Islamic Finance Definition

Definition

A financial service principally implemented to comply with the main tenets of Sharia or Islamic law

In turn, the main sources of Sharia are the Holy Quran, Hadith, Sunna, Ijma, Qiyas and Ijtihad. The Holy Quran is the book of revelation given to the Prophet Muhammad; Hadith is the narrative relating the deeds and utterances of Prophet Muhammad (S.A.W); Sunna refers to the habitual practice and behavior of Prophet Muhammad during his lifetime; Ijma is the consensus among religion scholars about specific issues not envisaged in either the Holy Quran or the Sunna; Qiyas is the use of deduction by analogy to provide an opinion on a case not referred to in the Quran or the Sunna in comparison with another case referred to in the Quran and the Sunna; and Ijtihad represents a jurists independent reasoning relating to the applicability of certain Sharia rules on cases not mentioned in ether the Quran or the Sunna.

A large number of Islamic finance definitions are found in the literature, ranging from the relatively simple definitions for specific aspects (say, Islamic banking) to more complex definitions covering all financial operations. Warde (2000, p. 5), for example, defines Islamic finance as follows: “Islamic financial institutions are those that are based, in their objectives and operations, on Quran’s principles (principles of the Muslims’ holy book)”. This particular definition suggests that Islamic financial firms are not just banks, but also other types of financial intermediaries that employ Sharia principles. The other point of departure is that the Sharia ostensibly requires the adjustment of all aspects of Muslims’ lives and the formation of a complete moral system. According to Iqbal (1997), while the prevailing Western financial system focuses on the capitalistic features of economic and financial processes, Islamic finance aims to make an actual moral and equitable distribution in resources and social fairness in all (Muslim) societies.