The Islamic Commercial Law Series (2): Feasibility Studies in Islamic Financial Institutions

Posted on: 17 June 2015

بسم الله الرحمن الرحيم

Feasibility Studies in Islamic Financial Institutions

  Feasibility studies are routine practice in Islamic banks. In the Arabic language this practice is called “dirasat al-jadwa.” It is a way in which the profitability of proposed projects is assessed, and is very important in the operation of a successful financial institution. When today’s markets are frequently changing, expert advice may help predict what shall happen in the market beforehand, and at times market changes are simply unpredictable. Market risk is inevitable is any profit generating venture.

  Investing one's funds in profitable ventures is important. The implementation of feasibility studies better directs investors towards which ventures will generate profit, and turns them away from what will waste capital and resources. Feasibility studies are used as preventive measures to avoid unsuccessful business enterprises. Developing economic studies and groundwork towards assessing which projects are economically viable and which are not is, in essence, Islamic. Wise investment decisions accord with one of the primary aims of Islamic law, the protection of wealth. 

   Furthermore, these studies provide an oppertunity to research the shari'ah compliance of investments in parallel with the economic study. A mere economic study may produce results similar to conventional financial schemes; while for a Muslim, their investments must be permitted in Islamic law. Accordingly, a feasibility study considers the Sacred Law as authoritive while determining viability.

   The obligation of such diligence may be inferred from various primary sources. Allah commands man to seek out what has been made lawful, this is stated in the Qur'an, like in 2:168, 5:88, 16:114-16. As well, the companions would ask the Prophet (upon him be peace) in regards to matters of commercial law. In Sahih al-Bukhari 3/55, on the authority of Bara' b. 'Azib and Zayd b. Arqam, they both related that they were merchants during the Prophet's time. They went to ask the Prophet (upon him be peace) in regards to the contract of sarf. And the Prophet (upon him be peace) said, "When the exchange is hand to hand, there is no problem. But when it is deferred, then it is no good."

   This series is meant to provide an overview into feasibility studies and how they ensure that financial institutions administer projects compliant with the Sacred Law. The following are the topics that shall be addressed herein:

i) The General Framework of Feasibility Studies

a) Understanding Feasibility Studies

b) The Importance of Preparing Feasibility Studies

c) The Extent of Feasibility Studies  

1) Beginning New Projects

2) Expanding Profitability

3) Advancements in Technology

4) Getting Bank and Development Loans

d) The Costs of Preparing Feasibility Studies In Profit Seeking Ventures with Islamic Banks

ii) The Standards for Evaluating Economic Profitability

a) Standards for Evaluating Economic Profitability

1) The Standard Period for Returns  

2) The Standard for Current Net Value

3) The Rate of Return

4) The Standard for Returns on Overhead

5) The Islamic Approach to the Aforementioned Standards

b) Feasibility Studies and the Standards for Evaluating Profitability in an Islamic bank

1) Feasibility Studies in an Islamic bank

2) The Standards for Evaluating Profitability in an Islamic bank

iii) The Standards for Evaluating Public Profitability  

  In forthcoming parts of this series each of these shall be discussed in greater detail insha'Allah.