Paper Title: The Role of Istihsan in Applying Maslahah in Islamic Finance

Author:        Muhammad Shahrul Ifwat Ishak & Syairazi Muhammad Husni Mohd Sharoni

Publisher:    Journal of Islamic Finance, Vol. 11, No. 1(2022), 113 – 120.

This paper identifies the role of Istihsan in Islamic finance that should be emphasized to strengthen the element of Shari’ah compliance.

Applying Shari’ah rulings in Islamic finance has witnessed several challenges and difficulties. In some aspects, there is need felt for toleration for the sake of Maslahah.

Authors argue that the role of Istihsan can be manifested through providing an exceptional ruling from general rulings, considering modern norms of business practices before applying rulings, harmonizing between Shari’ah and civil laws, and adapting Islamic finance within the change of circumstance.

Authors argue in favour of providing an exceptional ruling from general Shari’ah rulings when there is a need. Authors give the example of late payment penalty to illustrate this point. According to the Qur’an (Chapter 3:130), it is forbidden to impose late charge as it is part of Riba Jahiliyya (deferred usury). When the debt becomes due, creditors give two options to their debtors: to pay it now or to pay later with additional payment.

Therefore, Islamic financial institutions should not charge late payment from their customers because it looks similar to Riba. Nevertheless, abolishing this charge could directly affect their functions as financiers, in terms of incurring extra expenditures, such as the cost of issuing notices and letters, legal fees and other related costs, as they also utilize their depositors’ funds.

Thus, Istihsan needs to be applied to provide an exception on this issue in order to sustain the viability of Islamic finance industry. Nevertheless, Islamic financial institutions must ensure that the implementation of late payment penalty is different from the practice of Riba.

Authors also emphasize that it is important to consider the modern norm of business practices before applying a ruling. In Islamic jurisprudence, ‘urf’ (norm) is also recognized as a basis of ruling.

For example, ‘urf’ based Istihsan is applied in the case of allowing moveable Waqf because the society has recognized this practice.

In modern times, the case of T+2 settlement in currency exchange could illustrate the role of Istihsan. According to Shari’ah ruling, the exchange of different currencies must be carried out immediately.  Nevertheless, in modern financial practice, this transaction could not be exercised on the spot as its process requires two working days, called as T+2 settlement.

Authors also highlight the need for harmonization between Shari’ah and civil law. However, it must be remembered that Shari’ah law shall remain supreme. Whatever changes are introduced; they must be introduced in the civil law. Wait and efforts to change the civil law to bring it in harmony with Shari’ah law is a better course of action rather than changing the Shari’ah ruling itself. The paper highlights an important need for holistic analysis of Islamic finance product design, structures, delivery and operations to serve the financial and economic needs in a Shari’ah compliant way. However, it is also pertinent that Maslahah shall not be used to bring changes in Shari’ah rulings where explicit guidance from sources of Shari’ah are given.