Kulliyah of Economics and Management Sciences

Department of Economics

BOOK REVIEW
“AN INTRODUCTION OF ISLAMIC FINANCE”
BY
MUFTI MUHAMMAD TAQI USMANI

ECON 6864
ISLAMIC ECONOMICS AND FINANCE ISSUES FROM
SHARIAH PERSPEKTIVE

LECTURER:
DR. NAJM AL-DEEN K. KAREEM AL-ZANKI

PREPARED BY:
SHOCHRUL ROHMATUL AJIJA (G0821336)

SEM 1, 2009/2010
 BOOK REVIEW
“An Introduction to Islamic Finance”
By
Mufti Muhammad Taqi Usmani, 169 pages.

Although the principles of shari’ah require banks and financial institution to be

structured on an interest-free basis, this does not mean that such institutions are
charitable concern. As long as a person advancing money expects to share in the
profit earned (or losses incurred) by the other party, a stipulated proportion of profit is
legitimate. Actually, the philosophy is enshrined in the traditional Islamic concepts of
musharakah and mudarabah, along with their specialized modern variants
murabahah, ijarah, salam and istisna’. This guide to Islamic finance delineates the all
important distinctions between Islamic practices and conventional procedures based
on interest.
Nevertheless, all these instruments implemented by Islamic banks and
financial institutions are not the substitutes of interest in the strict sense, and it will be
wrong to presume that they may be used exactly in the same fashion as interest is
used. The question of what the truly principles and precepts of Islamic finance and
how to reconcile the contemporary reality in Islamic banking and finance with the
teaching of Islam have been troubling the Muslim conscience for decades.
Justice Usmani of Pakistan, Taqi Usmani, who chairs several Shari’ah
supervisory boards for Islamic banks, tries to tackle those questions in this book based
on his experiments collected in some articles that he has before. The objective of this
book is to provide basic information about the basic concept underlying the
instruments used by Islamic finance, the necessary requirements for their acceptability
from the Shari’ah standpoint and the correct method of their application. In addition,
Taqi Usmani also dealt with the practical issues involved in the application of these
instruments and their possible solutions in the light of Shari’ah.
In the Some Preliminary Points (pp. 9-16), Taqi Usmani begins by explaining
some points concerning the basic principles that govern the whole economic set-up in
an Islamic way of life. In his opinion, the foremost belief around which all the Islamic
concepts revolve is that the whole universe is created and controlled by One, the only
One God. He has created man and appointed him as His vicegerent on the earth to
fulfill certain objectives through obeying His commands. These commands are not
restricted to some modes of worship or so called religious rituals. They, on the
contrary, cover a substantial area of almost every aspect of our life. Based on this
view, Taqi Usmani then explains the basic difference between capitalist and Islamic
economy including asset-backed financing, and capital and entrepreneur concept.
After identifying the scope of Islamic concepts, in Section 2 (pp.17-30),
Musharakah, Taqi Usmani starts to explain about one of the concepts of profit and
loss sharing called musyarakah or shirkah that more commonly used in the Islamic
jurisprudence. In this term, shirkah has been divided into two kinds; there are shirkat-
ul-Milk and shirkat-ul-‘Aqd which is further divided into three kinds, shirkat-ul-
amwal, shirkat-ul-a’mal and shirkat-ul-‘aqd. Moreover, the difference views of the
nature of the capital from four scholars, Imam Malik, Imam Abu Hanifah, Imam
Ahmad and Imam al-Shafi’I are also explained. Furthermore, Taqi Usmani closes this
section with the explanation of termination of musyarakah.
Mudarabah which is defined as a special kind of partnership where one
partner gives money to another for investing it in a commercial enterprise is
elaborated in Section 3 (pp.31-37). As well as he has divided musyarakah, in this
section Taqi Usmani provide the crucial concepts about mudarabah such as how to
distribute the profit based on mudarabah and the termination of murabahah.
The part that requires the most difficult adjustment about the implementation
of both musyarakah and mudarabah as modes of financing, according to him, is how
to use those contracts in the purpose of financing in the context of modern trade and
industry. Therefore, Taqi Usmani assesses this issue in the section 4 (pp.37-65). The
concept of musharakah and mudarabah envisaged in the books of Islamic Fiqh
generally presumes that these contracts are meant for initiating a joint venture
whereby all the partners participate in the business right from its inception and
continue to be partners up to the end of the business when all the assets are liquidated.
Although it is too hard to find the traditional books of Islamic Fiqh explained about
the using of musyarakah and mudarabah that can be used to solve problems faced in
modern era, it does not mean that the concept of musyarakah and mudarabah cannot
be used for financing a running business as nowadays. Actually, when those concepts
applied even in the modern era, some basic principles that must be applied are; first,
financing through musyarakah and mudarabah does never mean the advancing of
money; second, an investor/financier must share the loss incurred by the business to
the extent of his financing; third, the partners are at liberty to determine, with mutual
consent, the ratio of profit allocated to each one of them, which may differ from the
ratio of investment; and fourth, the loss suffered by each partner must be exactly in
the proportion of his investment.
The first modern variant of Islamic concepts explained by Taqi Usmani in his
book is murabahah (pp.65-106) in section 5. In this section, he emphases that
murabahah is a particular kind of sale having nothing to do with financing in its
original sense. Some basic rules of murabahah which are important to be conducted
in every sale transaction are; first, the subject of sale must be existing at the time off
sale; second, the subject of sale must be in the ownership of the seller at the time of
sale; third, the subject of sale must be in the physical or constructive possession of the
seller when he sells it to another person; fourth, the sale must be instant and absolute;
fifth, the subject of sale must be a property of value; sixth, the subject of sale should
not be a thing which is not used except for haram purpose, like pork, wine, etc;
seventh, the subject of sale must be specifically known and identified to the buyer;
eighth, the delivery of the sold commodity to the buyer must be certain and should not
depend on a contingency or chance; ninth, the certainty of price is a necessary
condition for the validity of a sale; and tenth the sale must be unconditional.
Taqi Usmani then makes a clear to some issues involved in murabahah in this
section. This is very important because without correct understanding of these issues,
the concept may remain ambiguous and its practical application may be susceptible to
errors and misconceptions. Some issues justified are how to face the different pricing
for cash and credit sales, the use of interest rate such as using LIBOR (Inter-bank
offered rate in London) as a benchmark of the determination of profit or mark up,
promise to purchase, securities against murabahah price and guarantee the
murabahah, penalty of default.
In the last part of this section (pp.96-106), Taqi Usmani already has prepared
the alternative suggestion, which he called a real solution, arranged in one proposal
and based on some Maliki jurisprudences to solve many problems faced in
murabahah implementations. According to him, the purpose of the real solution is to
develop a system where the defaulters are duly punished by depriving them from
enjoying a financial facility in future. In fact, his proposal has now been implemented
successfully in a large number of Islamic financial institutions. In addition, he also
exposed about another rule which must be remembered and fully complied with is
that murabahah transaction cannot be rolled over for a further period.
Concepts of ijarah are described in section 6 (pp.109-127). Taqi Usmani has
provided the basic rules of ijarah or also called leasing, but not as deep as when he
explained murabahah. The part of this section that he emphasized is the securitization
of ijarah. This is because ijarah has a good potential of securitization which may help
create a secondary market for the financier on the basis in ijarah. In addition, Taqi
Usmani also considered about head-leasing, but not too much.
Salam and istisna’ which are special principles in shariah that do not use three
important ingredients of the basic conditions for the validity of a sale in shariah are
explained in section 7 (pp.128-129). Salam which is defined as a sale whereby the
seller undertakes to supply some specific goods to the buyer at a future date in
exchange of an advanced price fully paid at spot is described by using its basic
conditions and its part as a mode of financing. In this section, Taqi Usmani is success
to explain not only the difference between salam and istisna, but also the difference
between istisna’ and ijarah.
After has explained all contracts used in Islamic banking and finance, Taqi
Usmani described about the variety of Islamic investment fund such as equity fund,
ijarah fund, commodity fund, murabahah fund, bai’-al-dain and mixe fund in section
8 (pp.140-151). Furthermore, the principle of limited liability is also considered in
section 9 (pp. 152-160). This is necessary because the concept of limited liability has
now become an inseparable ingredient of the large scale enterprises of trade and
industry throughout the modern world, including the Muslim countries.
Taqi Usmani closes his book by discussing about a realistic evaluation from
the performance of the Islamic banks in section 10 (pp.161-169). His opinion written
in this section is his answer for the question asked one author in a press conference in
Malaysia about the contribution of the Islamic Banks in promoting the Islamic
economy. He highlights that Islamic banks have made a great break-through in the
present banking system by establishing Islamic financial institutions meant to follow
shariah. Although so many constraints faced, the Islamic banks should develop their
own culture to be a greater future.
Actually, the approach used by Taqi Usmani in this book is comprehensive,
where all basic principles and actual conditions of Islamic banks and finances are
described. Albeit many books have discussed the introduction of Islamic finance, but
most of them focus on kind of contracts used in the Islamic finance. But here the
writer also focuses on the current issues related with Islamic bank and finance. In
addition, based on his experiences as chairman/ member of the Shariah Supervisory
Boards of a number bank in different parts in the world, the writer always gives a
solution for each current problem faced. Therefore, this is probably why this book is a
valuable addition to the Islamic Economics collection.

Reference:
Usmani, Mufti Muhammad Taqi. 1998. An Introduce of Islamic Finance. Retrived
July 30, 2009. From
http://www.muftitaqiusmani.com/Downloads/Publications/Books/An%20Intro
duction%20to%20Islamic%20Finance.pdf