Shariah prohibitions and maqasid relating to the islamic capital market
PhD Scholar (Islamic Banking & Finance)
IIIE, International Islamic University Islamabad
Shariah Prohibitions and Maqasid
Related to the Islamic Capital Market
2. The Role of Shariah Principles in ICM
Shariah Principles play a vital role in concluding all
financial, money and capital transactions in Islamic
Capital Markets to achieve the desired Maqasid and
objectives as set by Islam.
All the products and instruments of ICM depends on
how much they are compliant to Shariah. More
compliance more acceptability of the products and vice
versa. Therefore it is better for all the financial and
capital engineers as well as all other players to be well
aware of Shariah while designing or trading any
product or instrument of ICM.
3. 1- Mankind is not created purposeless
Mankind is created by Allah to achieve some assigned
goals, targets and missions and not set free of rules and
regulations. The Quran says:
4. 2- Man has the duty to establish the writ of God
ُْذِإَوَُلاَقَُكُّبَرُِةَكِئ ََلَمْلِليِنِإُلِعاَجُِفيُ ِضْرَ ْاْلًُةَفيِلَخ(02:30)
Therefore divine law must be followed which is sent to
the messengers of God.
Uphold the faith and do not divide into factions within it.
5. 3- Mankind will be held accountable
Whoever has done an atom’s weight of good will see it,
but whoever has done an atom’s weight evil will that.
Therefore God does not punish people unless he sends
them His messengers who provide them clear and
6. Shariah role in ICM
1. Shariah guides all the operations of Islamic finance in
general and ICM particular.
2. Shariah sets the methodology of Ijtihad which is
implemented in the introduction of ICM’s products and
3. Shariah sets the classical ICM products compatible to
modern market demands and purifies the conventional
products to make them Shariah compliant.
4. It sets standards related to the aspects of product
development, governance, accounting auditing like
AAOIFI and Islamic Financial Services Board (IFSB).
8. Sources of Islamic Law (Shariah)
The main sources from which the laws of Islamic
Money and Capital markets are formulated can be
divided into two types:
1. The Primary Sources like the Quran, Sunnah, Ijma
2. The Secondary Sources like Istihsan (juristic
preference), Istishab (Presumptions of continuity),
Maslahah Mursalah (Consideration of Public
Interest), Sadd uz Zarai’ (blocking the means of evil)
and ‘Urf or custom
9. Types of Istihsan Related to ICM
Istihsan bi al- Nass
Istihsan bil al- Ijma’
Istihsan bi al- ‘Urf
Istihsan bi al- Darurah
Istihsan bi al- Masalah al- Mursalah
Istihsan bi al- ‘Aql
10. Application of Istihsan in ICM
1. The first use of Istihsan in ICM is to comply all the
existing (conventional) borrowing and lending
securities with Shariah Principles.
2. The role of Istihsan is to preserve the Objectives of
Shariah in settling legal issues relevant to finance,
capitalization and money lending or borrowing in
11. Al- Istishab االستصحاب
Authenticity of the rule:
1. The original rule for all things is permissibility.
2. The original rule is no presumption of liability
3. Certainty does not give way to doubt.
12. Types of Istishab
1. Presumption of Original absence
2. Presumption of Original presence
3. Istishab which presumes the continuity of the general
rules and principles of the Law ( استصحابالحکم )
4. Continuity of the attributes ( استصحابالوصف )
13. Application of Istishab in ICM
All the financial, money and capital contracts of the
ICM are valid unless and until proved prohibited and
void with presenting proper arguments from the Quran
and Sunnah or Ijma-e-Ummah.
No one will be held financial or monetarily responsible
on the grounds of suspicion or doubt
No financial or monetary doubt can vitiate any
financial or monetary certainty.
14. Types of Masalahah اقسامالمصلحة
Masalahah has the following types:
1. Masalahah al- Mursalah al- Mu’tabarah proved by
the text of the Quran or Sunnah clearly like Riba
2. Maslahah Mulghah which is not proved by the
Shariah but might be perceived by humans bringing
benefits to them like alcohol and gambling.
3. Masalahah al- Mursalah which is neither
acknowledged by Shariah nor rejected and based on
15. Maqasid al- Shariah Related to Islamic
The Objectives of Shariah with reference to ICM can be
of two types:
1. Objectives related to the management and policy
makers of ICM for formulating corporate policies
and rules for running ICM smoothly
2. The second objectives are related to execution of the
Objectives whether a particular entity of the ICM
upholds the spirit of Shariah or not.
16. Multiple dimensions of Hifz al- Mal
Shariah protects the wealth and property of a Muslim
through several means and measures which ensure its
protection through all its multiple dimensions. These
are Preservation of wealth through:
1. Protection of ownership
2. Acquisition and development
3. Protection of wealth from damage and undue loss
4. Circulation and rotation
5. Value protection
18. 1- al- Niyyah (Intention)
Shariah rulings on all ICM regulations and products are
based on its players’ intention on the outcome of the
ُالَمْعَ ْاْل،ِتاَّيِالنِباَمَّنِإَوُئ ِرْم ِلاَمَُنىَو
19. 2- Justice and ‘Adl
Justice related to ICM is of two dimensions:
1. Right of the all players like regulators, investors and
brokers to participate in setting rules, standards and
2. Right to fair participation in all kinds of deals, bids
and the right to access all the necessary information
relevant to ICM business.
20. 3- The principle of permissibility in
Permissibility is the original rule for contracts and
conditions unless proven contrary.
1. قلمنحرمةَني ِزللايِتَّالأخرجُِهِداَبِعِلوالطيباتمنالرزق
21. 4- The Principle of Risk and Reward
Liability accompanies gain
Acceptance of liability in the event of loss.
22. 5- The Principle of Juristic differences
Juristic issues can be divided into two types:
1. Prohibited Juristic differences like interest based
dealings or non-halal shares. These differences are
not allowed because there is consensus of Ummah.
2. Permissible Juristic differences that occur in
probable texts and Ijtihadic issues which are based
on customs as well as variation of time and space
examples of such differences are benchmarking of
non-Halal elements in mixed securities and the status
of purchasing of undertaking in Sukuk. العادةمحکمة
23. Prohibitions Related to ICM
Prohibited (Haramful) activities are actually harmful
1. Riba (Interest)
2. Gharar (element of uncertainty)
3. Maysir (Gambling)
4. Tala’ub (Manipulation)
5. Ihtikaar (Hoarding)
6. Najash (Artificial Hiking of Prices)
7. Tadlees (Concealment of Defect)
8. Short Selling
24. 1- Riba
Any increment from the exchange which is
conditioned upon one of the contracting parties.
Any increment without justification of equal counter
value in the exchange of property with property. (Ibn
Types of Riba:
1. Riba al- Nasiyyah: The deferment in possession of
two commodities to a certain time.
2. Riba al- Fadhal: Extra addition in the exchange of
25. Modes of Riba n (Public borrowing )
1. Riba in loan transactions (Riba al- Duyun): Arise
in loan transaction because of the time given to repay
the debt as well as for further extension or delay in
Riba in Loan Transaction= Riba al- Nasiyyah+Riba al-
1. Riba in sale transactions (Riba al- Buyu’): It
occurs from trading or exchange transactions in
which a commodity is exchanged for the same
commodity from the Ribawi Commodities in an
unequal amount and/ or delayed delivery of one of
26. Modes of Riba in Loan Transaction
1. Riba al- Qardh: Any increment in borrowing or
lending money whether in kind or cash over and
above the principal amount as an agreed stipulation
in the contract.
2. Riba al- Jahiliyyah: any extra charge in addition to
the debt principal as a result of deferment in paying
the debt to the creditor. It was practiced in Arabs as
It is prohibited by the Prophet (s.a.w) in his last Sermon
27. 2- Gharar غرر
Literal Meaning of Gharar: Fraud, Deception, al- Khatr
ىَلَعُِ َّاّللَُّنِإَفَُ َّاّللُيز َِزعُيمِكَح(8:49)
Gharar implies to uncertainty and deceit which leads to
dispute and cause injustice to any of the parties.
Therefore Shariah demands from the parties concerned
to be cleared and specific in all terms and conditions to
28. Gharar literal meaning
Something whose getting it and not getting is the
If in a contract the nature of goods and their quantity is
not confirm and unspecified amounts to Gharar.
Gharar also amounts to high risk, uncertainty,
ambiguity or ignorance of any party to the
consequences of the contract.
29. Gharar غرر
Gharar is one of the prohibited elements in commercial
transactions. Unlike Rib, Gharar is not prohibited at all
but up to some it is tolerable in the eye of Shariah.
Only excessive Gharar (Gharar-e-Fahish) where
uncontrollable risk leads to speculation and gambling
should be avoided.
30. Legal Status of Gharar
Ibn Umar ( رضیہللاعنھما ) reported that the Messenger
of Allah forbad sales that involve Gharar (Saheeh
Muslim Hadith # 1513)
Reason to the prohibition of Gharar
Reason to the prohibition of Gharar is Jahalah
or ignorance that leads to dispute and hatred
between the parties to the contract.
31. The Spirit of the Prohibition of Gharar
Islam demands for full disclosure, transparence and
accuracy of all necessary information that have direct
or indirect effects on the contract concerned. Fraud,
Speculation, Gambling and all kinds of speculations
that harm or may harm the interest of either party are
strictly discouraged by Islamic Shariah
32. Tracing of Gharar in contracts
1. Gharar can be located either in the contract by itself
(Sigha al- ‘Aqad) or
2. In the subject matter of the contract (Mahal al-
33. Characterization of Gharar
The object or the price of the contract may be either
1. Inexistent (Ma’doom) or
2. Unknown or unspecified (Majhool) or
3. Incapable to be delivered (Ma’jooz an al- Tasleem)
34. Causes of the Prohibition of Gharar
1. Uncertainty of existence and future outcome of a
transaction such as the sale of an item which may not
exist or which is not in the possession of one of the
parties like Sukuk al- Ijarah which are based on
2. Uncertainty in Possession and Ownership like selling
of an item which a seller does not posses or owns.
Selling something in the possession of someone’s
else or selling something that cannot be delivered.
35. Causes of Gharar……..
3. Inadequacy or inaccuracy of Information such as in
type, shape, quantity, weight and sum, time of
delivery, price, value and method of payment etc.
36. Causes of Gharar ……
4. Undue complexity of the contract such as
interdependence and conditional contracts or
conditional sale where the fulfillment of one sale is
conditional upon the fulfillment of the other contract.
5. Pure games of chance (al- Qimar and Maysir) sales
which are based on games and chance.
37. Types of Gharar
Gharar can be divided into three types:
1. Gharar-e-Yaseer (Slight or trivial)
2. Gharar-e-Mutawassit (Intermediate)
3. Gharar-e-Fahish (Excessive)
38. 1- Gharar-e-Yaseer (Slight or trivial)
Might be easily tolerated like forward lease which
contains some element of Gharar regarding the future
existence of its usufruct.
Vogal and hoie books
41. 3- Maysir ()المیسر
Maysir means any activity, which involves betting,
whereby the winner takes the entire bet and the loser loses
his bet. The whole activity revolves around the contractual
risk not the trading risk. In Maysir one of the parties gains
property by chance on the basis of excessive speculation.
Reasons to the Prohibition:
1. Quranic Verse:
اَياَهُّيَأَُِينذَّالوانَمآاَمَّنِإُرْمَخْالُِسْيَمْالَوُرُابَصْنَ ْاْلَوُم َلْزَ ْاْلَوُسْج ِرُِمُْنُِلَمَع
2. Excessive speculation or Gharar
3. Maysir does not give benefit to both the parties rather one
party take the property of the other party on the basis of
42. Maysir in ICM
Two types of buyers of stocks the investors and the
speculators. Investors buy shares with purpose of long
term investment to get benefit from the dividends. The
speculators involve in short term selling of the stocks
to gain from the shares prices differences in day
trading which has no concern to the actual investment.
43. 4- Talau’b (Manipulation)
Talau’b is the sum of different treks which deceive
investors of ICM by controlling artificially the line of
supply and demand of securities. Therefore Ihtikar
(hoarding), Najish (artificial price hiking), Tadlis
(concealment of defect) and many other treks that lead
to deceive investors are considered elements and
techniques of manipulation.
44. Types of Talau’b (Manipulation)
Talau’b or manipulation can be divided into two
1. Disclosure-Based Manipulation: A kind of
manipulation when someone disseminates false or
misleading information which misguides investors or
participants of ICM about the value or trading
valume of a security. One of its most well known
examples is “Pump and Dump”
45. Types of Talau’b ……
2. Trade-Based Manipulation: This is the buying or
selling of a security by a person that deceives or
misleads other participants about the value or trading
volume of that security. Some of the examples are
wash sales and pools etc.
Manipulation is considered a crime in the conventional
jurisdictions and the person concerned is punished for
several civil and criminal sanctions. Under Shariah
regulations, such activities are considered as fraud and
deception which are strictly prohibited.
46. 5- Ihtikar (Hoarding)
Ihtikar literally means to hide goods (securities) to
cause an increase in price. In terms of ICM, hoarding
is manipulating practice which disturbs the natural
discourse of supply and demand of securities.
The Hadith of the Prophet (s.a.w) strictly prohibits this
kind of market practice. He said “ No one does
hoarding except the sinner.” (Sahih Muslim Hadith#
47. 6- Najsh (Artificial Price Hiking)
According to Imam al- Shafi’, Bay’ al- Najsh as the
sale wherein a person bids-up the price of a
commodity with no intention of buying it, only to
induce other buyers to buy it for more than they would
This is a trick which is prohibited by the Hadith as: On
the authority of Abdullah Ibn Umar the Prophet (s.a.w)
forbade al- Najsh.”
Muslim jurists are agreed on the point that bay’ Najsh is
a sinful bay’ so should be avoided.
48. 7- Tadlis (Concealment of a Defect)
Tadlis literally means concealing, deceiving or hiding.
Technically in terms of ICM, Tadlis is the intentional
concealment of securities’ defects in a sale transaction.
This kind of mal practice is prohibited by the Prophet
(s.a.w) as: “Do not forcefully keep the milk in the
udders of camels and sheep, and if one buys it thus,
then he has the option after milking it, he may keep it
or return it together with a container of dates as a
compensation for the milk.”
49. 8- Short Selling ( بیعقبلالقبض )
Short Selling is the activity of borrowing securities
from the brokerage firm and immediately selling them
and then repurchasing them on lower price.
Reasons to the Prohibition:
1. Hadith of the Prophet (s.a.w): التبعمالیسعندك
2. Excessive speculation (Gharar) involved.
3. The actual delivery of the underlying asset does not
4. No economic activity occurs in ICM.