Sharia

Sharia (Arabic: sharīʿa, also spelled Shariah or Shari'a) is the body of religious law and moral guidance that Muslims regard as derived from God's will, expressed principally in the Qur'an and the Sunnah, the recorded words and practice of the Prophet Muhammad. It covers worship, family life, ethics and commerce. In finance, Sharia provides the principles from which jurists derive detailed rules on contracts, property, lending, risk and exchange, and it is the standard against which every Islamic finance product is judged.

The word originally meant "the path to a watering place". Scholars distinguish Sharia, the ideal divine law, from fiqh, the human effort to understand and apply it. Rules found in the books of fiqh, and in modern product approvals, are therefore interpretations that can differ between schools and scholars.

Classical Sunni legal theory recognizes four main sources:

1. The Qur'an, the primary source, which contains relatively few detailed commercial rules but sets out key prohibitions such as that on riba.
2. The Sunnah, transmitted in collections of hadith, which supplies many specific rulings on sales and exchanges.
3. Ijma, the consensus of qualified scholars on a question.
4. Qiyas, analogical reasoning that extends an established ruling to a new case sharing the same underlying cause.

Jurists also use supplementary methods, such as consideration of public interest and custom. The concept of maqasid al-sharia, the higher objectives of the law, including the protection of religion, life, intellect, lineage and property, guides how rules are interpreted in new situations.

Over the first centuries of Islam, four Sunni schools (madhhabs) became dominant: Hanafi, Maliki, Shafi'i and Hanbali. The main Shia school is the Ja'fari. Their views on commercial questions overlap heavily but differ on points such as whether a promise is binding, how much uncertainty voids a sale, or whether certain sale-and-buyback transactions are allowed. The regional dominance of different schools helps explain why a product accepted in Malaysia may be rejected in the Gulf, and vice versa.

The branch of law dealing with transactions is called fiqh al-muamalat. Its core financial principles are:

• Prohibition of riba: no predetermined increase on loans, covering both riba al-nasiah and riba al-fadl.
• Avoidance of gharar: contracts must not involve excessive uncertainty about price, subject matter or delivery; see gharar.
• Prohibition of maysir: gambling and purely speculative gain are forbidden; see maysir.
• Lawful activity: finance may not support prohibited businesses such as alcohol, pork or gambling.
• Risk and asset linkage: profit should be tied to bearing risk or to ownership of real assets, which is why Islamic banks use sales, leases and partnerships such as murabaha, ijarah, mudarabah and musharakah.

Islamic financial institutions translate these principles into practice through scholars. Each institution typically appoints a Sharia supervisory board that approves products and issues a fatwa (legal opinion) on new structures. Standard-setters such as AAOIFI publish Sharia standards to narrow differences between institutions, and the Islamic Financial Services Board issues prudential and governance standards. Failures to follow the rules create Sharia non-compliance risk.

The status of Sharia in state law varies widely. Some countries treat it as a principal source of legislation; others apply it mainly to personal status matters; in many Western countries it has no legal force, and Islamic financial contracts are governed by ordinary contract law. English courts, for example, have held that a contract cannot be governed by Sharia as a system of law in place of English law, although parties may incorporate specific Sharia terms. This makes the drafting of Islamic finance documentation, such as sukuk prospectuses, a combined exercise in national law and Sharia compliance.