Islamic Finance - Players in the field

Thinking about the Islamic finance industry today, I started to think of the various players in the field. Not specific people per se, but those character types that one can find when surveying the industry.

This is what comes to mind:

 

1- The Movers
This group, whose mainstay is with multi-national banks, are those that have been setting “Islamic” finance on an international scale. There are some regional banks, such as Dallah Barakah, al-Rajhi, KFH, DIB, etc. but for the majority of the Muslim world they mean absolutely nothing. With conventional networks already in place, along with Scholars that gain more credit with Muslims outside the Gulf already on the roster, the international players have a one-up on the homegrowns attempting to expand their market outside of the Middle East.
- These are analogous with the Rulers of old using both power and religion to advance their goals.

2- The shakers
Homegrown (usually) Muslim businesses (and/or people) that are key in setting up independent banks and/or Islamic windows. They are more than merely laymen. They have both the social and business acumen and connections to make things happen.
- These are analogous with the Wazirs of the past using both power and religion to advance their personal and/or regional goals.

3- The high-priests
More than clear for any familiar with the industry, these are scholars that are brought on-board to confirm the “Islamicity” of contracts and investment methods being used. More often than not, there names and traditional credentials are more important than the actual “Islamicity” of the contracts that they approve. Much of the approval is one that is “Takhrij” based, and not based on Ijtihad (singular or group). Their presence is a positive high point in marketing that offsets the negative low point of going to an “un-Islamic” bank. in that most people would generally take offense in dealing with a conventional bank if it were not for the presence of these scholars.
- These are analogous to two groups of old; in the view of the laymen they are analogous to the Imams who, even though not necessarily seen as infallible, were held to be irreproachable. The other group is the worldly scholars of old using both power and religion to advance their personal goals.

4- The pietist laymen
This group is multi-faceted, and works at many different levels of the industry, from management to consulting, compliance to marketing. They are similar to the next group in the list, their distinguishing characteristic being their pietist attitude in defending industry practices even when faced with contrary academic evidence. Most in no way specialists of Islamic law, their relationship to the scholars of the last group is one of “Imam-to-Muqallid”, and like many of the proponents of staunch Madhhabism degrade anyone that questions the correctness of their Imams position.
- These are analogous to the Muqallids of old, and some of them to the bigoted Madhhabists whose support of the school went beyond academic and into politics and partisanship.

5- The procedural laymen
Similar to the last group in function; this group does not share the stalwart attitude to industry criticism, and may show a bit of skepticism towards current practice. They are closer to the reformists in their rationale, yet see the necessity of finance and credit and wish to facilitate that to Muslims in a manner most conducive to their cultural sensitivities.
- These are analogous to the non-partisan Muqallids. Not bigoted towards one approach or the other, they saw the necessity of working in the system (whether for personal, familial, or communal benefit) while at the same time allowing themselves to disagree with incorrect practices.

6- Reformists
This group ranges from those directly involved in the industry to those that take an outside-looking-in approach, to those that were inside and have been thrown out. As Islamic finance has been supported by those most interested in making money, and not those particularly interested in the welfare of the vast numbers of poor (Muslim or otherwise).
- These are analogous with Independent scholars of the past, who for various reasons (ethical, personal, political or otherwise) chose not to be part of the religious bureaucracy forwarding goals juxtaposed to their own.

Now this is not to say that these character-types are static, or to say that there aren’t any others that may fall between the cracks or fit into more than one category; but when looking at the industry this is what can be observed. Character judgments about individuals however are to be reserved, as only God know what is in the hearts.

Linked: Ibn ‘Ashur’s Treatise on Maqasid

Ibn ‘Ashur, who was arguably one of the greatest scholars of the past century, followed in the tradition of al-Shatibi and al-’Izz with his book Maqasid al-Shari’ah.

Maqasid al-Shari’ah, a concise and intriguing work in its original Arabic, it is now available in the English from IIIT. For a review of the translation look here. Hat tip to Dr. Mahmoud El-Gamal who posts on reinvestigating legal objectives. He links to this article by Dr. Robert Crane, which mentions a bit about Ibn ‘Ashur and the Maqasid. The author cites the edition of al-Maqasid in Arabic saying:

“…His major work, first published in Arabic in 1946, was translated and annotated for a modern reader with incredibly thorough footnotes by Mohamed el-Tahir el-Mesawi under the title Ibn Ashur, Treatise on Maqasid al Shari’ah…”

While al-Mesawi’s edition is probably one of the better prints of the book, the footnotes are hardly “incredibly thorough”. There is however a another edition of this book which fits this description; the one annotated by Shaykh Muhammad al-Habib Bin Khujah and printed by the Ministry of Islamic Affairs, Qatar.

Bin Khujah (to my knowledge one of the last living students of Ibn ‘Ashur) has done an impeccable job of presenting the Maqasid of his teacher; servicing his knowledge, memory, and legacy.

This edition is printed in three volumes:

• Volume one: The biography of al-Imam al-Akbar Muhammad Al-Tahir Ibn ‘Ashur
• Volume two: Between the sciences of Usul al-Fiqh and Maqasid al-Shariah (Bayna ‘ilmay Usul al-Fiqh wa Maqasid al-Shariah); an introductory work on the relationship between these two sciences by Bin Khujah himself.
• Volume three: The Maqasid al-Shariah of Ibn ‘Ashur

The third volume of this set services the knowledge of the Imam; in doing so Bin Khujah depends on two of the earliest prints of this work, as well as the personal notes of Ibn ‘Ashur himself. He compares the two prints (in that the original manuscripts were not available to him), adds the author’s personal notes to the marginalia, as well as adding his own notes to issues he sees pertinent.

One of the major contributions that this edition make is the attribution of the texts referenced by Ibn Ashur back to their sources, including al-Shatibi’s al-Muwafaqat, al-Qurtubi’s Jami’, Ibn ‘Arabi’s Ahkam, as well as various works in fiqh and Usul. Ibn Ashur’s other seminal works are referenced as well, such as his tafsir al-Tahrir wa ‘l-Tanwir and his “Usul ‘l-Nizam ‘l-Ijtima’i fi ‘l-Islam”. At times Bin Khujah will even relate verbatim some of these referenced texts, in an attempt to give the reader more context of the original. This is in addition to explaining some of the terminology found in the book that might be lost on the non-specialist.

For those concerned with the area of business, finance, and economics, one of the latter portions of the book would be of interest “Maqasid ‘l-Tasarrufat ‘l-Maliyyah”. To give you an idea of the importance of this chapter he says:

As I mentioned in the previous chapter, the most important objective here is preservation and economization of this nation’s wealth. This nation’s wealth, whence viewed as a whole, is preserved through regulating the manners by which it is managed generally, in addition to the manners in which individual wealth is preserved and managed. Preservation of the whole depends on preservation of its components; the majority of Islamic legal principles dealing with wealth relate directly to the preservation of individual wealth, which in turn preserves the wealth of the nation; there being a direct correlation between the benefit of personal wealth and the benefit of public wealth in relation to the prosperity of the nation.

This section of the book is deserving of further analysis by Muslim economists, in that (in the eyes of this non-specialist) it presents a far better survey of Islamic views related to economics than what has been presented so far.

In conclusion this is probably the best print of Maqasid al-Shari’ah so far, and an indispensible one at that in light of the value added by Bin Khujah’s service to the book.

Linked: State regulation of ‘Shariah’ Advisors (A possible first)

This is a possible first in the industry, and a good sign…

From IHIblog:

The State Bank of Pakistan, Pakistan’s central bank, has issued new qualifications and restrictions on Shari’ah advisors. The new regulations require Shari’ah advisors to have a postgraduate degree in Shari’ah law, four years of experience and limits the degree to which Shari’ah scholars can hold executive or non-executive positions with Islamic banks other than Shari’ah scholars. The new regulations do allow Shari’ah scholars to oversee multiple Islamic financial institutions as long as they are not involved outside of the Shari’ah compliance role and do not have significant financial interests in any organization to which they provide oversight.

Thoughts on Insurance and Islamic Law

Classically, scholars categorized contracts as being from one of three types.

1. Commutative exchange (Mu’awaDat معاوضات) - Involving the voluntary exchange of good, services, and/or both for the purpose of trade. Includes: cash sales, bartering, and currency exchange.
2. Charitable exchange (Tabaru’at تبرعات) - Involving the voluntary not-for-profit exchange of good, services, and/or both out of the goodwill of the giver. Includes: monetary loans, material loans, gifts, and will & testament etc.
3. Contracts of record/certification (Tawthiqat توثيقات) - The recording of a right or claim of one party against another. Includes: Liens, pawn certificates, debt records, Kafala, etc

When the question of insurance started to proliferate throughout the Muslim world, scholars generally took the position that commercial insurance (insuring with a stock insurance company) was Haram (prohibited). They based their ruling on the perceived Gharar and gambling (muqamarah) involved in the transaction. A small minority differed with this verdict, permitting all forms of insurance; the opinion of this minority is becoming much more popular these days.

On the other hand, they allowed mutual insurance. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. A mutual company is, in the simplest terms, where all parties are members of an insurance ‘guild’ contributing to the ‘pot’. These contributions are charitable in nature and are seen as the the collective right of the guild, in which everyone agrees that if one member is faced with adversity or some loss that the money collected will be used to offset that loss.

Now for the problem

When scholars speak on the permissibility of insurance, they usually do so from the viewpoint of the end-use, i.e. the insured. Hardly ever do you hear of criticism of the insurance industry as a whole, and the pricing schemes involved. We are told that commercial insurance is Haram, and that we should all go out and get mutual insurance.

This one-sided solution to the problem of insurance, if not obligated by the authorities, leaves many people high and dry with regards to protecting their personal and business interests.

As a quick side note, in classical Islamic legal discussions, compensation for losses accrued by the individual or a group of investors through natural disasters and unforeseen events beyond their control were usually compensated for by the institution known as “Bayt al Mal” or the state treasury, if not they were taken up by the persons tribal allegiances. The state had the responsibility to ensure the livelihood of its citizens, in that it is the authority which collects zakat, ghana’im, and is entrusted with the natural resources of the state and the revenue received from them.

Going back to the issue of contracts, scholars said that mutual insurance fell under the second type, being charitable in nature. Commercial insurance was of the first type. However when we look practically at insurance practices, if in fact insurance of any type was a commutative exchange, then if we canceled or insurance we should have the option to received back that money that was ‘invested’ into the deal. As far as I know, you can not do this for most insurance packages. If this is the case, then you are essentially giving away a portion of you wealth in hopes to receive compensation in the face of future losses without expecting the principle contribution back; exactly what you are doing in the case of Mutual insurance.

If this truly is the case with insurance, then there would seem to be no difference between entering into a commercial or mutual insurance contract; in both you will end up receiving the same compensation and in both you will pay a similar amount. What does seem to be of consequence is the use of that money by the insurance company, their ability to cancel the policies of their clients, and their secondary investment of that money for their own profit.

Essentially the permissibility of insurance lies in the regulation of the insurance industry itself, and not in the character of the end-user agreement.

Here’s an example that should bring it a little closer to home:

In the contract called “MuDarabah” or the silent partnership, partners are to share equally in the profit and loss of the partnership. If say, the silent partner specifies for himself some form of profit to the exclusion of the other (who here is performing the ‘work’ involved), then scholars held to opinions as to how the profits should be distributed in the face of this invalid condition (calling this MuDarabah Fasidah مضاربة فاسدة). Some said that this partner should be given the salary commensurate to his work. Others said that he should receive the profit commensurate to that which a partner similar to him would receive.

The point here is that the second party involved in the MuDarabah contract receives compensation for that which he entered the contract for initially, whether is be profit or salary.

In essence then, the contract is being invalidated from one side only, not both. Therefore, the main issue with such a contract is that which pertains to regulating the contract and the distribution of the money involved, similar to our insurance example above.

It is then an issue of regulation, and not one pertaining to the permissibility of the end-user entering into such as agreement.

If this truly is the case, then for the end-user it should not matter as to what type of insurance he buys, to what extent he insures his property, and to what extent he receives compensation for his losses. In the end of the day it is all the same, he will receive compensation commensurate to his losses.

The key issue here would then seem to be state regulation of the insurance industry, and their guaranteeing fair business practices, just as they would guarantee fair compensation in classical legal literature.

Any thoughts?

Islamic Economics vs. Global Capitalism

Prof. Thoma @ Economist’s view posted this article from the LA times, asking the question “Will capitalism fall victim to its own success?“

From the article:

Karl Marx is turning in his grave. Or perhaps not, because some of his writings eerily foreshadowed our era of globalized capitalism. His prescription failed, but his description was prescient.

I assume that he is pointing to this quote from the Communist Manifesto:

The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie therefore produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable

But with all the criticism that can be heaped on capitalism, what are the alternatives? Social Democracy is named, Chavez and his “21st Century Socialism” is as well.

Then there is “Islamic Economics”…

From the article:

What, after all, are the big ideological alternatives? …
Islamism — billed as democratic capitalism’s great competitor in a new ideological struggle — offers no alternative economic system (aside from the peculiarities of Islamic finance) and does not appeal beyond the Muslim umma. Most anti-globalists are better at pointing out the failings of global capitalism than they are at suggesting systemic alternatives. “Capitalism should be replaced by something nicer,” read a placard at a May Day demonstration…

So Islamism, which I guess the author is using to mean the practice of Islam on more than a personal level, is insufficient in developing an alternative economic system. There are more than enough writings on “Islamic Economics” and I too was at first light attracted to such a concept. However, through research and study, there does not seem to be anything called “Islamic Economics” in that economics is largely and empirical science. We can however, use the ideology of Islam to develop an “Islamic theory of economics” i.e. one that guides the normative values of economics in a manner conducive to Islamic belief and practice. Yet much of what has been written in this field is extremely vague. Concepts of “Justice” and “equality” abound, re-iterated with the same examples of prohibiting “Riba” and usurpation of property. In fact, there seems to be a trend in many of these writings. When socialism was big in the Muslim world, many such writings reflect that influence, stressing wealth distribution and state regulation. Nowadays, with the socialist influence waning, more capitalist leaning thought has entered the fray. All in all, there is still alot of research that needs to be done. Economists such as Timur Kuran present the same picture of “Islamic Economics” that tha author of the above quoted article does. Others have been equally critical, yet without avail. There seems to be a stagnancy in admitting the need for progression in these research areas. So while many Muslims believe that they are simply being sticklers for orthodoxy, in fact they may be fulfilling prophecy.

This method of innovation-trailing in areas of economics and finance has lead to no substantial alternative to be developed for the benefit of mankind, much less the benefit of the Muslims. Anyone that would like the characterize critique of Islamic Economics as some from of self-hate, hypocrisy, or support for non-Islamic systems should remember the statement of Umar ibn AbdulAziz “May God grant mercy to he who presents to me my faults.”

Also from the article:

Does the lack of any clear ideological alternative mean that capitalism’s triumph is secure? Far from it. For a start, the history of capitalism hardly supports the view that it is an automatically self-correcting system. As George Soros (who should know) points out, global markets are now more than ever constantly out of equilibrium — and teetering on the edge of a larger disequilibrium. Again and again, capitalism has needed the visible hands of political, fiscal and legal correction to complement the invisible hand of the market.

So if Islamic Economics is an alternative system, what sort of corrective mechanisms are sanctioned offset disequilibrium? Most research, as alluded to in the article, has centered on issues of Islamic finance. Issues that for the most part are micro-economic in nature, and do not present an “Islamic” concept of a general regulatory framework or a theory of political economy.

In “The Worldly Philosophers” Robert L. Heilbroner lists three ways in which societies have dealt with such precariousness of human nature: tradition, authoritarianism, and market systems. In the past, it seems that much of the research and application of Islamic law as applies to economics, business and finance seemed to concentrate of the tradition of the Madhahib (juristic schools) and their analysis of the “Islamicity of contracts“. As alluded previously, authoritarian attitudes to these subjects took hold in the attempt to develop a viable Islamic counter-culture to what was thought to be the invasion of the “Un-Islamic” ideas of Capitalism and Democracy.

Now the only thing left is the development of market system reflecting the objectives of Islamic Law.

What sort of political correctionary methods are sanctioned by Islamic Law? If the Islamic economy is not authoritarian, then is it laissez-faire?

What sort of fiscal policy does Islamic economics advocate? Classically this was spoken of in the books of politic or “al-Siyasah al-Shar’iyyah”. However, there is in those works great emphasis on revenue from natural resources and appropriation of war-spoils. Zakat and land taxation is another large part of that discourse. With modern market economies and the spread of fiat currency, what is the Islamic view of Seignorage? What of taxation? (the latter being a particularly touchy topic in some medieval legal discourse).

As for legal corrections, this area has been particularly problematic for me. We find that one of the staunchest prohibitions in the Quran to be that of the prohibition of “Riba”. However, all of the punishments and admonishments attached to this form of transaction are of a moral type attached to other-worldly punishment. The question then remains: How can something that is viewed as so severe in its practice, be alloted a punishment that does not even equal that of the least of punishments for misappropriation of personal property (theft, etc.)

Admittedly, I am not an economist, I am a student of Law. If the assertions or assumptions that I have made here are wrong, please let me know. I would love to learn from you.

In closing, the article mentions:

Marx thought capitalism would have a problem finding consumers for the goods that improving techniques of production enabled it to churn out. Instead, it has become expert in a new branch of manufacturing: the manufacture of desires. It’s that core logic of ever-expanding desires that is unsustainable on a global scale. But are we prepared to abandon it?

A good question as many Muslim countries head down the path of Prophecy, importing some of the most determental aspects of capitalism without a 1/2 of the social and economic regulations needed to allow for longevity.

This post came to mind here. As well as the following verse:

“زُيِّنَ لِلنَّاسِ حُبُّ الشَّهَوَاتِ مِنَ النِّسَاء وَالْبَنِينَ وَالْقَنَاطِيرِ الْمُقَنطَرَةِ مِنَ الذَّهَبِ وَالْفِضَّةِ وَالْخَيْلِ الْمُسَوَّمَةِ وَالأَنْعَامِ وَالْحَرْثِ ذَلِكَ مَتَاعُ الْحَيَاةِ الدُّنْيَا وَاللّهُ عِندَهُ حُسْنُ الْمَآبِ”

“Beautified for men are the desires of women, children, hoards of gold and silver, groomed steeds, cattle and agricultural wealth. These are the frivolities of this life; God has with him the best of returns”
3:114

Caveat Emptor and “As-is” sales in Islamic Law

Generally, in terms of Islamic Law, all defects in a sales item are of two types. The first are those that occur naturally, for example selling a home with a faulty foundation or a car with a cracked engine head. The second type is those defects that are initiated by a legislative prohibition. An example of this would be selling a kilo of meat claiming that it was chicken, when in fact it turns out to be the “other white meat” or tying the udder of an animal so as to appear that it gives more milk. The effects that these defects have on the market price of the item for sale are to be considered when adjudicating. So someone who was sold a set of CD’s in which one CD was cracked or scratched may have the right to a replacement CD, but may not have the right to recover for damages, as the market price of the CD set is not adversely affected by one faulty CD and no ill intent can be determined in the sale of pre-packaged media.

A second consideration of existence is taken when considering the right of the buyer to recover for defects. Those defects that were present before the period of sale are, by consensus, valid causes for litigation and recovery. Scholars differed as to those that appear during the period of sale and before the sale is finalized; Malik saw that the buyer has three days to claim defect after which the claim must be dropped, in the case that the defect is of the type that does not appear except seasonally or except over a long period of time he allotted one year. An example of this would be the sale of an animal with Mange, the mange having been treated before the sales period but is known that without re-treatment it will reappear. The three day period was substantiated by a hadith (judged weak by the opposing opinion) and the period of one year by precedent found in the custom of the people of Medina. This application may be viewed as similar to the principle of Caveat Emptor in English Common Law although not synonymous.

The Majority (Abu Hanifah, al-Shafi, and Ahmad) saw no difference between the period of sale and that before it, allowing for claims indefinitely. They cite the principle “Presumption of Continuity” (Arabic: istiS-Ha_b al-Ha_l استصحاب الحال) with regards to the previous mentioned consensus.

When discussing the permissibility of selling an item “As is” scholars differed, holding three opinions. The first, held by the Hanafi and Hanbali schools, is that “As is” conditions are permissible, and as such liability can be disclaimed from every type of defect. The second opinion, held by scholars of the Maliki, Shafi, and Hanbali schools, is that liability can be disclaimed only from those defects that are unknown to the seller at that time. The third opinion, being an alternate opinion held by those mentioned in the second, is that liability can be disclaimed except in the case that they were known before hand. This third opinion is in reality a subset of the second, and as such consideration for only two opinions should be given.

Proponents of the first opinion cite a hadith collected by Ahmad that two men came to the Prophet having disagreed over inheritance that had since expired or dilapidated. After having been warned of the dangers of false litigation and the appropriation of another’s property wrongfully earning that person divine punishment in the next life, they agreed to forgive each other. At this the Prophet told them “Go then, divide your wealth, and be just to each other, then let each of you forgive the other.” The implied meaning of this hadith is that each of them after dividing the wealth in question would then forgive his partner for any defects found in his share, mutually disclaiming all liability. Those that held the second opinion however countered that this hadith is applicable to cases of inheritance, which in its self is not a commutative form of transaction. Proponents of the second opinion used case-precedent from the time of the Caliph Uthman, in which two men disagreed about a slave who had some defect that had been sold, the seller disclaiming all liability. When it became clear that the seller would not go under oath that he knew of this defect, the Caliph Uthman, acting as Judge in this case, ruled that the price paid must be refunded to the buyer by the seller and the slave returned.

Price-Based Deferred Sales

See the previous:

Islamic Micro-Finance (1): Credit-based Silent Partnership

Salam (السَلـَـم) is a form of contract that was found in pre-Islamic Arabic. At the time the Prophet arrived in Medina, he found people dealing in this form of trade.

In the Hadith of Ibn Abbas he reports:

The Messenger came to Medina and he found the people making deferred sales in fruit for one to two years, and sometimes. At this he said “Whoever makes a deferred sale, then let him do so according to a known volume or weight, and [for delivery at ] a known time.”

Generally, this form of contract was performed in the following way:

1. Party A requests from Party B a certain product, specifying it in a descriptive manner in such a way that the price would differ (if in fact at delivery the product does not fit the description)
2. Party B accepts to deliver the product for X amount of money on a specified date
3. Party A pays Party B for the product, and waits for delivery on the agreed date
4. On the agreed date, Party B delivers the product to Party A

This description of course barring circumstances such as inability to deliver, market failures, etc. and the product is deferred while the price is given up front. If delivery is not possible then the money is refunded.

An Example:

1. Bill goes to the farm, and requests from Jake 100 kilos of grade A California raisins, to be delivered in six months time.
2. Jake accepts for the price of 10 dollars a kilo, total being $1000 USD
3. In six months, Jake delivers 100 kilos of Grade A raisins to Bill.

Price-Based Deferred Sales

Similar to this method, there is another method that may be effective for Microfinance which is known as “price-based deferred sales”, where the same structure is used but instead of the product being the object of contract the price is the object.

This is performed in the following manner:

1. Bill goes to the farm, and requests from Jake 1000 Dollars worth of grade A California raisins, to be delivered in six months time.
2. Jake accepts and receives $1000 USD from Bill.
3. In six months, Jake delivers $1000 USD of Grade A California raisins to Bill

Differences between the two:

Price-based deferred sales are contracted by Party A (Bill) in hopes that prices go down per kilos, and the quantity received is more. Party B (Jake) hopes that prices go up, or stay the same.

Benefit here is reciprocal in that Party A benefits from the time value of the money increasing or remaining the same, thus reducing loss. Party B benefits from locking in a maximum that will be paid for the product, i.e. a fuzzy number estimated between (0-1) amounts of raisins.

Despite this presentation of various finance vehicles, it is important to remember that the general rule for all transactions is that they are permissible until a source for their invalidty is found (riba, gharar, sale of prohibited substance, invalid condition). If these are not found, or cannot be conclusively proven, then the transaction is valid. This is important to remember when discussing this subject; otherwise we are likely to forbid something erroneously; speaking in God’s name without proof.

A possible “Islamic” alternative to Microlending

With Muhammad Yunus having won the Nobel prize for economics, Microfinance has become a hot item for many seeking to make money and “lend” a helping hand. Much criticism has surrounded Microfinance, from Muslims and Non-Muslims alike, questioning the ethics and viability of the practice.

Objections generally center on the fact that it is a “Riba” based system, loaning out small amounts of money at a very high interest rate. Exploitation of women is another big concern. The majority of Microfinance and Micro-credit agencies cater solely to women, even though this apparently is a good thing, many of those women act merely as collection agents for the male members of their families who spend the money while the women bear the credit risk. Additionally, dependence on loans leads to circular borrowing and may constitute a minor form of debt slavery, forcing people out of waged work and into the informal economy.

These points aside, the objective here is not to dwell on the objections to or attempt to dismantle this system, but instead to promote a more ethical and credit-safe alternative to such practices.

Many proponents of “Islamic Finance” promote profit-sharing schemes that reduce credit risk and ensure profit-loss equity among the involved parties. One such method that may provide an alternative is called “Credit-Based Mudarabah”.

Mudarabah is an Arabic word for silent partnership,

Sharikat al-MuDarabah: a partnership of two parties in which one provides capital and the other provides labor. (For more on partnerships look here)

One method that the researcher mentioned was “credit-based Mudarabah” i.e. a credit-based silent partnership.

Credit-based Silent Partnership

Parties involved:

There will be one party that will provide the labor, known here as the “Agent”. The other party will provide capital, known here as the “Financier”.

How it works:

1. The agent and the financier enter into a partnership agreement
2. The two parties agree that the financing will not be provided until
   the business deal is arraigned with the various other parties involved.
3. Once proof of the deal is presented to the financier, payment is made
   to the third party selling the goods, and profits are shared between the
   financier and the agent.

An example:

1. Take into consideration this scenario:
2. An agent purchases concrete for re-sale with the option to
   return or cancel within 48 hours.
3. He then signs agreements with the purchasers of the concrete for delivery at the specified date.
4. Upon closure of the deal, he presents proof of purchase for re-sale and
   closure of re-sale to the financier, who then would issue payment to the
   concrete salesman.
5. Profits from the re-sale would be divided up between
   the agent and the financier.

Benefits of this method:

1. Cancellation of the last deal would cancel the first, and sales risk
   is minimized.
2. Credit-risk and risk of failure are brought to a minimum, as are the
   problems of misreporting

Additional considerations:

1. The method is applicable for both wholesale and retail
2. If the trade between the suppliers, the agent, and the retailers is constant, then there would only have to be an agreement to supply, with order amounts on a case by case agreement, an OCO (one cancels the other) agreement can be done in case the retailers or the financier defaults, so safety guards are in place.

See also: Price-Based Deferred Sales

Islamic legal development: In spite of vs. in light of

On issues of Islamic legal development theory, one point popped in my mind today when thinking about Ahkam al-Sharikat that is the Law of business partnerships. This point is, and hence the title, “In spite of vs. in light of”.

Now what I mean by this is that in the development of Islamic Law, certain aspects of that legal system developed “in light of” the texts. Many if not most of these are things which are explicit in nature, and are related in numbered explicit texts or innumerable implicit ones.

Take for instance the law of Business partnerships. There is a whole array of laws in all of the various books of classical Islamic law regulating this sector of the law. However, upon closer analysis, we find that there are only about 3-4 verses of the Quran if not less, and 10-15 hadith at most that speak on this topic specifically. When they do, it is usually after the fact, i.e. a transaction or partnership was created, a problem was presented, and then the prophetic guidance was given for that problem. That would then necessitate that the law as presented in the sacred texts developed in a reactionary manner to the prominent social convention of the time, and in general presents a broad regulatory framework for the issue at hand.

When we look at the books of Islamic law however, we see that they spell out for us only five types of partnerships (barring the agriculture based ones of Musaqah, etc.). Those five types are:

1- Sharikat al-‘Inan: a partnership of two parties both providing capital and sharing equally in labor.

2- Sharikat al-Abdan: a partnership of two parties sharing equally in labor with no capital investment from either of them.

3- Sharikat al-Wujuh: a partnership between 2 or more people whom enter a mutual liability based on their collective influence to enter a deal.

4- Sharikat al-MuDarabah: a partnership of two parties in which one provides capital and the other provides labor.

5- Sharikat al-MufawaDah: Being a partnership that includes all of the previous

Now the presence of these in classical works of fiqh is all fine and dandy. However the problem comes when we wish to apply them to modern forms of partnership such as corporations, LLC’s, etc.

And this is where the differentiation comes in, and draws us to ask some questions:

- Were these forms of partnership decreed by sacred text?

- Or were they conventions that were prevalent at the time?

- If new contracts arise, are we obligated to refer them back to the codified from of these medieval partnerships?

- Or do we look to the texts for broad regulatory guidelines and accept that the base ruling of all contracts and conditions is that they are permissible?

I’ll only take one type of partnership contract here, that being Sharikat al-Abdan.

Sharikat al-Abdan is usually substantiated by the statement of Abdullah ibn Mas’ud who said “Myself, Ammar, and Sa’d were were partners in anything that we gathered on the day of Badr; Sa’d returned with two captives, and Ammar and I returned with nothing.” This was narrated by al-Nisa’i, and is a weak hadith.

The scholars of the Shafi School rejected this form of partnership, while the majority accepted it. Now despite this hadith being weak, lets just say that it was authentic for arguments sake. In fact there may be supporting evidence for it, although I haven’t gone back to look. The scholars of the Shafi School may have rejected it based on the principle that the statements of the Sahabah are not admissible as evidence. They may have considered weak.

Regardless, let’s look at the context of the hadith. It is hardly a prophetically ordained mode of partnership. It is also not conclusive that there was any prophetic approval of the contract.

My point here is: Even though the majority of scholars may have allowed it based on this statement, it doesn’t follow that we are in need of this statement of that companion to say that this is allowed. Additionally, to designate a distinct type of partnership based on this would also not follow. Leaving the very open ended agreement that “partnerships are permissible as long as there is no harm” would have seemed more conducive to growth of the Muslim economy and in line with the flexibility of Islam.

Those that admitted this statement as evidence for the permissibility of this type of partnership then formulated all types of rulings for default, harm, and profit distribution, etc. and designated various sub-categories of this partnership agreement, all based not on text, but on the convention that was agreed upon in that time and place. Even though this fit the constraints of the era they lived in, it was detremental in that later generations took these rulings to embody Islamic legal canon, and as such everything after that was illegitimate. In essence the Majority of Scholars went the way of the Zahiri school as per contracts and their creation, contradicting themselves in principle.

Shihab al-Din al-Qarafi says:

Holding to rulings that have been deduced on the basis of custom, even after this custom has changed, is a violation of Unanimous Consensus (‘Ijma) and an open display of ignorance of the religion

Here we then see that with the development of this section of law that it developed very much in spite of specific textual guidance in contrast to developing in light of that guidance. Not that that is a bad thing per se, however when convention and custom then changes, it is important to relegate differences and rulings on the permissibility of a said action back to the broad regulatory framework as found in the sacred texts, instead of judging a later period convention according to that of an earlier one.

Anyone seeking to study Islamic Law as relates to Business and finance should then analyze the issues at hand, it being preferable for those capable of doing so to infer directly from the texts their broad maxims that regulate the sector in question, rather than appealing to the authority of the past or invoking the sacrosanctity of discontinued convention.

“Hiyal”: Definition

“Hiyal”: Definition

“Hiyal” in Islamic law can be described as falling into one of two general categories

 

The first: legal ruses, a ruse being defined as “a deceptive maneuver (especially to avoid capture)” this seems to conincide with the definition given by Muslim Jurists “…that which endevours to invalidate an obligation or make the forbidden permissible through an action which is not normally used for such nor legislated for it.”

 

The second: a diversion, i.e. something that diverts, in a legislated manner, some religious consequence from occuring.

As seen from the two above definitions, the latter is more general than the former. As such, we can see that not everything that is labeled as a “Hîlah” is necessarily impermissible. Some may be and some may not. Those that are not were called by some of the scholars “Makharij” or egresses/ ways out of a problem that faced a person. Muhammad ibn al-Hasan, the student of Abu Hanifah, had even written a book on this subject.