Scholarly article on topic 'Managing Investment in The Light of Quran and Sunnah: Textual Analysis'

Managing Investment in The Light of Quran and Sunnah: Textual Analysis Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — Mohamad Zaki Razaly, Mohd Asyadi Redzuan, Mohd Zainodin Mustaffa, Mahasin Saja, Sofwah Md Nawi, et al.

Abstract The world economic crisis has significantly awakened people on the importance of effective financial management. The impact of this scenario may not only threaten the stability of a country economically and politically, but failure to discharge it might trigger higher crime rate in the society. Sustainable quality of human life depends on the flexibility in managing and expanding wealth. Investment therefore emerges as an important instrument to secure capital growth with a potential risk of loss. Meticulous investment planning will catalyze economic development in a country and ensure the survival of humanity. Islam is not a religion which solely emphasises on ibadah, but also encompasses a comprehensive system of human life. Islam strongly encourages people to seek the bounty of Allah SWT by engaging in any activity that may lead to the achievement of this objective. In the realization of it, the observance of guidelines and regulations from authoritative text are required. Thus, this study aims to analyze Islamic textual evidence mainly from the Quran and Sunnah on the significance of investment. In addition, general overview from Muslim scholars pertaining to investments will also be discussed in brief.

Academic research paper on topic "Managing Investment in The Light of Quran and Sunnah: Textual Analysis"

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Procedía Economics and Finance 31 (2015) 380 - 386

INTERNATIONAL ACCOUNTING AND BUSINESS CONFERENCE 2015, IABC 2015

Managing Investment in The Light of Quran and Sunnah: Textual

Analysis

Mohamad Zaki Razaly3, Mohd Asyadi Redzuan", Mohd Zainodin Mustaffa", Mahasin Sajaa, Sofwah Md Nawib, Muhammad Firdaus Muhammad Hattac& Nor Erna Nabila

Mohd Raffid

aACIS UiTMJohor, Jalan Muar, 85009, Segamat, Johor, Malaysia bAPB UiTMJohor, Jalan Muar, 85009, Segamat, Johor, Malaysia CAAGBS UiTMShahAlam, Selangor, Malaysia MasterStudentAAGBS, UiTMShahAlam, Selangor, Malaysia

Abstract

The world economic crisis has significantly awakened people on the importance of effective financial management. The impact of this scenario may not only threaten the stability of a country economically and politically, but failure to discharge it might trigger higher crime rate in the society. Sustainable quality of human life depends on the flexibility in managing and expanding wealth. Investment therefore emerges as an important instrument to secure capital growth with a potential risk ofloss. Meticulous investment planning will catalyze economic development in a country and ensure the survival of humanity. Islam is not a religion which solely emphasises on ibadah, but also encompasses a comprehensive system of human life. Islam strongly encourages people to seek the bounty of Allah SWT by engaging in any activity that may lead to the achievement of this objective. In the realization of it, the observance of guidelines and regulations from authoritative text are required. Thus, this study aims to analyze Islamic textual evidence mainly from the Quran and Sunnah on the significance of investment. In addition, general overview from Muslim scholars pertaining to investments will also be discussed in brief.

©2015 The Authors.PublishedbyElsevierB.V. This is an open access article under the CC BY-NC-ND license

(http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of Universiti Teknologi MARA Johor

Keywords: Investment, economy, risk, textual evidence, Muslim scholars

1. Introduction

Islam demands that humans act beneficially for this life and the hereafter. A true Muslim is a person who devotes himself to develop his potential, both physically and spiritually. Managing life includes organizing our expenditure wisely as well as strengthening our financial well-being to ensure our survival. In managing natural resources,

2212-5671 © 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license

(http://creativecommons.Org/licenses/by-nc-nd/4.0/).

Peer-review under responsibility of Universiti Teknologi MARA Johor

doi: 10.1016/S2212-5671(15)01213-7

humans must avoid any ineffective way of conduct especially one thatjeopardizes their own future. Islam commands its followers to engage in lawful activities and manage their wealth accordingly as ordained by Allah SWT and His Messenger. Islam, as a complete and practical religion, teaches us to acquire wealth in order to provide for those under our responsibility as well as to restrain our hunger and thirst, where it becomes the necessity of our life. The wealth or resources is a blessing that God has given to mankind. From the Islamic perspectives, all wealth belongs to God and man is only a trustee who should manage it accordingly in order to achieve worldly prosperity. The Quran says:

"... and give something out of the wealth that God has bestowed upon you..." (An-Nur: 23).

A contemporary scholar, Sheikh Dr. Yusuf Al-Qaradhawi (2000) interpreted the above verse by denoting wealth as a great responsibility in which Allah SWT had offered to the heavens, the earth and the mountains; all of which declined but man accepted. This responsibility requires man to carry out the duties placed as His vicegerent on earth and will be judged by Allah SWT in the hereafter. Therefore, Muslims should follow the guidelines and the injunctions of God in their professions. A blessed wealth would bring the benefits to oneself and to others. In a narration, Prophet Muhammad SAW said:

"The upper hand is better than the lower hand. One should start giving first to his dependents. And the best object oj charity is that 'which is given by a 'wealthy person (from the money 'which is left after his expenses). And whoever abstains from asking others for some financial help, Allah SWT will give him and save him from asking others, Allah SWT 'will make him self-sufficient".

(Bukhari, 1980)

In general, wealth or assets should be used to meet the needs of humans at all levels; individual, family, society and country. Positive benefits derived from wealth/assets will be blessed in return, while negative benefits will render pain and suffering on the Day of Judgment as mentioned by Allah SWT in the Holy Quran:

"... You 'will surely be tested in your possessions and in yourselves. And you 'will surely hear from those who were given the Scripture before you and those who associated others with Allah much abuse. But ij you are patient and fear Allah-indeed, that is for the matters (worthy) oj determination... (ali-Imran: 186).

According to Abdullah (2004), halal rizq will be blessed while haram (prohibited rizq) will result in anxiety and uneasiness. Even more so, on the Day of Judgment, they will be denied from entering Jannah as mentioned by Prophet Muhammad SAW:

"...A person will not enter paradise if his growth is derived from haram or illegal efforts..."

(Ahmad, 1997)

Islam has concluded that any types of work, practical acquisition or efforts aimed towards acquiring rizq, is considered as ibadah i.e. initiative or efforts in pursuance of Allah's commands. It does not only bring return on this earth but it will also be compensated in the hereafter. Islam is the only religion which specifies and dictates how man should perform his business and manage economic activities in accordance with the teaching of the Quran and Sunnah. Thus, a person entrusted in managing wealth can achieve the highest degree of virtue (falah) by spending out his wealth within the boundaries prescribed by the Shari'ah. A1 Ghazali (1993), a great Muslim jurist, said "The very objective of the Shari'ah is to promote welfare which lies on safeguarding human faith, life, intellect, posterity and property". On the other hand, the Shari'ah explicitly specifies a set of rules and principles that regulates the legitimate sources of acquiring al-mal (property) as well as its growth and its disposal. These moral limits are meant to achieve two vital objectives; to promote socioeconomic justice and to uphold the concept of al-Ihsan. Al-Ihsan is

a reassurance that al-mal is to be used to maximize the welfare of the community (al-Ghazali, 1993).

2. The Importance of Investment in Islam

Investment in Arabic is known as al-Istismar which refers to activities that increase wealth or revenues (al-Mausu'ah al-Fiqhiyyah, 2003). According to Kamus Dewan (2002), investment can be literally defined as the capital invested in a transaction with the purpose of multiplying the profits. In technical terms, it is known as an activity of capital investment in the forms of properties and money to achieve long term profits in a project (Mazin Ubaydat, 1985). Based on these definitions, it can be deduced that capital and profits are the main factors in investment or business, besides its durations in the long run. This term is further enhanced in the viewpoint of Islamic economy by utilising the Shari'ah law. As defined by Al-Hawariyy (1982), investment in Islam is regulated by the Shari'ah in realizing the objectives of Islamic economy that may lead to the significant changes of Muslim community. Similarly, Sano Qutub (2000) emphasizes that investment is an action of individual or organizational body in managing wealth that complies with the Shari'ah principles to gain profit in securing his responsibility as Khalifah of Allah SWT. These views therefore illustrate the significance of investment in Islam from various aspects. Nonetheless, the ultimate goal is to perform investment as remembrance and thankfulness to Allah SWT for His benefits and blessings as mentioned in the Holy Quran:

"And when the prayer has been concluded, disperse within the land and seek from the bounty of Allah, and remember Allah often that you may succeed' (al-Jum'ah: 10).

"It is He who made the earth tamefor you - so 'walk among its slopes and eat oj Hisprovision - and to Him is the resurrection" (al-Mulk: 15).

The above verses encourage Muslims to strive in seeking income or earnings as awarded by Allah SWT. Our involvement in any economic activities including investment, however, should not cause us to deviate from Allah SWT. In fact, we are always reminded to show our gratitude towards Allah SWT. Therefore, when these principles are applied, investment should be able to free mankind from bondage of poverty. Islam does not obligate its followers to rely only on their fate, but display their earnest effort to earn a better living. As narrated by Prophet Muhammad SAW:

"The person that is responsible in managing the wealth of an orphan has to invest it, and don't let itfinish as caused ofsadaqah".

(Tirmizi, 1998)

The above Hadith contains a command from Prophet Muhammad SAW to manage the wealth of orphans in a proper way by investing it. The purpose is to avoid the wealth from being decreased and depleted. If the wealth is managed wisely by involving it in an investment, it can be multiplied and secure the benefit to the orphan.

3. Previous Study

Islamic Ethical System begins with Tawhid in that Earth and all the assets in it belong to Allah SWT. No one should carry out any activities that contradict the Islamic law because of the belief that Allah SWT can provide and recall anything at any time. Therefore, a Muslim should be humble and moderate at all times. A Muslim should not be over influenced by profits as it can divert us from the right path as commanded by Allah SWT (Zuriah Abdul Rahman, 2007). According to Yazid Ahmad & Ibnor Azli (2006) the absolute and ultimate owner is God. Qur'an outlines that the basis of wealth and its nature belong to God. Allah SWT has bestowed upon humans the responsibility to manage wealth. However, it is only right to symbolize wealth belonging to God, so it must be harnessed and channelled in the right way as endorsed by the Shari'ah.

Islam is a comprehensive religion because it governs and secures every aspect of human life. It encompasses personal and societal well-being as it relates to the worldly life and the hereafter. Muslims should therefore manage their wealth wisely and systematically to secure their future. Every single deed performed by Muslims must be guided by the Quran and Sunnah (Rodney Wilson, 2008). Human beings must know their responsibilities in managing their wealth and property wisely because everything will be questioned in the hereafter. This too applies in financial planning, as it is basically a discipline of wealth and even though one may not possess as much wealth, financial planning such as making an investment should still be practised (Arafah & Fathiy, 2013).

Investment is a good way to make proper use of savings and to achieve our goals in life. People save money for many reasons; to buy durable goods such as houses, furniture and cars or/and as a preparation for future life in the event of illness or hardship. In terms of investment funds, the organizations that manage individual savings get to share the benefits at the same time as each fund has its own mechanism, capital, subscription, maturity and expected returns and risks (Tayar, 2006). Nowadays, the demand for money has increased because of three motives. They are transaction motive, precautionary motive and speculative motive. The transaction motive refers to the demand for money for the current and daily transaction. As for precautionary motive, it holds the money at the time when unpredictable contingencies such as unemployment and accidents occur. Lastly, speculative motive refers to the desire of the public to hold cash balances to meet the advantage in market movements regarding the future changes in price and rate of interest. Out of the three motives, precautionary and speculative motives encourage people to save money while the banks will use the money to lend to businessmen for investment purposes. Thus, it can be concluded that savings and investments are closely related in delivering benefits to people (Odularu & Okunrinboye, 2009).

4. Textual Analysis on the Management of Investment

Investment sectors in Malaysia have grown rapidly as catalyzed by the positive development of economy. With various investment products offered, the concern for a Muslim is to identify its suitability with the principles and guidelines of Shari'ah. To identify whether the investment complies with the Shari'ah or not, it can be determined based on two aspects; the nature of instrument or transaction itself and the nature of contracting partners (Khatkhatay & Nisar, 2007). Any investment activity must avoid prohibited elements such as interest (riba), uncertainty (gharar) and gambling (maysir) that is involved in the structure of the transaction. In fact, there are many external elements that need to be considered. Otherwise it will affect the compliance of Shari'ah. In a hadith narrated by Anas Bin Malik, Prophet Muhammad SAW said:

"FindingLegitimate is an obligation on every Muslim"

In the above hadith, Prophet Muhammad SAW emphasized the obligation of being involved only in legal activities and to avoid the opposite. Thus, our responsibility as a Muslim is to ensure that our investment activities comply with the Shari'ah principles and Maqasid al-Shari'ah. However, in today's world, the high cost of living has put extreme pressure on people in that they begin to see everything from the economic perspectives. As a result, people are willing to do anything as an act of survival in desperate financial situations including performing prohibited transactions or investments. Prophet Muhammad SAW had warned us against this and said that:

"Every flesh nourished by Haram, the Hell-Fire deserves it more than any other place".

(Tirmizi, 1998)

"Allah the Almighty is good and accepts only that which is good. Allah has commanded the Faithful to do that which He commanded the Messengers, and the Almighty has said: "O you Messengers! Eat of the good things, and do right.." (Quran 23:51). And Allah the Almighty has said: "O you who believe! Eat of the good things wherewith We have provided you.." (2:172). Then he mentioned [the case of] a man who, having journeyed far, is disheveled and

dusty and 'who spreads out his hands to the sky [saying]: O Lord! O Lord!-while his food is unlawful, his drink is unlawful, his clothing unlawful, and he is nourished unlawfully, so how can he be answered/"

(Muslim, 2001)

Both hadiths indicate the implication for those who consumed from unlawful transaction. Income or profit generated from unlawful activities will result us to be burnt in the blazing fire in the hereafter. Allah SWT will also not listen to and grant the prayer of a person involved in unlawful transactions.

According to Mehdi Sadeghi (2008) in 1999, the Kuala Lumpur Stock Exchange, or known as Bursa Malaysia launched a new index knows as Shari'ah Index (SI) to ensure that investment activities are in accordance to the principles of Shari'ah. In Islam, avoidance of any prohibited elements is a must and therefore vital (Salman Lambak, 2013). To evaluate the status of the companies regarding the activities involved, the Shari'ah Advisory Council (SAC) states that it must fulfil two elements. Firstly, the public must be able to trust the company so that they can follow the good examples set by the company. Secondly, the company's involvement in very small non-halal elements can be tolerated and the activity of the company must be considered to be in the public interest (Mehdi Sadeghi, 2008). In order to determine the accepted level of mixed contributions from permissible and non-permissible activities of a company, SAC has established several benchmarks based on ijtihad (reasoning from the source of Shari'ah by qualified Shari'ah scholars). The benchmark was established to ensure the illegal elements are very small and relate to matters excused by the Shari'ah (Mohd Yahya & Joni Tamkin, 2009). The benchmark is classified under 5-percent, 10-percent, 20-percent and 25-percent. If the contributions from non-permissible activities exceed the benchmark, the securities of the company will be classified as Shari'ah non-compliant. This is based on one of the Islamic Legal maxims:

"There is mixed between the clean and the unclean, but beat on halal be illegal"

(Suyuthi, 2001)

According to Wilson and Rodney (2008), to be Shari'ah compliant in the investment activities, the financial institution itself needs to have or appoint a Shari'ah board (SAC) that comprises specialists in fiqh muamalat (trade) who will approve all the products and activities offered by the institution.

Other than the element of lawful activities in the investment, Shari'ah transactions must be based on a clear declaration or aqad. Therefore, if a contract is not clear or if there is a breach of contract that is against the Shari'ah principles, such transactions will be deemed as non-Shari'ah-compliant. Declaration of investment must be mentioned clearly whether it follows 'Qirad or 'Mudharabah' or ' Musharakah'. It must be noted that if a contract is null at the beginning, the entire investment process will therefore become void regardless of the investment placed in the lawful or unlawful counter. Normally in the investment contract, there will be a combination of aqad to strengthen the validity of the contract such as the combination of ' Wakalah' and 'Mudharabah' transaction. The combination of contracts is a potential mechanism of product development in Islamic finance. According to Majallah al-Ahkam al-'Adliyyah under clause number 768:

"(Contract) trust cannot be guaranteed, so when destroyed or lost not because the trustee acts and also not because of neglect it, it not be required to guarantee (replacement)".

According to Shafi'i mazhab, investment aqad can be nullified if the capital investment is guaranteed by the manager of the investment (Asyraf Md Hashim & Lokmanul Hakim, 2011). World Fiqh Scholars Union (Majma 'Fiqh Islami) and the OIC Islamic Fiqh Academy in their 9th convention had decided that the capital guarantee is only allowed if it comes from a third party. A privilege of the capital guarantee is not valid according to other schools of thoughts as well. This is because the concept of Islamic investments such as Mudharabah should not involve any assurance to the capital. According to Shari'ah, there are only two types of capital guarantees that are allowed in the Mudharabah contract. The first is a refundable capital guarantee if the 'mudharib' (investment manager) betrays any contents of the contract and negligence in managing the investment activities. The second type

is a guarantee from the third party who is not involved in the investment process (Asyraf Md Hashim & Lokmanul Hakim, 2011).

The reason for utilising the Qur'an and Hadith to guide investment is to avoid any possible exploitation that might occur from its implementation. Besides, by relying on other alternatives such as risk sharing, maslahah for both parties can be secured. The inability to understand the guidelines are derived from the lack of appreciation of the whole view of Islamic values which promotes socio-economic justice and equitable distribution of income and wealth.

5. Conclusion

Islam is not a religion that goes against the nature of humanity in acquiring wealth and property. In fact, Islam encourages its followers to acquire wealth for their happiness in this world and to prepare for their life in the hereafter. Nonetheless, there are rules and regulations that must be observed by Muslims. To earn from illegal investment activities is prohibited in Islam even though the profit is huge. Thus, it is vital to ensure that our investment activities are performed based on Shari'ah guidelines to realize the objectives of Islamic economy in bringing significant changes to the Muslim community. Being a practical and flexible way of life, Islam is committed to protect the interest of the Muslim communities in particular and the entire society in general.

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