards for The Ahli United Bank (UK) PLC,

 Sharia’a Law and Sharia’a Boards: Roles, Responsibility and Membership 29

London; Al-Baraka Group, Jeddah; and First Islamic Investment Bank, Bahrain. His other accomplishments include:

  • being a member of the Commission for Islamization of Economy, Government of Pakistan;
  • teaching several branches of Islamic studies for over 40 years;
  • participating in many Islamic, Da’wah and Fiqh meetings across the world.

His publications include over 50 works published in English (including Islamic Modes of Financing), Arabic and Urdu. He speaks Arabic, English, Urdu and Farsi.

Sheikh Abdullah Bin Suleiman Al-Maniya

Sheikh Abdullah Bin Suleiman Al-Maniya has been a member of the Senior Ulema Board since its inception in 1971 (1391 AH). He was formerly Judge of the Cassation Court in Makkah Al Mukarramah. He has supervised a number of PhD theses. By delegation he was appointed president of the courts of the Makkah Al Mukarramah. He has compiled a number of Fatawa (interpretive opinions) and published several books.

Sheikh Dr Abdullah bin Abdulaziz Al Musleh

Sheikh Dr Abdullah bin Abdulaziz Al Musleh established the branch of Al-Imam Muhammad bin Saud Islamic University in Abha (Saudi Arabia) and was its rector from 1976 until 1994 (1396–1415 AH). He was Dean of the Faculty of Sharia’a and Principles of Religion at the Imam Muhammad bin Saud Islamic University, in addition to his work as rector of the University’s branch in Abha. At the Faculty he also established the Islamic Economics Division. He was also Director General of the Panel of Scientific Miracles in the Qur’an and Sunnah. He has published numerous research studies and books.

Sheikh Dr Muhammad Al-Ali Al Qari bin Eid

Sheikh Dr Muhammad Al-Ali Al Qari bin Eid worked as Professor of Islamic Economics at King Abdulaziz University in Jeddah and was an expert at the Fiqh Academy of the Organi- sation of Islamic Conference in Jeddah. He was also director of the National Administrative Consultancy Centre in Jeddah. He has several publications and books to his name.


According to the State Bank of Pakistan, Sharia’a advisors needs the following minimum qualification and experience:

  • A minimum of five years experience giving religious rulings.
  • A knowledge of, or familiarity with, the banking industry.
  • A minimum qualification of Dars-e-Nizami. In higher education, a qualification such as an MA in Islamiat, economics or in the discipline of banking and finance may be an added bonus.

 30 Introduction to Islamic Banking & Finance

  • Where a Sharia’a advisor has experience as a teacher of Islamic Fiqh in a reputable institu- tion, other than banking institutions, for a period of not less than three years with a proven track record, the number of years of experience necessary may be relaxed.

As well as the above qualifications and experience, Sharia’a advisors must have an im- peccable track record in the companies with which they have served in the capacity of an employee or director or chief executive or as chairperson. Advisors must not have had their employment terminated or dismissed in the capacity of employee, director or chairman of a company.

Solvency and Financial Integrity

Sharia’a advisors must not be associated with any illegal activity relating to banking business. They must not have been in default of payment of dues owed to any financial institution and/or default in payment of any taxes in an individual capacity or any partnership firm or in any private unlisted and listed company. They must also have sufficient means to discharge financial obligations.

Personal Integrity, Honesty and Reputation

Sharia’a advisors must be honest and have no criminal convictions or have been involved in fraud or forgery or any other financial crime. They must not have been subject to any adverse findings or any settlement in civil or criminal proceedings particularly with regard to financial or business investments, misconduct, fraud, formation or management of a corporate body and so on. They must not have contravened any of the requirements and standards of regulatory system or the equivalent standards of requirements of other regulatory authorities, or been involved with a company, firm or other organisation that has been refused registration or licence to carry out trade or business. Nor must they have been involved with a company or firm whose registration or licence has been revoked or cancelled or gone into liquidation. Sharia’a advisors must not have been debarred for giving religious rulings by any religious institution or body.

They must have no conflict of interest; for example, the person cannot be a Sharia’a advisor for any other financial institution. The term financial institution includes any bank, investment finance company, nonbanking finance company, venture capital company, housing finance company, leasing company or Mudaraba company. The conflict of interest does not apply if a

Sharia’a advisor is nominated by the SBP to its own Sharia’a board.

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