Saiful Azhar Rosly
Islamic Financial Markets:
Shari’ and Tabi’ Principles
IB1006 Islamic capital market (CIFP1)
Prof. Saiful Azhar Rosly, INCEIF
When one listens to discussions and lectures on Islamic banks, takaful, Islamic funds and investment, it seems to gravitate on one issue, namely the Shariah guidelines. It deals with the permissible (halal) and prohibited (haram) as ordained by Allah swt. Islamic law of contracts (fiqh muamalat) has become indispensable and Shariah scholars are sought after by many Islamic banks and fund managers.
However, Islamic financial markets do not deal with Divine rules alone as business cannot run without making decent profits. The operational aspects of the Islamic markets should also be considered. But how? In what way is the Shariah aspects related to the mundane, namely the day to day running of the business? Is the mundane to be considered a secular and worldly affair something Shariah advisors cannot intrude? If Islamic financial markets are propelled by Shariah values, what then is the role of reason and sense experience in financial transactions?
To make things simple, the study of Islamic financial markets can be divided into to aspects, namely the 1) Shari’ and 2) Tabi’. In doing so, one can see the Islamic worldview in play where the dunya aspect is related in a profound and inseparable way to the akhirah aspect and in which the akhirah aspect has the ultimate and final significance. This is the concept of Islamic worldview as expounded by Syed Naquib Al-Attas. The dunya aspect relates to the mundane where man applies reason and experience to run their daily business while the akhirah convey the Divine rules that man must observe doing the same.
Since the Shari’ principles are derived from the Quran and Sunnah, they are common in all aspects of financial transactions taking place, whether one deals with Islamic banks, mutual funds, investments, takaful and financial planning. This is where Shariah scholars are needed to help market players know and understand what is halal and haram. These Shariah principles are given by God and remain permanent. These are given below:
- Prohibition of riba
- Application of al-bay’ (trade and commerce)
- Avoidance of gharar (ambiguities) in contractual agreements.
- Prohibition of maisir (gambling)
- Prohibition from conducting business involving prohibited commodities such as pork, liquor and pornography.
Figure 1.6 Islamic Financial Markets
But each of the above Shariah principles is unique in its own way when one looks at each particular market at a time. For example, the prohibition of riba is the cornerstone in the markets of deposits and funds in Islamic banking. However, when one deals with Islamic investments and derivatives, the gambling (maisir) and gharar issues seemed more urgent than riba. In takaful,riba, gharar and maisir factors are equally given importance, although the gambling factor is given more weight. In Shariah stock screening, more attention is given to the activities of issuing companies as relatively less given to the gharar factor. That is, first and foremost, the business must not be involved in the production of prohibited commodities.
But irrespective of the different emphasis and weights given to each of the Shariah principles, say on banking or takaful, one thing remains clear. That is, these principles are meant to promote justice (‘adalah) and equity in business transactions. God has guaranteed that justice will prevail when man obeys His Commandments (Shariah). This is the akhirah aspects of the Islamic worldview. It is about doing it right. By adhering strongly to the Shariah principles, the akhirah aspect is well-guarded and truly observed by the contracting parties.
While the Shariah principles expounded the equitable nature of Islamic financial markets, other dimension of market activities need not depend on explicit divine guidance. This is the tabi’ aspect of financial market activities. It defines efficiency. It is about doing things right. Tabi’ means natural. It is nature’s way. Tabi’ values are universal values. Once found, these values can be used by all people, irrespective of faiths and beliefs. Market players applied knowledge accumulated from reason and experience to understand how the market works and operates, which is a natural thing to do.
Thus knowledge derived from non-divine sources cannot be downgraded as ungodly. In Islam, ‘ainul yaqin refers to the knowledge derived from sense perception, namely material (jismani) and facts (haqiqi) wherelse ‘ilm-ul-yakin is based on reasoning (‘aql) and human judgement (khayali). For example, to reduce cost per unit, the company should increase output. This is economies of scale. To increase sales, it should first conduct marketing research. To look for a credible partner, it should conduct due-diligence and so on. The tabi’ aspect of business cannot be ignored even when it runs under an Islamic label. Muslims and non-Muslims alike are expected to obey the tabi’ law. It has less to do with the faith (aqidah).Working against this law is only inviting disaster and chaos. Business is doomed to fail when the tabi’ law is ignored.
As an example, to conduct an Islamic venture capital business, the Shariah principles are well-known and readily given by the Quran. But the tabi’ principles is different from that in banking. In Islamic venture capital, the tabi’ aspects deal with 1) deal-making 2) due-diligence and 3) market analysis. In banking the tabi’ aspects deal with 1) asset-liability management 2) risk-management and 3) marketing research. Likewise, in takaful the tabi’ aspects looks at 1) risk assessment 2) promotion and 3) fatality investigation. In equities, the fund managers conducted both fundamental and technical analysis to study what halal stocks to buy. They must know how to calculate the yield and when to exit the market. Defining what is halal and haram constitutes the Shariah aspects, but how and when to buy and sell is sorely based on reason and facts. Man does not have to resort to the Quran or Sunnah to make economic forecast or execute stock purchases. The role of the intellect (‘aql) is paramount here. This is what tabi’ law stands for.
The concept of tawakul can be used to highlight the interlinking of Shariah and tabi’ law. Investing in Shariah approved stocks implies that firstly, one must know what constitutes the halal stocks. This is the Shari’ aspect. Once, the screening is done, the tabi’ aspect is in play. To select a stock, one should consider its price-earning ratio, the return on investment, the earning per share. This is the company analysis. But company performance can be affected by macroeconomic variables such as inflation, unemployment, the gross domestic product and exchange rates. This is where knowledge on the market and economy is crucial. This is tabi’ law. The Shariah scholars know less about these things as they have no expertise on modern economics and finance. Their main role is to define and execute the Shariah sreeening process and ensure that the Shariah stocks are always free from the prohibited elements. But sometimes the tabi’ operations may implicate riba or gambling.For example, to avoid currency risk, a Shariah approved company may indulge in currency trading as it tries to hedge against market volatilities. Promotion and marketing of mutual funds may be associated with unethical practices. Thus, there are some tabi’ operations are are purely free from Shariah rules but some may not. This is because the Shariah does not only deal with the legal aspects (hukm) of financial transactions but also the moral and ethical aspects (akhlak).