AN ISLAMIC FRAMEWORK FOR PROJECT EVALUATION:
A THEORETICAL STUDY

BY

ABDULLAAH BIN JALIL

MANAGEMENT CENTER
INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

 i

AN ISLAMIC FRAMEWORK FOR PROJECT
EVALUATION: A THEORETICAL STUDY

By

ABDULLAAH BIN JALIL

Project Paper Submitted in Partial Fulfilment of the Requirement For the Degree of
Master of Business Administration

Management Center
International Islamic University Malaysia

2003

 ii

APPROVAL PAGE

I certify that I have supervised and read this Project Paper and that in my opinion it
conforms to acceptable standards of scholarly presentation and is fully adequate, in
scope and quality, as a Project Paper for the degree of Master of Business
Administration.

      ______________________________________
      Assoc. Prof. Dr. Ahamed Kameel Mydin Meera
      Supervisor

This Project Paper was submitted to the Management Center, IIUM and is accepted as
partial fulfilment of the requirements for the degree of Master of Business
Administration.

      ______________________________________
      Br. Mustapha Omar Mohamed
      Project Paper Examiner

This Project Paper was submitted to the Management Center, IIUM and is accepted as
partial fulfilment of the requirements for the degree of Master of Business
Administration.

      ______________________________________
      Assoc. Prof. Dr. Nik Nazli Nik Ahmad
      Chairperson
         MBA Project Paper Committee
      Management Center
      International Islamic University Malaysia

 iii

DECLARATION AND COPYRIGHT

Name   : ABDULLAAH BIN JALIL
Matric Number : G 0219795

I hereby declare that this research is the result of my own investigations, except where
otherwise stated.  Other sources are acknowledged by footnotes giving explicit
references and a bibliography is appended.

Signature:_________________________   Date:  6th July 2004

© Copyright by Abdullaah Bin Jalil and
International Islamic University Malaysia

 iv

This work is dedicated to

(1)

My beloved parents, Hj. Jalil Omar and Hapisah Ismail

Who have guided and encouraged me along the way

(2)

My brothers, Abdurrahman, Ibraahiim, Abdul ‘Afuww, Ismaaiil and Yuusof

and my adored sister, Ufairah ‘Adilah

for their encouragement, love and support

May Allah’s guidance and blessing be upon them in this world as well as in the

hereafter

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ACKNOWLEDGEMENTS

 بسم اهللا الرمحن الرحيم
احلمد هللا محد الشاكرين والصالة والسالم على املبعوث رمحةً للعاملني سيد األنبياء

واملرسلني حممد وعلى آله وصحابته ومن اهتدى ديه وسار على جه إىل يوم الدين
:وبعد

First and foremost, my highest appreciation and gratitude is for Allah S.W.T. whose
assistance and tawfiq have led me to the completion of this writing although I have
faced some difficulties and various constraints. May this exertion be accepted by Him
as one of my good deeds to attain His blessings. This learning process really teaches
me that success cannot be achieved overnight.

In carrying out this project paper, I am indebted to several people around me whose
help is undeniable. I would like to take this opportunity to extend my profound
appreciation to my respected supervisor, Asst. Prof. Dr. Ahmad Kamel Mydin Meera
who meticulously guided and supported me with his exceptional comments and ideas
to the completion of this project paper.

Then, I whole-heartedly acknowledge the great assistance of the staff of the
Management Center, IIUM for their great commitment and kindness in helping me in
completing my study here together with this project paper. In addition to that, special
thanks are due to all IIUM staff, especially the Library and Islamic Economics Centre
division for the obtained materials and Mr. Adnan Holden for proof-reading this
project paper.

Next, I would like to record my deepest gratitude and appreciation to all my
colleagues for their dedication and support during my study here. They have shown
me the sincere meaning of cooperation and teamwork during our studies here.

And, to those who have contributed directly or indirectly to the completion of this
project paper, may Allah S.W.T. bestow the best upon you as He is the best conferrer.

Last but not least, my thanks to my beloved parents, Hj. Jalil Omar and Hapisah
Ismail, my brothers, Abdurrahman, Ibraahiim, Abdul ‘Afuww, Ismaaiil, Yuusof, and
my lovely sister, Ufairah ‘Adilah, for their unconditional love that inspired me along
the way.

 vi

TABLE OF CONTENTS

Approval Page          ii

Declaration and Copyright Page       iii

Dedication          iv

Acknowledgements         v

Table of Contents         vi

List of Tables          x

List of Figures          ix

List of Abbreviations          xii

Abstract          xiii

1. INTRODUCTION

1.1 Problem Statement        1

1.2 Objectives of the Study       2

1.3 Significance of the Study       3

1.4 Research Methodology       4

1.5 Limitations of the Study       5

1.6 Organisation of the Project Paper      6

2. PART ONE: PROJECT EVALUATION FRAMEWORK IN

MAINSTREAM ECONOMICS

2.1 Definition of Project        7

2.2 Project Evaluation Definition and Function     8

2.3 Project Evaluation vis-à-vis the Project Cycle    10

 2.3.1 Project Formulation       12

 2.3.2 Feasibility Study       12

 2.3.3 Investment Decision       15

 vii

 2.3.4 Implementation        16

 2.3.5 Ex-Post Evaluation       16

2.4 Overview on the Major Developments of the Project Evaluation

Framework in Mainstream Economics     17

2.5 The Framework for Project Evaluation     21

 2.5.1 Commercial Profitability      23

  2.5.1.1 Investment Profitability Analysis    23

  2.5.1.2 Financial Analysis      25

 2.5.2 National Profitability       26

  2.5.2.1 Social Cost-Benefit Analysis     27

 2.5.3 Uncertainty Analysis       28

 2.5.4 Project’s Overall Merit       29

2. PART TWO: REVIEW OF THE FRAMEWORK: ISLAMIC POINT OF

VIEW

2.6 The Raison D'être for Ex-Ante Project Evaluation from the Islamic

Standpoint         32

2.7 The Mainstream Framework for Project Evaluation: Review of the Main

 Issues from the Islamic Standpoint      33

 2.7.1 The Need to Accommodate Shari‘ah Objectives   34

 2.7.2 The Principle of Cost Benefit Analysis     36

 2.7.3 The Rationale for Discounting Project’s Cost and Benefit  38

  2.7.3.1 Positive Time Preference     39

  2.7.3.2 Discounting Future Costs and Benefits   41

  2.7.3.3 Discount Rate       42

  2.7.3.4 Time as an Element in Contract of Exchange and Project

   Evaluation       43

 2.7.4 The Notion of (Commercial) Profit Maximisation for Private

    Projects         45

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3. THE CONCEPT OF MASLAHAH (SHARI‘AH OBJECTIVES) IN

PROJECT EVALUATION

3.1 Introduction         48

3.2 The Concept of Maslahah: Shari‘ah Objectives    48

3.3 Classification of Projects According to the Concept of Maslahah  50

 3.3.1 Necessities (Daruriyyat)      52

 3.3.2 Conveniences (Hajiyyat)      55

 3.3.3 Refinements (Tahsiniyyat)      56

3.4 The Rules Governing the Relationships amongst the Three Categories of

 Maslahah         56

3.5 Beyond the Maslahah: Al-Israf and Al-Tabdhir    58

3.6 Beneath the Maslahah: Al-Taqtir      59

3.7 The Incorporation of the Maslahah Concept into the Project Evaluation  60

3.8 The Need for Continuous Judgment      63

4. ISLAMIC VALUES IN PROJECT EVALUATION

4.1 Introduction         65

4.2 Islamic Value 1: Preservation of Future Generations’ Welfare  66

4.3 Islamic Value 2: Environmental Balance     67

4.4 Islamic Value 3: Public Interest is Given Priority over Private Interest 69

4.5 Islamic Value 4: Balance between Physical and Spiritual Development 70

4.6 Islamic Value 5: Avoidance of Both Extravagance and Niggardliness 71

4.7 Islamic Value 6: Promotion of Cooperation and Partnership   72

5. CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion         76

5.2 An Islamic Framework for Project Evaluation    78

5.3 Suggestions for Further Research      80

BIBLIOGRAPHY         81

GLOSSARY          87

 ix

APPENDIX 1          91

APPENDIX 2          94

LIST OF TABLES

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

Maslahah

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

Maslahah

 x

LIST OF FIGURES

Figure 1:  Steps Involved in the Project Formulation Stage

Figure 2:  The Relationship between the Economic/Investment Plan, Project

Cycle, Project Feasibility Study and Project Evaluation

Figure 3:  The Framework for Project Evaluation in Mainstream Economics

Figure 4: The Integration of Maslahah Analysis into the Project Evaluation

Figure 5: An Integrative Islamic Framework for Project Evaluation

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LIST OF ABBREVIATIONS

etc.  Et cetera (= and so on)

IDB  Islamic Development Bank

IDCAS Industrial Development Centre for Arab States

IIIE  International Institute of Islamic Economics

IIUM  International Islamic Institute Malaysia

IKIM  Institut Kefahaman Islam Malaysia

IRR  Internal Rate of Return

IRTI  Islamic Research and Training Institute

KLIA  Kuala Lumpur International Airport

MSC  Multimedia Supercorridor

n.d.  No date/year of publication

n.pb.  No publisher

NPV  Net Present Value

OECD  The Organisation for Economic Co-operation and Development

PBUH  Peace Be Upon Him

SCBA  Social Cost-Benefit Analysis

SRD  Social Rate of Discount

UNESCO United Nations Educational, Scientific and Cultural Organisation

UNIDO United Nations Industrial Developments Organisation

USA  United States of America

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ABSTRACT

Total dependence on the mainstream project evaluation framework may not be able to
lead Muslims to the most preferable project under the light of the Shari‘ah. There are
several major issues pertaining to the mainstream framework that need
reconsideration from the Islamic standpoint. Moreover, the mainstream framework
has been developed over the years in isolation from Islamic input. In carrying out this
study, the researcher has followed the descriptive method to illustrate the project
evaluation framework in mainstream economics. The researcher has also applied both
the inductive and deductive methods as well as the analytical method to thoroughly
examine and analyse the literature of the Muslim scholars. This study has
reconsidered the Islamic stance towards the main issues pertaining to the mainstream
project evaluation framework. The study also found that the concept of maslahah
(Shari‘ah objectives) has a significant role to play in an Islamic framework for project
evaluation and would to a great extent distinguish the Islamic framework from the
conventional one. Besides that, the decision makers and project analysts in an Islamic
framework should be guided by Islamic values in carrying out their judgments.
Finally, an integrative Islamic framework for project evaluation should take into
consideration the best elements of both Islamic and mainstream economics.

 1

CHAPTER ONE

INTRODUCTION

1.1 Problem Statement

Governments and individuals1 are faced with the problem of resource limitations

in attaining their respective objectives. Project evaluation procedure would help them

in rationalising the allocation of their resources among the competing alternatives. In

another way, it is a sort of justification for the use of resources in realising specific

objectives. The framework for project evaluation offered today in mainstream

economics per se may not be able to lead authorities, managers and investors to the

most preferable project (or investment) from the Islamic standpoint. There are several

main principles pertaining to the subject that need reinterpretation and reconsideration

to clarify the Islamic position on such issues2. This is vital as the project evaluation

procedure is highly influenced by the attitudes and beliefs of the project analysts and

decision-makers towards the commercial, social and national outputs (costs and

benefits) of the project. The correct Islamic understanding of these principles may

have an impact on the judgment of the project analysts and decision makers during the

process.

1 In economic and business discussions, the term “individuals” applies to both individual men and
firms, in conjunction with the pursuit of their interests reflected in profit maximisation (Muqorobin,
1998).
2 The principles that are related to the topic (as recognised by the researcher) and which will be
examined under this study are: (1) the need to accommodate Shari‘ah objectives, (2) the principle of
cost benefit analysis, (3) the rationale for discounting future cost and benefit and (4) the notion of
(commercial) profit maximisation for private projects.

 2

In addition to the methodological and technical tools that have been developed in

mainstream economics which are very helpful in this process, there are several

matters that are of considerable importance in an Islamic framework and worth further

discussion; amongst them are the concept of maslahah and Islamic values. The

uniqueness of the concept of maslahah (or Shari‘ah objectives) as put forward

predominantly by Al-Ghazali and Al-Shatibi will have a great impact on the project

evaluation procedure in an Islamic framework. Moreover, as the Islamic economy is a

value-loaded or value-based system, there are several Islamic values that may have

relevance in this process.  The importance of these values is hardly ever discussed in

the mainstream framework. However, this aspect of the project evaluation topic

should not be ignored in an Islamic framework.

1.2 Objectives of the Study

The objectives of this study are as below:

i) To review the main principles in the mainstream framework for project

evaluation from the Islamic point of view.

ii) To suggest the incorporation of Shari‘ah objectives or the concept of

maslahah into the project appraisal framework.

iii) To identify Islamic values that have relevance to the topic and their

importance in the procedure.

 3

iv) To suggest the essential stages of an integrative Islamic framework for

project evaluation which suits the spirit of the Shari‘ah and current

practice.

1.3 Significance of the Study

The significance of this study is as follows:

a) This study suggests the Islamic standpoint on the essential principles of the

project evaluation framework in mainstream economics. It is expected that

project analysts and decision makers (in an Islamic framework) should

have a clear Islamic understanding of these principles which would affect

their judgment later.

b) The study also provides a different perspective on the project evaluation

field by incorporating the concept of maslahah (Shari‘ah objectives) and

introducing Islamic values into the process that are peculiar to the current

practice.

c) This study could contribute to the development and growth of Islamic

finance and economics by exploring some fiqh sources by Muslim jurists

to find their relevance in the field of modern economics.

 4

1.4 Research Methodology

This study comprises library based research. Hence, it is academic and theoretical

in nature. The research methodology of this study is based on secondary data

available in the literature both in conventional and Islamic economics. This literature

comprises published journals, periodicals, books, theses, unpublished articles and

internet resources, in either English or Arabic. This research involves the following

methods:

(i) Descriptive methods

This method is used to explain the project concept and the project

evaluation framework in mainstream economics.

(ii) Inductive and deductive methods

The researcher applies both the inductive and deductive methods that help

to thoroughly examine the views and arguments of the Muslim scholars, as

recorded in their writings.

(iii) Analytical method

This method is used to analyse relevant views in this study and give

preference to some over others. The researcher may also present his own

suggestions.

 5

The last two methods are involved in clarifying the Islamic standpoint on the main

principles of the project evaluation framework in mainstream economics, the concept

of maslahah (Shari‘ah objectives) and its incorporation in the procedure, and the

importance of the Islamic values in the process.

1.5 Limitations of the Study

The limitations of this study are:

a) There is not much material in Islamic economics pertaining directly to the

project evaluation framework as discussions on such topic are still

relatively scarce.

b) In addition to that, the researcher confines himself to the resources

available in the library of International Islamic University Malaysia

(IIUM), his personal collections and the Internet.

c) This study concentrates on the framework for project evaluation rather

than on the technical and methodological issues of the subject matter to

give the study focus, conciseness and persistent direction.

d) Hence, this study is not an exhaustive discussion of the project evaluation

procedure as the technical and methodological matters of the subject are

not within the scope of this study. The discussion of such matters requires

 6

massive illustrations and hundreds of pages. Moreover, they are well

explained in the literature and reiteration would be redundant.

1.6 Organisation of the Project Paper

This paper consists of five chapters. In Chapter one, the introduction of this

research paper is presented. The problem statement, objectives, significance, research

methodology and limitations of this study are briefly stated in this chapter. Chapter

two is divided into two main parts. The first part provides the readers with the concept

of the project evaluation framework in mainstream economics. The second part is

devoted to the review and discussion of the main selected principles of the

mainstream project evaluation framework from the Islamic point of view. The concept

of the maslahah (Shari‘ah objectives) and its incorporation in the project evaluation

are discussed and suggested in Chapter three. In Chapter four, the Islamic values that

have relevance to the project and investment choice are identified and their

importance in the project evaluation procedure is expounded. The conclusions of this

study and the recommendations for the essential stages of an Islamic framework for

project evaluation are then presented in Chapter five.

 7

CHAPTER TWO

PART ONE

PROJECT EVALUATION FRAMEWORK IN

MAINSTREAM ECONOMICS

2.1 Definition of Project

In general, a project means a plan, a design or scheme for doing something and it

is relatively new when the development practitioners and academics use the term to

denote the investment or productive activity with the use of resources (Baum &

Tolbert, 1985). A project can be defined as a proposal for future investment which

aims to create, expand and/or develop specific facilities to increase the production of

goods and/or services in a community or place within a determined period of time

(Sang, 1995; UNIDO & IDCAS, 1980). Baum & Tolbert (1985) suggest the definition

of a project as “a discrete package of investments, policy measures, and institutional

and other actions designed to achieve a specific development objective (or set of

objectives) within a designated period”.

A project often forms part of an economic or investment plan. An economic or

investment plan may consist of a single project or projects that are strongly or weakly

inter-related (Little & Mirrless, 1974). Investment decision-making includes the

 8

consideration for embarking on a new project (Palm & Qayum, 1985). Project

evaluation then forms a fraction of the complete phases of a project (project cycle).

The further splitting-up of a project into several parts or units is possible for

reasonable consideration. Each of those parts is can then be defined as a separate

project. However, this requires that the sub-project can be analysed and evaluated

technically, commercially and economically as an independent and separable unit of

investment (Little & Mirrless, 1974; Sang, 1995; UNIDO & IDCAS, 1980). If two or

more activities are theoretically separable but practically indivisible, they should be

treated as one single subject for evaluation purposes (Palm & Qayum, 1985). An

example of separable sub-projects in a project given by Muqorobin (1998) is the

RM20 billion high-tech scheme of the Multimedia Supercorridor (MSC). The MSC

project can be separated and evaluated into several separable independent projects

such as the Kuala Lumpur International Airport (KLIA). This fact suggests that an

enormous project may consist of several projects that can be evaluated separately at

different levels.

2.2 Project Evaluation Definition and Function

Project evaluation or analysis or appraisal3, in the general sense, is basically an

examination between a project’s costs and benefits over its lifetime to determine the

net worth of the project from the commercial and national point of view. In this sense,

3 These three terms are used in the literature to connote the same meaning. However, the use of a
particular term may have some logical grounds as well as practical advantages (Sang, 1995).

 9

Sang (1995) defines project evaluation as “a studied judgment on the balance of all

the positive and negative effects of a project and its relative merits among the

alternatives for achieving government or private enterprise objectives”4. It is an

analysis of the project’s expected future events in order to determine the current

attractiveness of the project (Palm & Qayum, 1985). There are several other closely

related terms which are used interchangeably to denote this meaning of project

evaluation such as cost-benefit analysis, cost-effectiveness analysis and capital

budgeting. However, each of these terms may reveal a specific meaning.

Cost-benefit analysis5 and cost-effectiveness analysis, in most situations, refer to

the evaluation of public projects only. The former concerns the net result between the

project’s quantifiable costs and benefits whilst the latter deals with the project’s non-

quantifiable benefits in determining the least expensive project’s cost from its

alternatives that would provide the targeted outcome. On the other hand, the term

‘capital budgeting’ is often used to denote project evaluation by private individuals

concerning the sources and types of financing (Sang, 1995; Zarqa’, 1982).

Project evaluation is involved in three main situations where the decision is to

accept or reject a single project; to choose one single project amongst a range of

projects; or to decide on a certain number of projects within a range of proposed

4 His other definition of project evaluation is “an assessment of the net benefit expected of a project in
comparison with its alternatives for achieving national or private business goals”. This definition is
very similar to the first one.
5 Cost-Benefit Analysis (CBA) is also known as Social Cost-Benefit Analysis (SCBA) as it attempts to
consider all of the project’s pros and cons to the society as a whole (Boardman, Greenberg, Vining &
Weimer, 2001).

 10

projects (Zarqa’, 1982) Hence, it does have several critical functions. They are (Sang,

1995):

a) Provision of necessary information on a project.

b) Establishment of an order of priority among competing projects.

c) Assessment of the profitability of a project.

d) Rationalisation of the allocation of resources among the various sectors

and projects at the macroeconomic and microeconomic levels.

2.3  Project Evaluation vis-à-vis the Project Cycle

The various stages of information gathering and decision making that take place

between a project’s inception and completion are known by economists as the

“project cycle” (Irvin, 1978). In other words, a project cycle refers to the step-by-step

process by which a project is formulated, identified, evaluated, implemented and

completed (World Bank, n.d.). These various stages are conveniently known as the

‘project cycle’ to denote that they are closely linked to each other and follow a logical

progression (Baum & Tolbert, 1985). This concept of project cycle was first

introduced by the World Bank in describing the working procedures of its financing

in developing countries6. A slightly different framework concerning educational

6 The project cycle as conceived by the World Bank comprises (1) identification, (2) preparation, (3)
appraisal, (4) negotiations and board, (5) implementation and supervision, (6) implementation
completion, (7) evaluation and lastly (8) country assistance strategies. See www.worldbank.org

 11

projects was suggested by UNESCO7. Different authors provide different detailed

explanations of the stages a project should follow and each project has its own

distinctiveness and no two projects are alike (Sang, 1995). Indeed, the divisions of the

project cycle are somewhat artificial in practice but do illustrate the whole concept of

a continuous decision-making task (Irvin, 1978).

However, there is a general evolutionary pattern amongst projects comprising

several common stages (Sang, 1995). Muqorobin (1998) observes at least five major

stages of a project cycle. It appears to the researcher that the sequence of stages of the

project cycle as observed by him is the most explicable for summarising a typical

project cycle8. The sequence of the project cycle is as follows:

1. Project Formulation

2. Feasibility Study

3. Investment Decision

4. Implementation

5. Ex-post Evaluation

7 UNESCO’s suggestion is as follows: (1) evaluation of a system’s performance and needs; (2)
formulation of program objectives and project goals; (3) design of alternative projects; (4) pilot project
and experimentation; (5) project implementation; (6) project operation; and (7) outcome evaluation.
8 His suggestions for this project cycle are mostly excerpted from the works of George Irvin (1978),
Baum & Tolbert (1985), Axel Sell (1991) and Heng-Keng Sang (1995).

 12

2.3.1 Project Formulation

At this stage, there are three main steps that should take place. The first step is the

identification of needs and problem recognition. This will entail the second step i.e.,

the formulation of objectives that projects should aim at. The third one is the

identification of suitable projects whose desirability and suitability should conform to

the established objectives. In this sense, projects are actually designed to solve

specific problems and/or to meet the particular needs of a society, a country or an

individual (Sang, 1995). These steps can be depicted by Figure 1.

Figure 1: Steps Involved at the Project Formulation Stage

2.3.2 Feasibility Study

After the potential projects have been recognised, a feasibility study for each of

them will be carried out. A feasibility study can be defined as the examination of the

viability of the proposed projects in an exhaustive and comprehensive investigation to

Identification of Needs Problems Recognition

Formulation of Objectives

Determination of
Suitable Potential

Projects

 13

resolve the most sound project (s) in terms of the technical, financial, economic and

social aspects (Sang, 1995). A typical feasibility study of a project includes

quantitative and qualitative analysis considering the direct and indirect effects in

comparison to other alternatives, if any. This stage can be divided into the pre-

feasibility study and the detailed feasibility study (Irvin, 1978; Muqorobin, 1998). The

former differs essentially from the latter as it requires less workload and a more

simple analysis (Irvin, 1978). The pre-feasibility study provides the basis for choosing

one project or a small number of alternative projects for a more detailed feasibility

study (Sang, 1995). The result of the pre-feasibility study is less accurate in nature

than the detailed one. However, this is justifiable as a detailed feasibility study on all

proposed projects will cost a lot in terms of everything, and yet would find them to be

unacceptable. Therefore, if the results of the pre-feasibility studies are promising,

then, a more detailed feasibility study should be undertaken (Zarqa’, 1994).

A good feasibility study will provide answers on the project’s conformity with the

objectives and priorities of a country, demand for the output of the project, its

technical and environmental soundness, economic and financial profitability,

administrative workability, and its compatibility with the customs and traditions of the

beneficiaries (Baum & Tolbert, 1985).  In reality, the scope and duration of feasibility

studies can differ as widely as the projects themselves. UNIDO (1978) identifies nine

critical aspects of a feasibility study. The financial and economic evaluation of an

industrial project takes place at the end of a feasibility study. The nine aspects are as

follows:

 14

1. Project background and history

2. Market and plant capacity

3. Materials and input

4. Location and site

5. Project engineering

6. Plant organisation and overhead costs

7. Manpower

8. Implementation scheduling

9. Financial and economic evaluation

Irvin (1978) and Sell (1991) envisage the feasibility studies as having three

different sections, namely techno-economic, financial and economic analyses. On the

other hand, Sang (1995) enumerates the essential parts of a typical feasibility study in

the following points:

1. A general description of the project including the background, salient

features, configuration, and social and economic environment of the

project.

2. A cost-benefit analysis of the project and its overall feasibility.

3. The formulation of the project’s plans and design for implementation.

4. Financial plans and projections.

Project evaluation - as explained in most of the literature under this study –

constitutes a part of the feasibility study of a project (Irvin, 1978; Muqorobin, 1998).

 15

It refers to the analysis of the soundness and benefits of the projects in comparison

with other competing alternatives to attain commercial and national (social and

economic) objectives (Sang, 1995). However, it is observed that financial and

economic evaluations of projects are the two major aspects that have been emphasised

and discussed in most of the literature pertaining to project evaluation.

2.3.3 Investment Decision

With the results of the feasibility study, the decision-makers - not the analysts -

make decisions based on certain investment criteria that are important to them. The

decision-makers could be local or international financial institutions, planning

authorities, individual or institutional investors etc. Each of the decision makers has

his own investment criteria and a project is acceptable if it can meet the respective

criteria. If the decision makers are financial institutions, the project’s financial

viability, its liquidity and capital plan are of crucial importance. If they are planning

authorities, the project’s contribution to national development is their primary

concern. The presentation of investment or project justifications according to the

stipulations and requirements of the international investors is necessary to obtain their

resources.  And if the projects are privately or publicly owned, for the commercial

activities, the commercial profitability is the major concern (Sang, 1995).

 16

2.3.4 Implementation

This stage is about making the project a reality. The earlier stages are directed

toward the successful implementation of the project (Baum & Tolbert, 1985). At this

stage, there are two things that constitute the main focus. The first one is the

mobilisation of physical and financial resources. Secondly is the recruitment and

training of personnel for the successful implementation and operation of the projects.

Close monitoring and supervision to ensure the project’s adherence to the plan are

essential during this stage (Irvin, 1978; Sang, 1995).

2.3.5 Ex-Post Evaluation

The ex-ante evaluation involves many forecasts and estimates of the project’s

viability. On the other hand, the ex-post evaluation of a project finds out its actual

incomes and makes comparisons with anticipations in hindsight (Sang, 1995). An

important purpose of this stage is to ascertain the reason for the project’s success or

failure, in order to pinpoint the pitfalls that should be avoided or the successful

features that deserve replication in the future (Baum & Tolbert, 1985). This is an audit

process to assess the extent of achievement or possible deviation from the objectives

for which the project is undertaken. The result of ex-post evaluation would be the

lessons learned from the experience of planning and implementation of the project

(Sang, 1995). The ex-post evaluation also unveils the errors in forecast, measurement

and evaluation during the pre-investment stages (Boardman, Greenberg, Vining &

Weimer, 2001).

 17

As a summary of the foregoing discussions, Figure 2 illustrates the position of

project evaluation and its relationship with other relevant terms that have a broader

meaning and scope.

Figure 2: The Relationship between the Economic/Investment Plan, Project

Cycle, Project Feasibility Study and Project Evaluation

2.4 Overview on the Major Developments of the Project

Evaluation Framework in Mainstream Economics

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

Economic/Investment Plan

Project Cycle

Project Feasibility
Study

Project
Evaluation

 18

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).

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

 19

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 writings9 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

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)10.

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

9 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).
10 The revised edition of the Manual was published in 1972.

 20

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).

 21

2.5 The Framework for Project Evaluation

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

profitability11 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 satisfy12. Thus, the project evaluation framework necessarily examines the

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

basic framework for project evaluation in mainstream economics13 is depicted in

Figure 3.

11 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).
12 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.
13 The main references the researcher refers to in constructing this framework are: UNIDO & IDCAS
(1980), UNIDO (1972) and Sang (1995).

 22

Figure 3: The Framework for Project Evaluation in Mainstream Economics

2.5.1 Commercial Profitability

Financial
Analysis

Investment
Profitability Analysis

Social Cost-Benefit Analysis

Simple
Methods

Discounted Cash-
Flow Methods

Liquidity
Analysis

Capital Structure
Analysis

(i) Identification and
enumeration of project

costs and benefits

(ii) Quantification and
valuation of identified

cost and benefits

(iii) Computation of key
indicators with

discounting future costs
and benefits

Uncertainty Analysis

Project’s Overall Merit

Commercial Profitability National Profitability

Project Evaluation Objectives

 23

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).

2.5.1.1 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

 24

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).

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

 25

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

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).

2.5.1.2 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

 26

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).

2.5.2 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

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 study. However, the researcher

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).

2.5.2.1 Social Cost-Benefit Analysis

 27

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.

 28

2.5.3 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

 29

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

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).

2.5.4 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

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.

 30

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).

CHAPTER TWO

PART TWO

 31

REVIEW OF THE FRAMEWORK: ISLAMIC POINT OF

VIEW

Credit and recognitions should be given to mainstream economics for its

contributions to the birth and development of the existing framework for project

evaluation that takes into consideration the national or social interest, especially in

SCBA. Nevertheless, the framework and methodology have been developed in

isolation from Islamic input during the last one and half centuries. Consequently,

there is a need to review the existing framework and methodology for project

evaluation from the Islamic point of view.

Having presented the project concept and the framework for project evaluation in

mainstream economics, we now turn to the second part of Chapter two: Review of the

principles of project evaluation framework from the Islamic point of view. This

section starts with the raison d'être for conducting ex-ante project evaluation from the

Islamic point of view. Following that is the discussion on the main selected issues

pertaining to the framework for project evaluation from the Islamic standpoint. The

focus of the researcher in this review is on the principles of the mainstream

framework and not on methodological and technical matters. The methodological and

technical issues of project evaluation are not within the scope of the present study.

2.6 The Raison D'être for Ex-ante Project Evaluation from the

Islamic Standpoint

 32

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

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:

a) 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).

b) 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 (Muqtader, n.d.).

 33

c) 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).

2.7 The Mainstream Framework for Project Evaluation: Review of

the Main Issues from the Islamic Standpoint

In view of the vastness of the subject and the limitations of this study, the

researcher has selected several main issues that are particularly significant in theory

for reconsideration from the Islamic point of view. The major issues pertaining to the

principles of the project evaluation framework in mainstream economics (as

recognised by the researcher) and which will be discussed in this section can be

itemised into four main points. They are:

1. The need to accommodate Shari‘ah objectives

2. The principle of cost benefit analysis

3. The rationale for discounting project’s cost and benefit

 34

4. The notion of (commercial) profit maximisation for private project

2.7.1 The Need to Accommodate Shari‘ah Objectives

A project is designed to achieve specific objectives. In the mainstream framework,

the commercial and national profitability objectives cover the “dual dimension” of a

project’s overall objectives. An Islamic framework for project evaluation should

classify and prioritise projects according to the extent of their contribution to the

realisation of Shari‘ah objectives. The Shari‘ah aims at the welfare (maslahah) of

people in this life and in the hereafter (Khan & Ghifari, 1992). Maslahah can be

classified further into three categories. The three categories are (‘Afar, 1992; Kamali,

1989; Zarqa’, 1984):

(1) 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.

(2) 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

 35

in life. Conveniences promote and supplement the Necessities and

their neglect leads to hardship but not to the total disruption of

normal life.

(3) 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.

As a general rule, a project that falls under the category of Necessities should be

preferred to that of Conveniences in an Islamic framework. Similarly, a project that is

considered as a Convenience must be preferred to that of Refinements (Khan &

Ghifari, 1992; Meera, n.d.). The significance of this concept of maslahah or Shari‘ah

objectives in an Islamic framework for project evaluation will be further discussed in

Chapter Three.

2.7.2 The Principle of Cost Benefit Analysis

The Flood Control Act 1936 in the USA, which is considered as the earliest

application of SCBA, states that “…projects should be approved if the benefits to

 36

whomsoever they accrue are in excess of the estimated costs” (Anand, 1993; Campen,

1986; Pearce, 1983; Sang, 1995). The idea of comparing between cost and benefit to

select the best project is not peculiar in Islam. A similar statement has been recorded

hundreds years ago from Abu Yusuf where he states that, “If its benefit (project of

excavation of canal) is greater, then he (the decision-maker) would leave as it is (e.g.

it should go ahead); and if its harm is greater, than he would order to demolish it (i.e.

should abandon it),” (Meera & Ahsan, 1992).

There is evidence from the Holy Qur’an of analysis between the cost and benefit

of a matter. For example, the comparison between the advantage and disadvantage of

wine before it is being strictly forbidden in verse 2:21915. In the end, the wine or any

intoxicating liquid is forbidden in Islam as it contradicts one of the Shari‘ah

objectives i.e. protection of the mind.  Another example is the story of Musa and

Khidr from 18:61 to 18:82. Khidr has shown Musa that he scuttled the boat, slew the

young man and set up the wall on the point of falling down without asking for

recompense as the benefits of doing those things are greater than their evils (Al-

Qardawi, 2000).

Cost and benefit, in Islam, are generally denoted as mafsadah and maslahah

respectively16 (Muqorobin, 1998). Analysis between cost and benefit is thought

necessary as all masalih (plural of maslahah) and mafasid (plural of mafsadah) are not

equal. Some are more important than others and some are less important (Khan &

15 “They ask thee concerning wine and gambling. Say: In them is great sin, and some profit, for men;
but the sin is greater than profit.”
16 However, a cost does not necessarily stand for mafsadah in the context of project evaluation.

 37

Ghifari, 1992). Al-Qardawi (2000) mentioned three situations where the analysis of

maslahah and mafsadah could take place. The situations are:

a) Analysis between masalih, one to another

b) Analysis between mafasid, one to another

c) Analysis between masalih and mafasid

When there are trade-offs between the masalih, we choose the greater maslahah

over the lower one, public maslahah over the private one17, permanent maslahah over

the temporary one, actual maslahah over the potential one and so forth. In the second

situation, the principle of choosing the lesser evil would be applied. And as there are

contradictions between maslahah and mafsadah, they should be evaluated against

each other to find the final resolution (Al-Qardawi, 2000). It is evident that cost-

benefit analysis is indispensable in an Islamic framework for project evaluation and

the application of SCBA, in principle, is in line with the spirit of Islam.

2.7.3 The Rationale for Discounting Project’s Cost and Benefit

Discounting18 a project’s benefit and cost is essential in both commercial and

national profitability analyses in the mainstream framework. The two most regularly

used and superior methods in investment profitability analysis i.e. the NPV and IRR

17 If the rights or property of an individual have to be removed, he or she should be compensated fairly.
18 Discounting is a procedure to convert future values of costs and benefits into present worth through
the application of a discount rate (Sang, 1995).

 38

are based on this technique19. In SCBA, the cost and benefit are quantified, valued

and discounted to determine their present value. The discounting technique revalues

all the project’s costs and benefits that occur at different times throughout the lifetime

of project to make them comparable to the present costs and benefits. Discounting

explicitly takes into consideration the role of time in the flow of a project’s cost and

benefit (Little & Mirrlees, 1974; Palm & Qayum, 1985; Sang, 1995; UNIDO &

IDCAS, 1980).

The discussions concerning the practice of discounting in Islamic economics

center around two main issues, namely the justifications for the validity or invalidity

of positive time preference (or time value of money) and the alternative discount rate

that is different from the interest rate. The discussions are very important as they are

related with the most superior and widely used technique in project evaluation in

mainstream economics. The following subsections reviews this concept from the

Islamic point of view.

2.7.3.1 Positive Time Preference

Time preference indicates the extent of an individual’s preference for

current consumption over future consumption, and positive time preference

generally means that people think present consumption of an amount is

superior to future consumption of the same amount (Rosly, 2003). Zarqa’

19 On the theoretical ground, most of the literature, in both conventional and Islamic economics, asserts
the superiority of NPV over IRR (Bierman & Smidt, 1993; Brigham & Houston, 2001; Levy &
Alderson, 1998; Zarqa’, 1982 & 1983).

 39

(1983) does not recognise this 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 choice20. 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).

20 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).

 40

Indeed, Islam does recognise positive time preference, as evident in the

sayings of the Prophet PBUH. The Prophet PBUH said: “Virtuous are they

who pay back their debts well.” On another occasion, Mujahid reported that

‘Abd Allah Ibn ‘Umar took some dirhams as a loan and paid back better

dirhams21 (Rosly, 2003). It is encouraged, in Islam, for the debtor to pay his

debt well to manifest his gratitude towards the creditor. It is true, as the

creditor has forgone his current consumption of the loaned money and

relinquished the potential for income opportunities that may be obtained

through putting the money to use in an economic activity. The potential profit

of the economic activity is the economic cost borne by the creditor and is the

indirect value of time from the perspective of the creditor. However, the

potential for generating income is an unknown factor as it is subject to

business risk. Thus, Islam does not allow any form of contractual reward

(determined up-front) given in exchange for a loan (Rosly, 2003; Saadallah,

1994).

Moreover, the loan contract is also seen as a charitable contract from the

Islamic point of view. The creditor (perceived as a donor) actually donates his

potential opportunity of using the money to the debtor, and thus, the creditor

deserves the (spiritual) reward from Allah as stated in a saying of the Prophet

PBUH (Saadallah, 1994). From the above explanation, it is observed that the

concept of the time value of money has justifications from the Islamic

perspective. Therefore, it is acceptable to accept the concept of positive time

21 See Appendix 2 for full texts of the hadith. It should be noted that giving extra or addition in
repayment of debt is a matter of choice and not a general ruling in the Shari‘ah.

 41

preference or the time value of money in an Islamic framework, particularly in

matters pertaining to investment activities such as project evaluation22. This

also entails that economic agents in an Islamic economy would have positive

time preference, except in certain circumstances as highlighted by Zarqa’

(1983), and there will be indicators (which are different from the interest rate)

available in the economy to approximate the rate of their time preferences

(Khan, 1991).

2.7.3.2 Discounting Future Costs and Benefits

In spite of the differences between Islamic scholars on the preceding issue,

there is a general agreement that discounting is allowed irrespective of the

agreement, whether or not the concept of positive time preference is valid in

Islam (Iqbal & Khan, 1981). Those who hold the invalidity of positive time

preference amongst the economic agents argue that discounting future values

is necessitated by considerations of inter-temporal economic efficiency as well

as the avoidance of israf in consumption or production (Zarqa’, 1983; Sattar,

1991). Additionally, the fact that Muslims are permitted to choose several

halal (legitimate or lawful) investment opportunities in the society for a quite

likely positive return makes the money now in hand more valuable than

money in future (Iqbal & Khan, 1981; Sattar, 1991).

22 The validity of the concept of the time value of money in Islam as a justification for discounting is
still a matter of debate amongst the Muslim scholars and there is no authoritative opinion in this issue.
Yet, most of them agree on the legitimacy of discounting technique for project evaluation.

 42

 2.7.3.3 Discount Rate

Interest is a form of riba and the elimination of riba is one of the important

features of Islamic economics. This requires other alternative rates that are

acceptable and appropriate in an Islamic framework. It is unanimously agreed

in the literature on Islamic economics that the rate of return on capital (or

equivalent profit rate) should replace the interest rate as the discounting factor

in an Islamic framework (Choudhry, 1983; Zarqa’, 1983; Khan, 1991; Sattar,

1991; Muqorobin, 1998). The use of the profit rate or rate of return on capital

is based on the principle of opportunity cost. The rate of return in projects of

comparable risks may be taken as the discount rate to reflect properly the true

opportunity cost of project cash flows. The rate of discount for public projects,

Social Rate of Discount (SRD), should properly represent the social

opportunity cost (Zarqa’, 1983). The fact that the profit rate and interest rate

could perform as discount rates in the discounting technique does not justify

that both could be used in an Islamic framework. The legitimacy of the former

in an Islamic economy precludes the use of latter. Moreover, the profit rate in

an Islamic economy is a completely different concept from the interest rate in

mainstream economics (Iqbal & Khan, 1981).

2.7.3.4 Time as an Element in Contract of Exchange and

Project Evaluation

 43

Islam sees time as not a mere consumption phenomenon, but also one of

production. Work or activity (or to be more specific investment or production)

is given priority over consumption, as consumption constitutes a means and

production is an end (Muqorobin, 1998). Time is considered a subsidiary

factor (not primary) of production in Islamic economics (Al-Masri, 1999)23. It

is true as time alone neither gives a yield nor produces by itself, unless it is

joined to property – be it cash or any kind -, it acquires an indirect value

(Saadallah, 1994). A labourer increases his output with time, land produces its

crops with work and time, and a leased item is used during the leasing period

(or time) and its rental is higher with a longer leasing time. In a way, rents and

wages basically include a fixed reward for the time element (Khan, 1991). All

these testify that time is an indispensable element for economic consideration

as each economic process takes place within a period of time.

In addition to that, the jurists assert that time is a portion of price (Al-

Masri, 1999). This is evident from the juristic consensus that the price of an

item may be increased in case of deferred payment as in bay’ al-mu’ajjal24.

This is permitted, as the time element is involved in the process of exchange,

to offset the delayed payment (Khan, 1991; Saadallah, 1994). The proponents

of the validity of the time value of money concept in the Islamic framework

23 There are five factors of production in Islamic economics, three of them are primary and the last two
are subsidiary factors. The primary factors are land, work, and property, whilst the subsidiary factors
consist of risk and time elements. Risk and time are considered as subsidiary factors because these two
elements could not generate output by themselves, as they need to be joined to land or work or property
to generate output.
24 Bay‘ al-mu’ajjal is a sale on deferred payment, i.e. the goods are delivered not but the price is
delayed to the future. In this contract, the price may be different from the prevailing market price
(Khan, 1991).

 44

maintain that the legitimacy of this type of sale gives more support to the

validity of such concept in Islam. In terms of the involvement of the time

element in project evaluation, the project that yields returns earlier is

preferable to one that requires a longer period, provided all the income and

other things related to both projects are the same (Al-Masri, 1999).

From the above discussion, the researcher reasserts that the mainstream

discounting technique for project evaluation can be modified to suit the Islamic

concepts and principles. Thus, the use of the discounting technique to get the present

value of a project’s cost and benefit is possible in an Islamic framework with the rate

of return as the discount rate.

2.7.4 The Notion of (Commercial) Profit Maximisation for Private

Projects

The project evaluation framework in mainstream economics involves two broad

categories of project profitability as described earlier. They are commercial and

national profitability. The former relates mainly to private projects and the latter

relates to public ones (Muqorobin, 1998). Private individuals are acceptably assumed

to make decisions on the basis of the commercial profitability of a project. This

entails that individuals should decide on projects that maximise their commercial

 45

profitability. This is considered as the nature of the private business environment. The

impact of the project on the national and social profitability is mainly the concern of

the public authorities (Sang, 1995). The notion of (commercial) profit maximisation

still stands as the basic assumption even though many have argued that individuals

have objectives other than profit maximisation (Amin & Yusof, 2002). The emphasis

on the consideration of the national and social impact of a project in the mainstream

literature is mainly meant for public projects (Sugden & Williams, 1978). However,

the notion of profit maximisation has received objections from some Islamic scholars.

The Islamic standpoint on this issue should be clear for the project analysts of

private projects. The understanding of this issue will have an impact on their

judgment later. Zarqa’ (1982) asserts that the notion of profit maximisation is not in

line with the spirit of Islam, except in certain circumstances. However, he supports

this notion for awqaf projects. According to him, awqaf administration should choose

a project which maximises the present value of net profits from an investment. His

argument is that awqaf administration in most Muslim countries lacks sufficient

income to properly carry out their major functions in society and burdening them with

the objectives other than profitability would adversely affect the ability of awqaf to

fulfill its other social responsibilities (Zarqa’, 1994). On the other hand, Faridi (1983)

observes awqaf institutions as examples of the voluntary sector in the Islamic

economy which is not by intent or design, undertaken to attain any economic or

material benefit for the doer (s) but could cause wide ranging economic ramifications.

Hence, the profit maximisation notion does not suit the awqaf institutions. Amongst

the examples of such voluntary activities are the provision of shelter and meals to

 46

wayfarers, the cash disbursement of Sadaqat and charitable contribution to the state’s

defence needs (Faridi, 1983).

Arief (1982) conceives profit maximisation as irrelevant as money income ceases

to be the primary objective in Islam. Nevertheless, profit must be maximised in order

to survive in a situation of perfect competition since the profits so maximised are by

definition ‘normal’ profit. Profit maximisation per se in this limiting case does not

apparently violate the Islamic principles. But, profit maximisation in situations of

monopolistic competition, oligopoly, monopoly etc., resulting in abnormal profits is

certainly not in conformity with the Islamic economic order (Arief, 1982). Islamic

individual behaviour should be guided by the pursuit of falah (success). This concept

considers the individual as a maximiser of falah in this present life as well as in the

hereafter. This attitude rules the Islamic rationality, as opposed to the Smithian notion

of individual self-interest (Hallaq, 1994; Sattar, 1991).

On the other hand, Amin & Yusof (2002) conclude that the notion of profit

maximisation can still be applied in an Islamic framework. All together, they stress

the incorporation of Islamic values, particularly the concept of maslahah, in the

determination of the cost of production in an Islamic framework. Similarly, Hassan

(1992) maintains that profit maximisation in an Islamic economy is likely to be

different from that in mainstream economics. This is due to several reasons. For

examples, the abolition of interest and the profit-sharing system with labour in the

Islamic economy would promote growth and distributive justice at the same time. In

addition to that, Islam also envisages business as a fard al-kifayah where social

 47

obligation takes precedence over self-enrichment. Thus, the application of profit

maximisation should not violate any of these values (Hassan, 1992).

It appears to the researcher that the notion of profit maximisation is acceptable in

Islam, provided that individuals do not violate any Islamic principles in applying the

concept. As a general principle in Islam, individuals are permanently recognised as

having the right to own and decide on economic activities of their choice within the

Shari‘ah boundaries and Islam allows ample scope for individuals to move and

manoeuvre their economic activities (Hassan, 1995). It should also be understood that

the notion of profit maximisation should be comprehended and applied in line with

the objectives of Man’s existence i.e. to achieve well-being in this world and the

hereafter and the approval of Allah (Amin & Yusof, 2002).

CHAPTER THREE

THE CONCEPT OF MASLAHAH (SHARI‘AH

OBJECTIVES) IN PROJECT EVALUATION

3.1 Introduction

The need to accommodate Shari‘ah objectives or the concept of maslahah into the

project evaluation framework entails further discussion in this separate chapter. This

 48

chapter starts with a brief explanation of the concept of maslahah as the Shari‘ah

objectives. Then, the classifications of project according to the maslahah concept into

the categories of Necessities, Conveniences and Refinements are delineated.

Following that are the rules governing the relationship amongst the three categories of

maslahah. Next, the researcher explains what is beyond and beneath the maslahah.

After that, the integration of the maslahah concept into project evaluation and its

significance is expounded. The chapter ends with a discussion of the need for

continuous judgment for defining the maslahah. Towards the end of this chapter, it is

hoped that the reader will be able to appreciate the significance of the incorporation of

the maslahah concept into the framework of project evaluation.

3.2 The Concept of Maslahah: Shari‘ah Objectives

The concept of maslahah has been discussed at lenght 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-Shari‘ah” (Shibir, 2000). Other jurists who have discussed the

same subject are, for example, Al-Juwayni, Al-‘Izz Ibn ‘Abd 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

 49

means that the Shari‘ah in all its teaching aims at the attainment of good, welfare,

advantage, benefits, etcetera, and the warding off of evil, injury, loss, etcetera, for

creatures (Khan & Ghifari, 1992).

It is generally held that the Shari‘ah 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 Shari‘ah point of view is considered as

maslahah or utility. Similarly, each matter that decreases the welfare of people from

the Shari‘ah point of view is considered as mafsadah or disutility. This meaning is

observed in Al-Ghazali’s definition of maslahah i.e., “…Preservation of Shari‘ah

objectives, and the Shari‘ah objectives for the (welfare of) creation is five matters.

They are preservation of the religion, life, mind, offspring and wealth. And everything

that leads to the preservation of these five elements is considered maslahah, and

everything that leads to the disruption of these foundations is mafsadah, and its

removal is maslahah,” (Al-Masri, 1999; Hasan, 1993).

3.3 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

 50

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).

The classification of projects based on the concept of maslahah has been

suggested by Zarqa’ (1982) and ‘Afar (1992). However, ‘Afar (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 ‘Afar (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 maslahah. In dealing with the project evaluation topic, the

researcher is in favour of the established three categories of maslahah as recognised

by the Islamic jurists.

 51

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 Shafi‘iyyah, are (Al-

Zuhayli, 1998):

i. Religion (Din)

ii. Life (Nafs)

iii. Mind (’Aql)

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 (’Aql)

v. Wealth (Mal)

 52

‘Afar (1992) describes the same order as the Malikiyyah and the Shafi‘iyyah 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 researcher that the Shari‘ah does assign different weight

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

and he is of the opinion of the Malikiyyah and the Shafi‘iyyah25.

3.3.1 Necessities (Daruriyyat)

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).

We could summarise the Necessities projects into nine main areas as identified by

‘Afar (1992)26. The nine areas are:

25 Al-Shatibi is one of the Malikiyyah and Al-Ghazali is one of the Shafi‘iyyah. They also describe the
same order as the Malikiyyah and the Shafi‘iyyah (Al-Mays, 1987).
26 These nine areas are not exhaustive but ‘Afar’s (1992) explanation of this topic is very much more
detailed compared to the works of Zarqa’ (1982).

 53

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-‘ayn (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.

 54

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 (‘Afar, 1992; Zarqa’, 1982).

3.3.2 Conveniences (Hajiyyat)

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

 55

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

life (‘Afar, 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 (‘Afar, 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.

3.3.3 Refinements (Tahsiniyyat)

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:

 56

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.

3.4 The Rules Governing the Relationships amongst the Three

Categories of Maslahah

There are several rules governing the relationships amongst the three project

categories i.e., Necessities, Conveniences and Refinements. The rules are (Meera,

n.d.; Khan & Ghifari, 1992):

1. “Necessities” are fundamental to “Conveniences” and “Refinements”.

Thus, projects under “Necessities” should be preferred to those of

“Conveniences” and “Refinements”. Recommended and permissible

projects could not be perceived as having precedence, in any situation,

over obligatory projects.

2. Deficiency in “Necessities” causes deficiency in “Conveniences” and

“Refinements” in an immutable manner.

3. Deficiency in “Conveniences” and “Refinements” does not necessarily

affect “Necessities”.

 57

4. An absolute deficiency in “Conveniences” and “Refinements” may cause

deficiency to some extent to “Necessities”.

5. Society should keep up “Conveniences” and “Refinements” for the proper

maintenance of “Necessities”.

6. “Refinements” are the complement of “Conveniences” whilst

“Conveniences” are the complement of “Necessities”.

7. If “Refinements” are chosen over “Conveniences”, this practice may be

makruh (reprehensible) or khilaf al-awla (opposite to what is better or

greater)27. Nonetheless, “Conveniences” should be given more weight than

“Refinements” for evaluation purposes.

3.5 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 (‘Afar, 1992). The categories are:

27 Some of the Shafi‘ite jurists divide makruh (reprehensible) value into two categories: (1) makruh: If
the evidence of prohibition is not decisive but specific to a particular matter and (2) khilaf al-awla: If
the evidence of prohibition is not decisive and not specific to any particular matter (Al-‘Itah, 1989).

 58

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 (‘Afar,

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 (‘Afar, 1992).28

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.

3.6 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

28 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.

 59

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).

This requirement is observed, for example, in the Qur’anic verse 57: 729.

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 (‘Afar,

1992).

3.7 The Incorporation of the Maslahah Concept into the Project

Evaluation

The incorporation of the concept of maslahah 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 Shari‘ah’s objectives and the Islamic system as a whole. From

the foregoing discussions, the researcher has proposed Table 1 and Table 2 to

illustrate the priority and values of projects according to the concept of maslahah.

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

Maslahah

29 “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.”

 60

              Main
         Categories

Essential
Elements of
Man

B
eneath the
M

aslahah

N
ecessities

C
onveniences

R
efinem

ents

B
eyond the

M
aslahah

Religion 1st 6th 11th

Life 2nd 7th 12th

Mind 3rd 8th 13th

Offspring 4th 9th 14th

Wealth

U
nacceptable 5th 10th 15th

U
nacceptable

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.

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 Reprehensible or Forbidden
2 Necessities Obligatory
3 Conveniences Mandub
4 Refinements

Required & Acceptable
Mubah

5 Beyond the Maslahah Prohibited & Unacceptable Reprehensible or Forbidden

Figure 4 illustrates the framework for the maslahah analysis of projects in an

Islamic framework.

 61

Figure 4: The Integration of Maslahah Analysis into the Project Evaluation

The maslahah analysis could serve as the qualitative analysis in an Islamic

framework for project evaluation. The maslahah 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. The maslahah

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 maslahah analysis. Similarly, projects that

            Maslahah

(1) Necessities
(2) Conveniences

(3) Refinements

Maslahah (Shari‘ah Objectives) Analysis

Beyond the Maslahah

Beneath the Maslahah

Potential Projects

 62

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 analysis.

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

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.

3.8 The Need for Continuous Judgement

The interpretation of what is a Necessity or Convenience or Refinement in certain

areas is somewhat subjective as the situation becomes more sophisticated with

differences in time period, lifestyle, standard of living and level of technological

development between countries and states or between urban and rural areas. This is

 63

not peculiar in Islam, as difference in opinions is very much welcomed as proven in

the differences between the schools of fiqh in Islamic jurisprudence. Different

opinions would lead to different rulings between states or countries as the Islamic

scholars always take into consideration local customary practices (‘Urf) and public

interest in carrying out their judgements. There is a well-known Islamic legal maxim

which states that “Rulings could change according to changes in time.” This is

evidence of the flexibility of the concept of maslahah in Islam.

Continuous change in Man’s life may move certain activities or things from one

category of maslahah into another (Zarqa’, 1984). What is a Refinement in one place

may appear to be a Convenience in another. What fell under the category of

Convenience one decade ago might be considered as a Necessity nowadays. Some of

the examples are (Zarqa’, 1984):

1. Sewerage and sanitation were considered Conveniences or Refinements in

rural communities where the population was dispersed some years ago.

However, in heavily populated urban communities, they become

Necessities for without them significant difficulties and perils, including

health hazards, are faced.

2. Public transportation in small communities in small areas is a Refinement

although it may be perceived as a Convenience for them simultaneously

for the purpose of travel amongst such communities. On the other hand,

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people in urban centres extending over a relatively large area will

definitely see public transportation as a Convenience.

Thus, there is a real need for continuous judgment and interpretations to define a

clear-cut line between all these three categories. What falls beyond and beneath the

maslahah should also be defined. Authorities could set up a committee which

comprises economists, academicians, professionals, Islamic scholars and practitioners

of every single discipline to continuously carrying out judgement on this particular

issue. This committee could draw the guidelines for this purpose and it is possible

from the researcher’s point of view to have different guidelines for different areas to

really respond to the social needs and public interest of each area.

CHAPTER FOUR

ISLAMIC VALUES IN PROJECT EVALUATION

4.1 Introduction

The Islamic economy is a value-loaded or value-based system which has several

Islamic values that may have relevance to the subject of project evaluation. These

values should not be ignored in the discussion of the project evaluation topic as they

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will guide and influence the judgment of project analysts and decision-makers in an

Islamic framework. The significant Islamic values pertaining to the topic of project

evaluation as recognised by the researcher and which will be further discussed in this

chapter are30:

1. Preservation of future generation’s welfare

2. Environmental balance

3. Public interest is given priority over individual interest

4. Balance between physical and spiritual development

5. Avoidance of both extravagance and niggardliness

6. Promotion of cooperation and partnership

4.2 Islamic Value 1: Preservation of Future Generations’ Welfare

Consideration of the welfare of future generations is required in Islam. It is the

responsibility of the present generation to consider the welfare of future generations in

their decision making process. This requirement is illustrated in a hadith where the

Prophet PBUH says: “It is better that you leave behind you your relatives well-off

rather than obliged to beg for alms from others,” (Akhtar, 1996; Al-Qardawi, 1999).

Moreover, the Qur’anic depiction of believers’ (Mu’minun) characteristics where each

30 These values are not exhaustive; rather they are the significant ones on the topic of project evaluation
from the researcher’s point of view.

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generation of believers is concerned with other generations (by praying for each

other) indicates that consideration of future generations’ welfare is indispensable in

Islam (Zarqa’, 1982). The Qur’anic verse 59:10 mentions that:

“And those who came after them say: Our Lord! Forgive us, and our brethren

who came before us into faith, and leave not, in our hearts, rancour (or sense of

injury) against those who have believed. Our Lord! Thou art indeed Full of

Kindness, Most Merciful.”

This value is also manifested in Caliph ‘Umar Al-Khattab’s decision on land

management in southern Iraq where he decides not to undertake the project of

distribution of the conquered lands of southern Iraq amongst the Muslim soldiers. In

doing that, he argues that the distribution of lands would result in the creation of a

class of feudal lords and there will be nothing for the next generations.  He also

decides that the conquered lands are the property of the entire Muslim ummah and the

existing owners would cultivate the lands as before but with the payment of a tax

known as kharaj (Khan, 1997). His decision has been supported by Mu‘adh Ibn Jabal

and ‘Ali Ibn Abi Talib (Al-Qardawi, 1999; Zarqa’, 1982).

A project was rejected by ‘Umar Al-Khattab in consideration of the future

generations’ welfare. This Islamic value extends the time horizon of project

evaluation in an Islamic framework. The consideration of the effects and

consequences of a project on future generations is evidently imperative. Hence,

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project analysts in an Islamic framework should recognise the impact of a project not

only on the present generation but also on the future ones.

4.3 Islamic Value 2: Environmental Balance and Protection

The Islamic perspective on the environment rests on the belief that Allah is the

Creator and Sustainer of the universe. Nature is not seen as something that must be

overcome or conquered in Man’s pursuit of development in this world. It is actually a

bounty from Allah that must be utilised in the best way possible for all, in accordance

with Allah’s will, considering that it is part of Allah’s creation (Akhtar, 1996; Haneef,

1997). Islam places great importance on the issue of environmental balance. This is

evident in a hadith which encourages the growing of crops, planting of trees and

cultivating of gardens for the benefit of living things. The Prophet PBUH is reported

to have said:

“There is no Muslim who plants a tree or sows a field, and a human, bird or

animals eat from it, but is shall be reckoned as charity from him.”

In addition to that, Abu Bakr’s instruction to Yazid Ibn Abi Sufyan to preserve the

environmental values, even in enemy territory, also proves the importance of

environmental balance and protection in Islam. He writes to him, “Do not cut down a

tree, do not abuse a river, do not harm crops and animals, and always be kind and

humane to Allah’s creation, even to your enemies,”  (Akhtar, 1996).

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Husaini (as cited in Akhtar, 1996) maintains that the environmental disruption of

any kind must be avoided for two reasons. First, it is an ethical command of the

Shari‘ah and second, it is essential for protecting the public interest and universal

common good of all mankind and other creations of Allah. Moreover, environmental

degradation harms both the present and future generations, people and other living

things. Thus, it is an obligation of each individual and society to protect it (Chapra,

1993). Akhtar (1996) asserts that there exists environmental balance in the universe

and this concept implies two constraints:

(1) Human and non-human beings can not demand resources more than the

natural ecosystem is capable of providing them on a sustainable basis.

(2) They cannot discharge their waste products into the system in greater

quantities than the system is capable of recycling without impairing its

productivity.

It is apparent that the issue of environmental balance and protection should be

looked into in the process of project evaluation in an Islamic framework. Externalities

of the project are one of the major causes of the pollution problem (Akhtar, 1996).

Thus, project analysts and decision makers in an Islamic framework should internalise

the potential cause of pollution from a project and any project opted for under the

Islamic framework should not lead to unreasonable disorder or unjustifiable

destruction of the environment.

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4.4 Islamic Value 3: Public Interest is Given Priority over Private

Interest

Islam seeks to have a balance between public and private interests (Al-‘Anani,

1983). However, 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). However, a public interest

for which the sacrifice of individual interest is tolerable should be certain,

indispensable and could only be attained via the sacrifice of individual interest (Kahf,

1994).

This value also implies that the project that could provide the livelihood (rizq) to

the greatest number of people and other living things should be given preference in an

Islamic framework (Zarqa’, 1982). It is obligatory in Islam for each capable person to

provide his own livelihood and that of his dependents. Hence, the project that helps

the greatest number of people to carry out their obligations towards themselves and

their dependents should be preferred in an Islamic framework. Similarly, if the

resources are limited and there is a trade-off between public and private interests, the

former should be given preference over the latter.

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4.5 Islamic Value 4: Balance between Physical and Spiritual

Development

Balance between physical and spiritual development is one of the distinctive traits

of Islamic economics (Al-‘Anani, 1983). The utilisation of resources in Islam does not

only take into consideration the economic aspect, but also other aspects such as  the

religious, social and moral aspects (Chowdhury, 1999). Mainstream economics

disregards the spiritual and moral externalities of a project. For example, the

production of alcohol or musical instruments or gambling gadgets may be

economically desirable but it is morally undesirable (Khan, 1985).

Therefore, in principle, Islam rejects projects that could produce bad spiritual and

moral externalities and makes it unlawful to undertake them. Hence, projects that

would generate immoral consequences such as liquor production, pub or disco hub,

unlawful entertainment, prostitution and gambling are strictly forbidden. This value

emphasises the need for project analysts and decision makers in an Islamic framework

to take into consideration the spiritual and moral externalities of the project in the

project appraisal process.

4.6 Islamic Value 5: Avoidance of Both Extravagance and

Niggardliness

Resources in Islam are considered as trusts from Allah. The nature of this

trusteeship of resources entails efficient use of the resources and avoidance of

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extravagant/ excessive/ wasteful use of them. This is manifested in the following

Qur’anic verses:

1. “…eat and drink, but waste not by excess, for God loveth not the wasters,”

(7:31).

2. “Verily spendthrifts are brothers of the Evil Ones; and the Evil One is to

his Lord (himself) ungrateful,” (17:27).

Similarly, leaving the resources idle without being utilised for productive

purposes due to niggardliness is also condemned in Islam (Khawjah, 1994). The

condemnation is observed in the following Qur’anic verses:

1. “…And there are those who bury gold and silver and spend it not in the

Way of God; announce unto them a most grievous penalty,” (9:34).

2. “And what burden were it on them if they had faith in God and in the Last

Day, and they spent out of what God hath given them for sustenance? For

God hath full knowledge of them,” (4:39).

This value reemphasises the responsibility of project analysts and decision makers

not to support or approve a project that falls beyond or beneath the areas of maslahah

i.e. Necessities, Conveniences and Refinements. The use of resources for a project

that goes beyond the maslahah is considered as extravagance and their

underutilisation to meet the maslahah is niggardliness which is heavily condemned in

Islam.

 72

4.7 Islamic Value 6: Promotion of Cooperation and Partnership

The Islamic teachings emphasise the value of cooperation and collective work for

the purpose of doing good deeds as evident in the Qur’anic verse 5:331. Cooperation is

encouraged in Islam whether in respect to spiritual matters, economic affairs or social

activities (Kahf, 1978). The underlying principle of brotherhood in Islam calls for

cooperation amongst people, particularly Muslims. There are a lot of hadiths which

emphasise the nature of this brotherhood. Amongst them are (Akhtar, 1996; Kahf,

1978):

a) “A Muslim is a brother of another Muslim; he neither wrongs him, nor

leaves him without help.”

b) “I swear by Allah, one cannot become fully Muslim until he (or she) likes

for others whatever he (or she) likes for himself (or herself).”

c) “You find the Believers in respect to their mutual love, mercy and

compassion as one single body, that if a part of it is in pain, all the body

falls ill with restlessness and fever.”

Similarly, Islam encourages Muslims to participate in a partnership as it is a form

of cooperation and collaboration between individuals. Moreover, it leads to more

efficient and better use of resources (Al-Masri, 1999). Therefore, we can see that a

number of partnership projects have been established and discussed in the area of

31 “…help ye one another in righteousness and piety, but help ye not one another in sin and rancour…”

 73

Islamic jurisprudence. Partnership projects for commercial purposes in Islamic

jurisprudence (fiqh) basically can be divided into two major categories and can take

place in several forms. The divisions can be illustrated by the following points (Al-

Masri, 1999; Nyazee, 2002):

1) Agricultural Partnerships (Al-Sharikat Al-Zira‘iyyah). This category has

three forms:

a. Muzara‘ah (Share-cropping): It is a type of agricultural partnership

with land contributed by one party and work by another. The land

is cultivated and the yield is shared between them.

b. Musaqah (Share-watering): It is a type of agricultural partnership

whereby the trees and land are contributed by one party and their

care (watering) is undertaken by another with their fruit being

divided between the parties.

c. Mugharasah (Share-planting): It is a type of agricultural

partnership where the land and plants are contributed by one party

and the work of planting is provided by another party with a

portion of plants being given to him.

2) Trading Partnerships (Al-Sharikat Al-Tijariyyah). This type of partnership

is different from the previous one as the partners share the profit, neither

 74

crops nor plants, between them. This can be further divided into two

categories. This category has two forms:

a. Mudarabah: It is a type of trading partnership in which capital is

contributed by the capital provider (rabb al-mal) and labour from

the entrepreneur (mudarib). The profit is shared between them. In

case of loss, it is born by the capital provider. The entrepreneur

only suffers from the fruitless efforts.

b. Shirkah: It is a profit and loss sharing partnership and takes three

major forms.

i. Shirkat al-Amwal: It is a partnership in which participation

is based on the contribution of capital by all partners.

ii. Shirkat al-Abdan: It is a partnership in which participation

by the partners is based on labour or skill.

iii. Shirkat al-Wujuh: It is a partnership based on the credit-

worthiness of the partners. The ratio of loss is based on the

liability borne whereby the ratio of profit could be based on

either the liability borne by each partner or mutual

agreement between them.

 75

These three types of trading partnerships could be based on either

‘inan or mufawadah partnership32.

We can see from the above classifications that a project entails the combination of

resources. Some individuals only have resources but they do not have the expertise or

even the time to manage the resources. Hence, partnership projects are necessary to

make use of the resources and put them in more productive and beneficial activities.

With the combination of the resources and expertise, the resources would be used

more efficiently and not left idle. Accordingly, project analysts and decision makers

should consider cooperation with other parties if the cooperation could lead to the

better use of resources and generate bigger benefits to the beneficiaries of the project.

CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion

32 A mufawadah partnership is based on wakalah (agency) and kafalah (surety) that entails full
commitment from the partners. To achieve this purpose, all partners should maintain equality in capital,
labour, liability and legal capacity. It declares each partner to be an agent of and surety for the other. In
an ‘inan partnership, the equality of legal capacity and contribution by each partner is not necessary
(Nyazee, 2002).

 76

The topic of project evaluation is an enormous and vast topic covering a lot of

issues. This study, however, concentrates only on the framework for project

evaluation to give the study focus, conciseness and persistent direction. The

methodological and technical issues are not within the scope of the present study.

Firstly, we have seen that the framework for project evaluation offered today in

mainstream economics, with its complexity and thoroughness, has been developed in

isolation from Islamic input. The active participation from international organisations

such as the World Bank, UNIDO, IDCAS and the OECD has further developed and

advanced the framework for project evaluation in mainstream economics. With due

acknowledgements to the contributions of mainstream economics towards the birth

and development of the existing methodology and framework for project evaluation,

the study insists on its deficiency and inability to serve the Muslim governments and

individuals to opt for the most preferable project under the light of Shari‘ah.

Reconsidering the main principles of the mainstream project evaluation

framework from the Islamic point of view, this study found that most of the

mainstream framework is Islamically acceptable in principle. The technical tools that

have been developed in mainstream economics are very helpful and valuable in the

profitability analysis of projects in an Islamic framework. Nonetheless, the detailed

justification and structure of an Islamic framework for project evaluation might differ

from the mainstream one. For example, the role of interest should be abolished in an

Islamic framework and be replaced with the rate of return or equivalent profit rate.

 77

The study also found 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. The significance of this

maslahah concept is 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 eventhough

the selected project seems to be irrational from the mainstream economics point of

view.

Project analysts and decision makers in an Islamic framework for project

evaluation should also be guided by Islamic values in making their judgments. This is

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

Islam. The values could also influence the attitude of the project analysts and decision

makers towards several important issues in an Islamic framework and could be used

as a basis for giving preference for some projects over others.

In carrying out this study, the researcher also found that there are a lot of

traditional Islamic sources, particularly in fiqh (Islamic jurisprudence) and usul al-fiqh

(foundations of Islamic jurisprudence) that might seem, at a first glance, to be

unlikely sources for project evaluation in an Islamic framework. Indeed, they are not

only intellectual heritages but, more importantly, they could also have their own

relevant contributions and role in the topic. Some of the relevant literature for further

investigation is that pertaining to the Siyasah Shar‘iyyah (Islamic political science),

Maqasid al-Shari‘ah (Objectives of Shari‘ah) and Qawa‘id Fiqhiyyah (Islamic legal

 78

maxims) fields. These areas are very closely related to decision making criteria, the

skill of judgment as well as the qualitative evaluation of the subject matter.

5.2 An Islamic Framework for Project Evaluation

Having discussed the framework for project evaluation and the significance of the

concept of maslahah in project evaluation, the researcher suggests an integrative

Islamic framework for project evaluation as illustrated in Figure 5. The suggested

framework simply integrates the best elements of both Islamic and mainstream

economics. The description of each stage of the Islamic framework can be found in

the earlier chapters and reiteration in this chapter is unnecessary. 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.

 79

Figure 5: An Integrative Islamic Framework for Project
Evaluation

Financial
Analysis

Investment
Profitability Analysis

Social Cost-Benefit Analysis

Uncertainty Analysis

Project’s Overall Merit

Commercial Profitability National Profitability

Project Evaluation Objectives

Necessities Conveniences Refinements

Profitability Analysis

Maslahah (Shari‘ah Objectives) Analysis

 80

5.3 Suggestions for Further Research

The researcher suggests that future research should be carried out on the technical

study (or quantitative analysis) of the maslahah concept in project evaluation.  This

concept has the potential to be further developed and would be the main distinctive

trait of an Islamic framework. Another important area is the correlation between

project evaluation and project financing. Mainstream economics, in its discussions of

project evaluation - particularly in SCBA of public projects, dichotomises between the

investment criteria and project financing. This is due to its acceptance of interest-

based financing. However, it seems that this dichotomy should be mitigated in an

Islamic economics as interest-based financing is illegitimate. Additionally, the

practice of interest-based financing would cause the selected projects to generate

negative consequences and externalities, directly or indirectly, on society which are

unacceptable from the Islamic point of view. Hence, future research should also

concern this issue. The combination of quantitative and qualitative analyses should

also be taken into consideration as this will provide balance in giving justifications for

undertaking selected projects in an Islamic framework.

 81

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GLOSSARY

‘Aql Mind; Intellect

Awqaf Plural of waqf

Bay‘ al-Mu‘ajjal Sale on deferred payment i.e. the good is delivered but the price

is delayed to the future

Bukhl Niggardliness

Daruriyyat Necessities

Din Religion

Falah Success in this world as well as in the hereafter

Fard al-‘Ayn Individual obligation

Fard al-Kifayah Social obligation

Fiqh Literally means “the true understanding of what is intended”
 Theoretically, it refers to “Islamic Law deduced from the

sources of Islamic Law” or “Islamic jurisprudence”

Hadith The traditions of the Prophet Muhammad used as an exegesis

of the Qur’anic message

Hajiyyat  Conveniences

Halal   Lawful; Legitimate

Hanafiyyah  Hanafite jurists

Haram   Forbidden; Unlawful; Illegitimate

Israf   Wanton waste in production or consumption

Kharaj   Land tax in the Islamic state

Khilaf al-Awla  Opposite to what is better or greater

Mafasid  Plural of mafsadah

Mafsadah  Loss; Evil; Disadvantage; Disruption; Damage

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Makruh  Reprehensible

Mal   Wealth; Capital

Malikiyyah  Malikite jurists

Mandub  Recommended

Maqasid al-Shari‘ah Objectives of the Shari‘ah

Masalih  Plural of maslahah

Maslahah  Utility; Welfare; Benefit; Advantage

Mu’minun  Believers

Mubah   Permissible

Mudarabah Profit sharing partnership; It is a type of trading partnership in

which capital is contributed by the one party and labour from
the other party

Mudarib  Entrepreneur in a mudarabah partnership

Mugharasah  Share-planting partnership

Mukammilat Complementarities

Musaqah  Share-watering partnership

Muzara‘ah  Share-cropping partnership

Nafs Life

Nasab Offspring

Qawa‘id Fiqhiyyah Islamic legal maxims

Qur’an The holy book revealed by God to the Prophet Muhammad as a

continuation and completion of the Divine message to mankind
that was revealed to the earlier prophets of antiquity

Rabb al-Mal  Capital provider in a mudarabah partnership

Riba   Interest or usury (literally means increase or addition)

Rizq   Livelihood; Sustenance

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Sadaqat  Donations; Alms

Shafi‘iyyah  Shafi’ite jurists

Shari‘ah  (1) Islamic Divine Laws as available in Qur’an and Hadith

(2) Used regularly interchangeably with Islam itself
(3) One of the three elements of Islam that deals with all forms
of practical actions of human beings

Sharikat Tijariyyah Trading partnership

Sharikat Zira‘iyyah Agricultural partnership

Shirkah  Partnership

Shirkat al-Amwal  Capital-based partnership

Shirkat al-Abdan Labour/skill-based partnership

Shirkat al-Wujuh Creditworthiness-based partnership

Siyasah Shar‘iyyah  Islamic political science

Tabdhir  Worst type of wasteful production or consumption

Tahsiniyyat  Refinements

Taqtir   A sort of niggardliness

Ummah  World nation of Islam

‘Urf   Local customary practice

Usul al-Fiqh  Foundations of Islamic jurisprudence

Wajib   Obligatory

Waqf Endowments and trusts assets donated for use in Islamic

education or charities

Zakah   Wealth tax in Islam and one of the five pillars of Islamic belief

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APPENDICES

 91

APPENDIX 1
TRANSLITERATION TABLE33

A. Table 1: Consonants

 ق q  ز z  ء ’
b ب  s س  k ك
t ت  sh ش  l ل
th ث  s ص  m م
j ج  d ض  n ن
h ح  t ط  h هـ
kh خ  z ظ  h ة
d ع ‘  د  w و
dh ذ  gh غ  y ي
r ر  f ف

B. Table 2: Vocalisation Signs (Representing Arabic Vowels)

a  َ  i  ِ  u  ُ

i. Short vowels illustrated with consonant “d” / “د”

da د  di ِد  du د

ii. Long vowels illustrated with consonant “d” / “د”

da اد  di ِدي  du ود

C. Table 3: Diphthongs

aw و   َ  ay ي   َ

Examples: qawm قَوٌم  shaykh يٌخش

D. Words Containing Shaddah (   ّ  )

33 This transliteration is based on the paper, entitled “Transliteration”, presented by Asst. Prof. Dr.
Badri Najib Bin Zubir – IRKHS - in Research Methodology Course (SLAB) held by Research Center,
IIUM from 31st March to 8th April 2003 & from 10th to 18th June 2002.

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i. Shaddah involving consonants other than و   and ي  : Double the letter

Examples: bashshara رشب  qarra قَر

ii. Shaddah involving consonants و   and ي  :

a. Double the letter when the shaddah is in the middle

Examples: khawwafa فوخ  hayyara ريح

b. Double the letter when the shaddah is in the end and the letter before is

assigned fathah (   َ  )

Examples: jaww ٌّوج  tayy ٌّطَي

c. Represent  و   as “u” and  ي  as “i” when the letter before each is

assigned dammah (   ُ  ) and kasrah (   ِ  ) respectively

Examples: matlu ٌّتلُوم  nabi ٌِّبين

E. Words Containing the Prefix “ال”

The prefix “ال” is always transliterated “al” regardless of whether it is shamsiyyah or
qamariyyah and a hyphen is used after “al” to indicate that it is a prefix.

Examples: al-khayr اخلَري  al-sharr رالش

E. Words Containing Hamzah “ء”

Hamzah “ء” in the initial position, whether it is preceded by the prefix “ال” or not, is
not represented in transliteration but how it is vocalized is indicated. This rules
applies to both hamzat qat‘ and hamzat wasl.

Examples: al-insan اناِإلنس  idrak اكِإدر

F. Words Containing Ta’ Marbutah “ة”

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Ta’ Marbutah “ة” at the end of nouns is transliterated “h”.

Examples: madrasah ٌةسدرم  hasanah    حسنةٌ

Notwithstanding the above rule, Ta’ Marbutah “ة” is transliterated “t” when it is
present in the first word of a construct pair (idafah).

Examples: Kulliyyat al-Iqtisad ادةُ االقِتصكُلِّي  Majallat al-

Da‘wah
مجلَّةُ الدعوة

G. More Examples

Shari‘ah شريعة  Makruh مكروه  al-Tahsiniyyat التحسينيات
Maslahah مصلحة  Haram حرام  Mukammilat مكمالت

Bay‘ بيع  al-Awqaf األوقاف  ‘Ibadat عبادات
Wajib واجب  al-Mashru‘at املشروعات  Mu‘amalat معامالت

Mandub مندوب  al-
Daruriyyat

الضروريات  al-Muwazanat املوازنات

Mubah مباح  al-Hajiyyat احلاجيات  al-Awlawiyyat األولويات
al-Taqtir التقتري  al-Israf اإلسراف  al-Tabdhir التبذير

Note:  Other rules of application of the transliteration are not mentioned here for

brevity.

 94

APPENDIX 2

THE VALIDITY OF THE CONCEPT OF TIME VALUE OF

MONEY AS DERIVED FROM THE SAYINGS OF THE PROPHET

MUHAMMAD AND HIS COMPANIONS

1. ‘Ata’ Ibn Yasir reported Rafi’ said: “The Apostle of Allah (PBUH)

took on credit a small camel. When Camels of sadaqah (donation)

arrived, and he asked me to pay back a like camel, I said: Apostle of

Allah, the camels are all big and four years old. The Apostle of Allah

(PBUH) said: Give from them. Virtuous are they who pay back their

debts well.”34

2. Mujahid reported that ‘Abd Allah Ibn ‘Umar took some dirhams as a

loan and paid back better dirhams. He said: “O Abu ‘Abd Al-Rahman,

these are better than the dirhams I loaned out to you.” ‘Abd Allah Ibn

‘Umar replied: “Yes I know, but I paid out of my own goodwill and

pleasure.”35

34 Source: Muwatta’ Al-Imam Malik as quoted by Rosly (2003).
35 Ibid.