8 AN INTRODUCTION TO ISLAMIC FINANCE
ISLAMIC ECONOMIC AND FINANCIAL SYSTEMS
Given our understanding of the role of institutions, rules, Law (Shari’ah)
and the ideology of Islam, we can make the following propositions regarding
an Islamic economic system (the core principles of which will be discussed
in detail in Chapter 2):
■ (^) Islam has a view on how to organize political, social, and economic
systems based on a set of ontological and epistemological propositions
regarding individuals and their collectivities.
■ (^) Defi ning an economic system as a collection of institutions dealing with
production, exchange, distribution and redistribution, and defi ning insti-
tutions as rules and norms, Islam proposes a distinct economic system
is further divided into two components: ibadat (rituals) focuses on
the rites and rituals through which each individual comes to an inner
understanding of their relationship with Allah (swt); muamalat, on the
other hand, defi nes the rules governing social, political, and economic
life. Indeed, a signifi cant subset of muamalat defi nes the conduct of
economic activities within the economic system, which ultimately lays
down the rules for commercial, fi nancial and banking systems.
Ijtihad (from the root jahd, meaning “struggle”) plays a critical
role in deriving rules for resolving issues arising from time-dependent
challenges. Ijtihad refers to the efforts of individual jurists and scholars
to fi nd solutions to problems that arise in the course of the evolution of
human societies and that are not addressed specifi cally in the primary
sources. Ijtihad is based on the earlier consensus of jurists (ijma’), anal-
ogy (qiyas), judicial preference (istihsan), public interest (maslahah)
and customs (urf). Secondary sources of the Shari’ah must not intro-
duce any rules that are in confl ict with the main tenets of Islam.
Over the course of history, different methods of exercising ijtihad
have evolved depending upon the historical circumstances and the
different schools of thought (madhahib) that prevailed at different
times. The most commonly practiced methods are Hanafi , Maliki,
Shafi ’i, Hanbali and Jafari, which each assign different weights
in decision-making to each source of Law; that is, the Qur’an, the
Sunnah, ijma’ and qiyas. For example, the Jafari school does not
accept analogical reasoning in its entirety as a legitimate method to
derive rules of Shari’ah, favoring instead the expert investigation and
provision of solutions to new problems by jurists.