248 AN INTRODUCTION TO ISLAMIC FINANCE
A close scrutiny of the instruments underlying the Islamic fi nancial system
reveals that these instruments have characteristics similar to many of today’s
basic building blocks and it is a matter of designing more complex instruments
without violating any of the boundaries defi ned by the Islamic system.
The process of fi nancial innovation is complex and sensitive, as it requires
multi - disciplinary considerations involving not only knowledge of economics,
fi nance and banking, but also a deep understanding of Islamic jurisprudence.
Throughout history, pious Muslim businesses and traders have worked closely
with Shari’ah experts, and centuries of experience across several geographical
regions have grown into a rich body of Shari’ah rulings and precedents in the
area of business and economics. However, the process of innovative applica-
tion of the Shari’ah through ijtihad to resolve the problems of the time has
been dormant for a long time and there is a need to revive a practice that was
once alive and vibrant.
The process of determining the legitimacy of a new product involves
approval by Shari’ah scholars who ensure that the new product does not
violate any of principles of the Shari’ah. From a legal point of view, any
instrument is acceptable as a legitimate fi nancial instrument provided it does
not incorporate certain elements considered unlawful in Islam.
Suwailum (2006) suggests four guiding principles for fi nancial engineer-
ing: two concern the objectives — balance and integration; and two concern
methodology — acceptability and consistency. Here, we extend his ideas to
bring some additional principles which would infl uence the process and
practices of fi nancial engineering.
Adherence to the Essence and Spirit of Shari’ah The Shari’ah is not just a set
of laws; such laws have well - meaning objectives, commonly referred to as
the objectives of the Shari’ah (maqasid - al - Shari’ah). These are designed to
implement the essence or the ideology of Islam, which primarily revolves
around promoting unity, social justice, social welfare, the preservation of
property rights, and economic development. Therefore, any attempt to
develop a product or process that runs counter to these core objectives will
not be acceptable. However, by keeping these objectives in sight, fi nancial
engineering will lead to an increase in overall social welfare.
The objectives of the Shari’ah provide the fi rst line of defense against
the introduction of any innovation that is deemed to have the potential for
being counterproductive under any market conditions. For example, fi nan-
cial engineering cannot result in any product that leaves either lender or
borrower open to exploitation by the other under some market conditions.
Before approval can be given for any innovation, there would have to be an
impact assessment at the macro level. Although this would not be an easy
task as it involves subjective and qualitative judgment, the consistent appli-
cation of the core principles would serve that purpose.
Freedom of Contract An understanding of the laws governing contracts
in Islam is critical. Individuals have wide freedom of contract and the