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The Inseparable Shari' and Tabi' Principles in Business Strategy

By Prof. Dr. Saiful Azhar Rosly
Posted, Dec 3, 2004

Today, when companies plan to inculcate Islamic values in their business activities, strategic focus seems to revolve around legal issues ( i.e. Shariah guidelines). But less is mentioned about their day to day business operations such as marketing or how they plan to secure a competitive advantage in a global business environment.

The same applies to the Islamic finance market today. This article focuses on the Islamic finance market as an example, even though the general principles shall apply to any type of businesses.

When one listens to lectures on Islamic financing, it seems to gravitate on one issue, namely the Shariah guidelines. It deals with the permissible (halal) and prohibited (haram) as ordained by Allah swt. Hence, Islamic commercial law (fiqh muamalat) has become indispensable. Shariah scholars are hotly pursued by many Islamic banks and fund managers for legal advice.

However, Islamic financial markets do not deal with Divine rules alone, as business cannot run without making decent profits. Business strategies, marketing and performance of the Islamic companies remain the bottom-line of business. But how to put both mundane and divine in one package? In what way is the Shariah aspects related to the mundane, namely the day to day running of the business? Should the mundane be considered a secular and worldly affair - something that Shariah advisors cannot intrude? If Islamic financial markets are propelled by Shariah values, how does one see their relevance to mundane business activities such as management, marketing and accounting?

To make things simple, the study of any Islamic business can be divided into two principles, namely the 1) Shari' and 2) Tabi'. The Tabi' principles (i.e. the rational and empirical- an aspect of dunya) relate to the mundane where man applies reason and experience to run their daily business while the Shari' principles (i.e. God's commandment) convey the Divine rules that man must observe doing the same. Both shall remain inseparable. The rational and empirical is driven by the spiritual values of the Quran. In this way, submitting oneself to the Divine rules guarantees equity and efficiency This is the concept of Islamic worldview as expounded by Syed Naquib Al-Attas.

Since the Shari' principles are derived from the Quran and Sunnah, they are common in all aspects of financial transactions taking place, whether one deals with Islamic banks, mutual funds, investments, takaful ,financial planning and wealth management. This is where Shariah scholars are much needed to help market players distinguish the halal from the haram. These Shariah principles are given by God and shall remain a permanent principle irrespective of place and circumstances. These principles are given below:

1. Prohibition of riba
2. Application of al-bay' (trade and commerce)
3. Avoidance of gharar (ambiguities) in contractual agreements.
4. Prohibition of maisir (gambling)
5. Prohibition from conducting business involving prohibited commodities such as pork, liquor, illicit sex and pornography.
   

Islamic Financial Markets Source: Dr. Saiful Rosly

The above principles are meant to uphold and promote justice ('adalah) in business transactions. God has guaranteed that justice will prevail when man obeys His Commandments (Shariah). This is the akhirah aspects of the Islamic worldview. By adhering to these Shariah principles with a sense of taqwa (God's consciousness), the contracting parties have truly observed the akhirah aspect of the Islamic worldview.

While the Shariah principles expound the equitable nature of Islamic financial markets, other dimension of market activities need not depend on explicit divine guidance. This is the tabi' aspect of financial market activities. Tabi' means natural and it defines efficiency and therefore performance. It is nature's way. Tabi' values are universal values. Once discovered, these values can be used by all people, irrespective of faiths and beliefs.

For example, to reduce cost per unit, the company should increase output. This is economies of scale. To increase sales, it should first conduct marketing research. To look for a credible partner, it should conduct due-diligence and so on. The tabi' aspect of business cannot be ignored even when it runs under an Islamic label. Muslims and non-Muslims alike are expected to obey the tabi' law. It has less to do with the faith (aqidah) although faith forms the basis of efficiency and competence. Working against this law is only inviting disaster and chaos. Business is doomed to fail when the tabi' law is ignored.

As an example, to conduct an Islamic venture capital business, the Shariah principles are well-known and readily given by the Quran. But the tabi' principles is different from that in banking. In Islamic venture capital, the tabi' aspects deal with 1) deal-making 2) due-diligence and 3) market analysis. In banking the tabi' aspects deal with 1) asset-liability management 2) risk-management and 3) marketing research. Likewise, in takaful the tabi' aspects looks at 1) risk assessment 2) promotion and 3) fatality investigation. In equities, the fund managers conducted both fundamental and technical analysis to study what halal stocks to buy. They must know how to calculate the yield and when to exit the market. Defining what is halal and haram constitutes the Shariah aspects, but how and when to buy and sell is sorely based on reason and facts. Man does not have to resort to the Quran or Sunnah to make economic forecast or execute stock purchases. The role of the intellect ('aql) is paramount here. This is what tabi' law stands for.

To highlight the interlinking of Shariah and tabi' law is a vital component of Islamic economics and business. Investing in Shariah approved stocks implies that firstly, one must know what constitutes the halal stocks. This is the Shari' aspect. Once, the screening is done, the tabi' aspect is in play. To select a stock, one should consider its price-earning ratio, the return on investment, the earning per share. This is the company analysis. But company performance can be affected by macroeconomic variables such as inflation, unemployment, the gross domestic product and exchange rates. This is where knowledge on the market and economy is crucial. This is again tabi' law.

The Shariah scholars know less about these things as they are not trained in modern economics and finance. They are instead experts in Islamic laws. Their main role is and determined what the Quran values about human actions in economic transactions. For example, they help outline the basic principles of Shariah screeening for common stocks. They must ensure that Shariah stocks are always free from the prohibited elements by conducting the addition and deletion procedure over time.

But sometimes the tabi' operations may implicate riba or gambling. For example, to avoid currency risk (i.e. a tabi' decision), a Shariah approved company may indulge in currency trading as it tries to hedge against market volatilities. Promotion and marketing of mutual funds (i.e. a tabi' business strategy) may be associated with unethical practices. Thus, there are some tabi' operations that are purely free from Shariah rules but some may not. This is because the Shariah does not only deal with the legal aspects (hukm) of financial transactions but also the moral and ethical aspects (akhlak).

In conclusion, it should be noted that Tabi' principles although based on reason and facts are driven by the Shariah principles as Muslims are supposed to earn profits by way of work and risk-taking. To earn profits is an obligation that all business must pursue. To earn profits is a Tabi' phenomenon but how to earn them may require business to observe some rules and regulation. These rules and regulation can either be man made or derived from Divine values. It has to be recognized that knowledge derived from non-divine sources (i.e. man-made) cannot be downgraded as ungodly. This is because the 'aql (i.e. reason) is also divine in nature. Man can discover God by way of thinking and contemplation. The 'aql is a powerful instrument to explain the nature and therefore the greatness of Allah swt. But the 'aql devoid of divine guidance is short-sighted and impotent. It will not be able to produce credible Tabi' principles for the enjoyment of mankind.

Key Learnings: Muslim Businesses do not deal with Divine rules alone, as business cannot run without making decent profits. Study of any Islamic business can be divided into two principles, namely the 1) Shari' and 2) Tabi'. The Tabi' principles (i.e. the rational and empirical- an aspect of dunya) relate to the mundane where man applies reason and experience to run their daily business while the Shari' principles (i.e. God's commandment) convey the Divine rules that man must observe doing the same. Both shall remain inseparable. Tabi' principles although based on reason and facts are driven by the Shariah principles as Muslims are supposed to earn profits by way of work and risk-taking. To earn profits is mostly a Tabi' phenomenon but how to earn them may require business to observe some rules and regulation. These rules and regulation can either be man made or derived from Divine values.

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Dr. Saiful Azhar Rosly is Professor of Economics at the International Islamic University Malaysia. He has advised several institutions, including Ministry of Finance, National Economic Advisory Council (NEAC), Permodalan Usahawan Nasional Berhad (PUNB), EON Bank, Commerce International Merchant bank (CIMB) and Silverlake Malaysia, in the area of Islamic economics, banking and finance.

Professor Saiful has published his work in academic journals and has written for magazines and newspapers such as the KLSE Investors Digest, AmInvest, ZoomFinance, DataNiaga and the Sun.
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The views expressed here are the opinions and observations of the author and the positions taken by the author does not constitute an endorsement by Dinar Standard.

Your Feedback

"Salam to all, being the former MBA(Islamic Banking & Finance) student of UIA and had written a research paper on Salam Financing together with Prof Dr Saiful, I strongly recommend that his book should be the text book for all students who are majoring in the field.Congratulation to Prof Dr Saiful!"
Hamdan HJ Idris, Head Money Market & Investment
Malaysia

"I totally agree with Dr. Saiful. Islamic banks have to compete with conventional banks who are now offering the same services and products. Eventhough some Islamic scholars may say that existance of Islamic banks is to promote economic well being of the society, Islamic banks are also responsible for the economic well being of their depositors. This is where profitability of the bank comes into the picture. Nobody would be interested in depositing money in a bank that does not provide a return. Therefore, Islamic banks should be experts in the world of businesses.

At the same time, Islamic scholars should also be able to view the business world from the perspective of the Islamic bankers in order to justify their actions."
M. Mokhtar, Malaysia