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(1) AJK Penyelarasan Kurikulum Program Muamalat, Takaful, Kewangan dan Perbankan Islam. Kementerian Pengajian Tinggi Malaysia. Tarikh: 16 Ogos 2010 – 15 Ogos 2012. / A member of Committee for the Coordination of Muamalat, Takaful, Islamic Banking and Finance Curriculum at Ministry of Higher Learning. (Date: 16 August 2010 – 15 August 2012).
(2) One of the reviewers for “Diploma Kewangan Islam” (Diploma of Islamic Finance), Akademi Pengajian Islam, Kolej Universiti Islam Melaka. Date: December 2012.
(3) An advisor for Diploma in Islamic and Finance at MARA Professional College (for Fiqh Muamalat I and Fiqh Muamalat II courses). Date: 22 January 2015 – 22 Jan 2017.
(4) An External Advisor (Penasihat Luar) for Diploma of Islamic Banking (Diploma Perbankan Islam), Faculty of Business Management (Fakulti Pengurusan Perniagaan) University College Shahputra (UCSA) (Tenure: 2 years. Starting Date: May 23, 2016)
2016, December 15. Khamis. 5 ptg – 6.30 ptg. FEM, USIM. Semakan Dokumen.
(5) An External Advisor (Penasihat Luar) for Bachelor of Islamic Finance, Faculty of Business Management (Fakulti Pengurusan Perniagaan) Widad University College (Tenure: 2 years. Starting Date: May 23, 2016)
2016, December 15. Khamis. 5 ptg – 6.30 ptg. FEM, USIM. Semakan Dokumen.
Post Graduate Supervision
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Industrial Training Supervision
Semester II 2015-2016 (
Mei & Jun 2016
)

Semester II 2014-2015

Semester II 2013-2014
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                                                        1

THE SIGNIFICANCES OF MASLAHAH CONCEPT AND DOCTRINE OF

MAQASID (OBJECTIVES) AL-SHARI’AH IN PROJECT EVALUATION

By

Abdullaah Jalil

Islamic University College of Malaysia

Abstract

The concept of maslahah and doctrine of Maqasid (objectives) al-Shari’ah as put

forward predominantly by Al-Ghazali and Al-Shatibi could be referred for developing

choices and preferences from Islamic perspective. The two concepts shall have a great

impact on the project evaluation procedure in an Islamic framework. The paper aims

to analyze the significance of the incorporation of these two concepts into the

mainstream project evaluation framework. This paper is a conceptual attempt to

discuss the topic. Hence, it is a qualitative in nature. The author applies the content

analysis method through deep and intense readings of the previous texts and

literatures related to the topics.  The author thoroughly examines and analyses the

relevant literatures and develop the relationship between maslahah and Shari’ah

objectives with the mainstream framework of project evaluation. The paper found that

the concept of maslahah and Shari’ah objectives doctrine establish a more detailed

order of priorities amongst competing projects, rationalises choices under the light of

the Shari’ah and ensure the coherence of the selected project with the Islamic system

as a whole. The public and private institutions could establish ranking of priorities for

the potential competing projects based on the maslahah and Shariah Objectives

analysis of the projects to determine the best solution for resources allocation in an

Islamic framework.

Keyword: Maslahah, Sharicah objectives, project evaluation

1. INTRODUCTION

A project is a way of using resources, and the decision to undertake a particular

project or not is a choice between alternative ways of using resources (Sugden &

Williams, 1978). Resources, in Islam, are envisaged as trusts of Allah. Man, as His

                                                        2

vicegerent and servant, is entrusted to utilise these resources in the right way within

the Shari‘ah boundaries (Haneef, 1997). Appraisal of a project prior to its execution

in order to determine the optimal use of the resources is in line with the spirit of Islam

as manifested in the following points.

Firstly, project evaluation is about rationalising the use of resources for specific

purposes. Likewise, Islam calls on its followers to rationalise the use of resources.

The irrational and unjustified use of resources is highly condemned in Islam as

evident in a hadith narrated by Ahmad and al-Nasa’i where a bird which was killed

for no useful purpose will claim to Allah in the hereafter and say: “Oh God! This man

has killed me for no purpose and not for any benefit” (Al-Masri, 1999; Al-Qardawi,

1999). Secondly, Islam also favours efficiency and in this context, encourages ex-ante

evaluation of a project before it could be undertaken to achieve its goal of prevention

of israf - wanton use of resources, either in production or consumption (Choudhury &

Malik, 1992; Zarqa’, 1983). It is crystal clear that the prevention of israf is a founding

trait of Islamic economics. This is evident in the Qur’an’s condemnation on israf.

Finally, project evaluation also involves prioritisation of potential competing projects

for limited resources. Likewise, the prioritisation of actions and deeds is embedded in

Islam since the Shari‘ah assigns different weights/values to different actions and

deeds. With the right status, each matter could be ordered and prioritised according to

its importance and urgency from the viewpoint of the Shari‘ah (Al-Qardawi, 2000). In

a way, fiqh (Islamic Jurisprudence) itself is all about prioritisation as each matter

(including projects) can be categorised into one of the main five values, namely

obligatory (wajib), recommended (mandub), permissible (mubah), reprehensible

(makruh), and forbidden (haram).

The framework for project evaluation offered today in mainstream economics,

with its complexity and thoroughness, has been developed in isolation from Islamic

input. With due acknowledgements to the contributions of mainstream economics

towards the birth and development of the existing methodology and framework for

project evaluation, the author insists on its deficiency and inability to serve the

Muslim governments and individuals to opt for the most preferable project under the

light of the Shari‘ah. This fact entails the accommodation of the Sharicah objectives

and the concept of maslahah, as instigated by predominantly Al-Ghazali and Al-

                                                        3

Shatibi, into the project evaluation framework to determine an order of priority

amongst competing alternatives1. This paper is organized as follows:

Section 1 is the introductory part. Section 2 discusses the theoretical background

of the Maslahah concept and Shariah objectives doctrine. The section also discusses

the analytical framework of the paper. Section 3 reviews the literatures related to the

mainstream framework of project evaluation and the relationship of Maslahah and

Shariah objectives with project evaluation from the Islamic perspective. Section 4

discusses the significances of Maslahah concept and Shariah objectives doctrine with

the suggested Islamic framework for project evaluation. The final section concludes

the discussions with the policy implication of the study.

2. THEORETICAL BACKGROUND

2.1. The Concept of Maslahah and Shari‘ah Objectives

The concept of maslahah has been discussed at length by several jurists. However,

the two most prominent of them, as cited in the literature, are Al-Ghazali and Al-

Shatibi. The former is considered as the one who first gave the original formulation of

the concept from its rudimentary form, whilst the latter developed and refined the

concept (Khan, 1997; Zarqa’, 1984). Al-Shatibi is also considered as the first jurist to

write on the subject as a new independent theory, particularly in his book “Al-

Muwafaqat Fi Usul Al-Sharicah” (Shibir, 2000). Other jurists who have discussed the

same subject are, for examples, Al-Juwayni, Al-cIzz Ibn cAbd Al-Salam, Ibn Khaldun

and Ibn Al-Qayyim Al-Jawziyyah (Al-Masri, 1999; Khan & Ghifari, 1992). The

institution of maslahah is derived from the survey and scrutiny of all Islamic

teachings and injunctions available in the Qur’an and Hadith (Zarqa’, 1984). This

means that the Sharicah in all its teaching aims at the attainment of good, welfare,

advantage, benefits, etc., and the warding off of evil, injury, loss, etc., for creatures

(Khan & Ghifari, 1992).

Al-Ghazali explains the maslahah as the “preservation of the religion, life, mind,

offspring and wealth.” According to him, “everything that leads to the preservation

1 Establishment of an order of priority amongst competing projects is one of the objectives for carrying
out project evaluation study (Sang, 1995).

                                                        4

of these five foundations is considered maslahah2, and everything that leads to the

disruption of these foundations is mafsadah3, and its removal is maslahah,” (Al-

Ghazali, 1998). Hence, it is generally held that the Sharicah in all its parts aims at

securing a benefit for the people or protecting them against corruption and evil in

various degrees. The wajib (obligatory), mandub (recommended) and mubah

(permissible) aim at realising the benefit and welfare and the makruh (reprehensible)

and haram (forbidden) aim at preventing corruption and evil (Kamali, 1989). As a

principle, each matter that increases the welfare of people from the Sharicah point of

view is considered as maslahah or utility. Similarly, each matter that decreases the

welfare of people from the Sharicah point of view is considered as mafsadah or

disutility. Maslahah can be classified further into three categories. The three

categories are (‘Afar, 1992; Kamali, 1989; Zarqa’, 1984):

a) Daruriyyat (Necessities): These Necessities are defined as those activities and

things that are essential to the preservation of the five foundations of

individual and social life according to Islam i.e. Religion, Life, Mind,

Offspring and Wealth. Their neglect leads to total disruption and chaos in life.

Khan and Ghifari (1992) assert that one foundation i.e. freedom should be

added to the list. They see freedom as the sixth element that should be

promoted along with the five elements.

b) Hajiyyat (Conveniences): This category comprises all activities and things that

are not vital to the preservation of the five foundations, but are necessary to

relieve or remove impediments and difficulties in life. Conveniences promote

and supplement the Necessities and their neglect leads to hardship but not to

the total disruption of normal life.

c) Tahsiniyyat (Refinements): The Refinements refer to activities and things that

go beyond the limits of Conveniences and whose realisation leads to the

improvement and attainment of that which is desirable such as jewellery,

innocent hobbies, politeness in behaviour and speech, Islamic etiquette in

cleanliness, moderation or avoiding extravagance and etc. Going beyond

Refinements into prodigality and self-indulgence is perceived by Islam as a

disutility for both individuals and society, and is strongly disapproved.

2 Utility; Welfare; Benefit; Advantage from the Shari’ah perspective. The plural of maslahah is
mafasid.
3 Loss; Evil; Disadvantage; Disruption; Damage from the Shari’ah perspective. The plural of mafsadah
is mafasid.

                                                        5

The previous Islamic jurists discuss the Shari’ah objectives doctrine without

giving a specific definition of the doctrine. However, the late Islamic jurists such as

Ibn ‘Ashur has defined Shari’ah objectives as “the observed meanings and wisdoms in

every Shari’ah rulings or most of them, whereby their observations prove that they

are not specific to a type of Shari’ah rulings,” (Ibn ‘Ashur, 1978). Based on the

concept of maslahah, projects, additionally, could also be classified into five

categories. These five categories are related to the protection, improvement and

amelioration of Man’s five basic elements namely, religion, life, mind, offspring and

wealth (Al-Masri, 1999). However, these five elements are not equal in importance.

Some are more important than others, but each of them is essential. The elements, in

order of priority according to the Malikiyyah and the Shaficiyyah, are (Al-Zuhayli,

1998):

i. Religion (Din)

ii. Life (Nafs)

iii. Mind (cAql)

iv. Offspring (Nasab)

v. Wealth (Mal)

The prioritisation of these five elements by the Hanafiyyah is as follows (Al-

Zuhayli, 1998):

i. Religion (Din)

ii. Life (Nafs)

iii. Offspring (Nasab)

iv. Mind (cAql)

v. Wealth (Mal)

cAfar (1992) describes the same order as the Malikiyyah and the Shaficiyyah and

classifies projects into one of these five essential elements. On the other hand, Zarqa’

(1982) equates all the five elements in terms of importance as their maintenance and

preservation are all compulsory in Islam. This is another important difference between

both of them. It seems to the author that the Sharicah does assign different weight to

                                                        6

these five elements. Al-Qardawi (2000) provides a good explanation of the issue and

he is of the opinion of the Malikiyyah and the Shaficiyyah4.

The concept of Maslahah and the doctrine of Shari’ah objectives are quite similar

at the first glance. However, in a more detailed analysis, the two concepts are actually

complement and interdependent between each other. The Shari’ah objectives doctrine

is related with the protection of the human basic elements while maslahah is the level

of protection of those elements. Figure 1 illustrates the relationship between the two

concepts.

Figure 1: The Relationship between the Maslahah Concept and Doctrine of Shari’ah Objectives

It is a debatable issue between the Islamic jurists whether the concept of Maslahah

and Shari’ah objectives doctrine are philosophy or methodology in nature. However,

this is not within the scope of the paper. It is enough to note that the Islamic jurist

have agreed on the role of these concepts as a common platform where all of the

Shari’ah rulings are directed in a coherent manner.

2.2. The Analytical Framework

4 Al-Shatibi is one of the Malikiyyah and Al-Ghazali is one of the Shaficiyyah. They also describe the
same order as the Malikiyyah and the Shaficiyyah (Al-Mays, 1987).

R
el
ig
io
n

L
if
e

M
in
d

O
ff
sp

ri
ng

W
ea
lth

Tahsiniyyat

Hajiyyat

Daruriyyat

Tahsiniyyat

Hajiyyat

Daruriyyat

Maslahah Shari’ah Objectives

Bring into existence and
maintain

Remove difficulties

Enhance and put comfort

Protected Elements

L
ev
el
 o
f P
ro
te
ct
io
n

                                                        7

This paper is a conceptual attempt to discuss the topic. Hence, it is a qualitative in

nature. The author applies the content analysis method through deep and intense

readings of the previous texts and literatures related to the topics.  The author applies

both the inductive and deductive methods as well as the analytical method to

thoroughly examine and analyse the relevant literatures and develop the relationship

between Maslahah and Shariah objectives with the mainstream framework of project

evaluation. The analytical framework of this study is illustrated in Figure 2.

Figure 2: Analytical framework

MASLAHAH AND
SHARI’AH

OBJECTIVES

PROJECT
EVALUATION

FRAMEWORK IN
MAINSTREAM
ECONOMICS

CONTENT
ANALYSIS
METHOD

AN ISLAMIC
FRAMEWORK OF

PROJECT
EVALUATION

3. LITERATURE REVIEW

3.1. Mainstream Framework

The practice of private project evaluation can be traced back to the early days of

Capitalism where the profit motive was the emphasis of mainstream economics. The

focus of analysis was on the microeconomics of a firm and the social significance of

the private project was seldom raised. The role of government (and public projects)

during those days was believed to be limited to the maintenance of law and order and

the provision of certain public facilities and services. However, the situation has seen

changes after two great events, namely the Great Depression and the Second World

War.  The emergence of welfare economics, the increased government involvement in

the mobilisation of resources and socio-economic affairs, and the influence of

Keynesian economics have provided bases and a theoretical background for the

development of project evaluation foundations and techniques (Sang, 1995).

                                                        8

The development of social cost-benefit analysis (hereafter cited as SCBA) can be

considered as the cornerstone of the project evaluation framework in mainstream

economics, particularly for public projects. The earliest idea of comparison between

projects’ costs and benefits can be found in Benjamin Franklin’s advice in 1772 for

making personal decision where he named it as “Moral or Prudential Algebra”

(Boardman et al, 2001; Sang, 1995). In 1808, Albert Gallatin - U.S. Secretary of the

Treasury - recommended the comparison of costs and benefits in water-related

projects (Hanley & Spash, 1993). However, the modern methods of SCBA are

accredited to the work of Jules Dupuit, a French engineer, in his paper entitled “On

the Measurement of the Utility of Public Works” in 1844 (Anand, 1993; Sang, 1995).

In terms of the practice of SCBA, it was first put into practice with the enunciation

of the Flood Control Act 1936 in the USA. According to the Act, flood-control

projects should be approved if the benefits to whomsoever they accrue are in excess

of the estimated costs (Anand, 1993; Campen, 1986; Pearce, 1983; Sang, 1995). In

1950, the U.S. Federal Inter-Agency River Basin Committee issued a manual entitled

“Proposed Practice for Economic Analysis of River Basin Projects” in an attempt to

instill some agreed set of rules for comparing costs and benefits. The manual was later

replaced by Budget Circular A-47 issued by the U.S. Bureau of Budget (Campen,

1986; Hanley & Spash, 1993; Pearce, 1983; Sang, 1995). In the 1950s, there was a

number of significant writings5 that further advanced the theory and practice of

SCBA. The advent of development economics and the increase of project aid flows to

the Third World countries within the same period aroused great interest in the

application of SCBA in developing countries. During the 1960s, SCBA became

increasingly accepted as the analytical tool for project evaluation. It is observed that

the practice of SCBA made its first move in the USA, particularly in water-related

projects, before being extended to Europe and the developing countries (Anand, 1993;

Irvin, 1978; Sang, 1995).

With regard to the framework and methodologies of project evaluation, the

international co-operation for development, particularly OECD, UNIDO and IDCAS

5 Three highly important publications are the works of Otto Eclstein (Water Resource Management),
John Krutilla and Eckstein (Multiple Purpose River Development), and Roland N. Mckean. All of their
works were published in 1958 (Anand, 1993; Pearce, 1983; Sang, 1995).

                                                        9

have played a prominent role in this area. The OECD introduced its Manual of

Industrial Project Analysis in Developing Countries in 1968. The OECD Manual was

published in two volumes. The first volume is mainly concerned with project

evaluation from a firm’s point of view. The second volume deals with the

examination of projects from the social point of view i.e. SCBA (OECD, 1972)6.

Then, in 1974, the same authors of the OECD Manual i.e., Little & Mirrlees, revised

their previous approach and provided a more systematic exposition in a new book

entitled “Project Appraisal and Planning for Developing Countries” (Anand, 1993;

Sang, 1995).

On the other hand, UNIDO has also published two main works on project

evaluation framework and methodologies. The first one was published in 1972 under

the title Guidelines for Project Evaluation. The authors of the Guidelines were

Dasgupta, Sen and Marglin.  In 1975, Squire and van der Tak reconciled the

differences between the OECD and UNIDO approaches. The OECD Manual and

UNIDO Guidelines insist on the superiority of the national profitability of a project

and the need for CBA. The second one by UNIDO was the Manual for Evaluation of

Industrial Projects. The Manual was prepared in collaboration with IDCAS in 1980.

The UNIDO & IDCAS Manual differs conceptually from the UNIDO Guidelines,

OECD Manual and Little & Mirrlees (1974) in its simplicity and operational step-by-

step approach. The UNIDO & IDCAS Manual suggests the use of net-value added

criteria which judge the merits of a project based on its contribution to the national

income (Anand, 1993; Sang, 1995; UNIDO & IDCAS, 1980). The works of the

OECD (Little & Mirrlees), UNIDO and IDCAS are known as the “New

Methodologies” of SCBA. In spite of several technical and methodological

differences with the traditional SCBA, these “New Methodologies” have the same

framework as the traditional one (Sang, 1995).

3.2. Islamic Framework

Most of the discussions on project evaluation framework in the Islamic literatures

concern with the rationale of discounting future costs and benefits and its

practicability from the Islamic perspective. Zarqa’ (1983) does not recognise this

6 The revised edition of the Manual was published in 1972.

                                                        10

concept as either a principle of rationality or an empirically prime tendency amongst

the economic agents. According to him, it is only one of the three patterns of inter-

temporal choice7. Similarly, Khan (1994) argues that “the utility of money in the

present is greater than the utility of same money in the future” is conceptually a faulty

assumption. He adds that the concept would lead to legitimacy of interest on capital

lent. Others with similar stands are Iqbal & Khan (1981). Muqorobin (1998) believes

its rationality in production rather than in consumption.

On the other hand, a number of Islamic scholars believe in its acceptability and

validity in Islam. Amongst them are Khan (1991), Azhar (1992), Saadallah (1994),

Al-Masri (1999) and Rosly (2003). According to them, there is nothing against

positive time preference or against realising a time value of money in the Islamic

framework, as long as the time value of money is not claimed as a predetermined

value (Khan, 1991). Additionally, the Shari‘ah admits that time has a value and

recognises the innate human preference of what is in hand to what is loaned and of the

immediate to the deferred (Saadallah, 1994). The prohibition of any conditional

increase in the principal of a loan in return for deferred repayment does not indicate

the invalidity of the concept of the time value of money in Islam (Saadallah, 1994; Al-

Masri, 1999; Rosly, 2003). The classification of projects based on the concept of

maslahah has been suggested by Zarqa’ (1982) and cAfar (1992).

4. DISCUSSION AND RESULTS

4.1. Classification of Projects according to the Concept of Maslahah

The classification of projects in an Islamic framework into either halal (lawful) or

haram (unlawful) is not enough to determine an order of priorities for the projects.

Thus, bringing the concept of maslahah into the framework is necessary. The concept

can determine the order of priorities in an Islamic framework and thus, entails ranking

of projects into three main categories. They are:

1. Necessities (Daruriyyat)

2. Conveniences (Hajiyyat)

3. Refinements (Tahsiniyyat).

7 The other two are zero and negative time preference. According to him, each of them is valid and
rational under its own conditions (Zarqa’, 1983).

                                                        11

However, cAfar(1992) suggests the division of projects into six categories to have

a more detailed classification of projects. The divisions are:

1. Necessities

2. Complementarities (Mukammilat) of Necessities

3. Conveniences

4. Complementarities (Mukammilat) of Conveniences

5. Refinements

6. Complementarities (Mukammilat) of Refinements

According to cAfar (1992), Complementarity projects can be defined as projects

that will realise the lower level of maslahah, but simultaneously have importance for

the higher level of maslahah8. In dealing with the project evaluation topic, the author

is in favour of categorising projects into the established three categories of maslahah.

Hence, Complementarity projects of Necessities can be categorised under the

Necessities category itself and so forth.

4.2. Necessities Category

Under this category are those projects that are required for bringing into existence

and maintaining the very existence of man’s five essential elements i.e., Religion,

Life, Mind, Offspring and Wealth. This includes projects that are necessary for

protecting these elements from destruction (Khan & Ghifari, 1992). It also includes

projects that are necessary for the achievement of the maintenance and protection of

these five elements. This is due to an established Islamic legal maxim: Whatever is

indispensable for the performance of an obligation is also obligatory (Zarqa’, 1984).

The Necessities category projects could be categorized into nine main areas as

identified (cAfar, 1992)9. The nine areas are:

8 Al-Zuhayli (1998) states that complementarities (mukammilat) of each category of maslahah are
those matters which absence will not necessarily lead to the destruction of the objectives of the
respective category.
9 These nine areas are not exhaustive but cAfar’s (1992) explanation of this topic is very much more
detailed compared to the works of Zarqa’ (1982).

                                                        12

1. Provision of staple foods and what are necessary for their existence and

continuity. This includes production of fertilizer, basic agricultural

instruments and machines and distribution services.

2. Provision of clean water and basic public utilities. This includes

establishment of institutions and organisations responsible for this job.

3. Basic education. It is obligatory for the government and society to ensure

that both knowledge of fard al-cayn (individual obligation) and fard al-

kifayah (social obligation) in each discipline is adequately provided. This

will also entail the establishment of relevant institutions such as schools,

mosques, universities and other educational centers.

4. Production of basic apparel to protect Man’s well-being. This includes

summer and winter clothes and costumes for specific work that ensure the

safety of the workers.

5. Accommodation that are suitable for the local environment and provide

protection and rest for the households (family institution). This also

includes the production of basic home appliances and furniture.

6. Basic transportation and communication means. They are essential for the

people to carry out their work and obligations towards themselves, their

families and communities.

7. Health services to protect and preserve two essential elements of Man i.e.,

Life and Mind. The protection of the environment falls under this

category.

8. Institutions for maintaining and preserving Islamic laws, justice and order

in the society. Some of the examples are law councils, courts, police

stations, and zakah institutions.

9. National safety and defence. It is obligatory for Muslims to protect their

very existence by making preparation in terms of military weapons and

instruments. This should be done up to the level that they have the ability

to ensure their sovereignty and furthermore, exercise their rights in Islam.

It is worth mentioning here that projects that fall under this category of maslahah

are considered obligatory to be undertaken in Islam (cAfar, 1992; Zarqa’, 1982).

4.3. Conveniences Category

                                                        13

Projects that are not vital to the preservation of the five essential elements, but

rather, are needed to relieve or remove impediments and hardship (facing the five

elements) in life should fall under this category of maslahah. In the real world

situation, most projects, crafts, industries and economic activities are included here

(Meera, n.d.; Zarqa’, 1984). The execution of such projects is strongly recommended

in Islam up to the extent sufficient to remove difficulties or achieve conveniences in

life (cAfar, 1992; Zarqa’, 1982 & 1984).

As a general principle, projects that contribute to the advancement of the essential

areas and make Man’s activities easier and remove the difficulties facing them are

Conveniences projects. Examples of such projects are numerous, but some of them

are listed here for illustration (cAfar, 1992; Zarqa, 1984):

1. Promotion of physical education to strengthen the body and enhance one’s

health (Notice that protection of life and mind is a Necessity).

2. Production of quality foods and good clothes.

3. Comfortable houses and cars.

4. Improvement in transportation and communications.

5. Advancement in educational level, etc.

4.4. Refinements Category

Projects that do not remove or relieve difficulties but rather, those that adorn life

and put comfort into it fall under the category of refinements. In other words, projects

which go beyond the limits of Conveniences fall under this category - on condition

that they are carried out moderately (Zarqa’, 1984). Such projects should be given

least priority, particularly if the first two categories have not been satisfied (Meera,

n.d.). The discharge of projects under this category is either recommended or

permissible in Islam (Zarqa’, 1982). Examples of projects under this category are as

follows:

1. Objects of enjoyment and ornamentation e.g., flower, perfumes, luxurious

items and jewellery.

2. Building and house decorations.

3. Recreation centres.

4. Landscaping, etc.

                                                        14

4.5. Beyond the Maslahah: Al-Israf and al-Tabdhir

Another aspect of the significance of this concept (which is peculiar to

mainstream practice) is that only projects that fall under the three categories of

maslahah should be pursued in an Islamic framework. A project that is beyond the

category of maslahah can be classified into two main categories which are

unacceptable in the Shari‘ah (cAfar, 1992). The categories are:

1. Al-Israf: This refers to the act of spending or investment in permissible

(halal) activities but more than what is required. Self-indulgence (al-taraf)

or living in great unnecessary luxury also falls under this category (cAfar,

1992).

2. Al-Tabdhir: This can be defined as any disbursement on unlawful (haram)

or unjustifiable activities. Similarly, the fulfillment of lower-level needs in

the presence of higher-level needs that are not being satisfied is perceived

as an act of al-tabdhir (cAfar, 1992).10

Projects that fall under these two categories can be either reprehensible (makruh)

or forbidden (haram) from the Islamic point of view. Examples of projects under

these two categories are those that involve forbidden activities such as the provision

of riba’, gambling, non-halal goods or services.

4.6. Beneath the Maslahah: Al-Taqtir

If the government or individuals underutilise the available resources to fulfil the

maslahah or they decide not to carry out projects whilst the maslahah or welfare of

the people is deficient, this could be considered as an act of al-taqtir.  Al-Taqtir is a

sort of niggardliness (bukhl) which is condemned by the Prophet PBUH (Al-Masri,

1999). Moreover, Islam requires Man to use these resources to the extent necessary

for the production of individually or socially useful goods and services and employ

the means that justify their use for the end product (Pomeranz, 1995; Ahmad, 1991).

10 Al-Masri (1999) gives a slightly different definition of al-israf and al-tabdhir. According to him, al-
israf is spending in haram even in a small amount or spending in halal but excessive. Al-tabdhir is a
situation worse than al-israf., e.g., spending in haram in a big amount.

                                                        15

This requirement is observed, for example, in the Qur’anic verse 57: 711.

Additionally, Al-Ghazali and Al-Shatibi assert that it is society’s obligation to steer

their system, capacity and resources towards the realisation of the maslahah (cAfar,

1992).

4.7. The Framework for Project Evaluation in Mainstream Economics

The structure (or approach) of project evaluation is somewhat different amongst

the literature in mainstream economics. However, there are two aspects of a project’s

profitability which have been the focus in the evaluation of projects. The first aspect

is the project’s commercial profitability and the second one is the national

profitability12 of the project. Whilst the former is the main concern of individuals, the

latter has been emphasised in public project evaluation. The two aspects of the

project’s profitability mainly make up the objectives which a particular project is

intended to satisfy13. Thus, the project evaluation framework necessarily examines the

project’s contribution to the attaining of commercial and national objectives.

4.7.1. Commercial Profitability

Commercial profitability analysis is concerned with the feasibility of the project

from the financial point of view. At this stage, the project’s costs and benefits are

calculated in pecuniary terms at the prevailing market prices (UNIDO & IDCAS,

1980). The cash flow (inflows and outflows) estimation is the basis for the

commercial profitability analysis. Thus, constructing relevant cash flows is of great

importance to assure reliable results from the analysis (Sell, 1991). The commercial

profitability analysis is composed of:

a) Investment Profitability Analysis

b) Financial Analysis

Each type of analysis deals with different aspects of the project. Hence, they are

not complementary and not substitutable (UNIDO & IDCAS, 1980).

11 “Believe in God and His Messenger, and spend (in charity) out of the (substance) whereof He has
made you heirs. For, those of you who believe and spend (in charity), - for them is a great reward,”
(cAli, 2000).
12 The national profitability basically represents the social profitability of the project. The net social
gains may usefully be called national profits, when the society is identified with the nation. This should
include the economic and non-economic costs and benefits of a project that would affect national or
social welfare (UNIDO, 1972).
13 Some authors suggest a more detailed division of project objectives. For example, Ahmad (1999)
gives four aspects of project objectives namely, economic, technological, social and political.

                                                        16

4.7.1.1.Investment Profitability Analysis

Investment profitability analysis measures the return on the capital put into the

projects regardless of the sources of the financing. In other words, it analyses the

expected earning power of the resources committed to a project without taking into

consideration the financial transactions which occur over the project’s lifetime

(UNIDO & IDCAS, 1980). The main methods for this analysis are divided into two

groups:

1) Discounted Cash-Flow Methods

2) Simple Methods

Discounted cash-flow methods comprise the two most important and regularly

used methods i.e. Net Present Value (NPV) and Internal Rate of Return (IRR). These

two methods are classified under this category as they take into consideration the

economic life of the project as a whole by discounting future cash inflows and

outflows to their present values. The NPV method determines the divergence between

the present values of a project’s cash inflows and outflows. The cash flows are

discounted by an appropriate discount rate to determine their present value (Sang,

1995; UNIDO & IDCAS, 1980).

The IRR, by definition, is the rate of discount that equates the present value of its

cash inflows to the present value of its costs (Brigham & Houston, 2001). In another

sense, it is the rate that equates the NPV of the project to zero (Levy & Alderson,

1988; Sang, 1955; UNIDO & IDCAS, 1980). The IRR is then being compared to the

cut-off rate (or hurdle rate) that represents the minimum acceptable rate at which the

capital invested should be compounded. The project is acceptable if the IRR is bigger

than the cut-off rate. It seems that the IRR has a somewhat a “breakeven” feature that

makes it really useful in project evaluation. This method is helpful if the project

analysts find it difficult to attain the appropriate discount rate for calculating the NPV

of the project (Brigham & Houston, 2001; UNIDO & IDCAS, 1980).

The simple methods consist of two simple and straightforward methods. The

methods do not take into account the present value of the project’s future cash flows

or the whole life span of the project. They rely on one model period, usually one year.

                                                        17

The methods are the simple rate of return and payback period. The simple rate of

return is the ratio of the project’s net profit to the total investment – both fixed and

working capital (Sang, 1995; UNIDO & IDCAS, 1980). The pay-back period method

calculates the expected number of years required to recover the original investment.

The result of this method will then be compared to the cut-off payback period set by

the decision-makers to decide on its acceptance or rejection (Brigham & Houston,

2001; Irvin, 1978).

4.7.1.2.Financial Analysis

Financial analysis consists of liquidity and capital structure analysis. Liquidity

analysis checks the possibilities of cash deficiency in the years of a project’s life

(Sang, 1995). It concerns the financial transactions affecting a project’s cash balance

which are not highlighted in the investment profitability analysis. It is done on a year-

by-year basis and, hence, the cash flows are calculated at their nominal values

(UNIDO & IDCAS, 1980).

The question of capital sufficiency is analysed in the capital structure analysis. It

is performed to ensure that each type of investment (fixed or working capital) is

covered by a suitable type of finance. The most commonly used as the indicator of an

enterprise’s capital structure is the debt equity ratio. It is simply the ratio of long-term

loans to equity capital. There is no specific favourable debt equity ratio. It depends

upon the earnings of the project, the nature of the enterprise and the uncertainties of

the future. However, a low debt equity ratio reflects a lower risk of solvency or heavy

financial obligations and vice-versa (Sang, 1995; UNIDO & IDCAS, 1980).

4.7.2. National Profitability

The national profitability analysis is seen necessary due to several limitations of

commercial profitability analysis. For example, the use of market price in commercial

profitability analysis could be misleading and it is not a good guide to social gains.

Additionally, a project may have effects outside the market which have not been

treated in commercial profitability analysis (UNIDO, 1972). Thus, international

agencies such as UNIDO, the OECD and the World Bank have repeatedly emphasised

the need for SCBA, particularly for public projects, in their various publications to

                                                        18

account for the national profitability of a project (Anand, 1993). The methodology of

SCBA, its conceptual foundations, valuation and measurement issues are massive

topics and they are not within the scope of the paper. However, the author describes

here its main framework. The framework of SCBA is worthy of explanation as

“various techniques have been developed for project studies within the framework of

cost-benefit analysis” (Sang, 1995).

4.7.2.1.Social Cost-Benefit Analysis

The basic framework of SCBA can be summarised in the following points (Sang,

1995; Boardman et al, 2001):

1) Identification and enumeration of project costs and benefits

The relevant costs and benefits are defined by type, region, recipient or other

criteria. This includes the effects of the project in the realm of production and

distribution, positive and negative, direct and indirect, internal and external,

measurable and immeasurable effects.

2) Quantification and valuation of identified costs and benefits

In order to determine precisely the net balance between the project’s costs and

benefits, the individual items have to be quantified and valued. The project

analysts should quantify as many items as possible and attach a value or a

degree of significance to each of the remaining items so that the overall merit

or demerit of the project can be determined.

3) Computation of key indicators with discounting future costs and

benefits

Selected indicators are computed on the basis of available data and valuations.

The most commonly applied indicators for public project are the NPV and

IRR. Next, these indicators will undergo uncertainty analysis and then, the

advantages and disadvantages of the project are weighed against each other to

arrive at the project’s overall merit.

                                                        19

4.7.3. Uncertainty Analysis

The previous stages of the framework are carried out under the assumption of

certainty of the future. In reality, there is always uncertainty about the future, and with

uncertainty, there is likely a conflict between what is theoretically correct and

practically feasible (Bierman & Smidt, 1993). The outcome of the project may turn

out to be slightly or considerably different from the initial expectations. Managers in a

firm might tend to be optimistic in their forecasts as they have to compete for

internally rationed funds (Meera, n.d.). Unfortunately, reality seems to prove that an

underestimation of cost is more usual than vice-versa. In other words, it is always the

case that the analysts seem to overestimate the benefit and the potential danger is

underestimated (Sell, 1991).

Therefore, it is obvious that the uncertainty analysis is indispensable and it has

been discussed, in short or great detail, by almost all the literature pertaining to

project evaluation. Each variable needed for uncertainty analysis could be a source of

uncertainty that affects the outcome of the project. Some of the common variables are

the size of investment, operating costs and sales revenue - cash flow estimation

(UNIDO & IDCAS, 1980). The uncertainties might also be caused by inadequate

data, insufficient money and time and poor performance by the project analysts.

Uncertainties are either internal or external. Internal uncertainties are related to the

project itself that constitute the elements and structure of the project. On the other

hand, external uncertainties relate to the surrounding environment of the project in

which it operates such as political, social and economic changes during the lifetime of

project14 (Sang, 1995; UNIDO & IDCAS, 1980).

There are several methods for project analysts to carry out uncertainty analysis.

The simplest one is the break-even analysis. A more systematic approach for

uncertainty analysis is the sensitivity analysis. Sensitivity analysis shows how the

value of the crucial indicators (the NPV, IRR or any other criteria) changes with a

given change in an input variable, sometimes more than one variable, with other

things held constant. This technique is used to determine how sensitive the results of

project evaluation would be in relation to changes in crucial variables or key

14 Some examples of external uncertainties are (1) civil wars might occur; (2) national economy falls
into recession; (3) governments change their policies and priorities; and (4) new laws are imposed.

                                                        20

parameters. Where there are great uncertainties in the future or each variable has a

significant chance of occurrence, probability analysis is recommended. This method

identifies the possible range of each key variable, if not all, and does not restrict the

judgment to a single optimistic, pessimistic or realistic estimation (Brigham &

Houston, 2001; UNIDO & IDCAS, 1980).

4.7.4. Project’s Overall Merit

Based on the uncertainty analysis results, the project’s overall attractiveness from

the commercial and national points of view is presented. This framework for project

evaluation is basically a quantitative analysis of a project to arrive at the present

attractiveness of the project. The analytical quantitative methods and criteria

described here are not exhaustive; rather it is a list of main examples for each stage of

the analysis. The choice of methods and criteria depends on the objectives of project

evaluation, the decision makers, the economic environment, and the availability of

relevant data (Sang, 1995; UNIDO & IDCAS, 1980).

4.8. The Incorporation of the Maslahah Concept and Shari’ah Objectives

Doctrine into the Project Evaluation

The incorporation of the concept of maslahah and Shari’ah objectives doctrine

will greatly distinguish an Islamic framework for project evaluation from the

conventional one. The purpose of incorporating this concept into the framework is to

ensure the adherence of the selected project to the Islamic system as a whole. From

the foregoing discussions, the author has developed Table 1 and Table 2 to illustrate

the priority and values of projects according to the concept of maslahah. Each number

represents the rank of the project from the Shari‘ah point of view. Projects that

receive the highest priority in an Islamic framework are those which have the

Religion element of the Necessities category.

The maslahah and Shari’ah objectives analysis could serve as the qualitative

analysis in an Islamic framework for project evaluation. The analysis will reject

projects that involve forbidden activities such as the provision of riba’, gambling,

non-halal goods or services e.g. liquor, pork etc. Hence, unlawful (haram) projects

will have no place for consideration in an Islamic framework for project evaluation.

                                                        21

The analysis will also include the spiritual and moral effects of the project which are

ignored in the mainstream project evaluation process. A disco project might be

attractive commercially, but its contradiction with the Shari‘ah objectives and

immoral effects make it rejected in the analysis. Similarly, projects that involve caring

for others e.g. looking after orphans, widows, needy persons, old parents or even

animals, or building facilities for pilgrims or wayfarers, or expanding awqaf

institutions may not be attractive commercially, yet they are favourable according to

maslahah and Shari’ah objectives analysis.

Table 1: Classification and Priority of Projects According to the Concept of Maslahah and

Shariah Objectives Doctrine

              Main

         Categories

Essential

Elements of

Man

B
eneath the M

aslahah

N
ecessities

C
onveniences

R
efinem

ents

B
eyond the M

aslahah

Religion U
nacceptable

1st 6th 11th U
nacceptable

Life 2nd 7th 12th

Mind 3rd 8th 13th

Offspring 4th 9th 14th

Wealth 5th 10th 15th

Table 2: Project’s Category, Status and Value According to the Concept of Maslahah

PROJECT

NO. CATEGORY STATUS VALUE

1 Beneath the Maslahah Prohibited & Unacceptable Makruh or Haram

2 Necessities

Required & Acceptable

Wajib

3 Conveniences Mandub

4 Refinements Mubah

5 Beyond the Maslahah Prohibited & Unacceptable Makruh or Haram

Another important impact of integrating maslahah analysis into the framework is

that it would mitigate the conflicts between individual (private) and government

(public) preferences. The concept of maslahah would put the individual maslahah in

                                                        22

line with the social maslahah. This is because the promotion of the five basic

elements is desirable from both the individual and social points of view (Khan &

Ghifari, 1992). Last but not least, maslahah analysis will facilitate the subsequent

procedures in the framework. In terms of quantification and valuation, a project that

falls under the category of Necessities should be given more weight than

Conveniences and Refinements projects. The hurdle rate for Necessities projects

should also be made to be lower than the hurdle rate for Conveniences and

Refinements projects. This adjustment of the hurdle rate, as suggested by Meera

(n.d.), could make socially favourable projects commercially attractive. In carrying

out maslahah analysis, the analysts should also determine the scale of beneficiaries or

lossers from the benefits or losses caused by the project. This is imperative to

distinguish between public (cammah) and individual (khassah) interest generated by

the project. If there is a conflict between public and private interest, the public interest

should be given priority over the private one. There is an Islamic legal maxim that

states, “Individual loss (or damage) is tolerated to ward off public loss (or damage),”

(Al-Masri, 1999). In such a case, the individual interest should be duly compensated

and should not be ignored (Mannan, 1978). Having discussed the framework for

project evaluation and the significance of the concept of maslahah in project

evaluation, the author suggests an integrative Islamic framework for project

evaluation as illustrated in Figure 3. The suggested framework simply integrates the

best elements of both Islamic and mainstream economics.

Figure 3: An Integrative Islamic Framework for Project Evaluation

                                                        23

PROJECT EVALUATION
OBJECTIVES

PROFITABILITY ANALYSIS

COMMERCIAL
PROFITABILITY

NATIONAL
PROFITABILITY

INVESTMENT
PROFITABILITY

ANALYSIS

FINANCIAL
ANALYSIS

SOCIAL COST-
BENEFIT ANALYSIS

UNCERTAINTY ANALYSIS

PROJECT’S OVERALL MERIT

Discounted
Cash-Flow
Methods

Simple Methods Liquidity Analysis
Capital Structure

Analysis

MASLAHAH & SHARIAH
OBJECTIVES ANALYSIS

NECESSITIES CONVENIENCES REFINEMENTS

5. CONCLUDING REMARKS

It is observed that the concept of maslahah or Shari‘ah objectives has a significant

impact on an Islamic framework for project evaluation and would greatly distinguish

the Islamic framework from the mainstream one. It could determine an order of

                                                        24

priorities in an Islamic framework. Maslahah analysis of project is imperative to

ensure the coherence of the selected project with the Shari‘ah’s objectives and the

Islamic system as a whole. Furthermore, the maslahah concept could rationalise the

choice of a project in an Islamic framework even though the selected project seems to

be irrational from the mainstream economics point of view. The maslahah concept

should also represent one of the Islamic values that should be considered by the

project analysts and decision makers in carrying out their judgments. This is

imperative to ensure that decisions made will not contradict the established values in

Islam. From the author’s point of view, maslahah analysis should be carried out prior

to performing the commercial and national profitability analysis of the project.

It is hoped that the international Islamic organisations such as the Islamic

Development Bank (IDB) and the Islamic Fiqh Academy could collaborate and

provide detailed guidelines for project evaluation from the Islamic perspective that are

theoretically Islamic and practically viable as they have the expertise, data and

experience to perform such a task. Cooperation between Islamic countries at the

international level is also needed to accelerate the initiative of the preparation of the

guidelines and such cooperation would give birth to a detailed Islamic framework for

project evaluation. The public and private institutions could establish ranking of

priorities for the potential competing projects based on the Maslahah and Shari’ah

Objectives analysis of the projects. It is a qualitative in nature; however it could be the

starting point of the project evaluation framework from the Islamic perspective.

6. REFERENCES
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mashrucat fi al-iqtisad al-Islami. Mansurah: Dar al-Wafa’.

Ahmad, Adam Mahdi. (1999). Al-Dalil li dirasat al-jadwa al-iqtisadiyyah. Cairo: Al-

Shirkah Al-‘Alamiyyah Li Al-Taba‘ah Wa Al-Nashr.

Ahmad, Sayyid Fayyaz. (1991). The ethical responsibility of business: Islamic

principles and implications. Journal of Objective Studies, 3, 23-43.

Al-Ghazali, Muhammad. 1998. al-Mustasfa min ‘ilm al-usul. Beirut: Dar al-Kutub al-

‘Islamiyyah.

Al-Masri, Rafiq Yunus. (1999). Usul al-Iqtisad al-Islami. Bayrut: Dar Al-Shamiyyah.

                                                        25

Al-Mays, Khalil. (1987). Al-Qawacid al-fiqhiyyah al-kulliyyah wa maqasid al-

Sharicah. International Seminar on Islamic Economics for University Teacher

(Papers). Islamabad: IIIE & IRTI.

Al-Qardawi, Yusuf. (2000). Al-Siyasah al-sharciyyah fi daw’i al-nusus al-Sharicah wa

maqasidiha. Bayrut: Mu’assat Al-Risalah.

Al-Zuhayli, Wahbah. (1998). Usul al-fiqh al-Islami. (2nd ed.). Dimashq: Dar Al-Fikr.
cAli, cAbdullah Yusuf. (2000). The Holy Qur’an: Original Arabic Text with English

Translation & Selected Commentaries. Kuala Lumpur: Saba Islamic Media.

Anand, Manoj. (1993). Economic appraisal of industrial projects. New Delhi: Deep

& Deep Publications.

Bierman, Harold, Jr. & Smidt, Seymour. (1993). The capital budgeting decision:

economic analysis of investments projects. (8th ed.). New York: Macmillan.

Boardman, Anthony E. et al (2001). Cost-benefit analysis: concepts and practice. (2nd

ed.). New Jersey: Prentice Hall.

Brigham, Eugene F. & Houston, Joel F. (2001). Fundamentals of financial

management. (9th ed.). Orlando: Harcourt.

Campen, James T. (1986). Benefit, cost and beyond: the political economy of benefit-

cost analysis. Massachusetts: Ballinger.

Choudhury, Masudul Alam & Malik, Uzir Abdul (1992). The foundations of Islamic

political economy. London: Macmillan.

Haneef, Mohamed Aslam Mohamed. (1997). Islam, the Islamic worldview, and

Islamic economics. IIUM Journal of Economics and Management, 5, 39-65.

Hanley, Nick & Spash, Clive L. (1993). Cost-benefit analysis and the environment.

Aldershot: Edward Elgar.

Hassan, Husayn Hamid (1993). Fiqh al-maslahah wa tatbiqatuhu al-mucasirah (1st

ed.). Jaddah: Al-Bank Al-Islami Li Al-Tanmiyah.

Ibn ‘Ashur, Muhammad Tahir. 1978. Maqasid al-Shari’ah al-‘Islamiyyah. N.pp.: al-

Sharikah al-Tunisiyyah.

Iqbal, Munawar & Khan, M. Fahim. (1981). A survey of issues and a programme for

research in monetary and fiscal economics of Islam. Islamabad: Institute of

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Irvin, George. (1978). Modern cost-benefit methods: an introduction to financial,

economic and social appraisal to development projects. Hampshire: Macmillan.

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Kamali, Muhammad Hashim. (1989). Source, nature and objectives of Sharicah. The

Islamic Quarterly, 33, 215-234.

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Sharicah and some implications for consumer theory. In AbulHasan M. Sadeq &

Aidit Ghazali (Ed.), Readings in Islamic Economic Thought (pp. 176-202).

Selangor: Longman Malaysia.

Khan, Muhammad Akram. (1994). Accounting issues and concepts for Islamic banks.

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Institute of Islamic Banking and Insurance.

Khan, Muhammad Akram. (1997). The role of the government in the economy. The

American Journal of Islamic Social Sciences, 14, 155-171.

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South-Western.

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criteria in an interest-free Islamic economy: a comparative policy approach. In

Mohammad Ariff (Ed.), Monetary and Fiscal Economics of Islam (pp. 43-73).

Jeddah: International Centre for Research in Islamic Economics.

Meera, Ahamed Kameel Mydin (n.d.). Adjusting the hurdle-rate to account for

uncertainty-induced bias and social importance of projects. Unpublished article.

Muqorobin, Masyhudi. (1998). Project evaluation in an Islamic perspective: an

analysis of theoretical structures. M. Econ. Thesis. International Islamic

University Malaysia – Kuala Lumpur.

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Pearce, D. W. (1983). Cost-benefit analysis. (2nd ed.). London: Macmillan.

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fiqhiyyah fi al-Sharicah al-Islamiyyah. (1st ed.). ‘Amman: Dar Al-Furqan.

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al-mashrucat. In Dr. Jamal Al-Din cAtiyyah (Ed.), Majallah Al-Muslim Al-Mucasir

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Prakashan.

                                                        28

About this artcle:

Reference Type: Journal Article
Record Number: 37
Author:   Abdullaah Jalil,
Year:   2006
Title:  The Significances of Maslahah Concept and Doctrine of

Maqasid (Objectives) Al-Shari'ah in Project Evaluation
Journal:  The Journal of Muamalat and Islamic Finance Research

(JMIFR)
Volume:   3
Issue:   1
Pages:   171-202
ISSN:   1823-075X
Language:   English

1. INTRODUCTION

2. THEORETICAL BACKGROUND

2.1. The Concept of Maslahah and Shari‘ah Objectives

2.2. The Analytical Framework

3. LITERATURE REVIEW

3.1. Mainstream Framework

3.2. Islamic Framework

4. DISCUSSION AND RESULTS

4.1. Classification of Projects according to the Concept of Maslahah

4.2. Necessities Category

4.3. Conveniences Category

4.4. Refinements Category

4.7. The Framework for Project Evaluation in Mainstream Economics

4.7.1. Commercial Profitability

4.7.1.1. Investment Profitability Analysis

4.7.1.2. Financial Analysis

4.7.2. National Profitability

4.7.2.1. Social Cost-Benefit Analysis

4.7.3. Uncertainty Analysis

4.7.4. Project’s Overall Merit

4.8. The Incorporation of the Maslahah Concept and Shari’ah Objectives Doctrine into the Project Evaluation

5. CONCLUDING REMARKS

6. REFERENCES


Issued on: 13 April 2017 BNM/RH/PD028-4

Kafalah
Policy Document

Applicable to:
1. Licensed Islamic banks
2. Licensed takaful operators and professional retakaful operators
3. Licensed banks and licensed investment banks carrying on Islamic banking business
4. Prescribed institutions carrying on Islamic financial business

Kafalah  1 of 18

Issued on: 13 April 2017                                                                                BNM/RH/PD028-4

TABLE OF CONTENTS

PART A OVERVIEW ............................................................................................... 3

1. Introduction ................................................................................................ 3

2. Applicability ............................................................................................... 4

3. Legal provisions ........................................................................................ 4

4. Effective date ............................................................................................. 4

5. Interpretation ............................................................................................. 4

6. Related legal instruments and policy documents ...................................... 5

PART B SHARIAH REQUIREMENTS AND OPTIONAL PRACTICES ................... 6

7. Compliance with Part B ............................................................................. 6

8. Definition ................................................................................................... 6

9. Nature........................................................................................................ 6

10. Components of kafalah ............................................................................. 6

11. Contracting parties .................................................................................... 6

12. Offer (ijab) of kafalah ................................................................................. 7

13. Subject matter of kafalah ........................................................................... 7

14. Rights and responsibilities ......................................................................... 7

15. Imposition of fees or charges on kafalah ................................................... 9

16. Recourse and recovery ............................................................................. 9

17. Arrangement of kafalah with other contracts or concepts .......................... 9

18. Dissolution of kafalah .............................................................................. 10

19. Completion of kafalah .............................................................................. 10

PART C GENERAL OPERATIONAL REQUIREMENTS FOR KAFALAH
CONTRACT ............................................................................................................. 11

20. Background ............................................................................................. 11

21. Governance and oversight ...................................................................... 11

22. Structuring ............................................................................................... 12

23. Risk management ................................................................................... 13

24. Business and market conduct ................................................................. 14

25. Financial disclosure ................................................................................. 14

PART D SPECIFIC OPERATIONAL REQUIREMENTS .......................................... 14

26. Specific operational requirements where the IFI enters into kafalah in the
capacity of a guarantor ......................................................................................... 14

27. Specific operational requirements where the IFI enters into kafalah in the
capacity of a beneficiary ....................................................................................... 15

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PART E SUBMISSION REQUIREMENT ................................................................. 16

28. Submission Requirement ........................................................................ 16

APPENDICES .......................................................................................................... 17

APPENDIX 1 Legitimacy of kafalah ................................................................... 17

APPENDIX 2 Glossary ...................................................................................... 18

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PART A OVERVIEW

1. Introduction

 1.1 Compliance with Shariah requirement is a prerequisite in ensuring the
legitimacy and integrity of Islamic financial products and services. In meeting
this expectation, it is essential for an Islamic financial institution (IFI) to
establish the necessary operational framework and infrastructure to ensure
that the conduct of the Islamic financial transactions is consistent with
Shariah.

 1.2 The Shariah contract-based regulatory policy is intended to promote
consistency of Shariah contract application in Islamic financial products and
services. This policy is envisaged to strengthen legal certainty and Shariah
compliance practices by the IFI.

 1.3 Kafalah refers to a contract where the guarantor conjoins the guaranteed
party in assuming the latter’s specified liability. In the context of Islamic
financial transactions, kafalah is used by the IFI to provide guarantee
services, such as bank guarantee, standby letter of credit and shipping
guarantee. It is also being used as one of the contracts to supplement various
primary Islamic financial products, predominantly for risk mitigation purposes,
such as musyarakah, mudarabah, murabahah, istisna´, ijarah and tawarruq.

 1.4 This objectives of this policy document are to:
(a) provide reference on the applicable Shariah rulings for kafalah contract;
(b) set out key operational requirements for the implementation of kafalah

contract; and
(c) promote end-to-end compliance with Shariah requirements which

further promote sound banking practices safeguard consumers’
interests.

 1.5 This policy document sets out the following:
(a) salient features and essential conditions of kafalah in Part B; and
(b) regulatory and supervisory expectations for the operational

requirements on governance and oversight, structuring, risk
management, financial reporting and business and market conduct in
Parts C and D.  Part C provides general operational requirements for a
kafalah contract, whereas Part D provides specific operational
requirements where the IFI is in the capacity of a guarantor or a
beneficiary.

 1.6 This policy document covers the application of kafalah contract in financial
products and services offered by the IFI.

 1.7 For the purpose of the policy document, the subject matter of kafalah is
confined to financial guarantees (kafalah bi al-mal). Therefore, guarantee on
ensuring presence of certain person (kafalah al-nafs) and appearance of
certain person (kafalah al-wajh) are excluded from the application of this
policy document.

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2. Applicability

 2.1 Subject to paragraph 2.2, this policy document is applicable to all IFIs as
defined in paragraph 5.2.

 2.2 A licensed takaful operator and professional retakaful operator is only
required to comply with Part B of this policy document.

3. Legal provisions

 3.1 The requirements in Part B of this policy document are specified pursuant to:
(a) section 29(1)of the Islamic Financial Services Act 2013 (IFSA); and
(b) section 33E of the Development Financial Institutions Act 2002 (DFIA).

 3.2 The requirements in Part C, D and E of this policy document are specified

pursuant to:
(a) sections 29(2), 57(1), 135(1) and 155 of the IFSA; and
(b) sections 33E(2), 41, 42C(1) and 116 of the DFIA.

 3.3 The guidance in this policy document is issued pursuant to section 277 of the
IFSA and section 126 of the DFIA.

4. Effective date

 4.1 This policy document comes into effect on 1 January 2018 except for Part E
which shall take effect immediately upon the issuance of this policy
document.

5. Interpretation

 5.1 The terms and expressions used in this policy document shall have the same
meanings assigned under the IFSA, Financial Services Act 2013 (FSA), and
DFIA, as the case may be, unless otherwise defined in this policy document.

 5.2 For the purpose of this policy document–

“S”   denotes a standard, an obligation, a requirement, specification, direction,

condition and any interpretative, supplemental and transitional
provisions that must be complied with. Non-compliance may result in
enforcement action.

 “G” denotes guidance which may consist of statements or information
intended to promote common understanding and advice or
recommendations that are encouraged to be adopted.

“Islamic financial institution” or “IFI” means any:
(a) licensed Islamic bank;
(b) licensed takaful operator and professional retakaful operator;
(c) licensed bank and licensed investment bank and approved under

section 15(1)(a) of the FSA to carry on Islamic banking business; and

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(d) prescribed institution and approved under section 33B of the DFIA to
carry on Islamic financial business.

 5.3 A glossary of terms used in this policy document is set out in Appendix 2.

6. Related legal instruments and policy documents

 6.1 This policy document must be read together with other relevant legal
instruments, policy documents or guidelines that have been issued by the
Bank.

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PART B SHARIAH REQUIREMENTS AND OPTIONAL PRACTICES

7. Compliance with Part B

S 7.1 An IFI which uses the kafalah contract for its products and services shall
ensure that such products and services are in compliance with Part B of this
policy document.

8. Definition

S 8.1 Kafalah refers to a contract where the guarantor conjoins the guaranteed
party in assuming the latter’s specified liability.

9. Nature

S 9.1 The specific inherent nature of kafalah is to provide assurance on the
fulfilment of an obligation of the guaranteed party’s liability.

S 9.2 Kafalah is binding on the guarantor.

 10. Components of kafalah

S 10.1 The components of a kafalah shall consist of the following:
(a) contracting parties, namely the guarantor (kafil), the beneficiary (makful

lahu), and the guaranteed party (makful ‘anhu);
(b) offer (ijab) by guarantor; and
(c) subject matter of kafalah.

 11. Contracting parties

S 11.1 The contracting parties in the kafalah contract are the guarantor (kafil), the
beneficiary1 (makful lahu) and the guaranteed party2 (makful `anhu).

S 11.2 The guarantor shall have the legal capacity3 to enter into the kafalah contract.

S 11.3 The contracting parties in the kafalah contract shall be a natural person or a
legal entity.

G 11.4 A guaranteed party may be guaranteed by more than one guarantors.

1
 The beneficiary is a creditor or a party who has the right to claim the liability from the guaranteed
party (makful `anhu) or the guarantor (kafil).

2
 The guaranteed party is a debtor or a party guaranteed by the guarantor.

3
 The legal capacity of a person, from Shariah perspective, is defined as capacity to assume rights
and responsibilities; and capacity to give legal effect to his action. Among the important conditions
are that the person must possess sound mind and the capacity to distinguish between what is
harmful or beneficial to one’s interests. Legal capacity of a legal entity is defined as eligibility of an
entity to acquire rights and assume responsibilities. In Malaysia, the legal capacity is governed
under the Contracts Act 1950 and the Age of Majority Act 1971.

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 12. Offer (ijab) of kafalah

S 12.1 The kafalah contract shall be effected by an offer from the guarantor to
provide kafalah.

G 12.2 In relation to paragraph 12.1, the offer may be expressed orally, in writing or
by any other methods which could be evidenced by appropriate
documentation or record.

 13. Subject matter of kafalah

S 13.1 The subject matter of the kafalah shall not be any obligation arising from
Shariah non-compliant contracts or activities.

G 13.2 The subject matter of the kafalah is categorised into:
(a) kafalah al-dayn (guarantee of a debt liability); and
(b) kafalah al-`ayn (guarantee to deliver a physical asset).

G 13.3 The obligation arising from Shariah compliant contracts or activities for the
purpose of kafalah may involve any of the following:
(a) a financial liability or obligation of the guaranteed party that is already

established or that will be established in the future;
(b) performance of a certain act by the guaranteed party;
(c) fulfilment of an obligation by the guaranteed party; or
(d) a combination of any or all of the above.

G 13.4 Subject to the beneficiary’s consent, the guarantor may fulfil the guaranteed

liability under the kafalah by compensating an agreed amount to the
beneficiary.

 MANAGEMENT OF KAFALAH

 14. Rights and responsibilities

G 14.1 The guarantor may provide kafalah without conditions (unrestricted kafalah)
or with conditions (restricted kafalah).

S 14.2 The guarantor’s liability under an unrestricted kafalah shall be in accordance
with the terms and conditions of the original liability between the guaranteed
party and the beneficiary.

G 14.3 The guarantor may provide a restricted kafalah whereby the terms and
conditions of the guarantee are specified.  The specified terms and conditions
may include time, effective date, trigger events, amount or any additional
terms and conditions of the guarantee which are acceptable by Shariah.

S 14.4 In the case of paragraph 14.3, the terms and conditions of a restricted kafalah
shall be consistent with the terms and conditions of the original liability
between the guaranteed party and the beneficiary.

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S 14.5 The guarantor’s liability under a restricted kafalah shall be in accordance with
the specified terms and conditions and consistent with the original liability
referred to in paragraphs 14.3 and 14.4.

G 14.6 The beneficiary may claim his rights from the guaranteed party or the
guarantor, either for:
(a) the full amount of the liability from either of them; or
(b) a part of the liability from the guaranteed party and the other part from

the guarantor or guarantors (based on the agreed sequence, if any).

G 14.7 The guarantor may stipulate a condition that the beneficiary shall first claim
from the guaranteed party and will only claim from the guarantor if the
guaranteed party is unable to settle his liability.

S 14.8 If the guaranteed liability becomes claimable before its maturity due to the
demise or dissolution of the guaranteed party or any agreed trigger events,
the kafalah contract remains enforceable unless otherwise specified.

G 14.9 The guarantor may request the guaranteed party to place an asset as
collateral at the inception of the kafalah contract.

G 14.10 If the beneficiary grants the guaranteed party an extension period to settle the
liability, such extension may also apply to the guarantor.

S 14.11 The contracting parties must obtain the guarantor’s consent before the period
to settle the guaranteed liability referred to in paragraph 14.10 can be
extended.

S 14.12 However, if the extension period to settle the liability is granted by the
beneficiary to the guarantor only, such extension shall not be applicable to
the guaranteed party.

G 14.13 In the event that the kafalah involves more than one guarantors, the
contracting parties may agree to the specific terms of the guarantee such as
priority of claims against each guarantor, the guarantee limit, and the extent
of their respective liabilities, whether jointly, severally or both.

S 14.14 In the event the guarantor’s demise occurs before his obligation under the
kafalah contract is due, the guarantor’s liability ceases to exist unless
otherwise specified in the kafalah contract that the beneficiary may claim the
guaranteed amount against the guarantor’s estate when it becomes due.

G 14.15 In the event the guarantor’s demise occurs after his obligation under the
kafalah contract is due, the beneficiary may claim the guaranteed amount
from the guaranteed party first before claiming it against the guarantor’s
estate.

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 15. Imposition of fees or charges on kafalah

G 15.1 The guarantor may impose a fee for providing the kafalah service.

G 15.2 Pursuant to paragraph 15.1, the fee as agreed in the kafalah contract may be
in the form of:
(a) an agreed fixed amount; or
(b) a percentage of the guaranteed amount.

 16. Recourse and recovery

S 16.1 The guarantor shall have the right of recourse against the guaranteed party
even though the kafalah is given on a voluntary basis.

S 16.2 The guarantor is only entitled to recourse up to the amount he has paid to the
beneficiary as a result of providing the kafalah.

G 16.3 Notwithstanding paragraph 16.2, the guarantor may recover from the
guaranteed party the total cost associated with payment of the kafalah
amount to the beneficiary.

G 16.4 In the event that the guarantor has a debt obligation against the guaranteed
party, the amount of recourse may be set-off against the debt obligation.

S 16.5 The right of recourse arises subsequent to the payment to the beneficiary or
at such times as agreed between the guarantor and the guaranteed party.

G 16.6 If the guaranteed party fails to settle the amount claimed by the guarantor
within the agreed time frame pursuant to exercising the guarantor’s right of
recourse, the guaranteed party is subjected to the late payment charges as
determined by the relevant authorities.4

S 16.7 In the event that the guarantor fails to fulfil his commitment towards the
beneficiary’s claim as stipulated in the kafalah contract, he shall be subjected
to the same actions as may be taken against the guaranteed party.

 17. Arrangement of kafalah with other contracts or concepts

G 17.1 Kafalah may be arranged with other Shariah contracts or concepts including
exchange-based contract, agency contract, partnership contract, benevolent
(tabarru`at) contract and wa`d provided that requirements for the
arrangement of kafalah with such contracts/concepts are observed5.

4
 Refer to paragraph 26.1.

5
 Refer to the relevant policy documents relating to such Shariah contracts or concepts.

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 DISSOLUTION (FASAKH) AND COMPLETION (INTIHA’) OF KAFALAH
CONTRACT

 18. Dissolution of kafalah

S 18.1 Subject to paragraph 18.2, a kafalah contract is dissolved when the
beneficiary discharges the guarantor from the guaranteed liability, whether or
not at the guarantor’s request. The discharge of the guarantor’s liability shall
not affect the responsibility of the guaranteed party to fulfil his obligations to
the beneficiary.

S 18.2 If a fee is paid by the guaranteed party for the kafalah, the kafalah contract
shall not be dissolved without the consent of the guaranteed party.

 19. Completion of kafalah

S 19.1 The kafalah completes upon the occurrence of any of the following
circumstances:
(a) full settlement of the guaranteed liability by the guaranteed party, his

agent (wakil), or the guarantor;
(b) set-off (muqassah) of full debt obligations between the beneficiary and

the guaranteed party;
(c) the beneficiary waives his right to claim the whole of the guaranteed

liability from the guaranteed party; or
(d) expiry of the guarantee period or period to claim the guaranteed liability

by the beneficiary.

S

19.2 Upon completion of the kafalah, the guarantor shall be discharged from the
specified liability under the kafalah contract.

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 PART C GENERAL OPERATIONAL REQUIREMENTS FOR KAFALAH
CONTRACT

 20. Background

G 20.1 An IFI may enter into a kafalah in the capacity of a guarantor or beneficiary
and, below are some of the common applications of the kafalah:
(a) in the capacity of a guarantor, the IFI provides a guarantee to a third

party in favour of its customers through various kafalah-based financial
products such as bank guarantee, standby letter of credit and shipping
guarantee; and

(b) in the capacity of a beneficiary, the IFI accepts the guarantee provided
by a third party in favour of its customers for the financing facilities
extended, as a risk mitigation tool for the IFI or a credit enhancing tool
for the customer.

 21. Governance and oversight

S 21.1 The IFI must establish a sound governance structure to facilitate effective
oversight on the management and implementation of kafalah.

S 21.2 The board of director (the Board) shall be responsible for Shariah governance
and Shariah compliance of the IFI. As such the Board must:
(a) approve the IFI’s business and risk strategies with regard to the

application of the kafalah;
(b) approve and oversee the implementation of the IFI’s relevant internal

policies and procedures governing kafalah;
(c) ensure the internal policies are reviewed regularly in order to remain

current, relevant and adequate to ensure the operational conduct and
risk profile of kafalah are managed appropriately. Any material changes
to the internal policies must be approved by the Board;

(d) ensure that all Shariah-related matters are endorsed by the Shariah
Committee (SC); and

(e) ensure that independent reviews are conducted regularly to assess
compliance to the standards issued by the Bank and internal policies
established by the IFI.

S 21.3 The SC shall be responsible to advise the IFI in ensuring its business, affairs
and activities comply with Shariah, which includes activities relating to the
kafalah. As such, the SC must:
(a) endorse relevant internal policies and procedures governing the

application of a kafalah contract from Shariah perspective;
(b) review and endorse the terms and conditions provided in

documentations including fees and charges, contracts, product manual,
marketing advertisement, sales illustrations and brochures;

(c) assess the work carried out by Shariah review and Shariah audit,
identify issues and propose appropriate corrective measures; and

(d) advise and provide clarification on relevant Shariah rulings, decisions
or guidelines on Shariah matters issued by the Bank, and if relevant,
any other authorities.

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S 21.4 The senior management shall be responsible to ensure that the business and
operations of the IFI comply with Shariah. As such, the senior management
must:
(a) develop and implement internal policies and procedures governing

kafalah transactions. At minimum, the internal policies must include:
(i) the structuring policies;
(ii) risk management policies; and
(iii) business and market conduct policies.

(b) ensure adequate system and infrastructure to support kafalah
implementation, Shariah audit and Shariah compliance;

(c) clearly communicate the approved internal policies to internal
stakeholders to facilitate effective implementation;

(d) undertake regular review and compliance monitoring on the
established policies and seek the Board’s approval on enhancement to
the policies; and

(e) ensure timely disclosure of relevant information to the Board and the
SC.

 22. Structuring

S 22.1 The IFI must ensure structuring of kafalah is consistent with Shariah
requirements and is supported by comprehensive policies and procedures, as
well as robust documentations.

 Structuring policies

S 22.2 The IFI must ensure that policies and procedures governing the structuring of
kafalah (structuring policies) are in place. At minimum, the structuring policies
must include:
(a) methodologies in ascertaining fees and charges;
(b) criteria and conditions to determine the acceptable collateral/ security

for kafalah;
(c) procedures with regard to claims, recourse and recovery, which include

the recourse period, claims limit, forms of notification and payment
method(s); and

(d) procedures in ensuring subject matter of the kafalah is not from
Shariah non-compliant contract or activities.

 Documentation

S 22.3 The IFI must ensure legally enforceable documents6 are adopted to reflect
kafalah.

S 22.4 The IFI must ensure that terms and conditions that are prohibited by Shariah
are excluded from the documentations.

6
 Include contracts, agreements and other generally acceptable documents in financial transactions.

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S 22.5 Pursuant to paragraph 17.1, when kafalah is applied with a wakalah, the
contracts shall be entered into independently and separately where the effect
of one contract shall not be interrelated to the other.

S 22.6 If Arabic terminologies are used in the documentations, the IFI must provide
clarification and explanation on such terminologies to the customer.

S 22.7 The IFI, at minimum, must include the terms and conditions of the kafalah in

relevant documentation, covering the following aspects:
(a) roles and responsibilities of the contracting parties;
(b) fees and charges, where applicable;
(c) purpose of guarantee;
(d) tenure of guarantee, where applicable;
(e) guaranteed amount, where applicable;
(f) expiry date and claim period, where applicable;
(g) claims procedure and priority of claims, where applicable;
(h) recourse and recovery terms including the recourse period, forms of

notification and payment method;
(i) fee refund procedure, if applicable, in the event of early termination or

deferred commencement of the kafalah;
(j) collateral including the types of collaterals, tenure and criteria to

release the collateral or security;
(k) termination and completion events of the kafalah; and
(l) requirements for all contracting parties to ensure continuous

compliance with Shariah.

 23. Risk management

S 23.1 The IFI must institute and implement a sound risk management framework to
effectively manage risks associated with a kafalah.

 Risk Management Policies

S 23.2 The IFI must establish risk management policies associated with kafalah.

S 23.3 At minimum, the IFI’s risk management policies must include the following:
(a) processes and procedures for the identification, measurement,

monitoring, reporting and control of all risk exposures associated with
kafalah;

(b) internal limits on risk exposures in line with the risk appetite and
capacity of the IFI;

(c) appropriate risk mitigation measures, including Shariah screening,
valuation of the collateral and credit assessment of the customer; and

(d) reporting requirements to the Board, the SC and the senior
management.

S 23.4 The IFI must establish processes to periodically review and update the risk
management policies, procedures and internal limits to ensure consistency
with the risk appetite of the IFI.

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 24. Business and market conduct

S 24.1 Kafalah must be undertaken in a fair and transparent manner in line with
Shariah to protect interest of contracting parties.

S 24.2 The IFI must give due regard to the interests of all contracting parties in its
policies and procedures to ensure that the kafalah is conducted in a fair,
transparent, responsible and professional manner, in line with Shariah
requirements.

 Business and market conduct policies

S 24.3 The internal policies and procedures of the IFI on business and market
conduct for the kafalah must reflect fair dealing practices to the contracting
parties, including:
(a) information provided to the customer is accurate, clear and not

misleading; and
(b) fees and charges, where applicable, are disclosed to the customer.

 Disclosure of information

S 24.4 The IFI must facilitate the contracting parties to understand the concept of
kafalah.

 25. Financial disclosure

S 25.1 The IFI shall provide adequate financial disclosure to facilitate the
stakeholders in the understanding and assessment of kafalah.

S 25.2 The IFI must maintain accounting records and other records in a timely
manner that will sufficiently enable the preparation and reporting of true and
fair financial statements.

 PART D SPECIFIC OPERATIONAL REQUIREMENTS

 26. Specific operational requirements where the IFI enters into kafalah in
the capacity of a guarantor

 Structuring

S 26.1 Pursuant to paragraph 16.6, in the event where the IFI impose late payment
charges, the treatment must be in accordance with the Guidelines on Late
Payment Charges for Islamic Financial Institutions.

 Risk Management

S 26.2 The IFI must perform credit appraisal on the guaranteed party based on
relevant internal policy prior to the provision of kafalah products and services.

G 26.3 In executing kafalah, the IFI may require the guaranteed party to provide
collateral or security to safeguard itself against events of default.

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S 26.4 For purposes of paragraph 26.3, if the collateral is in the form of other than
cash, the IFI must ensure periodic valuation of the collateral, in accordance
with the internal policies and procedures.

S 26.5 Pursuant to subparagraph 22.2(b), the IFI must take into account funding
liquidity risk of the collateral or security accepted in setting out the exposure
limit for the kafalah.

S 26.6 In relation to paragraph 14.13, for kafalah that involves more than one
guarantors, the IFI must ensure that the terms of the kafalah, such as priority
of claims and guarantee limit by guarantors, are clearly stipulated in the legal
documentation.

 Business and market conduct

S 26.7 To ensure that the potential customer is able to make an informed decision,
the IFI must disclose and provide adequate information to the potential
customer in the marketing or promotional materials, product disclosure sheet
and any other relevant materials with regard to the kafalah during the pre-
contractual stage and at time of entering into the contract. The information
must include:
(a) key features of the kafalah;
(b) salient terms and conditions of kafalah, such as:

(i) tenure and purpose;
(ii) rights and obligations of the contracting parties;
(iii) significant risks associated with the kafalah;
(iv) fees and charges that will or may be payable by the contracting

parties and the time at which those amount will or may be
payable; and

(v) the requirements for collateral, if any.

S 26.8 During the term of the kafalah, the IFI must communicate to the customer7
any changes to the contract, including the terms and conditions, features of
financial products, and rights and obligations of the customer.

S 26.9 The IFI must honour the claim by the beneficiary subject to the terms and
conditions set out in the kafalah contract, provided that the kafalah has not
been dissolved or terminated.

 27. Specific operational requirements where the IFI enters into kafalah in
the capacity of a beneficiary

 Risk Management

S 27.1 The IFI must ensure the effectiveness of kafalah as a risk mitigation tool.  At
minimum, the IFI must:
(a) assess capability of the guarantor in fulfilling the obligation under the

kafalah; and

7
 Subject to Guidelines on Product Transparency and Disclosure

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(b) ensure that the kafalah contract is enforceable.

 Business and market conduct

S

27.2 The IFI must explain the terms and conditions of the kafalah contract to the
guarantor.

G 27.3 In relation to paragraph 22.7(g) and in pursuing rights under its kafalah
contract, the IFI should not commence any action against the guarantor,
unless the IFI has first claimed the guaranteed liability against the guaranteed
party and the guaranteed party is unable to settle his liability.

 PART E SUBMISSION REQUIREMENT

 28. Submission Requirement

S 28.1 The Board and the SC must respectively approve and endorse the IFI’s
implementation plan to ensure compliance with the policy document by 1
January 2018.

S 28.2 The IFI that offers any product or service that is structured based on kafalah,
must submit the implementation plan to Jabatan Perbankan Islam dan
Takaful (JPIT) by 31 October 2016.

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APPENDICES

APPENDIX 1 Legitimacy of kafalah

1. The legitimacy of the kafalah contract is derived from the Quran and founded

on the Sunnah of Prophet Muhammad (peace be upon him) and the consensus
of the muslim jurists (ijma`).

The Quran

2. The following verse of the Quran implies the permissibility of the kafalah
contract:

[The officials] said, "We are missing the king's goblet.” [And their chief added],
"He who brings it shall have a camel-load of provisions; I personally guarantee
it."8

The Sunnah of Prophet Muhammad (peace be upon him)

3. The following hadith implies the permissibility of kafalah.

 فأيت دين، وعليه مات رجل على يصلي ال وسلم عليه اهلل صلى اهلل رسول كان: قال جابر، عن
 قتادة أبو فقال. صاحبكم على صلوا: قال ديناران، نعم،: قالوا دين؟ أعليه: فقال مبيت،

.وسلم عليه اهلل صلى اهلل رسول عليه فصلى: قال. اهلل رسول يا علي مها: األنصاري
Jabir narrated: The Messenger of Allah (peace be upon him) would not perform
funeral prayer over a person who died while a debt was due from him. The body
of a Muslim was brought to him, and he asked: “Is there any debt due from him?”
[The companions] said: “Yes, two dinars.” He said: “Pray over your companion
[as he has unpaid debt].” Then Abu Qatadah al-Ansari said: “I shall pay them,
Messenger of Allah.” The Messenger of Allah (peace be upon him) then prayed
over him."9

Consensus of the Muslim jurists (Ijma’)

4. The Muslim jurists have reached ijma` on the permissibility of kafalah in
general, as cited by Ibn Qudamah10.

8
 Surah Yusuf, verse 72.

9
 Abu Daud, Sunan Abi Daud, hadith no. 3343.

10
 Ibn Qudamah, Al-Mughni, 4:400.

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Issued on: 13 April 2017                                                                                BNM/RH/PD028-4

APPENDIX 2 Glossary

For the purpose of this policy, the following terms shall have the following definitions:

Terms Definition

Dayn lazim A legally binding debt

Ibra’ Rebate

Ijma` Consensus of Muslim jurists

Kafalah al-`ayn Guarantee of a physical asset

Kafalah al-dayn Guarantee of a debt liability

Kafalah bi al-mal Financial guarantee

Kafil Guarantor

Makful `anhu
The guaranteed party who is a debtor or a party guaranteed
by the guarantor

Makful lahu
The beneficiary who is a creditor or a party who has the right
to claim the liability (debt) from the guaranteed party (makful
`anhu) or the guarantor (kafil)

Ma ya’ul ila luzum A debt that will become legally binding in the future

Muqassah Offsetting

Tabarru`at Benevolent

`Urf
Common business practice which is acceptable by the
community and does not contradict the Shariah rulings

Wa`d Promise or undertaking