Sources of Islamic Finance

Before delving into the principles of Islamic finance, it is useful to look at an encounter between Prophet Muhammad  and Mu'adh b. Jabal. The Prophet  was reported to have sent Mu'adh b. Jabal, one of his companions, as a governor to Yemen and also appointed him as a judge.

Before sending him the Prophet  asked him: "According to what will you judge if a problem is brought to you?" He replied, "According to the Scriptures of Allah. "And if you did not find anything in it?" the Prophet  asked. "According to the Sunnah of the Messenger of Allah," Mu'adh replied. "And if you did not find anything in it?" "Then I shall strive to interpret with the exertion of my reason." And thereupon the Prophet  said: "Praise be to Allah who has favoured the messenger of His Messenger with what His Messenger is willing to approve of."


Muslims believe the Qur'an (also known as al-Qur'an al-Karim, meaning the noble Qur'an) to be the direct word of Allah, revealed to the Prophet Muhammad  over 23 years by the angel Gabriel. To gain a full appreciation of the Qur'an and its significance, we can quote Tariq Ramadan, professor of Islamic Studies at the University of Oxford, writing in the New York Times:

For Muslims the Koran stands as the Text of reference, the source and the essence of the message transmitted to humanity by the creator. It is the last of a lengthy series of revelations addressed to humans down through history. It is the Word of God — but it is not God. The Koran makes known, reveals and guides: it is a light that responds to the quest for meaning. The Koran is remembrance of all previous messages, those of Noah and Abraham, of Moses and Jesus. Like them, it reminds and instructs our consciousness: life has meaning, facts are signs.

It is the Book of all Muslims the world over. But paradoxically, it is not the first book someone seeking to know Islam should read. (A life of the Prophet  or any book presenting Islam would be a better introduction.) For it is both extremely simple and deeply complex. The nature of the spiritual, human, historical and social teachings to be drawn from it can be understood at different levels. The Text is one, but its readings are multiple.

For the woman or the man whose heart has made the message of Islam its own, the Koran speaks in a singular way. It is both the voice and the Path. God speaks to one’s innermost being, to his consciousness, to his heart, and guides him onto the Path that leads to knowledge of him, to the meeting with him: This is the Book, about it there can be no doubt; it is a Path for those who are aware of God.” More than a mere text, it is a traveling companion to be chanted, to be sung or to be heard.

Throughout the Muslim world, in mosques, in homes and in the streets, one can hear magnificent voices reciting the divine Words. Here, there can be no distinction between religious scholars (ulema) and laymen. The Koran speaks to each in his language, accessibly, as if to match his intelligence, his heart, his questions, his joy as well as his pain. This is what the ulema have termed reading or listening as adoration. As Muslims read or hear the Text, they strive to suffuse themselves with the spiritual dimension of its message: beyond time, beyond history and the millions of beings who populate the earth, God is speaking to each of them, calling and reminding each of them, inviting, guiding, counseling and commanding. God responds, to her, to him, to the heart of each: with no intermediary, in the deepest intimacy.

No need for studies and diplomas, for masters and guides. Here, as we take our first steps, God beckons us with the simplicity of his closeness. The Koran belongs to everyone, free of distinction and of hierarchy. God responds to whoever comes to his Word. It is not rare to observe women and men, poor and rich, educated and illiterate, Eastern and Western, falling silent, staring into the distance, lost in thought, stepping back, weeping. The search for meaning has encountered the sacred, God is near: “Indeed, I am close at hand. I answer the call of him who calls me when s/he calls.”

Some have falsely claimed that because Muslims believe the Koran to be the word of God, interpretation and reform are impossible. This belief is then cited as the reason why a historical and critical approach cannot be applied to the revealed Text. The development of the sciences of the Koran — the methodological tools fashioned and wielded by the ulema and the history of Koranic commentary — prove such a conclusion baseless. Since the beginning, the three levels outlined above have led to a cautious approach to the texts, one that obligates whoever takes up the task to be in harmony with his era and to renew his comprehension. Dogmatic and often mummified, hidebound readings clearly reflect not upon the Author of the Text, but upon the intelligence and psychology of the person reading it. Just as we can read the work of a human author, from Marx to Keynes, in closed-minded and rigid fashion, we can approach divine revelation in a similar manner. Instead, we should be at once critical, open-minded and incisive. The history of Islamic civilization offers us ample proof of this.

As we shall witness throughout Islamic Banker, the last paragraph is particularly significant in the context of Islamic finance.


In their epic book The Vision of Islam, William Chittick and Sachiko Murata claim "the role of the prophet in codifying Muslim learning should not be underestimated." For example, it is commanded in the Qur'an for every Muslim to perform the salat (Islamic prayer). However, the precise instructions on how to perform the salat can only be found in the teachings of Prophet Muhammad , also known as hadith (pl. ahadith) . Similarly, understanding of ahadith is crucially important in relation to Islamic finance. The Prophet  once said "I was only sent to perfect noble character," and it is this statement that in principle goes to the very core of Islamic banking. It is argued that the conventional financial model is ethically flawed and as a result inconsistent with Islamic beliefs. This is one of the main reasons for the massive uptake of Islamic banking products. However, the surge in product uptake has been followed by a surge in criticisms. The key question for consumers here is: if we adopt Islamic finance, are we closer to the teachings of Prophet Muhammad ?


Qiyas is defined as analogical reasoning. For example, wine drinking is prohibited because it intoxicates and therefore anything else that intoxicates is also prohibited. Qiyas is used when the Qur'an or the ahadith do not specifically cover a situation. In terms of Islamic banking, this concept has become important in product development, especially in the derivatives and hedge fund space.


Ijtihad is one of the key tools used by Islamic scholars where the focus is placed on reasoning and analogy. In Islamic banking, Shariah Supervisory Boards (SSB) use this concept daily to assist the product development team.

References & Further Reading

  1. Sachiko Murata and William C. Chittick, (1994) The Vision of Islam (London and New York: I.B. Tauris),
  2. Tariq Ramadan, (2008) Reading the Koran, The New York Times
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