Islamic Law and Finance Almeezan by Frank

LAWS SERIES
Urab~ Islamic
ISLAMIC LAW AND FINANCE

Religion, Risk, and Return
by
Frank E. Vogel and Samuel L Hayes, III
KLUWER LAW
,. !
ISLAMIC LAW AND FINANCE RELIGION, RISK, AND RETURN
Preface Chapter 1 Part I -
xiii Introduction
1
THE ISLAMIC LAW OF FINANCE By Frank E. Vogel 2 - Islamic Finance as the Application of Islamic Law 3 - Qur'an and Sunna on Contract and Commerce 4 - Islamic Laws of Usury, Risk, and Property 5 - Islamic Law of Contract 6 - The Law of Islamic Financial Institutions and Instruments
17 19 53 71 97 129
Chapter Chapter Chapter Chapter Chapter
Part II - A FINANCIAL ANALYSISOF ISLAMIC BANKING AND FINANCE By Samuel L. Hayes, III Chapter 7 Chapter 8 Chapter 9 Part III Islamic Financial Instruments: A Primer The Opportunity Rate of Capital and Islamic Capital Structure Derivatives in Islamic Finance CASE-STUDIES: ISLAMIC FINANCIAL INNOVATION Innovationin Islamic Financial Products Conclusion
179 181 201 219 233 235 291 297 305 319
Chapter 10 Chapter 11 Glossary Bibliography Index
DETAILED TABLE OF CONTENTS
Preface
CHAPTER 1
xiii
Introduction
What Is Islamic Banking and Finance? The Origins of Islamic Finance Growth in Islamic Financing Activity Financial Intermediaries Current Bank Products The Impact of Religious Scholars Government Influence The Potential of Islamic Banking and Finance Goals and Method of This Book Plan of the Book
CHAPTER 2
1 1
4 5 6 7 9 10 13 14
15
Islamic Finance as the Application of Islamic Law

Religious Law (Shari'a and Fiqh) Relevance of the Religious Law to Banking and Finance Obstacles to the Application of the Islamic Law Islamic Law and Islamic Economics Structure and Method of Classical Law in Theory and Practice Ijtihad, or Derivation from Revealed Sources Shari'a and Fiqh; Divergence of Opinion; Schools of Law
19 23
24 28 29 31 32 32
vii
Detailed Table of Contents
Four Methods of Elaborating the Law: Interpretation, Choice, Necessity, and Artifice Ethical and Legal Consequences of Islamic Legal Rulings The Casuistic Style of Classical Islamic Legal Reasoning Modern Reinterpretations The Context for Islamic Legal Developments in Islamic Banking and Finance Modern Islamic Legal Institutions Islamic Legal Application in a Western Legal Environment
34 41 42 44 47 47 50
CHAPTER
Qur'an and Sunna on Contract and Commerce

Property or Wealth Trade by Mutual Consent Debt Usury Gambling and Risk Commercial Ethics Fulfilling Contracts Freedom of Contract Summary
53
56 59 61 62 63 65 66 67 68
CHAPTER
Islamic Lawsof Usury, Risk, and Property

Law of Usury (Riba) The Qur'an; Riba al-Iahiliyya TheSunna
~~M~~~~
71
72 72 73
U
77 77
The Sunna on Riba in Loans Plumbing the Rules of Riba
viii
Gambling (Maysir) and Risk (Gharar) The Spectrum of Risks and Their Prohibitions Classical Fiqh Rules on Gharar Fiqh Provisions on Property (Mal)
87
88
91 94
CHAPTER
Islamic Law of Contract

Freedom of Contract New Contracts Stipulations The Nominate Contract Scheme Mutually Onerous Contracts Gratuitous Contracts Accessory Contracts Four Principles of Islamic Contract Law Important in Modern Financial Practice Non-Binding Ua'iz) versus Binding (Lazim) Risk of Loss (Daman) versus Trust (Amana) Rules Governing Delay in Payment and in Performance - The Sale of Dayn for Dayn The Promise (Wa 'd) in Islamic Law
97
97 98 100 102 102 105 107 110 111
112 114
125
CHAPTER
The Law of Islamic Financial Institutions and Instruments

The Model for an Islamic Financial Institution The Two-Tier Mudaraba Islamic Legal Hurdles Facing This Islamic Banking Model Islamic Contracts As Used in Islamic Finance
Mudaraba Bay' Mu' ajjal, or Credit Sale Murabaha, or Sale with Markup
129
129
130
131 138 138 139 140
ix
Ijara, or Lease Salam, or Advance Purchase Istisna', or Commissioned Manufacture Ii'ala, or Reward Ta'min, or Insurance The Problem ofInsurance and the (Tentative) Solution Possible Impact of Insurance on Islamic Financial Theory and Practice Prospects for Islamically Valid Derivatives Khiyar al-Shart, or Stipulated Option 'Arbun, or Down Payment Prospects for Approval of the Option as a New Contract Type Investment Securities and Their Negotiability Primary Market Instruments Islamically Lawful Primary Market Instruments Islamically Unlawful or Questionable Secondary Market
143 145 146 149 150 150 153 154 155 156 164 165 166 170 172
CHAPTER
Islamic Financial Instruments: A Primer

Financing Working Capital The Murabaha Contract The 'Ina Contract The Salam Contract The Istisna' Contract Financing Receivables Long-Term Financing Leasing (Ijara) Revenue Bonds Equity-Like Instruments The Mudaraba Contract The Musharaka Contract Preferred Stock Attitudes Toward Risk
181
182 182 183 183 184 185 188 190 191 193 193 195 196 197
Illiquidity Risk Credit Risk Currency Risk Capital Structure Risk Conclusions
198 198 199 199 200
CHAPTER
The Opportunity Rate of Capital and Islamic Capital Structure

Interest and Usury The Islamic Cost of Capital The Cost of Equity Capital Asset Pricing Model Arbitrage Pricing Theory Equilibrium Analysis of a Profit-Sharing Agreement Cost of Equity Summarized The Cost of Debt Murabaha Salam Istisna' Ijara Calculating the Weighted Cost of Capital Choosing an Appropriate Capital Structure Conclusions
201
201 204 205 205 207 209 212 212 212 213 213 214 215 215 217
CHAPTER 9
Derivatives in Islamic Finance

Relevant Islamic Contracts Islamic Contracts and Western Financial Products Forward Contracts Futures Contracts Call Options
219
220 222 222 225 226
xi
Put Options The Khiyar al-Shart Option The Mudarib Call Conclusions
228 229 230 231
CHAPTER 10
Innovation in Islamic Financial Products

The Intended Beneficiaries of Innovation Capital Users Capital Providers Proposals Related to Murabaha (Sale with Markup) Ownership-in- Transit Cooperative Non-Bank Factoring Firm Proposals Related to Salam Parallel Salam Contracts The Default Penalty Option An Islamic Clearinghouse Proposals for Innovations Related to Ijara (Lease and Hire) Lease Pools Staged Leases and Lease Pools An Islamic Convertible Lease Proposals for Innovations Related to Istisna' Back-to-BackIstisna' Contracts Options in Istisna' Contracts Istisna' Contracts for Manufacturing Streams Fungible Manufactures and Options Ii'ala (Reward) Conclusions
235
237 237 238 239 241 244
246
246 253 258 260 264 269 275 279 279 281 282 284 286 288
CHAPTER 11
Conclusion
Glossary Bibliography Index
xii
291
297 305 319
Preface
The impulse for the writing of this book came some four years ago, when in meetings with Wellington Management Company of Boston, Harvard University's Center for Middle Eastern Studies (CMES) identified the need for an objective cross-disciplinary study of Islamic banking and finance addressing both its origins and its future potential. Thomas Mullins, Associate Director of CMES, and Professor Frank Vogel, Director of the Harvard Law School's Islamic Legal Studies Program and a faculty member of the Law School and CMES, recruited Professor Samuel Hayes of the Harvard Business School as well as a group of faculty scholars and interested graduate and undergraduate students to undertake the Harvard Islamic Finance Project. Together with Wellington, the National Commercial Bank in Iedda and Goldman Sachs in London generously agreed to support the Project. The National Commercial Bank, under the far-sighted leadership of Sheikh Mohammed Bin Mahfouz, provided us not only the major financial support but also valuable research support and introductions to scholars and information sources around the Islamic world. This book, the work of two members of the Project, is one of the expected fruits of this extraordinary initiative. Our work has benefited much from the travel, research assistance, and editorial support afforded us by the Project. We were assisted in our research for this book by a great many individuals and institutions. First among them is the Islamic Development Bank of Iedda and its associated Islamic Research and Training Institute (IRTI). The Bank's two successive Presidents, H.E. Dr. Osama Faquih and H.E. Mohammad Ali, both gave their warm support to our exchanges with the Bank. IRTI scholars, especially Dr. Sami Homoud, Dr. M. Fahim Khan,
xiii
Preface Dr. Omar Hafiz, and Dr. Munawar Iqbal, gave us much instruction and insight into this subject, and were willing sounding boards for our hypotheses and financial product ideas. We exchanged several visits with them, in Cambridge and in Iedda, Special thanks go to Dr. Sami Homoud, who, with IRTI's sponsorship and support, came to Harvard in April 1995 to offer us a three-day intensive lecture series on Islamic finance. Interviews with officials of the Bank itself, including particularly Vice President, Finance, Dr. Fuad A. Al-Omar, General Counsel Dr. M. AI-Fatih Hamid, Dr. D. M. Qureshi, and Dr. Beshier Orner Fadlallah, gave us a great many insights and ideas. Many Bank officials and IRTI scholars took part in a most illuminating two-day workshop on a draft of the book held in Iedda in September 1996. Islamic banks as well as other financial intermediaries cooperated in the research effort, giving generously of their time and expertise. At NCB, Dr. Said Al-Martan, Abdullah Al-Darwish, and Sami Barmah in Iedda and Kiril Coon ley in London; at Goldman Sachs, Brace Young and Roy Salameh in London; at Wellington Management, Nicholas Greville and George Lodge in Boston and Ronald Strunck in London; at the Islamic Investment Bank of the Gulf (DMI), Mr. Iqbal Ahmad Khan; at Citi Islamic Investment Bank, Mr. Mohammed E. Al-Shroogi and Mr. Usama Mikdashi; at the International Investor in Kuwait, Mr. Adnan Al-Bahar; at Al-Baraka Investment and Development Co. in Iedda, Dr. Saleh J. Malaikah; at DMI International (Geneva) and Faisal Finance (Switzerland), Dr. Mohammad El- Helw; and at the National Bank of Kuwait, Mr. AI- Tayeb Al- Dajani, were all extremely helpful. Prince Amr bin Mohammed AI Faisal AI Saud was a valuable resource, as was Sheikh Khalid Alturki, Chairman of ABC International in London, and Samer S. Khanachet, Managing Director of United Gulf Management in Boston. Among academic colleagues, we are particularly indebted to Dr. Mohamed Elgari, Director of the Center for Islamic Economics at King Abdulaziz University, Iedda, who spent two snowy weeks with us at Harvard Law School in January 1996 giving us the benefit of his learning and experience. Professor Zuhayr Mikdashi of the University of Lausanne contributed at several points in our research. Our colleagues at the Harvard Law School and the Harvard Business School made many useful suggestions which found their way into the book. At the Center for Middle Eastern Studies, the successive Directors, Professors William A. Graham and E. Roger Owen, have strongly sup-
xiv
Preface
ported both the Project and this book. Tom Mullins deserves immense credit for launching the overall Project and shepherding it along. Project research has been coordinated by Dr. Don Babai, with assistance from Zahir Asmayl, Tim Buthe, Helen AI Mallakh, Elaine Murphy, Elizabeth Papp, Said Saffari, and Tarik Yousef, all Harvard students. The Islamic Legal Studies Program at Harvard Law School played a central role in the work toward this book. Barbro Ek, Associate Director of the Program, and Denise Heintze, Staff Assistant, helped administer the multiple activities supporting our research and writing. We received much valuable help from our research assistants. These included Indrajit Garai, Hashem Montasser, Abdullah Binladen, Dr. Hassan Osman, Newell Cotton, and Walid Hegazy. Editorial assistance was provided by Deborah Kreuze, Richard Luecke, and Rachel Vargas. Needless to say,while acknowledging the invaluable help of so many, the authors take full responsibility for the content of this book. Frank E. Vogel Samuel 1. Hayes, III Cambridge, Massachusetts
xv
CHAPTER!
Introduction
This book describes the field of Islamic banking and finance as practiced in the modern era. The dramatic growth of this unique form of commerce over the past twenty years coincides with expanding wealth in the Middle East and parts of Asia and with a turning away from secular Western practices. In Iran, Pakistan, and Sudan, Islamic banking is now the law of the land. In many other states, such as Egypt, Malaysia, and Brunei, it coexists and competes with Western-style institutions. The commercial potential of this new field has not gone unnoticed; a number of major Western, Middle Eastern, and Asian financial institutions recognize Islamic banking as an important new opportunity for growth. These firms have established Islamic practices to serve this growing market. Mutual funds have also sprung up that - like socially responsible funds in the West - invest client monies in ways that do not conflict with the conscience or practical interests of Muslims. To do business with Muslim clients, and to engage in cross-border financing, they need to be familiar with current Islamic financial practices and potential avenues of innovation. Students and scholars of Middle Eastern and Islamic culture will likewise benefit from understanding this important aspect of Islamic life.
What Is Islamic Banking and Finance? The structure ofIslamic finance is firmly rooted in the Qur'an and the teachings of Muhammad, and the interpretations of these sources of reve1
Islamic Law and Finance
lation by his followers. In various forms it has been a constant of Islamic civilization for fourteen centuries. In the last three decades it has emerged as one of the most significant and successful modern implementations of the Islamic legal system, and a test case for future Islamic legal innovation and development. Nonetheless Islamic finance remains subject to a variety of misunderstandings by both Muslims and non-Muslims. For example, it is widely known that Islamic finance prohibits the charging of interest on loans. But most do not know that Islamic law does not reject the notion of the time value of money. The capital provider is permitted an adequate return. For instance: • If money is committed to another party to use for a period of time, compensation for the financing may not be a predetermined amount guaranteed by the other party to the contract; instead, it should be a share in the actual profits of the venture. Money is not treated as a commodity, as in the West, but as a bearer of risk, and therefore subject to the same uncertainties as those borne by other partners in the enterprise. If investors finance the acquisition of tangible goods by sale or lease, they may legitimately compensate themselves for foregone opportunities. Profits deriving from lease payments or from credit sale may reflect, even explicitly, a time factor. Given these ways in which finance is legitimately compensated, the term "profit banking" is a useful way to describe the system of credit extension in the Islamic world. Islamic rules do permit businesses to utilize credit, and do not prescribe that all businesses be financed entirely with equity capital. Islamic businesses can and do utilize financial leverage in their capital structures, thereby exposing their owners to both the potential enhancement of returns on equity if things go well and to value reduction if results are disappointing. There are many similarities between Islamic and conventional finance, since both deal with a common set of operating business realities. In most cases, Islamic and conventional finance simply travel different paths toward the same goal, but there are important differences. Consider these examples:
Introduction
• Most businesses need long-term financing. In conventional finance, this is accomplished through some mix oflong-term debt and owners' capital. In one Islamic solution, passive partners contract for a certain share of the profits, with another share going to the entrepreneurs who manage the business. This solution meets the concept of partnership required by doctrine and is similar to a conventional preferred shareholder contract. If the business does not want to dilute its ownership by bringing in partners, other options exist, such as leasing. A lease does not involve formal interest or a partnership stake, yet satisfies the business's need for long-term financing of plant and equipment and the investor's need to earn a fair return. • Inventory financing is a requirement common to both Islamic and conventional commerce. An Islamic business in need of short-term inventory financing can purchase the inventory on credit, that credit being supplied either by the inventory supplier or a bank. The bank can purchase the inventory for the business based on the business's promise to buy the inventory later for cost plus a fair markup. • Many businesses find it necessary to supply credit to their customers through accounts receivable. An Islamic business can do this but is not permitted - as in conventional finance - to refinance by pledging or selling those receivables because they are not real assets. Under Islamic law, financial assets cannot be sold or used as collateral. So the Islamic business either has to finance its credit extensions from internally-generated funds or arrange for a third party to buy the goods on behalf of its customers and resell them to those customers with a markup - just as the Islamic business would finance its own purchases from suppliers. These are some of the simpler Islamic alternatives to conventional finance. These and a number of others are examined in detail in this book. To the outsider, some of these arrangements may seem to be elaborate subterfuges for conventional financial transactions. This conclusion would ignore a number of important subtleties with respect to intentions, the detailed legal incidents of the various transactions, the religious and secular constraints on banking practices, and the limited number of financial contracts currently available to practitioners ofIslamic finance.
Even if in some cases variation from conventional practice is only nominal, one should not forget that in all religions even purely formal accommodations to piety can be of crucial importance. In any event, Muslim investors, religious advisers, and finance managers are expressing increased dissatisfaction with purely nominal or concessionary practices, and demanding more genuine investment vehicles. These demands are stimulating innovations that promise to make Islamic finance more robust and in step with the requirements of modern commerce. The prospects for these innovations are assessed later in this book.
THE ORIGINS OF ISLAMIC FINANCE

Islamic finance is not an invention of this century's Islamic extremist political movements but stems from injunctions found in the Qur'an and the sayings of the Prophet Muhammad. These inspired central tenets in the religious law of Islam concerning commercial dealings are as much part of the religion as is marriage. Islamic law has derived from revealed texts a web of interrelated norms prohibiting interest-taking and undue speculative practices. In medieval times, these were considered both sinful and illegal, and were duly avoided. The centuries-old practice of finance in Islamic form was largely eclipsed during the period of the European colonial empires, when almost the entire Islamic world came under the rule of Western powers. Under European influence, most countries adopted Westerninspired banking systems and business models and abandoned Islamic commercial practices. Thus, the modern period ofIslamic finance traces its beginnings to the independence of Muslim countries after World War II. The earliest recorded Islamic financial institution, the Mit Ghamr project, was established in Egypt in 1963, soon followed by the Nasser Social Bank in 1971. The next milestone is the founding, under the Organization of the Islamic Conference, of the multinational Islamic Development Bank in 1973. During the seventies many Islamic financial institutions were established in a number of countries - some public, some partly government-owned, and some private.' The more recent surge of Islamic self-identity has provided another positive push for adopting Islamic principles in business and finance. ReISee Abdullah Saeed, Islamic Banking and Interest (Leiden: E.J. Brill, 1996),5-16.
Introduction
pelled by the politics and culture of the West, and inspired by religious piety, a growing number of devout Muslims seek greater conformity between their lives in the modern world and the precepts of their faith. Islamic banking makes that conformity possible in the realm of commerce. The end of colonialism and a rising tide of religiosity may have sparked the revival of Islamic finance, but the great wealth generated through the oil boom fueled its growth. Dramatic increases in oil revenues throughout the 1970s brought an unprecedented degree of affluence and surplus savings to the populations of a number of oil-rich Middle Eastern states. Prior to that, only a handful of ruling families and the merchant elite had significant investable funds, most of which were directed to conventional Western investments that did not square with traditional religious principles. Since these practices were limited to a few individuals and largely unnoticed by the broader population, little was said about them, even by religious leaders. The oil boom changed this situation dramatically. Quite suddenly, much more money was in many more hands, and the question of how believers should invest these funds became pressing.
GROWTH IN ISLAMIC FINANCING
ACTIVITY
The actual size and rate of growth in the Islamic financing pool worldwide is difficult to measure. Size estimates range from $50 billion to more than $100 billion, excluding the financial assets of the three totally Islamic economies, Pakistan, Iran, and Sudan. One approach to measuring the size of the Islamic savings pool would be to aggregate the balance sheets of the important Islamic banks. Despite a number of complications which make this route unpromising, a comparison of the balance sheet footings for the leading Islamic banks for which numbers can be obtained shows a growth of more than 15 percent per year for the past five years. Furthermore, large sums of Islamically-directed savings in the hands of individual investors are not channeled through banks at all, but are invested directly in businesses. It would not be unusual for a bank in London (a major market center for Islamic finance) to place $100 million or more on behalf of a single wealthy individual. There is general agreement that the funds currently handled by Islamic banks represent ready money - i.e., the funds of individual in-
vestors with strong personal commitments to religious principles. Ten or twenty years earlier, many kept their funds idle in non-interest-bearing accounts in Western banks. Others circumvented the conventional banking system altogether, keeping money in their homes. With this easily attracted money now accounted for, some bankers we interviewed believe that the current pace of growth will be difficult to sustain. In their opinion, future growth will depend on the industry's ability to attract the funds of savers and investors who currently opt for the superior returns and risk characteristics of conventional bankers and investment bankers. There is, indeed, a rich lode of Muslim savings to tap; the experience of the Gulf War makes this clear. One knowledgeable observer estimated that more than $50 billion of savings fled the Gulf region during the Gulf War crisis of 1990-91. Most went to Swissbanks, which have long provided wealthy Middle Easterners with safety, discretion, and competitive returns. Little of that money had reportedly returned to the Gulf by the end of 1996. Attracting these and other funds will require the development of Islamic investment opportunities that offer competitive rates of return at acceptable levels of risk. In the opinion of many, this will not happen within the context of the Islamic financial transactions as now practiced. Subsequent chapters will describe the current universe of these transactions. These are few in number and in many cases create difficulties for investors and capital users that conventional financial arrangements do not. Nevertheless, many anticipate innovations in these and other Islamically valid contracts that may surmount these difficulties.
FINANCIAL INTERMEDIARIES
As described earlier, the potential of the Islamic capital market has not gone unnoticed by financial institutions - either indigenous or foreignowned - operating in countries with Muslim populations. A handful of large Gulf-owned Islamic banks (which often omit "bank" from their names to emphasize their Islamic character) dominate the current market. These include al-Rajhi, DMI (for Dar al-Mal, or "treasury" in Arabic), alBaraka, and Kuwait Finance House. In addition, some indigenous and Western commercial banks have substantial Islamic operations, including National Commercial Bank, Saudi American Bank, Citibank, Kleinwort
Introduction
Benson, Grindlays, the recently-merged Chase Manhattan Bank, and Bankers Trust. A number of these were initially reluctant to initiate Islamic deposit programs with profit-sharing structures for fear of cannibalizing their conventional account base in which some Muslim depositors were accepting no interest. This fear later proved to be justified. While the indigenous institutions appear to have the dominant share of Muslim deposits in the Gulf region at this time, fortunes may be looking better for some Western banks. Notable scandals and failures - and the political impact of the Gulf War - have cast a cloud over some domestic institutions. By comparison, Western operators enjoy an aura of deep pockets, geographic diversification, and reputations for sophisticated, reliable, and innovative banking. It seems likely that Islamic bankers will continue trying to move away from the banking model of accepting short-term deposits and extending Islamically-acceptable commercial credit, toward more of an investment management role. This trend would certainly be supported by Islamic law, which generally favors equity investments over credit arrangements.
CURRENT BANK PRODUCTS

Compared to conventional investors, Muslim savers today have relatively few acceptable investment contracts from which to choose. These are covered in considerable detail elsewhere in this book. Our research indicates that most Islamic funds are confined to short-term, low-risk investments, principally in the form of trade financing for inventory accomplished through the markup (murabaha) contract described earlier, in which the bank buys inventory from the supplier to resell it to the customer at a price covering the bank's cost plus a markup. Investments are also scattered in profit-sharing partnerships called mudaraba and musharaka, and in leasing arrangements called ijara, but these represent a small portion of the total investment pool and historically are concentrated in the portfolios of more innovative vendors. Although Islamic banking and finance are often referred to by Islamic economists and others as profit-sharing finance, it has already been noted that the bulk of Islamic funds are aimed at short-term markup deals with slim profit margins. A variety of explanations for this can be drawn from both field interviews and the existing literature. Perhaps the most frequently cited explanation is the fact that an Islamic bank has no central
bank discount window to turn to when it needs quick liquidity, and no deposit insurance program to reassure savers and help prevent panic bank runs. Thus, longer-term investments (which are typically more profitable) create a worrisome mismatch between assets and liabilities, despite the formal requirement of advance withdrawal notice that Islamic investment depositors are supposed to give. As a practical matter, many Islamic investors expect the same instant liquidity (and yields) as conventional banks. Field interviews suggest that Islamic investors in the Gulf (including the Islamic banks) are more averse to risk than investors elsewhere. This may be attributable in part to shocks such as the collapse of the Souk al-Manakh (the Kuwait stock exchange) and the failure of BCCI, in which a number of Islamic banks and other investors maintained large deposits. Banks in these regions do sit on lots of nervous money, but their concern for liquidity seems overblown in light of the facts. During the Gulf War in 1991, for example, the Islamic banks in that region lost 40 percent of their deposits, yet in 1996 these same banks maintain 80-90 percent of their assets in shortterm investments - twice their worst historical withdrawal experience. Another explanation for caution is the limited capacity of these institutions to undertake the rigorous credit analysis required for more aggressive investing. It is understandable that they would be reluctant to enter into long-term investments unless they were confident that they understood the risks; lacking this confidence, it is natural to stick with short-term deals. This short-term investment strategy of Islamic banks may be a deadend, however. Profit margins in these contracts are simply too thin to support overhead and produce sufficient bottom-line profits to satisfy both depositors and bank owners. Typically, 70 percent of these profits go to depositors and 30 percent to bank owners, but in the current atmosphere, depositors at some Islamic banks have only been able to earn returns comparable to those offered by conventional banks at the expense of the bank's owners. A number of Islamic banks have had to subsidize profit distributions to depositors out of the bank owners' share of profits or, in some cases, out of additional capital infusions by owners, a situation which is clearly unsustainable. If this bleak scenario is not sufficient motivation for bankers and investors to move to higher-yielding but riskier investments, recent pronouncements by respected Islamic scholars may provide it. A number of scholars have recently cast doubts upon the acceptability of one of the most
Introduction
widely used forms of Islamic finance: the type of murabaha trade financing practiced in London. These transactions involve, for the most part, trade financing deals between Islamic investors and well-known multinationals seeking lowest-cost working capital loans. Although these multi-billiondollar contracts have been popular for many years, many doubt the banks truly assume possession, even constructively, of inventory, a key condition of a religiously acceptable murabaha. Without possession, these arrangements are condemned as nothing more than short-term conventional loans with a predetermined interest rate incorporated in the price at which the borrower repurchases the inventory. These "synthetic" murabaha transactions are unacceptable to the devout Muslim, and accordingly there is now a movement away from murabaha investments of all types. Al-Rajhi Bank, al-Baraka, and the Government of Sudan are among the institutions that have vowed to phase out murabaha deals. This development creates difficulty: as Islamic banking now operates, murabaha trade financing is an indispensable tool. It makes it possible for Islamic businesses both to make credit sales to customers and to obtain credit from suppliers for their own inventory and equipment purchases. There is currently no alternative investment contract that provides Islamic investors with the high liquidity and low risk profile they have been demanding. Because of this, Islamic businesses would be severely crippled if murabaha trade financing were prohibited. So where will Islamic investors turn? To the extent that they opt for longer-term, higher-yielding investments, they show a preference for leases (ijara) over other contracts. Leases have some of the same advantages as sale in allowing recognition of the time factor in setting prices, and investors may regard leases as incorporating lower risks because the investor retains title to the property until the end of the contract. If there is a default, the property can be repossessed, thereby avoiding the cumbersome and debtor-partial rules that accompany a default under shari'a law.
THE IMPACT OF RELIGIOUS SCHOLARS

Islamic scholars have a profound influence on the day-to-day practice of finance; to our knowledge there is no equivalent in other religious cultures. For example, Islamic financial institutions generally maintain boards of
scholarly advisors, called shari 'a boards, to review all proposed transactions for conformity with religious law. The judgment of religious scholars is neither absolute nor uniform. In Sunni Islam four schools of Islamic jurisprudence apply Islamic teachings to business and finance in different ways. Disagreements on specific points of religious law occur both between these four schools and within them. Furthermore, shari'a boards sometimes change their minds, reversing earlier decisions. The sophistication of shari 'a boards has visibly increased as they have gained experience with modern financial concepts and their applications in contemporary commerce. In the early years, religious scholars were less familiar with the dynamics of financial markets and the impact of finance on business organizations and portfolio investment strategies. Not surprisingly, their pronouncements were cautious and often looked more to the form of financing arrangements than to intent or outcome. All parties to these contracts, in fact, were feeling their way along an unfamiliar road, and the terms of the financings were typically spelled out in elaborate detail, often with frequent referrals back to the shari'a board for clarification and approval on particular points of religious law. Today, shari'a boards are more knowledgeable about modern finance and the practical requirements of investors and businesses, and they increasingly consider the intent as well as the letter of situations brought before them. The length and degree of detail included in many of these contract documents have shrunk, undoubtedly reflecting, at least in part, the scholars' enhanced understanding of the workings of the financial markets, and their increased comfort level with frequently-used Islamic contracts. The more familiar Islamic scholars become with the actual workings of real-life finance, and the more knowledgeable business and investment professionals are about Islamic religious principles, the more likely that their collaboration will produce acceptable and innovative Islamic solutions to financial needs. Greater training for both shari'a board members and financial professionals will advance this collaboration.
GOVERNMENT
INFLUENCE
Although the raison d'etre for the practice ofIslamic finance is undeniably religious, politics and national government policy also play important roles
10
Introduction
in determining how it manifests itself in the Islamic world. Government stances can be divided into several categories: • those that have transformed their entire internal financial systems to an Islamic form (Iran, Pakistan and Sudan); • those that embrace Islamic banking as a national policy while supporting dual banking tracks (Bahrain, Brunei, Kuwait, Malaysia, Turkey, United Arab Emirates); • those that neither support nor oppose Islamic banking within their jurisdictions (Egypt, Yemen, Singapore, and possibly Indonesia); and • those that actively discourage a separate Islamic banking presence (Saudi Arabia and Oman). Following the revolution in 1978-79, the theocratic Iranian government called for an immediate transformation of the country's economy to one run according to Islamic principles, including a switch to a wholly Islamic banking and finance structure. The process has been difficult and has involved often cumbersome arrangements. In Malaysia, civil disturbances in the late 1960s by Muslim ethnic Malays protesting the ethnic Chinese dominance in the commercial sector prompted a government program to redistribute wealth and concentrate more political power in the hands of Muslim Malays. Islamic traditionalists also inveighed against aspects of Western culture that had become part of the Malaysian scene. To placate these activists, the government initiated Islamic banking in parallel with conventional banking on a trial basis. Ten years later, it made Islamic banking a permanent part of the financial structure, and increasingly takes pride in its Islamic banking sector. The tiny Sultanate of Brunei followed Malaysia's example in 1985 when the Sultan decreed an Islamic banking option. Although the government did not actually put an Islamic bank into operation until 1992, it has actively supported that bank and has provided subsidies that permit it to pay competitively attractive dividends to depositors. A profitable Islamic insurance sector has also been established. In Turkey, President Ozal initiated Islamic banking in 1982 as a way of attracting deposits from Muslims in the oil-rich Gulf states. Turks have shown little enthusiasm for this Islamic alternative - less than 5 percent of total deposits are channeled there, and neither have the Turkish
11
Islamic banks attracted significant deposits from other parts of the Muslim world. Egypt is usually credited with being the cradle of Islamic banking, since much of the earliest financing activity was centered there, but insufficient government regulation helped create conditions that led to massive fraud by certain "Islamic investment companies" in the 1970s, resulting in huge depositor losses. Since then, both government and savers tread a cautious path regarding Islamic banks. In the last category of Islamic countries, Saudi Arabia provides an instructive example. It has actively discouraged a distinct Islamic banking sector, despite the fact that Saudi Arabia is a highly traditionalist Islamic religious state, and is the fountainhead of much of the private sector savings that fuel Islamic banking elsewhere in the Gulf. Its official position is that since it is an Islamic state, all of its banks are as Islamic as is feasible. To single out certain of them as Islamic would imply that the others are not Islamic. In reality, none of the Kingdom's principal banks follow the principles of contemporary Islamic banking and finance, except where they have been permitted to open Islamic windows to accommodate religious depositors. Some observers suggest that, in contrast to Malaysia which encourages Islamic banking as a constructive outlet for Islamic religious fervor, the Saudi leadership may fear that Islamic extremists would turn an Islamic banking base into a political weapon to disrupt the country. One important government regulatory issue related to alternative banking systems is the relationship between bank liquidity needs, profitability, and the appropriate composition of the capital structure. Liquidity concerns have caused Islamic banks to be particularly cautious in their investment policies, to the detriment of bank profitability. The Bank for International Settlements has established minimum capital levels for conventional commercial banks around the world, but no such standards have been established for Islamic banks. Reserve requirements in Turkey, for instance, are set at 1 percent for Islamic investment deposits in contrast to the 10 percent reserve required for conventional bank deposits. This level may be insufficient. In Malaysia, the Central Bank has set up a formal interbank lending facility along Islamic lines to deal with liquidity questions. Thus far it has not been tested because most of the banks taking Islamic deposits already have a surfeit of liquidity. In some other Islamic countries, governments have established informal means to provide assistance to Islamic institutions in a liquidity crisis.
12
Introduction
THE POTENTIAL OF ISLAMIC BANKING AND FINANCE

No irreducible obstacles exist to the continued development of Islamic finance. This is not to suggest an absence of challenges. An important deterrent to continued growth in the Islamic banking sector is a shortage of investment outlets with acceptable risk/reward tradeoffs. Unlike conventional investors who can choose from a broad menu of debt and equity investments, Islamic investors who follow their religious principles have considerably fewer choices. We therefore give much attention to existing Islamic contracts and ways to expand their uses in either their original or modified forms, ways which in our opinion have good prospects for receiving the approval of shari 'a boards. One almost indispensable resource for accomplishing this is a secondary market capable of providing acceptable liquidity for investors. There is much debate about what kinds of investments can be traded in a secondary market. Islamic law forbids the sale or trade of financial contracts, which explains why financing of accounts receivable is difficult. On the other hand, if a contract or security represents a direct claim on a real asset, it may be sold or traded. Thus, if a common share is understood as a undivided share in the ownership of a company's assets, it may be eligible to be traded under Islamic law. An interest in leased property can also be traded because it represents a direct claim on an asset. Given such interpretations, a number of Islamic securities could even now be traded. So why is there now no viable secondary market for any instruments in any part of the Islamic world? Interviews with bank executives and others suggest various explanations. For one thing, there is no generally accepted set of Islamic religious principles which can assure that such traded securities will meet the religious standards for all groups of Muslim investors. Additionally, a variety of accounting issues need to be clarified to establish just what an investor is paying for when he buys a publicly-traded instrument. Then, too, Islamic vendors appear reluctant to commit the capital and the overhead required to create such a market. Thus, among the most obvious impediments to the future growth of Islamic banking and finance are lack of liquidity, a limited set of approved instruments, cumbersome transactional arrangements, and no ready provisions for risk management. But as the following chapters will show, none of these impediments is insurmountable. Innovation, driven by growing demand for Islamically-approved capital outlets, has the potential to create new forms that would satisfy capital users, investors, and religious requirements.
13
GOALS AND METHOD OF THIS BOOK

This book aims to give a fresh description of Islamic finance. We do not claim that this description is comprehensive. We do not attempt, for example, an institutional analysis of the industry, which would describe both Islamic financial institutions and the regulatory setting in which they operate in various countries. The focus of this book is largely at the micro level. Here we examine individual Islamic financial transactions using the disciplines of finance and of law, seeking to bridge between Islamic legal and financial theories and practices and those employed in conventional or Western law and finance. While we try to portray the motivations and conceptions of Islamic banking and finance, this is no summary or abridgement of the existing literature. We do not attempt to make the final statement of either fact or interpretation on any issue. Rather we attempt to pose and seriously pursue a series of thought-provoking questions about Islamic finance - questions chosen for their power to reveal some of its differences and similarities, both conceptual and factual, with conventional law and finance.? Though our coverage is therefore partial, we hope that insights drawn from our study will enhance comparative knowledge of Islamic law, commerce, and finance. Our sources include the available literature of Islamic finance (in Arabic and English) and empirical research. Given the nascent state of the field, statistical sources are frustratingly limited. We conducted extensive interviews with individuals involved in Islamic finance - in both private and public sectors, in both Islamic and non-Islamic financial institutions, in a number of countries - asking them for details about actual transactions, including documents, where possible. In some cases we were permitted to examine extensive in-house files on Islamic financial transactions. We also received helpful comments on drafts of this book from a number of persons, including those mentioned with gratitude in the preface. We hope that responses to our work - now that it emerges in published form - will not only bring to light any mistakes of fact, interpretation, or evaluation we may have made, but more importantly lead to increasing the exchanges, still meager, between the insiders and outsiders to Islamic finance, both scholars and practitioners.
20ur method is further discussed in Chapter 3, 53-55.
14
Introduction
This book seeks to maintain a respectful attitude toward Muslims' efforts to implement their faith and law. The last thing we wish is to cause offense in such grave matters, and we apologize for any lapses in this respect. This does not prevent us, however, from commenting as fairly and factually as we can on the successes and failures of Islamic banking, usually by reference to the field's own standards and aspirations. As religious sciences, Islamic jurisprudence and economics do not shun but seek the light of objectivity and fact. We trust, therefore, that participants and supporters of Islamic finance will not dismiss or mistrust our efforts, even as outsiders, to add something to that light. Again, we hope that this book at least makes the argument for enhancing objective, thorough-going exchange between participants in Islamic finance and outside observers.
PLAN OF THE BOOK The rest of this book is divided into three parts. Part I (by Frank Vogel) is a comparative description of the Islamic law relevant to finance. While these chapters are a basic introduction to this subject, they also include detailed explorations of several issues that are on the controversial cutting edge of Islamic finance innovation. Part II (by Samuel Hayes) examines the relevance of a number of concepts, theories, and practices of conventional finance to Islamic finance, highlighting similarities and differences between the two bodies of practice. Part III draws on all the foregoing material to offer illustrations of possible future innovations in Islamic finance. These innovations serve as case-studies for testing the findings and conclusions of the book. Part III is followed by a conclusion.
15
PART I
The Islamic Law of Finance Frank E. Vogel
CHAPTER 2
Islamic Finance as the Application of
Islamic Law
One of the more striking facts about the rise of Islamic banking and finance is that it represents an assertion of religious law in the area of commerciallife, where secularism rules almost unquestioned throughout the rest of the world. Even as adherence to Western-derived commercial laws is becoming more commonplace and advantageous, Islamic finance challenges these laws in two key respects: first, it challenges the presumption that modern commercial mores are per se more efficient or otherwise superior; and second, it challenges the secular separation of commerce from considerations of religion and piety. Islamic economics raises similar issues for the modern science of economics. From the middle of the nineteenth century, nearly every Muslim country, under direct or indirect pressure from the newly dominant West, adopted laws and legal systems based on Western models, particularly in the civil and commercial sphere. Only a few (such as the future Saudi Arabia and other countries of the Arabian peninsula) were able to avoid the Westernizing tide and retain their traditional legal systems. As Muslim countries gained independence from Western powers in this century, they usually adopted codes paying deference to Islamic law. Even these, however, remained close in form and substance to Western codes. Only in family matters did Islamic law remain in force. Far-reaching Westernizing changes in the laws and legal systems of Islamic countries were accepted by most Muslim religious scholars, but only on grounds of necessity. The scholars refused to lend them their prestige and cooperation, and struggled to preserve the principle of Islamic law's
19
sovereignty over all spheres of life - even as practice flaunted the principle more and more. To a large extent, the scholars succeeded, and Islamic law remains - in faith if not in legal reality - the criterion for right action in Muslim life. Today, after further gains in independence, many Muslims call for restoring Islamic law as the law of the land. While for the religious this call is an expression of piety, it also reflects, among both religious and nonreligious persons, a desire for authenticity and independence, and a rejection of Western "isms" in favor of the ideals through which Islamic civilization achieved past greatness. Even the non-religious can appreciate the need for laws that reflect the convictions of the people and engage their support. Islamic jurisprudence (jiqh) is one of the greatest achievements of Islamic civilization, and many believe that Muslims may retain it and still find their own way in the modern world. They can adopt from the West what is useful, but not at the cost of their cultural identity. Best known for the call to reinstate Islamic law are the activist Islamic political movements, called "fundamentalist" in the West. Few in the West, however, recognize that the trend toward Islamic legal authenticity is far wider than these movements; it is a cherished wish even among many who reject or distrust the various political movements that rally beneath the Islamic banner. The question of whether law should be secular or religious can represent a false dichotomy to the Muslim. To the believer, Islamic law is not merely an obligation of conscience, which if observed earns eternal reward; the law is also the best guide to human welfare in this world. To believers, God legislates for their well-being in this world and the next. As a law instilled by God in man and nature, obedience to it leads to social and individual success and happiness. Muslims often conclude that their current social, economic, and moral weaknesses are a consequence of their deviation from divine law in favor of Western ways. Calls to return to the application of Islamic law emerged into prominence during the 1970s, seizing the world's attention most forcefully with the 1979 Iranian Revolution. Many Muslim rulers and governments responded to these calls with promises to bring domestic legal systems into accord with Islamic law, but progress has been slow, particularly in the fields of contract and commercial law. Concrete indications of legislative movement toward Islamic law are found chiefly in constitutional provisions recognizing shari'a as a "principal source of legislation;' new civil codes in Jordan and the UAE hewing closer to Islamic legal doctrine, and statutes banning interest-lending between individuals. But no country20
Islamic Finance as the Application
of Islamic Law
not even Iran or Sudan where radical Islamic regimes rule - has abolished or revised all, or even most, of its West-derived laws and legal institutions. Clearly, if recognition by Muslim states of Islamic contract and commercial law is to continue to advance, it will do so gradually and without wholesale break with Western-style legal norms and methods. Inertia in these matters of profound legislative change intensifies attention on those spheres of obedience to Islamic law that are voluntary, private, or individual. Observers report increased compliance with religious norms - prayer attendance; fasting; religious studies; abstinence from forbidden alcohol, dancing, and music; and modest dress and veiling for women. To Westerners, these behaviors are easily understood as indicators of religious piety. But Islamic law also lays demands on believers in spheres most Westerners no longer associate strictly with religion: family interactions (courtship customs, inheritance rights, gifts to heirs); social security and public welfare (alms-tax, strengthening religious education); social interactions (separation of the sexes,women not working); and, most importantly for our purposes, contract. Classical Islamic law offers a complete corpus of commercial and contract law intimately linked with fundamental religious precepts. Courts in most parts of the Muslim world have not applied that law for nearly a century and a half, but its precepts retain a claim on the Muslim religious conscience. Muslims are now turning in large numbers to Islamic banking and finance as the application of Islamic law by voluntary means, accomplished through contract and business association. Indeed, as we shall see in the next section, the strictures of Islam in matters of commerce and finance are emphatic and far-reaching. The religious person cannot be unmoved by them, and one cannot overestimate the reserves of piety driving the desire for full compliance with them. In sum, the surge in Islamic banking and finance is part of the much larger phenomenon ofIslamic reassertion. Since the tenets ofIslamic banking derive from fundamental principles of Islamic law, one may expect Islamic banking and finance to endure, as Muslims continue working out the significance of their faith for modern life. Driven by these forces, Islamic banking and finance are the areas in which contemporary Islamic law is undergoing its most rapid and fertile development. A great many impressive advances have been made, and the pace appears to be increasing. Gains include: • the training of a practical-minded cadre of scholars; • new institutions and methodologies for legal development;
21
• new channels of international cooperation in Islamic legal research and opinion; • new familiarity and respect for Islamic law in non-Muslim societies. Work in this field provides a model for development in other difficult areas - politics, international law, and Islamic social sciences. The potential for long-range success in Islamic finance has great significance for assessing the potential of Islamic law to continue to shape the worldly life of Muslims.' Many worldly interests propel the advance of Islamic finance. Here, money and power intersect forcefully with religion. A sense of impropriety or incongruity in such a conjunction is felt far less by Muslims than nonMuslims. After all, Islamic law is supposed to operate at the heart of struggles for worldly goods and authority, regulating them toward justice; it is not supposed to be some other-worldly ideal or purely personal value. As is proper, in Islamic finance, legal scholars and practitioners are not just irrelevant clerics; they are called on to decide real-world issues. Such demands invigorate and vindicate them and their work. Legal development in Islamic finance advances also because of its relative distance from politics. Admittedly, Islamic banks have been drawn into political alignments, such as alliances with the Sudanese Islamic Front prior to the 1989 coup. In other instances, as in Pakistan or Malaysia, they are made to symbolize a degree of Islamization in the larger political and social order. But generally Islamic banking and finance infringe little on local politics. Islamic banking is advancing in countries of all political and religious colors: from total state-mandated systems in Pakistan, Iran, and Sudan; to Saudi Arabia where it is an unheralded but growing sector of the banking community; to Malaysia, Brunei, Jordan, Bahrain, UAE, Egypt, and a dozen other countries where Islamic banking is a specialty alongside interest-based banks; to Turkey, where it is expanding despite official secularism; to Denmark, where an Islamic retail bank has been chartered; to Europe and the United States, where Islamic banks from abroad carry out many forms of non-retail banking and business, and where conventional
'See Frank E. Vogel, "Islamic Governance in the Gulf: A Framework for Analysis, Comparison, and Prediction:' in The Persian Gulf at the Millennium: Essays in Politics, Economy, Security, and Religion, ed. Gary G. Sick and Lawrence G. Potter (New York: St. Martin's Press, 1997),249-295.
22
of Islamic Law
banks and investment firms increasingly compete to develop Islamic products. Only a handful of Muslim countries, notably Iraq (until the Gulf War ) and Syria, are fearful of the symbols of Islamic identity, and only in these places has Islamic banking been wholly absent.
RELIGIOUS LAW (SHARI~ AND FIQH)

Islamic banking and finance seek to apply the Islamic religious law (shari'a) to a sector of modern commerce. This law - more than business organization, economics, politics, theology, or history - shapes Islamic banking and finance and differentiates it from its conventional counterparts. Since the time of the Prophet, Muslims have understood that the means by which the believer earns God's favor, and with it salvation, is through obedience to the Divine Command as conveyed for all time in the words of the Qur' an, the divine book, and the Prophet's Sunna, or example. The latter, when conveyed by authenticated reports of the acts and words of the Prophet, is also taken as revealed, since God corrected the Prophet whenever he was in error. The Sunna is embodied in a great many written reports about the Prophet's lifetime (individually called hadith), each subjected to a careful process of authentication in various degrees. Thus the Sunna, like the Qur'an, ends up as a written text. From these two texts Islamic jurisprudence arises by interpretation, the interpretation carried out by persons considered sufficiently learned, called the "scholars" (,ulama'). The scholars labor to derive from the texts specific rules of behavior, indeed rules to govern all spheres of human life - from inward (e.g., worship, personal morality, family life) to outward (e.g., buying and selling, communal relations, political life, and international relations). Islamic legal rules encompass both ethics and law, this world and the next, church and state. The law does not separate rules enforced by individual conscience from rules enforced by a judge or by the state. Since scholars alone are capable of knowing the law directly from revelation, laypeople are expected to seek an opinion (fatwa) from a qualified scholar on any point in doubt; if they follow that opinion sincerely, they are blameless even if the opinion is in error. Note that a distinction is possible between the perfect, immutable Divine Law itself as revealed in the Qur'an and the Sunna, called shari'a (literally "the Way"), and the sum of human efforts to apprehend that law, some
23
of which may be in error or at least in dispute, called fiqh (literally"understanding"). For example, while God knows His perfect Law in its last detail, human beings often differ about that Law, particularly in details. Many schools of thought see little point in differentiating between shari'a and fiqh, since they believe that fiqh is the only valid means to know the shari'a and that any apparent flaws in fiqh are divinely intended. Yetthe distinction remains useful and valid. The outsider who wishes to comment on Islamic legal phenomena in history without questioning either the perfection of Divine Law or the truth of Muslim beliefs may find it indispensable. In what follows, when we refer to Islamic law we nearly always mean fiqh, not the shari'a. Within fiqh, moreover, we are usually concerned only with classical fiqh, by which we mean the law as constituted in the immense corpus of legal writings by religious scholars from the eighth to the eighteenth century (before the westernizing transformations). This law provides a constant, in the sense of being authoritatively knowable. But, by using the term "classical" we do not imply that classical fiqh is hopelessly out-of-date; this would be to deny out of hand the very validity of the enterprise that is the subject of this book. We also discuss modern fiqh, i.e., novel interpretations and applications of the shari'a, which undeniably differs from classical fiqh. It not only differs in content, such as in discussing matters like heart transplants or commodities options, but also in method or process. For many traditionalist scholars, fiqh's methodology (usul al-fiqh), schools of thought (madhahib), and scholarly disciplines (e.g., deference to past scholars' views) continue without change, but a great many others recognize change even in these. We therefore need a term by which to distinguish modern and contemporary legal writings from writings predating the vast Westernizing transformations in Muslim law and legal systems.
RELEVANCE OF THE RELIGIOUS LAW TO BANKING AND FINANCE

Classical legal rules that appear to prohibit categorically this or that modern practice - such as paying interest on bank deposits - pose a quandary for the devout Muslim. Are these rules out of date? Should a modern practice such as interest-based banking be assessed anew and perhaps declared benign? Indeed, should not Muslims live in the modern
24
of Islamic Law
world with naturalness and common sense, without disfiguring their lives with antiquated rules? Or is the prevalence of a practice like interest-taking a modern corruption, a sign of the decadence and religious error of modern society? By indulging in the practice, is one not committing a sin with one's eyes open? One's only excuse may be the compulsion exerted by life in a system shaped by alien values. Many Muslims have moved beyond this quandary, concluding that modern financial practices are not irreligious in and of themselves, even if they involve interest, insurance, pure speculation, and other practices not countenanced in the classical law. For such Muslims, the Qur'an and Sunna must be reinterpreted on these matters, and the teachings of the classicallaw not applied literally. Literal application of the classical law today is, for them, a denial of reality, a hopeless turning to the past, a reinforcement of reactionary tendencies, and a diversion of energy from genuine Islamic causes. But such Muslims, though numerous, appear to be in the minority. A much larger number, supported by a near-unanimity of traditionalist scholars, seem certain that modern bank-interest falls within the revealed prohibitions and entails a major sin, tolerable only in the throes of necessity. For many Muslim societies, the case for excuse from strict rules due to necessity is compelling; for at least a century interest has been central to the blueprint of economy and society. But in other countries, notably the newly modernized Gulf states, such claims of necessity are less powerful, and have not dispelled a consciousness of sin. In Saudi Arabia and other countries, many bank customers refuse interest on their large cash deposits, producing a windfall for the conventional banks that hold those deposits. Similar concerns inhibit use of other modern commercial contracts, such as life insurance, which is banned in several parts of the Muslim world due to concerns over religiously prohibited risk-taking (gharar) and the belief that death is predestined. But if some Muslims are certain what Islamic commercial morality demands, a great many others are not sure. Perhaps they have been partly swayed by the fact that a few 'ulama' have declared bank interest permissible. A key concern for this group - and not an irrelevant one religiously - is whether banking and finance without interest are practicable in today's world. Whatever they believe, this is a swing group. which will embrace Islamic banking if it succeeds materially, but desert it if it fails. Here one sees the failure of the Westernizing elites to convince the masses of the Islamic permissibility of imported laws and legal practices.
25
Islamic banking as we know it today would never have arisen if the classical law did not still command overwhelming authority and prestige. The growth of this new form of commerce is driven by the desire not to replace the classical law but to apply it. There is a feeling that the law has never been given a fair chance in modern times. This line of thinking dictates a legal conservatism in Islamic banking and finance, a conservatism probably greater than could be explained by the methodological tenets of its practitioners. Why revise Islamic law, as has been tried so extensively and in times of political and religious weakness, when its original provisions may be more desirable? Therefore the determinant in Islamic finance is, and is likely to remain, the classical law itself. Islamic banking and finance are straightforward in asserting their differences with conventional forms. If a drastic liberalizing reinterpretation of the Qur'anic ban on interest and other strictures were broadly accepted by religious Muslims, Islamic banking and finance would have little purpose. Advocates do not dream of a future alignment with conventional practice, but of successfully asserting their difference with it. If necessary, they will create a permanently distinct sphere of finance. If their ways convert the rest of the world, well and good; otherwise Islamic finance will go its own way. In any event, if its interpretation of God's law is correct, Islamic finance should experience great worldly success, yielding moral, financial, and social rewards, thus proving to the world the superiority of Islamic norms. Its successes should not only be individual, but social, leading to a more just society, enjoying a fairer distribution of wealth, greater support for the poor and needy, and less corruption and dishonesty;"
2Manyauthors anticipate such benefits from adopting Islamic finance and related aspects of Islamic economy. See, e.g., Umar Chapra, Towards a Just Monetary System (Leicester, UK: The Islamic Foundation, 1985). Some of these authors must be disappointed by the mundane commercial nature of actual Islamic banks. Though the banks and their employees certainly profess aspirations to Islamically guided, socially responsible investment, it is doubtful how much more is done than is demanded by good community image. See, regarding the Jordan Islamic Bank, Fuad AI-Omar and Mohammed Abdel-Haq, Islamic Banking (London: Zed Books, 1996),52-56. Some ordinary Muslims believe Islamic banks to be discredited when they are shown in practice to be not "religious" or "charitable" institutions but mere profit-making businesses. At their deepest, these unresolved dashing perspectives on Islamic bankingprofit-making under Islamic law versus agent for advancing Islamic virtue and welfare - may align with two strains in contemporary "Islamism," i.e., activism to26
of Islamic Law
That Islamic finance is expected to lead to this-worldly benefits points up a nuance in how outsiders and insiders use the term "Islamic bank," "Islamic finance," and so forth. To Muslims, it can seem inappropriate, even offensive, that outsiders wish to term every novel finance and banking procedure engaged in by Muslims "Islamic." Even the terms "Islamic bank:' "Islamic finance:' or "Islamic investor" can seem unsuitable. Ideally, they would be replaced with "profit bank:' "equity investor," and the like. If the Islamic laws that dictate norms for everyday conduct are truly God's, they reason, then they must reflect the true nature of man and the world and would benefit Muslims and non-Muslims alike. A non-Muslim labelling novel modes of finance "Islamic" (e.g., "an Islamic lease:' "an Islamic stock option") implies a rejection of the rational and utilitarian arguments offered in their favor by Islamic economists and lawyers, and betrays a view that they arise only from the arbitrary dictates of an alien religion. Despite these objections, however, such terms are in frequent use. But when Muslim bankers, economists, and lawyers use the term "Islamic" for their financial techniques and institutions, the nuance is usually different. They are not saying that their banks or instruments should be associated with religious life in the same manner as, for example, prayer or almsgiving; they are saying that these activities, while practical and mundane, do not, unlike
ward achieving a more "Islamic" society and politics. One strain is utopian, radical, communitarian, populist, dismissive of things Western; in its extremes it can be violent, as in Egypt, Saudi Arabia, or Algeria, and revolutionary, as in Iran. Another strain is socially and politically conservative, seeking individual piety and social mores built around traditionalist compliance with fiqh, and looks to social and political improvements mainly as a result of that. Islamic banking outside Iran is far more characterized by the latter strain than by the former. Noting this fact, one Western commentator sympathetic with the first strain denounces Islamic banking as mere marketing designed to enrich further a business elite born of government influence and largesse. It demonstrates the falsity of the second strain's promises to reform society, these being based solely on calls for individual virtue while ignoring socioeconomic realities. Olivier Roy, The Failure of Political Islam, trans. Carol Volk (Cambridge, MA: Harvard University Press, 1994), 140-46. The comment is apt in pointing to the micro, individualizing, conservative, traditionalist tenor in Islamic banking's approach to shari'a; it is not apt in failing to notice the degree to which this approach has enduring historical, social, cultural, ethical, religious, and even political significance for Muslim societies. For more on these differing strains of Islamism and the relevance of Islamic banking to them, see Vogel, "Islamic Governance:' 27
their conventional counterparts, contlict with Islamic law.Any added tlavor to the term retlects a call to community solidarity: that "Islamic banks;' being enlightened by Islamic norms, should enjoy Muslims' support and patronage. In sum, for many Muslims, Islamic financial institutions offer an invigorating escape from one of the more difficult quandaries of modern life. If they succeed economically, they relieve the practitioner of pangs of conscience while benefiting him financially. The success of Islamic financial institutions would be the harbinger of a host of other advances toward a more integrated Islamic way of life.
OBSTACLES TO THE APPLICATION
OF THE ISLAMIC LAW
It is easy for the uninitiated to underestimate the difficulty of applying the classical Islamic law to modern commercial transactions. Some believe that the law's dictates can be summed up in a set of vague and general ethical and moral precepts, which do not entail any precise system of legal rules. In contrast, others expect that the legal restrictions are few, concrete, specific, and easily accommodated, leaving the rest of the field free for innovation and development. In either case, the outsider may expect to adapt Islamic finance easily to Western practices, simply by observing a short list of do's and don'ts. Instead, on closer examination the outsider finds the applicable classical jurisprudence (fiqh) extraordinarily rich and complex. While this law does harbor profound general principles, it is not stated in those terms but as innumerable detailed rules. The rules and the principles are interconnected at a level rarely made explicit. Moreover, the rules and principles offered are not only legal but moral, defeating at times any hope of a legalistic precision. These are some of the difficulties of grasping the classical law; others will be mentioned presently. But first consider the inherent difficulty of applying to modern phenomena a system of law that emerged in a wholly different time and social setting. (We emphasize that here we are discussing the system of the classical jurisprudence or fiqh, not the shari'a or Divine Law. To Muslims the Divine Law is timeless and always in application, if only in the fora of God's judgment and the believer's conscience.) In most parts of the Islamic world, Islamic law has been separated from legal practice and application in all but personal and private affairs for one hundred and fifty years. It is found in writings usually at least 500 years old. Even if
28
of Islamic Law
it were to be applied at present, knowledge of how to apply it has entirely lapsed, among both laypeople and specialists - no one now alive has ever observed or used the classical commercial law in its entirety in actual commerce. Moreover, the scholars charged with interpreting the law no longer hold the influential positions held by scholars in the past -legislators, judges, officials, social leaders, and merchant-notables. The societies and economies of all Muslim countries have been utterly transformed in the modern era. Most of the banking and financial transactions that now must be evaluated religiously did not even exist as such when the classical law held sway.The form and substance of every transaction is either altered or entirely new. Many concepts we take for granted today have no direct parallels from the past: the corporation, artificial personality, the share, the option contract, the bank deposit, documentary credits, non-possessory security interests, insurance, and many other tools of modern finance. Not only are the transactions novel, but the contexts in which they are applied are light-years distant from the contexts of the classicallaw. Consider changes such as the speed and security of modern communication and transportation; widespread monetary inflation; worldwide markets for commodities, currency, and securities; the anonymity of many commercial relationships; vastly increased governmental and regulatory power in the economy; or the transition from personal and confessional legal regimes to territorial and national ones. Were the classical scholar transported to our world, how many of his judgments (fatwas) would remain the same? Would not many of them be affected fundamentally by the surrounding system and context? Clearly, adapting classical Islamic law to the modern financial world is a huge task. While a great deal has been achieved - for which a great many brilliant and hard-working scholars deserve immense credit - the legal elaboration of Islamic finance is still at a beginning stage. But the pace of progress is increasing. Finance is presently the most innovative area of contemporary Islamic law.
ISLAMIC LAW AND ISLAMIC ECONOMICS

Islamic legal thought about modern finance proceeds largely along two approaches, Islamic law and Islamic economics, neither of which solves all the difficulties just described. Both approaches are in a sense survivals of the classical law.
29
The first, Islamic law or fiqh, seeks to evaluate modern behavior in terms of the classical legal rules. The classical law arises from the advice of private scholars to individuals on particular events of their lives, and thus has an intrinsic private and micro focus. It is ultimately concerned with concrete individual actions, since it is these that have prime religious significance.' The classical law largely delegates concern for welfare at large, and all of the more systemic or macro aspects of Islamic life, to the state or ruler, who has a religious duty (siyasa shar'iyya) to pursue the public good within general Islamic principles. Modern legal writings on finance also view questions from a micro perspective, focusing on the particular terms of particular contracts (e.g., mayan Islamic bank in its installment sales contract impose penalties on defaulting but solvent debtors?). The second approach to Islamic finance, that of Islamic economics, is a novel discipline that seeks to develop from Islamic teachings an alternative to conventional Western economics - one that produces more beneficial economic outcomes, even as judged by the non-Muslim economist. Much of the concern of Islamic economics is with developing Islamic macroeconomic models, distant from the transactional focus of Islamic law. In contrast to legal scholars, Islamic economists usually mine the classical law corpus for fundamental Islamic principles: general legal rules (such as the prohibition of interest on debt), general moral precepts (such as opposition to fraud or corruption; approval of markets, trade, and commerce), and basic legal institutions (such as the alms-tax). Many areas in classical writings are instructive from this perspective: the rules as to charity (sadaqa), alms-tax (zakat), charitable trusts (waqf), supervision of markets (hisba), the fisc (bayt al-mal), public revenues, taxation, price-fixing, expropriation in the public interest, and social security (many of the these falling under the general heading of political governance [ahkam sultaniyya, siyasa shar'iyya 1). From investigating such rules economists derive recommendations on macro matters (e.g., the institutional structure of banks or regulatory agencies; traits of an interest-free economy; modern Islamic taxation or social security; an Islamic stance toward consumerism).
3Most classical legal scholars do consider aggregate economic effects, but to a limited extent. First, they generally lack the tools to appreciate these effects, tending to see them only as individual benefits multiplied; and second, according to their formal methodology, utility or welfare (maslaha), individual or collective, is only a subsidiary consideration, helping to choose between two opinions deriving from other sources. Classically, most scholars decline to use utility as an independent basis for legal rules: either they reject it theoretically or delegate it to the ruler.
30
of Islamic Law
While Islamic law and Islamic economics operate in very different ways, both draw on the classical legal corpus. Insofar as Islamic economics addresses phenomena at the state, macro, and social level, instead of just the behavior of particular individuals, it fills gaps in the classical law and its characteristic method." The two disciplines are becoming better acquainted, and even now are enriching and disciplining each other. Someday they may yield a single, fertile discipline governing Islamic economic activity. Islamic economics may develop theories and observations correlated closely enough to the reasoning, principles, rules, and particular judgments of the law as to provide legal scholars guidance and security in venturing reinterpretations of the classical sources. For the present, however, it is the classical law, with its micro, formal, transaction-based perspective, that most influences practices of Islamic banking and finance. It alone concerns us in this and the following four chapters.
STRUCTURE AND METHOD OF CLASSICAL LAW IN THEORY AND PRACTICE

Since classical Islamic law dictates the most distinctive traits of Islamic banking and finance, and most influences their innovation and development, it is useful to discuss its basic characteristics.' In the following discussion, and indeed throughout the book, we shall consider only the majority Sunni division of Islam.
"Per a meditation by an economist on the relation of the two sciences, in which a fact-value distinction plays the key role, see Muhammad Anas Zarqa', "Tahqiq islamiyyat 'ilm al-iqtisad," Majallat [ami'at al-Malik; 'Abd al- 'Aziz 2 (1990): 3-40. 5There are several basic introductions to Islamic law, including Noel J. Coulson, A History of Islamic Law (Edinburgh: Edinburgh University Press, 1964); Joseph Schacht, An Introduction to Islamic Law (London: Oxford University Press, 1964); M.A. Abdur Rahim, Principles of Muhammadan Jurisprudence (London: Luzac & Co., 1911). A very clear, brief description of ijtihad and usul al-fiqh is Bernard Weiss, "Interpretation in Islamic Law: The Theory of Ijtihad" American Journal of Comparative Law 26 (1978): 199-210. The particular points made in this section are considered in more detail in Frank E. Vogel, Islamic Law and Legal System: Studies of Saudi Arabia (forthcoming, 1998). 31
Wamic Law and Finance
Ijtihad, or Derivation from Revealed Sources

In Islamic conception, all law must be ultimately rooted in the Qur'an and the Sunna. While God is thus the true and only law-giver, in worldly terms those who determine the law are those skilled in interpreting the revealed sources, namely religious scholars (ulama'). According to these scholars, the Islamic law is to be found from the Qur'an and the Sunna by a qualified scholar employing the interpretive effort called ijtihad (literally, "effort"). Ijtihad observes a particular methodology, called "the roots of the law" (usul al-fiqh). In what follows we examine various aspects of the system of laws built on the conception of ijtihad.
Shari'a and Fiqh; Divergence of Opinion; Schools of Law

The English term "Islamic law" is ambiguous, translating two Arabic terms, shari'a (the divine law) and fiqh (human comprehension of that law). As explained above,fiqh, unlike shari'a, can be faulty, multiple, uncertain, and changing. Indeed, since the revealed texts are only finite and are often ambiguous, the norm is that fiqh rulings are uncertain and merely probable suppositions as to what God's law truly is. Indeed, on most points of doctrine fiqh writings record multiple opinions, all from qualified scholars. Fiqh rulings are taken as truly and certainly God's law only when they are established by a literal revealed text or when they have been agreed upon unanimously by all Islamic scholars of an age. The latter agreement is called "consensus" or ijma '.6 The theoretical prerequisites for ijma' are stringent, meaning that the doctrine lends certainty to relatively few rules, leaving almost everything no more than probable. In practice, however, scholars accord presumptive truth to propositions to the degree that past scholars have reached agreement, partial or complete, on them, with the result that the law has a workable stability. While this was the classical practice, nowadays the authority of the past is less tenacious, and less conservative writers feel free to depart from the views of even a majority of bygone scholars.
6Scholars' constructions of ijma' differ. For some, no qualified scholar's view can ever be overridden by a later agreement. This gives more scope for variation than other positions on ijma' holding that an ijma' in a later generation disproves all the contradictory views of earlier generations.
32
of Islamic Law
This discussion yields two points useful in understanding and evaluatingfiqh rulings: • although there is general agreement on the general methodology and on many principles and basic conceptions of the law, the various schools oflaw (not to mention individual scholars) disagree frequently on particular rules; and • where they disagree, none of their views can be declared wholly wrong. While fiqh harbors a multiplicity of views on an issue, most scholars do not think this means that God Himself embraces multiple truths, or that the revelation is inadequate to guide humans to the single Truth. Instead, human beings simply fall short of finding the one truth due to the inherent difficulty of correct interpretation or ijtihad. Only one view is right, but no one except God knows with certainty what it is. Such is the situation in theory. In practice, and to enable the application of the law, classical Islamic legal scholars introduced institutions and conceptions to narrow - for purposes of application of the law - the range of acceptable rulings. For the majority Sunni division of Islam, the most important such idea is the doctrine of universal "conformism" (taqlid) or the "closing of the door of ijtihad," the idea that scholars are no longer qualified to practice ijtihad (to interpret the Qur'an and Sunna for themselves) but must simply follow past scholars' views. This idea originated in the ninth century and became increasingly widespread as centuries passed. In practice, all scholars joined one or another of the established schools or "ways of thought" (madhhab). Sunni opinion became confined to four "schools of thought;' the Hanafi, Maliki, Shafi'i, and Hanbali, all named after scholars living in the period roughly between 700 and 850 CEo These schools in turn progressively narrowed their positions over time, until at last in anyone time and place one could know what position each school espoused on any issue. Thus, on a proposition of Islamic (Sunni) law one can usually list four positions, taking the most accepted one from each school. The duty of conformism was not as absolute, however, as it is often represented. In every age eminent scholars continued to practice ijtihad, whether they or their contemporaries acknowledged it or not, and many scholars declared, against the trend, that ijtihad is a perennial duty for all who possess learning. Moreover, the scholars never claimed that school authority
33
assures ultimate truth. As proper ijma' doctrine requires, all views on which there is no ijma' remain technically available and unrefuted. In recognition of this, and in order to make the record for ijma', each school carefully preserved and handed down the opinions of earlier scholars, even when these were abandoned in favor of other views. Each school developed mechanisms to invoke weaker, abandoned, or minority views as alternatives to the standard views, usually when a view agreed with custom or the general welfare. The Muslim layperson has always dealt with this diversity by following the rules traditionally followed in his or her family on ordinary matters, and by consulting the scholar he or she most respects on other matters. Institutions committed to Islamic law - including financial institutionsfollow a similar approach, adhering to generally accepted views when possible, and consulting a particular scholar or board of scholars on all other matters. So far we have described the law as it was handed down from medieval times. Modern law has introduced many changes in outlook. For one thing, the long-standing controversy over ijtihad and taqlid has drastically shifted ground. Nowadays most scholars agree with the medieval critics of conformism, and insist that the "door of ijtihad" is not closed and never was. Indeed, moderns do not think it necessary today to belong to a single school, in the sense of invariably following its precepts (although most have a single school in which their training was concentrated and in which they are most skilled). They argue that a scholar may adopt whatever opinion seems best on the grounds of its proof.
Four Methods of Elaborating the Law: Interpretation, Choice, Necessity, and Artifice
The legal rulings applied in today's Islamic banking and finance are, generally speaking, developed using one or the other of four different techniques. The first and metaphysically most pristine technique is ijtihad, or derivation directly from the revealed texts of the Qur'an and the Prophet's Sunna, as discussed above. This method is increasingly being used in Islamic banking and finance, particularly when a legal instrument or ruling is considered novel, never considered by scholars of the past. For example, the scholars have found that the option contract has no counterpart in classicallaw, and so must be evaluated afresh using ijtihad. Indeed, the need for
34
of Islamic Law
ijtihad is increasing as scholars move from everyday transactions to newer and more complex ones. But the scholars animating modern Islamic banking are conservatives, and reluctant to diverge from fiqh on points of past broad agreement. As long as a new approach can be subsumed by a legal conception from the past (for example, if it can be understood as a lease or a sale), the rules of the past tend to be applied. Practically any new contract will overlap substantially with one or more contracts from the classical law, which after all incorporates the basic building blocks of commercial and contract law: property, sale, lease, loan, pledge, and so forth. In the case of options, after practicing ijtihad scholars declared them invalid and improper on the grounds that: 1) an option is more similar to sale than to any other contract type; 2) in the c1assicallaw of sale what is sold must be "property" (mal); and 3) the option right is not property according to the classical definition? Clear departures from old rules are extremely rare. Scholars rarely invent new terms, alter the definition of old ones, introduce new legal constructions, or criticize the methods or thought processes of the old scholars. They do not systematically refer to specific intervening changes in technology, institutions, economics, or law as guides or motives to review, amend, or replace old rules. They are mostly content to work with existing rules in ways that would be largely familiar to scholars of the past. Devotion to basic "principles" (qawa'id) of the Islamic law lends further stability. Qawa'id are general legal rulings, often stated as maxims, some found in Prophetic sayings, that classical scholars have identified, by a process of induction from many fiqh rulings, as sound generalizations about the law. Scholars consider these to be innate, systemic characteristics of fiqh which can hardly be altered without changing the whole edifice. In Islamic finance ijtihad has not usually been employed for fresh inventions anyway, but for evaluating and modifying existing conventional financial or banking practices (such as the option contract above). In such cases ijtihad often takes the form of deciding whether the transaction can
7Decision 65/1/7, seventh session (1992), Majallat Majma' al-Fiqh al-Islami [Journal of the Islamic Fiqh Academy] 1: 711, 715 (hereafter cited as Fiqh Academy Journal). (Note: There is another Islamic Fiqh Academy of a similar name organized under the auspices of the Muslim World League, with its headquarters in Mecca. This Academy has not taken as prominent a role in fiqh deliberations on Islamic finance as has the OIC [Organization of the Islamic Conference] Academy.) Options are further discussed in Chapters 5, 6, 9, and 10. 35
be reconciled with Islamic revealed texts andfiqh principles. As an example, by ijtihad the modern company or corporation with artificial personality and limited liability - an entity wholly novel to Islamic law - has come into common use." Only in rare instances have concepts new to both Islamic and Western law arisen in response to the needs of modern Islamic transactions. One example is the provision of "Islamic insurance" by a sort of mutual aid society, to which Muslims make common "donations" agreeing to aid each other in the event of loss. When faced with tough questions, scholars seek strength in numbers. They realize that to gain more acceptance for their opinions, and to deal with the many complexities of questions submitted, they must act in groups. The result is a modern innovation called "group ijtihad" whereby scholars gather in convocations to deliberate collectively and decide questions by majority vote. A second method by which to reach opinions, instead of ijtihad directly from the Qur'an and Sunna, is the method of choice (ikhtiyar) among views already propounded by past scholars. This method has the advantage of aligning the modern scholar's view with that of a great scholar of the past, which at a minimum lends assurance that nothing about the opinion fundamentally offends shari'a, that no disastrous innovation is afoot. There are various subcategories of this method, according to the criteria of choice employed. One criterion, the most ambitious, reverts to the Qur'an and Sunna and to basic fiqh principles to decide which view offers the best or strongest interpretation of the revealed texts. A second criterion evaluates an opinion by the rules of decision internal to the school which espouses it, such as the degree of support from the school's founder or its consistency with other school holdings (e.g., there are "stronger" and "weaker" Hanafi views). A third criterion examines which view best serves the general welfare (maslaha, a conception including religious welfare), sometimes because it conforms to prevailing practices or customs. One argument for this last approach is that fiqh delegates freedom to act to those responsible for the general welfare as long as they do not offend fundamental principles of shari'a? Note that this last approach is much less ambitious metaphysically than ijtihad, since its immediate choice of doctrines
8This although debate continues on some of the difficult ijtihad issues it poses. See Imran Ahsan Khan Nyazee, "Corporations and Islamic Law" (manuscript on file at Islamic Legal Studies Program, Harvard Law Schoo!). 9The classical term for this delegation of power is siyasa shar'iyya. 36
of Islamic Law
follows not from revelation but from changing temporal circumstance. Let us call this sub-method "utilitarian choice:' Quite often, a question cannot be answered simply by deploying the method of choice among single views of past scholars. Transactions are often complex, and to approve them scholars need to combine views of different schools on different parts or aspects of transactions. This can accentuate the need for independent ijtihad, since, as views are combined, issues never addressed by any past scholar come to the fore. Also, since schools do differ in their approaches to contract law, combining their views willy-nilly can distort or negate the chains of reasoning by which the schools justified their views, requiring the modern scholar to look again at the underlying justifications for the composite positions using the revealed sources and fiqh principles. The result can be a method halfway between ijtihad and choice, in which a modern scholar's ijtihad, immensely respectful of the past, tries to weave appropriate modern solutions from the threads of old opinions. Such a scholar may draw simultaneously on all the three submethods of choice just noted. If this is done improperly, merely mechanically, it is referred to disparagingly as "patching" (talfiq). To give an extreme (but historical) example of patching, one might combine one scholar's view prohibiting X, and another scholar's view permitting X, to yield a novel third view by which X is allowed only under certain conditions. In Islamic banking and finance, choice is the method most commonly in use. Usually modest in their claims to practice ijtihad, scholars most often say they practice only utilitarian choice. to They use this technique across all the four Sunni schools, and sometimes beyond. They claim not to practice "patching:' though they sometimes accuse each other of this. 11 Paradoxically, choice, especially utilitarian choice, is more likely than ijtihad to liberalize, because of scholars' conservativism in using ijtihad. It has sanctioned changes that from a comparative legal perspective hold the potential to transform Islamic contract and commercial law. Note that if
"The religious consultant of the Kuwait Finance House, Badr 'Abd al-Basit, affirms that he never offers an opinion of his own as long as a classical view "whether from near or far" is available. When nothing in classical opinions is relevant, he turns to general principles (qawa'id) of Islamic law, particularly the pursuit of welfare. He says nothing about ijtihad. Oddly, this discussion is preceded by mention of how many modern economic transactions are novel and unknown to past scholars. Bayt al- Tamwil al-Kuwayti [Kuwait Finance House], al-Fatawa al-shar'iyyafi al-masa'il al-iqtisadiyya 1979-1989 (Kuwait: Kuwait Finance House, n.d.), 1: 5-13. lIE.g., as to murabaha li-amir bi-al-shira'. See 140-143 and referenced sources. 37
one were systematically to single out the scattered opinions of past Islamic legal scholars that align with Western contract law, removing them from context, one might construct, "patch" together, a fiqh of contract identical to Western contract law. Adopting extraordinary views can erode the Islamic system's internal logic, making it increasingly susceptible to the pull of conventional legal theory and practice. This has not as yet occurred, but the force of this seemingly modest method should not be underestimated. In Islamic and other legal systems, minor steps such as small shifts of definition, or uses of legal fictions to cast novel practices as old laws, have wholly transformed the law in practice and eventually in theory. 12 We shall see a number of instances of potentially radical change in the following sections. For example, respect for the opinions of Ibn Taymiyya, a fourteenth-century Hanbali scholar with strikingly modern-sounding views, is a pervasive influence on the modern law. If his opinions were adopted without reservation, especially as he emphatically states them, the results would be revolutionary. Similarly, modern fiqh opinion is strongly attracted to the idea of the binding promise, a concept basic to Western laws but recognized only exceptionally by classical Islamic law. This might provide a basis for contractual obligations independent, and subversive, of the classical law's regime of contract types. Another example is the idea, in play already, of importing into contract law tort conceptions of damages for wrongful acts to create liabilities for breaches of representations or promises that classically are not binding. A third method of deriving rulings, still lower in metaphysical status, permits one to adopt as a ruling any position, even one contravening a categorical shari'a rule, when one is compelled by stark necessity (darura). The necessity must be of great severity, usually life-or-death. The basis for this approach is the Qur'an's frequent recognition that a person driven by necessity may eat otherwise forbidden food (e.g., 2:173), and also its disavowal of any divine intent to cause mankind hardship or to press it beyond its capacity (e.g., 2:286). A version of the doctrine holds that a mere "need" (haja), if it affects many, may be treated like a dire necessity affecting only one. Scholars in Islamic finance and banking have invoked necessity to permit exceptional relaxations of rules. They have issued fatwas (opinions) allowing Islamic banks to deposit funds in interest-bearing accounts, par12See Lon Fuller, Legal Fictions (Stanford, CA: Stanf~rd University Press, 1967); Baber Johansen, The Islamic Law on Land Tax and Rent (New York: Croom Helm, 1988). 38
of Islamic Law
ticularly in foreign countries, because these banks have no alternative investments at the necessary maturities. Typically, however, they place conditions on such fatwas, such as requiring that the unlawful gains be used for religiously meritorious purposes such as charity, training, or research. Such fatwas are particular to the circumstances in which they are issued. If conditions change, or if an alternative to the necessary evil arises, the scholars require that the practice end. Classical Islamic law indulged in a fourth method of attaining desired legal outcomes: the legal artifice (hila, pl. hiyal). The foundation of this method is a formalistic approach to contract, in the sense of a concern for the external form of transactions instead of the parties' substantive intentions. All classical scholars found hiyal acceptable when they were merely clever uses of law to achieve legitimate ends. For example, a landlord, worried about a tenant cancelling unfairly, might stipulate payment of the bulk of the rent early in the lease term. But other hiyal were frank subversions of the law's basic rules and principles. A famous example is the ancient doublesale ('ina or mukhatara, in Europe called mohatra). In this deal a borrower and a lender arrange to sell and then resell between them a trivial object, once for cash and once for a greater sum on credit, with the net result being a loan with interest.'! In another example, a lender sells a borrower an object for an exaggerated price and then immediately lends him money.'! A third example, quite widely accepted classically,is the "sale with right of redemption:' or bay' al-wafa', by which the borrower, who owns certain property, sells that property to the lender, leases it back, pays rent on it (equalling interest), and then invokes a right to repurchase the property for the original sale price. IS Schools vigorously differ on these subversive artifices, their views falling across a spectrum: the Hanafis and Shafi'is often declare them valid although immoral (in many cases scholars declare them not even immoral), but the Malikis, and even more consistently the Hanbalis, condemn them altogether. 16
13Inthe Hanafi school the dominant position was that such a sale is permissible. See al-Fatawa al-hindiyya (large compendium of Hanafi law legal opinions current in India, compiled in 17th century) (Beirut: Dar Ihya' al-Turath al-Arabi, 1980),3:208; Muhammad Amin Ibn 'Abidin (d. 1836), Hashiyat radd al-muhtar 'ala al-durr almukhtar sharh tanwir al-absar (Cairo: Mustafa Babi al-Halabi, 1966),5:273. 14al-Fatawa al-hindiyya, 3:202-203. 15al-Fatawa al-hindiyya, 3:209. 16YvonLinant de Bellefonds, "Volonte interne et volonte declare en droit musulman;' Revue intemationale de droit compare 10 (July-Sep. 1958): 510-521. 39
In modern Islamic banking, artifices of the latter type are in acknowledged use mainly in Pakistan, where the most common transaction of all ("markup" financing) is the 'ina sale. For example, a firm seeking inventory financing sells its inventory to the bank for cash and simultaneously repurchases it on credit; the parties never even bother to identify the inventory.'? Apparently Islamic banking in Malaysia employs the same approach.!" Despite condemnation by the Ole Fiqh Academy,'? bay' al-wafa' has reportedly seen use even in the Gulf. Contemporary scholarly opinion disapproves of such techniques. Nevertheless, deals distinguished from conventional counterparts by little but their form do take place, leading one to ask whether the classical religious debate about hiyal needs to be reopened. In any event, it is sometimes difficult to decide if a particular artifice merely overcomes inconvenience in the law or wholly defeats its purposes, or when certain technical differences between one transaction and another unlawful one should preserve the former from condemnation. Such line-drawing exercises are hardly unknown in other legal systems, as, for example, in lawyerly schemes to get around obstacles or burdens under tax or securities laws." The above techniques describe a hierarchy of responses a scholar may make if asked to legitimize a transaction useful for Islamic banking or finance. First, the scholar may evaluate the transaction exercising his ijtihad, his own best understanding of the divine law of contract. Since, however, the authoritative scholars tend to be conservative in their use of ijtihad, they use this approach only for wholly novel elements of contracts, where ijtihad is unavoidable. The second level in the decision hierarchy is to choose from among past opinions ones that, without deviating from fundamental principles of the law, advance the interests or utility of Muslims in financial transactions. Third, if a transaction cannot be rendered lawful
17National Bank of Pakistan contracts on file with Harvard Law School, Islamic Legal Studies Program. lBIsmail ann, "Development of the Islamic Capital Market in Malaysia;' in Symposium of the Malaysian Experience in Islamic Banking (Kuwait: High Consultative Council for the Completion of the Implementation of the Islamic Shari'a, 1996),7. 19Decision 68/4/7, seventh session (1992), Fiqh Academy Journal, 557. 2°A good example is the difficulties for tax purposes of drawing lines between leases and installment sales. See, e.g., US Internal Revenue Service, Rev. Proc. 75-21 (Jan. 1975) on leveraged leases (with gratitude to Prof. Reuven Avi-Yonah, Harvard Law School).
40
of Islamic Law
under prior opinion, and if necessity still demands its use, there is the alternative of allowing it, but only to the extent and for the duration of the necessity. The fourth approach, that of artifice, is generally condemned, though practiced in Pakistan and Malaysia. Given all these options, in evaluating a report that a scholar (or board of scholars) has permitted transaction X, one should not conclude that transaction X is "Islamic" for all parties and for all time. The ijtihads of different scholars may legitimately vary. Moreover, if the fatwa is based on utilitarian choice, assessments of utility can change with place and time. And, lastly, a fatwa might rest on nothing more than temporary, and changeable, necessity. One result of these diverse and often changeable opinions is that Islamic financial institutions differ in the practices they follow. These institutions would certainly benefit from greater uniformity of scholarly opinion, for example, in enhancing cooperation in secondary financial markets, joint investments, or syndications; consumer confidence (religious and secular); and full disclosure. The diversity of opinion probably is due less to specific disagreements in legal reasoning than to differing degrees of strictness in general; for example, one bank is well known for charging customers penalties for late payments, but other banks consider this practice usurious. Strictness varies strikingly with geographical region; for example, practices in Saudi Arabia are reputed to be far stricter than practices in Malaysia or Pakistan.
Ethical and Legal Consequences of Islamic Legal Rulings

Another point essential to understanding Islamic legal opinions is that Islamic law is the arbiter of not only legality but also virtue and vice. An Islamic judgment falls into a scale of five values: 1) prohibited (haram), 2) reprehensible (makruh), 3) indifferent (mubah), 4) meritorious (mustahabb), and 5) obligatory (wajib). All these values have consequences both in worldly legal matters and in the reckoning of the Hereafter. Values 2, 3, and 4, from a worldly legal standpoint, entail permissibility and are given their legal effect. Values 2 and 4 do have additional moral consequences, but these are left to the Hereafter. Value 1 acts are not only sins, but are in this world ordinarily legally invalid or void, as well as punishable. Value 5 acts are not only virtuous acts, but are also ordinarily not only valid and
41
enforceable but also compulsory, their neglect being punishable. But there are some exceptions to all these results. Some prohibited acts (value 1) are legally valid (e.g., in some schools, employing subversive artifices [hiyal]), while some obligatory acts (value 5) are denied legal validity and recognition (e.g., in some schools, a wife refusing to cohabit with a man who, as she knows but cannot prove, established marriage with her by procured witnesses). Many deeds are obligatory in conscience but cannot be enforced by a judge (e.g., unilateral promises; certain alms-tax obligations; atonement for vows and oaths). The moral and the legal in Islamic legal rulings is sometimes difficult to disentangle. In what follows, transactions declared "invalid" or "void" are usually also "prohibited" (haram) and a sin. (In our contexts the reasons for invalidity and sinfulness are usually violations of revealed prohibitions against either usury friba] or risk or uncertainty [gharar] or both.) Morally, gains from such a contract should not be put to one's use; at best they can be given away in charity. In secular legal terms, the most common consequence of a violation of Islamic law is that the contract between the parties is or becomes void and unenforceable. At the suit of either party (usually a party disappointed by the outcome of a deal), an Islamic court will give a judgment that, to the extent feasible, restores the parties to their state before the contract was made, by returning their respective performances or payments. Sometimes not the whole contract but only a single term is voided. This sometimes results in a shift in the balance of the bargain between the parties. For example, a party may bargain hard for a particular term in a contract, e.g., a guarantee by the other party of a level of profits. If that term is later declared void by an Islamic court or arbitrator, the losing party ordinarily gets no compensation for its loss, such as by an adjustment in the price.
The Casuistic Style of Classical Islamic Legal Reasoning

The way the classical law grounds its rulings in the Qur'an and the Sunna is key to understanding many aspects of Islamic banking and finance. A problem the law addresses is that the style of the revealed texts does not lend itself to promulgating general legal rules or principles. Qur'anic verses were revealed in relation to specific events during Muham-
42
of Islamic Law
mad's prophethood. Most of the legally significant verses declare certain actions prohibited or obligatory in general terms (e.g., drinking wine, paying alms-tax), posit general moral principles (e.g., "do justice," "be true to your trusts"), or lay down a few specific rules (e.g., how an inheritance is to be divided). The Sunna, far more voluminous, contributes enormously to the interpretation of the Qur'an, but follows a similar style. Legal utterances of the Prophet are mostly either very general or very specific, and often relate to a particular event. Perhaps because of the concreteness of so much of this legal material, Islamic law decided not to treat the specific revealed rulings as mere implementations or instances of other more general laws that God intended to reveal through them. Taking such an approach would, in almost all scholars' view, introduce too great a human element into the divine message. Rather, the law strove to take the literal rulings as the divine law, and to minimize the role of fallible human reasoning in elaborating and applying them. How to do this awakened much controversy in early centuries, but in the end scholars settled on analogy (qiyas) as the most defensible legal method. According to this doctrine, a divine law revealed for one event can be applied to another event only if some common feature is found to exist in both events. Of course, analogy can become a powerful tool for rationalization, potentially equal to reasoning by induction to general rules or principles which, we have noted, Islamic law has rejected. Muslims endorsed only a modest analogical method, merely the linking of a particular novel case to a particular revealed judgment on the grounds of some shared external trait. Such a method results in a casuistic law - i.e., one elaborated as a series of rulings for each imagined case - rather than in a rational or hierarchical system of rules. For example, from the Qur'anic ban on drinking "grape wine:' various scholars selected the following traits as the basis for analogies: grape beverage; grape, date, or raisin beverage; drink from steeping fruits; drink after fermentation and settling; intoxicating liquid. Only a few scholars identified as the rule the one which is most general and most rational: intoxicating substance. Other human sources of law, such as utility or custom, are in formal theory subordinate to analogy, invoked only to choose one possible analogy over another. Note that wholly absent from this schema is any notion of legislation by the state or other worldly authorities.
43
It is likely that many all-embracing general legal theories and conceptions were employed in the early development of the law. But after the formalization of the law's methodology such forms of interpretation retreated to the background, yielding pride of place to strict analogical method. Only in specialized works (e.g., qawa'id, furuq) were general inductive propositions discussed at length. In such works principles are not presented as the law, or even as its source, but as mere useful generalizations about the law. The result of all this is that the legal method of the classical law is daunting to the outsider - atomistic, multifarious, scholastic. These traits hobble comparison with modern laws based on Western models. Westerners studying the classical law may feel perplexed by its multiplicity, and conclude that behind the details there must be some fixed system that instead is "the law:' They are wrong; such a system does not exist.
Modern Reinterpretations
Intensive efforts have been made in the last two centuries to reform and renew the classical law, departing from new intellectual bases and using different methods." Important in all of them is an increased interest in the utility and legal rationality of law. Simplification and Rationalization. One form of reinterpretation of Islamic law is simply to restate its rules and principles in the fashion of Western law (particularly the civil legal systems of Europe), using Western terminologies and Western intellectual tools and methods. For decades, writers - among them lawyers, economists, and bankers - have made major contributions to this comparative legal task. Famous lawyers, whose work has been critical for modern Islamic finance, include 'Ali al-Khafif, 'Abd al-Razzaq al-Sanhuri, Muhammad Abu Zahra, Mustafa al-Zarqa', Subhi Mahmassani, and others. While such restatements generally do not seek to change the law, but merely to simplify access to, and to generalize about, its holdings, less diligent work along these lines, usually by non-lawyers, does introduce many misunderstandings. Some authors seem to think that the complexities of
See, e.g., A. Merad, "Islah," pt.l, Encyclopedia of Islam, 2d ed.
21
44
of Islamic Law
the classical fiqh can be replaced with a few basic rules or principles, or that fiqh is just the wordy elaboration of a handful of general propositions. Among the propositions - all wrong- often presented as summing up the Islamic law on banking and finance are the following: • rules on usury (riba) are to prevent exploitation of the weak; • Islamic law denies the opportunity costs of capital, or denies the value of time; • the prohibition of "risk" (gharar) is to prevent "speculation"; • gain is lawful only when accompanied by substantial risks. Again, as statements about the classical law, these propositions are incorrect. They cannot be taken as the law itself or as adequate predictors of scholarly opinions. To endow them with legal force would be to replace the classical law with something else, and also to disregard the great wealth of interpretation found in the classical writings. Not all such simplifying reinterpretations undermine Islamic banking and finance. Many of them are used daily by practitioners of Islamic finance as rules of thumb to guide and organize their work, and to attempt to predict and understand the workings of their shari'a review boards. Others are invaluable to economists as the tools from which to construct theories about the as-yet-unrealized Islamic economic system. Still others offer potential sources of critique of Islamic banking, should its microlegitimated practices lead to macro injustices, such as the aggrandizing of the wealth of a few or increasing the cost or difficulty of credit for the poor. At present in Islamic banking circles there are two highly divergent understandings of Islamic finance: one, a simplified and rationalized system employing Western economic and financial conceptions and a highly generalized understanding of Islamic law; and the other, the classical legal method. The two approaches correspond to the background and persona of their users: respectively, Western-trained experts in finance and economics, and traditionally-trained ulama or religious legal scholars. (Only a few famous leaders can combine the two areas of expertise.) A certain cacophony results when discussions go on simultaneously in both idioms. At its worst, the methodological divide between them engenders a communication gap that blocks progress and perpetuates certain mistaken ideas about fiqh. Narrow interests of the group can also cause gaps: for example,
45
bankers may wish to keep shari'a review abstract and distant from nutsand-bolts while scholars may want to preserve fiqh from manipulation by the uninitiated. Change in the Law. Modern reinterpretations of fiqh also seek to make changes in the contract law. A central topic has been reinterpretation of the Qur'anic ban on usury, which is fundamental to everything that follows. In the 1930s, Syrian scholar Marouf al-Daoualibi suggested that the Qur'an bans interest only on consumption loans, not investment 10ans,22and in the 1940s Egyptian jurist al-Sanhuri argued that the Qur'an sought chiefly to ban interest on interest.P A more extreme and recent example is the opinion of the mufti of Egypt, Shaykh Muhammad Sayyid Tantawi, who in 198924 declared that interest on certain interest-based government investments was not forbidden riba (because the gain is little different from the sharing of the government's profits from use of the funds or because the bank deposit contract is novel), thus joining the thin ranks of prominent religious figures who have issued fatwas declaring clear interest practices permissible.P This fatwa aroused a storm of controversy, with opposition from nearly all traditional religious scholars and warm praise from secular modernizers. Later he went even further, saying that interest-bearing bank deposits are perfectly Islamic, and more so than "Islamic" accounts that impose disadvantageous terms on the customer. Laws should change the legal terminology used for bank interest and bank accounts to clarify their freedom from the stigma of riba/" It must be recognized, however, that no such reinterpretations have as yet gained a mass following among Muslims, and all have been rejected by
22M. Daoualibi, "La Theorie de l'usure en droit musulman," in Travaux de la semaine internationale de droit musulman, ed. L. Milliot (Paris: Receuil Sirey, 1953), 139142. 23'Abd al-Razzaq al-Sanhuri (d. 1971), Masadir al-haqq fi al-fiqh al-islami (Cairo: Dar Ihya' al-Turath al-Arabi, 1967-1968),3: 234-244. On the genesis of this opinion, see Chibli Mallat, "The Debate on Riba and Interest in Twentieth-Century Jurisprudence;' in Chibli Mallat, ed., Islamic Law and Finance (London: Graham & Trotman, 1988),6988. 24al-Ahram, 8 Sept. 1989. 25Chibli Mallat, "Tantawi on Banking Operations in Egypt," in Islamic Legal Interpretation: Muftis and their Fatwas, ed. M. Khalid Masud, Brinkley Messick, and David Powers (Cambridge, MA: Harvard University Press, 1996),286-296. 26See,e.g., Akhbar al-yawm, 22 Feb. 1997, 1,3.
46
of Islamic Law
the overwhelming majority of religious scholars. In the short term, these reinterpretations may afford some ease of conscience for those forced (or eager) to follow conventional practices. In the longer term, they provide precedents for other scholars of permissive views. But the Islamic banking and finance industry vehemently rejects such attempts, since that industry is built, as noted above, on the idea of applying the classical law, not replacing it.
THE CONTEXT FOR ISLAMIC LEGAL DEVELOPMENTS ISLAMIC BANKING AND FINANCE
IN
Modern Islamic Legal Institutions

We noted earlier that the Islamic legal system was dismantled during the eighteenth and nineteenth centuries and replaced by systems drawn mainly from the West. This transformation had two far-reaching effects on the context in which Islamic law operates. First, and most obviously, Islamic law is no longer recognized as the law of the land in many Islamic countries. Outside the sphere of family law, Islamic law is now enforced chiefly through personal or communal means, and not by the state. Second, the transformation weakened or abolished the institutions governed by Islamic legal scholars, official and private, through which Islamic law was authoritatively taught and studied and through which legislating (by giving fatwas and judgments and by advising the government) was achieved. Even the "schools of law" that once dictated legal thought and action are now important chiefly as vehicles for organizing legal education and for the study of past views. Thus, one of the challenges to the persistence of Islamic law is the absence of institutions that could lend stability and authority to its prescriptions. With their institutions weakened, their worldly sway greatly eroded, their expertise seemingly remote from much of contemporary life, Islamic scholars have lost much of their means to exert authority, and this at a time when Islamic law faces greater challenges than in any era since its early centuries. Though many scholars enjoy great respect among the religious, and a few have international renown and huge followings, they cannot claim for their opinions on law any conclusive effect, even among the faithful. One problem is that few scholars have expertise in both the classical law and in
47
modern sciences and arts, and this often shows in their opinions. Indeed, what is often most cherished about a scholar is his firm resistance to modern ways, even at the cost of familiarity with them. Scholars have made many adaptations to cope with these difficulties. One is to acknowledge the need to consult with experts in other fields before reaching any decision to which those fields are relevant. A second response is the convening of groups of scholars for ijtihad, as mentioned above. These two ideas have contributed to important institutional innovations, particularly the creation ofjiqh convocations or academies, both national and international. There are now three or four jiqh academies of major significance, the most important of which is the Islamic Fiqh Academy in Iedda formed under the auspices of the Organization of the Islamic Conference (OIC). The Academy meets annually in various locations; its members are scholars appointed by member-states of the OIC. The Academy itself appoints a number of consultants, among them scholars of Islamic law as well as specialists in areas relevant to decisions, such as the natural sciences, law, economics, finance, and banking. In advance of the meetings, members and experts prepare studies for subjects on the agenda, which they then present. After debate, a decision by majority vote of those present states the Academy's Islamic legal opinion or fatwa on the issue. The reports and debates, as well as the fatwas, are published in the journal of the Academy.F The Academy concentrates on pressing Islamic legal issues, most of them involving modern scientific, technological, and institutional innovations. The topic most preoccupying the Academy in recent years has been Islamic finance and banking; second most important has been medical practices, such as organ transplant and in vitro fertilization. The publications of the OIC Academy are invaluable, indeed without equal, for the study of the development of the law of modern Islamic finance. The concept of group ijtihad is important also within individual Islamic financial institutions. After initially relying on single scholars for fatwas, Islamic banks now form shari'a review boards of several scholars to facilitate research and enhance credibility. These review boards sometimes collaborate by holding international conferences on Islamic finance issues, sometimes under the auspices of international Islamic finance companies and organizations. These collaborative activities are helping to increase the momentum and the coherence of intellectual work in the field of Islamic finance. 27Piqh Academy Journal. 48
Islamic Finance as the Application of Islamic Law
The institution of the shari'a review board is important for the study of Islamic finance, because it has become standard practice for Islamic financial institutions to obtain a fatwa to support any new product or amendment to an old one. Supportive fatwas are an important component of a product, and potential investors or customers often inquire about them. Some banks have published fatwa collections. Scholars of repute are sought after by banks to serve in providing fatwas, and customers inquire as to their identities when reviewing the "Islamicity" of products. Nearly every institution has regularized the fatwa process through the creation of its own permanent shari'a review board. Many review boards have progressed beyond provision of fatwas, which are purely advisory, to degrees of control and audit of Islamic propriety. Some boards employ techniques borrowed from financial audits to enforce shari'a compliance. Boards report periodically to shareholders on the Islamicity of procedures. The institution of shari'a boards is likely to see much elaboration and development in the future.P A recent survey of shari'a review boards of fifteen Islamic banks in various countries asked a number of questions related to board structure and function.'? Forty-one board members responded. The surveyed boards varied in size from one scholar (three respondent banks), to seven or more. Ninety-two percent of the board members had Islamic law training, while 60 percent instead or in addition had studied modern non-religious law. Boards most often (49 percent) meet quarterly, though many meet monthly (7 percent) or weekly (24 percent). Respondents differed in their understandings of the functions of shari 'a control boards. Almost all (98 percent) felt that board opinions were compulsory for the bank, to the extent that if the board rejected a transaction it would not be performed. Most felt that their authority derived from the shareholders (75 percent) rather than from the board of directors or management (25 percent). Salaries of respondents were most often fixed by the shareholders in the annual meeting (66 percent), rather than by the board of directors (29 percent) or the management (4 percent). The great majority, however, characterized their relationship with directors and management in terms of coordination and advice, not authority. Most
28See,e.g., Muhammad Bahjat, "Nahwa ma'ayir lil-riqaba al-shar'iyya fi-al-bunuk al-islamiyya," Majallat buhuth ai-iqtisad al-islami 3 (1994): 1-60. 29Faris Mahmoud Abumouamer, "An Analysis of the Role and Function of Shariah Control in Islamic Banks" (Ph.D. diss., University of Wales, 1989). 49
(71 percent) would report any unlawful practice to the shareholders, as well as to management or the board. The great majority of shati'a boards perform some degree of auditing. While a great majority (85 percent) stated that they "audit" the balance sheet, nearly as many perform an "audit" of key accounts. On the other hand, most members of boards (66 percent) stated that they rely on statements by management to learn of the "financial" practices followed by the bank before issuing fatwas, without consulting records. Thirty-two percent of respondent members of shati'a control committees believed that 100 percent of their bank's activities were Islamically legal; another 51 percent considered them at least 90 percent legal; 10 percent, less than 90 percent legal. While responses from management attached great importance to the boards, responses from bank clients indicated less attention to them. Only about one-third of the clients stated that they learn of Islamic lawfulness of bank transactions from the shari'a boards, as opposed to management or bank publications, and a similar fraction stated they did not even know or understand the role of the boards.
Islamic Legal Application in a Western Legal Environment

Although parties may agree by contract to abide by Islamic precepts, they cannot alter the surrounding legal system which in the end enforces their agreements. In nearly all Muslim countries today, civil and commercial codes are greatly influenced by European laws, most commonly French, next most commonly English. Egyptian law and jurisprudence, inspired by French and other continental European law, are widely emulated in Arab countries. The legal institutions and laws of procedure in most Muslim countries are also taken from Western models. Only in Saudi Arabia, Oman, and a few other countries of the Arabian Peninsula do legal rules and institutions resemble those of classical periods, but even in these countries, Western patterns have made strong inroads. In Saudi Arabia, the world's most traditionally Islamic country, the laws applied in explicitly commercial matters, such as companies, banking, and commercial paper laws, strongly resemble French and Egyptian laws. But the general Saudi legal environment, including the general civil law regime, is that of the clas-
so
of Islamic Law
sical Hanbali school. All laws are applied by judges trained in Islamic law using largely Islamic procedures and rules of evidence. When classical Islamic law is applied in an alien environment, even if parties structure their agreements according to a classical Islamic legal form, the laws that govern the interpretation and enforcement of these agreements usually are wholly ignorant of that form. It is simply impractical for parties to incorporate into their agreement all the relevant Islamic rules, but many of the rules which are omitted are just as much the outcome of Islamic principles as are the bans on interest and excessive risk. For example, Islamic law does not allow recovery of lost profits, seeing such claims as both speculative and unearned. But a national law may award such damages, even against a losing party's protests that the contract is "Islamic:' Note also that if the parties have agreed on terms that are questionable under Islamic law but allowed under local law, such as a contract to sell in the future, the local legal system will almost certainly enforce it, enabling parties to push the limits of, or even evade, the Islamic law. The only way by which Islamic finance contracts can avoid such outcomes is by opting out of local law and courts through choice-of-law and dispute-settlement clauses, which are very common in Islamic finance contracts. An (unscientific) survey of all the sample contracts in our possession shows that many contracts still do not choose Islamic law (or, e.g., Saudi Arabian law) but rather the law of one or another non-Islamic system. This can be due to the insistence of a non-Islamic, or even Islamic, party to the contract, who desires to avoid either the impracticalities or the uncertainty of applying classical Islamic law in any respect beyond affording the basic model for the contract. Some contracts, including those of the Islamic Development Bank, choose as applicable law the "principles of the Islamic shari'a;' a term that allows flexibility as to the details of Islamic legal rules. Still other contracts adopt a compromise position: "Subject to the principles of the Glorious shari'a, this Agreement shall be governed by the laws of England:' Finally, some contracts do choose "Islamic law" as the applicable law. When they do so, according to our survey, virtually all also include a provision for commercial arbitration. If the arbitrators have expertise in Islamic law,it is possible that the award would fully reflect the classical law. Such an award would then be enforceable in most countries, as long as no offense is given to the fundamental national values called "public policy:' Presumably
51
these contracts provide for arbitration, and not adjudication in national courts, because the latter courts likely could not apply Islamic law fully or successfully. Islamic law is not applied in toto by any national system, can be known only from scholarly texts in Arabic or by expert testimony, is often in dispute, and does not possess analogues to many institutions of modern law. Indeed, courts might declare some of the law's provisions unenforceable and against public policy - its use of corporal punishment and imprisonment to secure payment, for example, and possibly its denial of certain damages.
52
CHAPTER 3
This chapter acquaints the reader with the primary revealed texts on the chief themes of commerce and contract. We present here all vital Qur'anic verses, but only a few of the most important Sunna reports, since the Sunna is much larger and more complex than the Qur'an. The next chapter addresses the contract law deriving from these verses and reports. Any attempt to give a brief introduction to Islamic law relating to banking and finance is beset with difficulties, especially if we want to learn something of that law's religious and cultural context. Simply stating the law's ethical and general principles would provide a glimpse of the religious wellsprings of the law and the moral logic of particular outcomes. It would not, however, help the reader to predict legal results or show how they are derived. On the other hand, a codified statement of basic rules would make the law seem much more fixed, mechanical, and categorical than it is, and would convey little of the religious and ethical background. Neither approach would indicate the methods by which the law is developed and justified. Despite these difficulties, our approach aims to give the uninitiated outsider an appreciation at once of the religious nature, the detailed content, and the legal methods of the law. It hopefully will also suggest something of the dynamics of the field: its inner tensions, the choices it faces, and its likely trends of future development. The first step in this outsider-based approach is to acquaint the reader with translations of the central scriptural texts that shape Islam's unique
53
approach to finance and commerce, giving a glimpse into the very heart of the religion and religious law relevant to our subject. I The second step, taken up in Chapters 4 and 5, is to learn something of the most authoritative interpretations of these texts - namely, the rules and principles of the classical contract and commercial law (jiqh) propounded by medieval scholars. The third step, in Chapter 6, is to see how modern scholars, lawyers, and bankers apply both the revealed texts and the classical rules and principles to modern problems of finance and banking. As represented by the tetrahedron in Figure 3-1, our approach juxtaposes, but keeps distinct, four stances from which to understand the Islamic law. Three of the vertices of this tetrahedron represent the three viewpoints on Islamic law just mentioned: the Qur'an and Sunna; the classical Islamic law (jiqh); and the modern Islamic law. The fourth vertex represents the stance of the outsider, who, we assume, holds conventional, largely Western ideas of law, finance, and economics. The purpose of this book is, in a sense, to explore the relationships among these four vertices.' The three vertices other than the Qur'an and Sunna - those that define a single plane or face (A) of the tetrahedron - represent human, interpretive, relative, truth. These three we constantly interrogate and compare as interpretations and realizations of the revealed texts. A second face (B) of the tetrahedron is defined by the three Islamic expressions of the law. The outsider's viewpoint, having no Islamic authority, stands outside this plane, but remains relevant to Muslims' interpretations of the law, if only because Islamic law and finance interact intensively with non-Islamic law and finance, are categorized and judged by it, and are under immense pressure to conform to it. A third face (C) is defined by the three expressions of the law observable in our time. Since the classical law and its practice can no longer be fully recaptured, any enactment of them must be a reenactment, a modern interpretation. If we confined ourselves to the fourth face (0), we would be improperly ignoring the Islamic validity and authority of mod"The translations given here are my own, drawing on two works: Muhammad Asad, The Message of the Qur'an (Gibraltar: Dar al-Andalus, 1980); and Saudi Arabia, Presidency of Islamic Researches, Ifta, Call, and Guidance, The Holy Qur' an (Medina: King Fahd Holy Qur'an Printing Complex, 1992). 20f course, each of the vertices of this tetrahedron has complexities and multiplicities: for example, for each of classical Islamic, modern Islamic, and modern Western law, we face multiple rules and multiple legal systems.
54
Qur'an and Sunna on Contract
and Commerce
ern Muslim interpretation and practice of Islamic law and harshly opposing a "true" Islam of the past with the modern West. Such an approach is taken in common by the classic Orientalist and the ultraconservative Muslim. The hard reality is that even were Muslims to seek to apply nothing but classical law, under present circumstances they could not do so without constant comparison among all the four vertices. Our treatment of the Qur'an and Sunna in this chapter is not scientific in Islamic terms. First, we use translations, and, as Muslims properly insist, no translation is the Qur' an. Second, inevitably English translations offer a modernizing commentary. Third, we cannot delve into the full commentarial and historical depths of each verse (or Sunna report). Our goal is, however, not sophisticated internal Islamic appreciation of these texts, but only an outsider's fresh and inquiring first acquaintance. (In other words, it is to do an initial trace of the line between the top and the leftmost vertices of Figure 3-1.) This step is necessary for the work of subsequent chapters.
Qu'ran and Sunna
Outsider's efforts to grasp, rationalize, compare, and interact with Islamic legal doctrine and practice
Classical Islamic legal interpretations and practice
Modern Islamic legal interpretations and practice
Figure 3-1. Comparative Method
55
PROPERTY OR WEALTH
"The earth belongs to God;' says the Qur'an in many places. "He gives it as a heritage to those whom He wills of His servants:' [7:128] The Qur'an repeats more than twenty times that "His is the dominion over the heavens and the earth; and all things return to God." [57:5] Dominion on earth is delegated to man as God's vicegerent.
It is He who has created for you all that is on the earth ... And lo! Your Lord said to the angels: "Behold, I am about to establish on the earth a khalifa [inheritor, successor, or vicegerent]:' [2:29-30]3
We thus find fiqh statements that everything is God's property, and that man deals with it only as agent. Every worldly benefit comes to mankind from God, as his providence. God taught mankind all arts that lend comfort to their life," and encourages industry to gain his bounty. When the prayer is ended, disperse through the earth and seek something of God's bounty ... [62:10] Unlike Christian teaching, the Qur'an discourages asceticism and rejection of the world. All things are good, except for those things which God specifically forbids, such as pork and wine." of Adam! Adorn yourselves beautifully for every time and place of prayer; eat and drink; but do not waste .... Who is there to forbid the beautiful things which God has brought forth for His servants, and the good things from among the means of sustenance? [7:31-32]6 God wills for you ease, and does not will for you hardship. [2: 185] Nevertheless, God has deliberately created disparities in the distribution of goods in this world. But no one may claim more than he has earned. Do not covet the bounties which God has bestowed more abundantly on some of you than on others. Men are allotted what they earn, and women are allotted what they earn. Ask God for something of His bounty. [4:32]
3See e.g. 6:165; 7:129;27:62;35:39. 4See, e.g., sura (chapter) 16.
o Children
52:172-3.
6See also 5:87.
56
and Commerce
God urges all to do charity, to "spend [on others] out of the sustenance We have granted them." [2:3] Indeed, charity devolves from man's status as vicegerent," and is no mere gift but a right of the dispossessed:
Behold, the pious [who] in their property acknowledge a due share [right, haqq] to those who ask and to those who are deprived. [51:15-19; see 70:2425.]
One of the "five pillars" of Islam is the alms-tax, levied on various forms of wealth in fixed percentages annually+ The Qur'an describes charity as a "good loan" to God, which he will "repay many times over,"? Spending from God's sustenance is enjoined; hoarding is condemned.!? Property rights are sacred.
As
for the man who is a thief and the woman who is a thief, cut off their hands in requital for what they have reaped, and as an exemplary punishment from God. [5:38]
Consider the following reference to property from reports of the Prophet's famous Farewell Pilgrimage sermon:
'0 people! Do you know what month you are in, and what day you are in, and what town you are in?' They said, 'In a sacred day, a sacred month, a sacred town.' He said, 'Then your persons, your property and your honor are as sacred [forbidden] to you as the sacredness of this your day in this your month in this your town, until the day you meet Him.' Then he said, 'Hear me, 0 my nation! Live together, but do not do wrong, do not do wrong, do not do wrong! For [taking] the property of a man is not permissible except by his finding it good [bi-tibi nafsin minhu].'ll
757:7,10. 89:60;see also 59:7. 92:245;64:17;30:39. 1°9:34. I1Ibn Hanbal and Ibn Maja. As noted in Chapter 2, the Sunna, Prophet Muhammad's words and deeds, is constituted from reports called hadith. In the earliest centuries of the Islamic era, particularly in the third (the 9th century CE), specialized collections of authenticated hadiths emerged considered authoritative by later generations. Hadiths are normally cited to these collections. Six of these collections are the most relied upon, each named after its author: Bukhari, Muslim, Abu Dawud, Tirmidhi,
57
Many Qur'anic verses condemn the wrongful taking (lit., eating or consuming) of property. These verses afford guidance on matters of fundamental significance for contract law - the rightful and the wrongful means of acquiring property from others.
Do not devour one another's property wrongfully, nor throw it before the judges [i.e., to influence them corruptly] in order to devour a portion of others' property sinfully and knowingly. [2:188] Behold, those who unjustly devour the property of orphans but fill their bellies with fire; they will soon endure a blazing flame! [4:10; see 4:2] So, for the wickedness of the Jews, We prohibited them certain of the good things of life which had been allowed to them; and [We did this] for their having turned many away from the path of God, and their taking usury [riba] which had been forbidden them, and their wrongful devouring of others' property. [4:160; see also 9:34] Do not devour one another's property wrongfully - unless it be by trade based on mutual consent [taradin]and do not kill [or destroy] yourselves [or one another] .... One who does this with rancour and wickedness him shall We make to endure fire. [4:29-30]
Thus, we see this phrase - wrongfully devouring property - associated with taking property by legal artifice, consuming property of orphans entrusted to one's care, usury, and trade without ready consent. The last two of these associations will be discussed below. Classical Qur'anic commentaries explain the term "wrongfully (bi-al-batil)" as all that is unlawful under the shari'a, like usurpation, usury, gambling, theft, perjury, or deception. These verses have had profound repercussions in Islamic culture, stirNasa'i, Ibn Maja. We shall cite hadiths - as here - simply by naming the collections in which they can be found, omitting exact citations to any particular edition. We also cite to several other famous collections: Ibn Hanbal, Hakim, Bayhaqi,etc. (Bibliographic information about editions of these collections can be found in the bibliography.) Ibn Hajar al-'Asqalani (d. 1449), Bulugh al-muram min jam' adil/at al-ahkam (Beirut: Dar al-Kutub al-'Ilmiyya, n.d.) was employed as a useful collection of relevant and authoritative hadiths.
58
and Commerce
ring pious anxiety about the sacredness of property.P and about whether one's property is honestly earned (halal). For example, Qur'an and Sunna texts condemn rulers who take public wealth beyond living expenses.P Eulogies record extreme measures by more pious rulers to avoid offending this principle.r' Ascetics and mystics pay extreme attention to the lawfulness of their means of support.'! Similarly, in a report the Prophet states:
The hand [meaning possession] [orfulfills] it.16 is obliged by what it takes, until it performs
This suggests a general conception
of unjust enrichment.F
TRADE BY MUTUAL CONSENT

For contract law, the most significant condemnation of wrongful taking of property is the verse excepting "trade based on mutual consent [ilia an takuna tijaratan 'an taradin minkum 1:' This endorsement of trade by consent (taradin) is made emphatic by an odd contradiction implicit in the verse - seemingly casting trade as an allowed form of wrongful taking. Is it too much to read here some implied protection for those transactions, common enough in commerce, which in their outcome seem unfair
12See Saba Habachy, "Property, Right and Contract in Muslim Law," Columbia Law Review 42 (1962): 450-471. 133:161; 'Ali b.Ahmad al-Nisaburi (d. 1075), Asbab al-nuzul (Beirut: Dar al-Kutub al-'Ilmiyya, 1980), 84; Isma'illbn Kathir (d. 1373), Tafsir al-Qur'an al-iazim, 2 vols. (Cairo: Isa al-Babi al-Halabi, n.d.), 1:399. l4See, e.g., Muhammad al-Tabari (d. 923), The History of al-Tabari, vol. 12, The Battle of Qadisiyya, trans. Yohanan Friedman (New York: State University of New York Press, 1992),204-06 (how much of state's property rulers could use); Nizam al-Mulk (d. 1092), The Book of Government or Rules for Kings, trans. Hubert Darke, 2d ed. (London: Routledge & Kegan Paul, 1978),64-65, 144-48. lsE.g., Farid aI-Din Attar, Muslim Saints and Mystics: Episodes from the Tadhkirat al-Auliya, trans. A.J. Arberry (Boston: Routledge & Kegan Paul, 1966), 57-60. 16"~la al-yad ma akhadhat hatta tu'addiyah:" Abu Dawud, Tirmidhi, Nasa'i, Ibn Maja. 17Islamic law includes a law of unjust enrichment, but it is beyond the scope of this chapter.
59
and leave one party ruing the deal, or which seem to create gain out of nothingr" Trade is given even greater emphasis by being singled out over other lawful means of gain such as gift and inheritance. 19 Thus two key elements of a general theory of contract are endorsed emphatically in these verses: mutual consent and gainful exchange. These elements reappear in the Sunna, where one finds no echo of the medieval Christian disapproval of trade as morally suspect:
Asked 'What form of gain is best?' [the Prophet) hands, and every legitimate sale.?" said, 'A man's work with his
[The Prophet gave one of his Companions) a dinar to buy for him sacrifice animals or a ewe. He bought with it two ewes, then sold one of them for a dinar. He brought him a ewe and a dinar, and he [the Prophet) invoked God's blessing for him in his trade. 'For were he to buy dirt he would make a profit in it.'21
As for the requirement of mutual assent, there is the mention in the Prophet's Farewell Pilgrimage sermon, already quoted: "For the property of a man is not permissible except by a willing consent from him."22 Again, the divine permission - by which property, sacred in its owner's hands, transfers justly and rightfully to another - is made to hang on the single point of the willing assent of the transferring party. It appears that the assent sought ideally is the real, the inner, state of mind, and no external token for it. A fundamental proposition of Islam,
18Commentators tarry only briefly over this point, resolving that the term "except" (illa) here has the meaning of "but:' and that several words have been elided. Fakhr aI-Din al-Razi, Mafatih al-Ghayb (Istanbul: al-Matba'a al-'Amira, 1891),3:302: the correct meaning is "but ['eating' property is lawful] by trade based on mutual consent:' He notes another interpretation where "illa" means "except" as usual, but after a long ellipsis: "even if with agreement, such as in usury and otherwise, unless it be by trade by mutual consent:' Ibid. There are problems with this interpretation as well, and the majority do not follow it. 19It is felt that the verse neither impugns nor endorses these latter means, ibid. One theory why trade is favored with mention is that it is the most common and considered the most "manly" of means of gain. Nasir al- Din 'Abd Allah b. Umar al- Baydawi (d. 1286), Tafsir al-Qur'an (Istanbul: Dar al-Tiba'a al-'Amira, 1886), 109. 2°Hakim ("valid"). Another hadith: "The truthful, honest merchant is with the prophets ... and martyrs." Tirmidhi. 21 Bukhari, Muslim, Abu Dawud, Tirmidhi. 22Seep. 57 above. 60
Qur' an and Sunna on Contract
and Commerce
applying in both spiritual and secular spheres of life, is the Prophet's reported statement or hadith "Actions are only according to their intentions (niyyat, sing. niyyah)."23 The Qur'an states: "Man has only [i.e., is held accountable only for] what he strives for." [53:39] We shall see below that many of the characteristic doctrines of the Islamic contract law reflect this extraordinary emphasis on consent.
DEBT
The Qur'an shows no disapproval of incurring debt, setting forth in detail how to record a debt in writing. [2:282] The Sunna reinforces this impression. Besides recording the Prophet's purchases on credit, statements of the Prophet almost encourage one to incur debts if for lawful purposes: No Muslim incurs a debt and God knows that he wishes to repay it but God repays it for him in this world and the next.24 God is with the debtor until he pays his debt, as long as it is not for something God disapproves. 25 The last statement led a ruler to incur a personal debt, saying "I do not wish to spend a night without God with me."26 The Qur'an and Sunna encourage leniency by those who hold debts. If [the debtor] is in difficulty, [then grant] a delay until a time of ease; if you were to remit [the debt] by way of charity it would be good for you - if you but knew. [2:280] This verse suggests that creditors and Islamic courts should readily grant pressed debtors additional time to pay, that bankruptcy status affords mere delay and immunity from collections, not release, and (especially since the 23Bukharirelates it in seven places; Muslim; Tirmidhi; and others. 24IbnMaja and Hakim. Cited from Muhammad Anas al-Zarqa and Muhammad Ali al-Qari, "al- Ta'wid 'an darar al-mumatala fi al-dayn bayn al-fiqh wa-al-iqtisadl' Majallat iami'at al-MalikAbd al-'Aziz 3 (1991): 25-57, 28. 25Ibid.,citing Ibn Maja. 26Ibid.
61
verse occurs in the context of a prohibition of usury) that the creditor's grant of delay is uncompensated.
USURY
We have already noted the Qur'an's association between riba (usury, etymologically "increase") and "wrongful devouring of property:' and that commentators consider the former one form of the latter. The Qur'an forbids riba in the strongest terms.
Devour not usury friba], doubled and re-doubled .... [3:130]
Those who devour usury friba] do not stand except as one stands whom Satan has confounded with his touch: for they say, 'Buying and selling [bal] is like usury' - the while God has made buying and selling lawful and usury unlawful. One who becomes aware of his Lord's admonition and desists, may keep his past gains, and his affair is for God [to judge]; but as for those who return to it, they are Companions of the Fire; they will abide in it! God effaces [the gains of] usury, while He makes acts of charity increase .... Give up what remains of usury, if you are believers; for if you do it, take notice of war from God and His Apostle. But if you repent, then you shall be entitled to your principal: you will do no wrong, and neither will you be wronged. [2:275-79; see also 4:161]
Note that these verses do little to explain what riba is, or why it is wrongful, except by opposing it to charity-? At a minimum, therefore, it applies to
the riba known at the time of the Qur'an. Prior to Islam riba applied to an increase (usually a doubling of the debt) in return for an extension (usually a doubling of the term) granted a borrower who could not make payment when due.28 This is called the riba al-jahiliyya, or the riba of the pre-Islamic period. This practice may lie behind the Qur'anic reference to "doubling and redoubling:' Some say that the Qur' an refers only to this type of riba/"
27Seealso 30:39. 28Aban on such transactions, understood somewhat more generally, is one interpretation of the hadith prohibiting "sale of a debt for a debt" (bay' kali' bi-kali' or bay' dayn bi-dayn), a term which resurfaces below. Abdullah Alwi Haji Hassan, Sales and Contracts in Early Islamic Commercial Law (Ph.D. diss., University of Edinburgh, 1986), 65. 29Fazlur Rahman, "Riba and Interest;' Islamic Studies 3 (March 1969): 1-43.
62
The question arises, why, if such transactions meet with the approval of both parties (taradin), are they divinely disapproved? The Qur'an asks this very question, but in a more penetrating way - why is sale not like riba? - and gives the emphatic, if obscure, answer that God has allowed the one and prohibited the other. Given the question and the response, it becomes morally urgent to be able to distinguish riba from ordinary trade. What sorts of "increase" or inequality in exchange transform lawful commercial gain into condemned usury, despite both parties' ready consent? In what circumstances does the desire for gain become perverted and corrupt? Unfortunately, the answers to these vital questions have never been easy. The Caliph 'Umar reportedly lamented that the Prophet never spelled out the full scope of riba:
['Vmar said,] The last verse revealed was the verse of riba, and [then] the Messenger of God was taken [in death]. He had not explained it to us. So leave riba and doubt [ribah].30
The Sunna is no less emphatic and inclusive in denunciations of riba. One report has the Prophet declaring, "Riba is of 73 types. The least of them is like a man having sexual intercourse with his mother."? Another states: "The Messenger of God cursed the one who consumes riba, the one who makes it be consumed, its inscriber, and its two witnessesf " The Sunna does offer more guidance as to the meaning of riba when in several hadiths it describes specific instances of it in loans and sale, without however confining riba to these cases. We postpone review of these hadiths to the next chapter.
GAMBLING AND RISK

Gambling is another type of consensual transaction condemned in the Qur'an, and represents a second major exception to the general approval of trade by mutual consent.
30IbnMaja. Others dispute the late timing of the riba prohibition. See Rahman, "Riba and Interest." 31Ibn Maja, in shortened form. Hakim givesit in complete form and considers it valid (sahih). 32Muslim. ukhari has something similar. B
63
Intoxicants, games of chance [maysir], [worship of] idols, and [divination by] arrows are but an abomination, Satan's handiwork; avoid it then, so that you might prosper! By means of intoxicants and games of chance Satan wants only to sow enmity and hatred among you, and hinder you from the remembrance of God and from prayer. Will you not, then, desist? [5:90-91]33
Particularly noticeable here is that the revelation offers a reason for the gambling prohibition - that maysir invokes enmity and distracts the faithful from worship. The Sunna takes this prohibition much further, in condemning not only gambling but also sales of gharar, a word meaning peril, risk, or hazard."
The Messenger of God forbade the 'sale of the pebble' [hasah, sale of an object chosen or determined by the throwing of a pebble], and the sale of gharar.35 Do not buy fish in the sea, for it is gharar.36
These and other hadiths condemning aleatory transactions (transactions conditioned on uncertain events) are analyzed below. Again, as with riba, a legal preoccupation with gharar emerges, driven by the urge for moral security in transactions and for divine sanction of the property rights gained thereby. If commercial gain is lawful, despite the risk and uncertainty intrinsic to it, what is the added element that turns gain into condemned gharar? When is the parties' ready consent no longer a talisman, presumably because it is corrupted by some human moral weakness and blindness, such as a passion for unearned gain or for tempting fate? On these vital questions the revelation says little beyond what can be gleaned from texts like those above. As with riba,fiqh scholars have been unable to define the exact scope of gharar or reach full agreement among themselves concerning it.
33Commentators on this verse describe a complex game played in the Prophet's time, by which lots were drawn for parts of a slaughtered camel with those who lost paying for all its cost. Most declare the term here to refer to gambling generally. 34Theterm gharar does not appear in the Qur'an. Etymologically related words meaning "delusion" do appear. 35Muslim. 36IbnHanbal. He states that a version ascribing this to the Prophet's Companion Ibn Mas'ud, not the Prophet, is more authentic.
64
Qur'an
and Sunna on Contract
and Commerce
COMMERCIAL ETHICS
Both the Qur'an and the Sunna repeatedly enjoin commercial probity:
Give full measure whenever you measure, and weigh with the true balance; this will be [for your own] good, and best in the end. [17:35] Do not [refrain from milking] camels or sheep [so their milk appears copious to a purchaser]. One who buys them after this may choose either as he sees best after he milks it: ifhe wishes he may keep it, and ifhe wishes he may return it with a [measure] of dates. 37 The Messenger of God passed by a heap of foodstuffs. He thrust his hand into it, and his fingers encountered dampness. He said, "What is this, 0 owner of the foodstuffs?" He said, "Rain has stricken it, 0 Messenger of God:' He said, "Why do you not put it at the top of the foodstuffs, so that the people may see it? He who deceives is not of me."38 Do not meet al-jalab [i.e., meet outside the town those who drive animals from one place to another for sale]. The master of the one who is met, and is purchased from, has an option when he comes to the market.l? Only an errant one hoards." As with the last two hadiths, the Sunna reflects a heavy reliance on the market. Shortly after emigrating from Mecca to Medina, the Prophet created a market in which his fellow emigrants could trade. His recognition of the market principles of supply and demand is recounted in the following hadith. Asked to fix prices in Medina when prices were high, the Prophet said: God is the one who sets prices, who takes, who amply gives sustenance, who makes provision. I do not wish that I meet God Most High and anyone have against me a claim of injustice in either blood [life] or property," 37Bukhariand Muslim, and in Muslim's version, "He has a three days' option." 38Muslim. 39Muslim. 4°Muslim. 41 Bukhari, Muslim, Abu Dawud, Tirmidhi.
65
Finally, the Qur'an devotes a lengthy passage (2:282-4) to arranging for proof or evidence of transactions on credit.
FULFILLING CONTRACTS
So far we have focused on one aspect of the morality of contract - when the party benefiting from the contract may justly keep his gains, or when the gains reaped from a transaction are lawful. Another aspect of contract morality concerns the disadvantaged party: when is he morally obliged to fulfill his undertaking? The Qur'an emphatically upholds the moral obligation to fulfill one's contracts and undertakings: "0 you who believe! Fulfill all covenants ['uqud]!" [5:1] The term here used, 'uqud, sing., 'aqd, means knot or tie, hence obligation and compact; also it can refer to the conclusion or ratification of a compact ('ahd) or an oath (yamin). As commentators note, the initial address of the verse to "those who believe" indicates that fulfillment of contracts is part and parcel of faith. Other Qur'anic verses require one to fulfill all pledges and relations of trust:
Fulfill every pledge ['ahd] inquired into! [17:34] for verily [on Judgment Day] the pledge will be
Fulfill your covenant ['ahd] with God whenever you bind yourselves by a pledge ['ahadtum], and do not break oaths layman] after you have confirmed them; indeed, you have made God your surety; behold, God knows all that you do. [16:91] God commands you to deliver your trusts [amanat] to those entitled to them. [4:58]
The term 'ahd means injunction, pledge, vow, compact, contract, obligation, promise. It is used in the Qur'an for the primordial covenant to worship and obey God made between God and mankind.f but also for other undertakings including, according to commentators, ordinary contracts."
427:172-73.
ome explain the two as near synonyms, 'ahd conveying the sense of obligation (ilzam), and 'aqd the sense of undertaking an obligation (iltizam).
43S
66
and Commerce
Indeed, the two usages of 'ahd are linked in the second of the last three verses, suggesting that to fulfill the divine covenant requires fulfilling one's pledges to all others. The Sunna contains similar injunctions, the most important being: "The Muslims are bound by their stipulations [shurutihim] :'44 A hadith condemns promise-breaking as the behavior of a hypocrite: "Ifhe makes a promise [wa'd] he breaks it, and ifhe makes a compact ['ahd] he acts treacherously=" Another states: "If a man makes a promise [wa'd] intending to fulfill it, and then does not do so, no blame attaches to him."46 Despite their broad reach and their highly religious and ethical tone, these provisions fall short of a definitive obligation to observe promises.
FREEDOM OF CONTRACT Despite the general obligation to uphold contracts, not all contractual arrangements are condoned by the texts. Hadiths raise a number of specific obstacles to free contract. The most important such hadith involves a transaction of the Prophet's wife 'A'isha,who desired to buy and then free a certain slave,Barira. The owners would not agree to the price without reserving for themselves the "right of clientage;' chiefly a right to inherit from the slave. This right ordinarily falls to the manumitter, who in this case was 'A'isha.
[The Prophet advised 'A'isha] "Take her and stipulate in [the sellers'] favor the right of clientage. For the right of clientage is only his who manumits." 'A'isha did [this], then the Messenger of God stood among the people, and praised God. Then he said, "What do you think of men who impose stipulations [shurut] which are not in the Writ [or Book] of God Most High? Any stipulation not in the Writ of God is void [batil]. Were it one hundred conditions, the judgment of God is more just, and the stipulation of God more reliable. The right of clientage is only his who manumits."?
This hadith is highly troubling for freedom of contract. It suggests that the very terms of contracts, not to mention contracts themselves, must be pre44AbuDawud, Hakim, Ibn Hanbal: Tirmidhi, Nasa'i, 45Bukhari,Muslim, Abu Dawud, Tirmidhi, Nasa'i, 46AbuDawud. 47Bukhari.Muslim, with "Purchase her, free her, and stipulate in their favor the right of clientage."
67
scribed by God's writ. Unless a term is positively allowed by revelation ("in the Book of God"), it is nugatory, the parties' agreement notwithstanding. Contractual terms are treated here as if they were part of fundamental morality, conclusively and exclusively fixed by revelation, like the Qur'an's prescriptions as to the types and degrees of relationship within which persons may marry. Other hadiths raise specific obstacles to free contract, for example:
[The Prophet] The Messenger forbade a sale and a stipulation of God forbade two bargains
[bay' wa-shartJ.48 [safqahJ in one.'? [al-kali'J for a delayed
The Prophet forbade obligation. 50
sale of the delayed obligation
These hadiths, and freedom of contract, are discussed in greater detail in the next chapter. Whatever might be suggested by the Qur'an, the provisions of the Sunna create a climate inhospitable to freedom of contract. And this is even more the case when the effect of such provisions is compounded with the revelation's categorical, but vague, prohibitions of riba and gharar.51 There is the possibility, not apparent from evidence so far, that all restrictions on free consent stem solely out of desire to protect against riba and gharar. This is the assertion of the great Andalusian philosopher and jurist Averroes or Ibn Rushd (d. 1198), who stated that the causes for the invalidity of sale intrinsic to the concept of sale are four: illicitness of object of sale (e.g., wine); riba; gharar; and "those terms that conduce to one of the last two or some combination of them:'
SUMMARY
The Qur'an and Sunna powerfully enunciate basic tenets of Islamic contract law. What can we observe about those tenets?
48Abu Dawud. Ibn Hanbal rejects it. 49Ibn Hanbal. 50Daraqutni, Bayhaqi, Hakim, and others. See Nazih Kamal Hammad, Bay' al-kali' bi-ai-kali' (bay' al-dayn bi-al-dayn) fi al-fiqh al-islami (Jedda: MarkazAbhath al-Iqtisad al-Islarni, Iami'at al-Malik 'Abd al- 'Aziz, 1986),9-10. 51Muhammad b. Ahmad Ibn Rushd (d. 1198), Bidayat al-mujtahid wa-nihayat almuqtasid (Cairo: Mustafa al-Babi al-Halabi, 1981),2:123-4. 68
Clearly, one tenet is that property is God-created and God-given. The construction of property differs radically from a common modern conception of property as a secular value to be defined and redefined as needed to further utility, or as the aggregate of whatever property claims the legal system chooses to respect. In Islamic law, by contrast, property is irreducible, sacrosanct, and virtually transcendent. The lawfulness of its acquisition and use is grounded on texts whose source lies above reason, and is a matter with which God is minutely concerned. A second major tenet is that contract is a moral and legal means to gain property. The legitimacy of gain through trade, a vexed issue at the intersection of ethics, economics, and contract law, is resolved in a strikingly liberal fashion. Offsetting this endorsement in the Qur'an are prohibitions on riba and maysir, and in the Sunna more detailed riba prohibitions and the ban on gharar. Obviously generalized prohibitions on increase and risk, if expansively interpreted, are arrows aimed at the very heart of the idea of commercial gain. With this introduction to the Qur'an and Sunna texts on contract and related ideas, in the next two chapters we explore the classical Islamic law itself, which presents itself as the corpus of law which has been authoritatively derived from these texts.
69
CHAPTER 4
Islamic Laws of Usury, Risk, and Property
This chapter begins our exploration of Islamic contract law by investigating its rules concerning three concepts basic to that law: usury, risk, and property. These concepts are prefigured in Qur'anic verses found in the preceding chapter. We continue the method introduced at the beginning of the previous chapter, turning our attention for this and the next chapter to the classical Islamic law (jiqh). While exposingfiqh's rules, we pose two layman's, outsider's, questions about them. First, admitting that fiqh rules are the most authoritative and operative interpretations of the texts of the Qur'an and Sunna we have read, are they impressive and convincing interpretations? Second, do they appear to be rational, in reflecting some persuasive order, logic, or reasoning, whether moral, economic, legal, or all three? Whether or not such a rationale exists, searching for it helps the outsider to learn and appreciate the complex structure of the legal rules. As we noted above in discussing the Islamic legal method of qiyas or analogy, Islamic law and legal interpretation rarely rely, at least explicitly, on general meanings or rationalizing explanations of the texts as the ground for rulings. A great part of the law's interpretation and rulings trace from historical events in the Prophet's era and later that are not exposed here. So it is unlikely that outsiders can answer either of these two questions with complete success. On the other hand, three facts about the Islamic legal tradition make the endeavor not wholly unjustifiable, even in Islamic terms: (i) Qur'anic and Sunna texts do include general statements of morality and law (qawa'id, maqasid); (ii) Islamic fiqh does exhibit pre-
71
..
dictable patterns often expressible as general principles (also qawa'id); and (iii) theology recognizes that these principles are concordant with and respond to human reason, common sense, and experience. Our approach means that in this and following chapters we depart from classical Islamic legal method and presentation and pursue what must remain an approximation. 1 But our goal is not to capture the thought process of classical legal scholars, whose method is quite different.! but rather to test and compare the ru1es elaborated by these scholars with the outsider's rationalizing appreciations of them. Among other things this effort demonstrates how often these latter rationalizations fail to capture the complexity and profundity of the classical interpretations. This chapter often presents the views of only two schools of thought, the Hanbali and the Hanafi, the most influential schools in modern Sunni contract law,"
LAW OF USURY (RIBA) The Quean; Riba al-Jahiliyya

The Qur'an vehemently condemns riba, but provides little explanation of what that term means, beyond contrasting riba and charity and mentioning exorbitant "doubling." Commentators describe a pre-Islamic
lIt is also to rush in where the truly learned and qualified fear to tread - to making rationalizations and generalizations about Islamic law or even its individual legal schools. The practice involves constant errors and omissions. To gain an authentic sense of Islamic jurisprudential method and content, one should delve into fiqh texts, through translations if necessary. See e.g., Ibn Rushd, The Distinguished Jurist's Primer, trans. Imran Ahsan Khan Nyazee (Reading, UK: Garnet Publishing Ltd., 1996), 153-231, esp. 158-17l. 2These outsider's understandings are not at a great remove from contemporary, as opposed to classical, Islamic thought. Modern reinterpretations of the scriptural texts and of the classical legal corpus, like our own proposed outsider understandings, work to relate the revealed texts and classical Islamic thought, on the one hand, with modern religious, philosophical, economic, and legal ideas, on the other. "The Malikis are a close third in influence in commercial law, and the Shafi'is a distant fourth.
72
practice of extending delay to debtors in return for an increase in the principal (riba al-jahiliyya). Since this practice is recorded as existing at the time of the revelation, it is one certain instance of what the Qur'an prohibits. Hence Ibn Hanbal, founder of the Hanbali school, declared that this practice - "payor increase" - is the only form of riba the prohibition of which is beyond any doubt," Among other things, it includes charging a debtor any penalty for failure to pay when due (although delay by a solvent person is a sin and may be punished as a crime).
TheSunna
The Sunna shows that the divine prohibition of riba extends far beyond riba al-jahiliyya, but it still leaves much uncertainty about its definition. Several hadiths suggest how expansive the notion may be. For example:
If a man intercedes for his brother, who then gives him a present, and he [that man) accepts it, he has opened a wide gate for riba.5
Two other hadiths, more germane to our concerns, have been the most influential texts in shaping the fiqh conception of riba:
Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, equal for equal, hand to hand. If these types differ, then sell them as you wish, if it is hand to hand." Every loan [qard) that attracts a benefit is riba.'
4ShamsaI-Din Muhammad Ibn Qayyim al-Jawziyya(known as "Ibn al-Qayyim," d. 1350), I'lam al-muwaqqa'in 'ala rabb al- 'alamin, ed. Taha 'Abd al-Ra'uf Sa'd (Beirut: Dar al-Jil, 1973),2:153-4. sIbn Hanbal, Abu Dawud. 6Muslim. "Ihis hadith, not in any of the six chief collections, is related by the most respected scholars only on the authority of Companions, not the Prophet. As a prophetic hadith scholars reject it as false. See Muhammad b. 'Alial-Shawkani (d. 1839), Nayl alawtar (Cairo: Mustafa Babi al-Halabi, n.d.), 5:262.
73
Note that the first hadith covers sales and the second loans. We shall analyze each separately.
The Sunna on Riba in Sales

The actual reach of the riba prohibition goes far beyond compensation for lending money. Oddly, the core case of riba for Muslim scholars is not interest in loans, but sales involving excess or delay in exchanges of certain types of property - for example, foodstuffs and currency. Therefore we need to consider riba in sales in order to understand the full meaning of riba. The hadith "gold for gold" suggests the rules for most cases of riba in sales. The hadith establishes that certain goods (technically called ribawi, or riba-related) can be exchanged for each other as long as the exchange is present barter ("hand-to-hand"). Exchange of goods within a single type (e.g., dates for dates) is permitted only in equal amounts (e.g., one kilogram for one kilogram). These two permissions entail two prohibitions: first, of all sales within a single type with inequality, with or without delay (termed riba al-fadl, lit., riba of excess); and second, of all exchanges with delay among the listed (ribawi) goods, with or without equality or identity of type (termed riba al-nasi'a, lit., riba of delay). Due to the first prohibition, on riba al-fadl, one cannot sell, for example, good-quality dates for a larger quantity of poor-quality dates. In another hadith the Prophet advises conducting such exchanges through the medium of money, one of the parties selling his dates for cash and then buying the other's dates with cash." The second prohibition, of riba al-nasi'a, seems to ban sales with delay of any of these goods for gold or silver. But reports that the Prophet purchased on credit? reverse this result: delayed sales are permitted as long as currency is only one of the two considerations. Goods may be sold on credit for silver or gold. Does this hadith apply only to the items mentioned in it? Does it con8"Sell the whole for dirhams, then buy the (better quality dates) with the dirhams." Bukhari and Muslim. 9The Prophet's wife 'A'isha reported: "I said, '0 Messenger of God, so-and-so has come with linens from Syria. What if you were to send to him, and buy from him two robes with delay (nasi'atan) to a time of ease?' And he [the Prophet] sent to him, and he refused." Hakim, Bayhaqi.
74
cern sales of barley or wheat but not rice? Of dates but not raisins? A minor school, the Zahiri, does hold that the named types are literal and exclusive, but the majority use analogy to see a deeper "efficient cause" ('ilIa) for the riba prohibition behind each of the named types. An 'illa is the attribute of an event that entails a particular divine ruling in all cases possessing that attribute; it is the basis for applying analogy (qiyas) to the two cases. Ribawi goods are therefore goods that exhibit one of the "efficient causes" occasioning application of riba rules. The schools define these causes differently. The Shafi'is detect two causes among the six cases of the hadith: currency and food. The Malikis add to food additional traits: being basic foodstuff and being preservable. Hanafi and Hanbali schools see only one cause - goods sold by either weight or volume. This 'illa is divided into three equal sub-causes: measure by weight, measure by volume, and highly precise measure (for the precious metals gold and silver only). All the schools declare that the hadith's prohibitions apply to exchanges of items that share a single (sub-) cause. Thus, the Hanafis and Hanbalis prohibit the sale on credit of bread for copper (both measured by weight), but allow the sale on credit of bread for salt (one measured by weight and the other by volumej.!" Malikis and Shafi'is, since they are concerned only with exchanges among food or among currencies, reach results opposite to the other two schools in these cases. To give a more contemporary example, crude oil is a ribawi for Hanafis and Hanbalis, but not for Malikis and Shafi'is. For the former schools, whether oil belongs in the weight or volume class (this may depend more on historical than present practice) determines whether it can be traded for either wheat or iron. Note also that according to this hadith, if one of the two countervalues is not ribawi - a house, a suit of clothes - then no prohibitions arise at all. II As to riba al-fadl (riba of excess), the hadith is read as permitting exchanges even within an 'ilia as long as the genus of the goods differs (e.g.,
IOTheHanbalis and Hanafis define weighables and measureables somewhat differently. See Mansur al-Bahuti (d. 1641), Kashshaf al-qina' (Beirut: Dar al-Fikr, 1982), 3:262-63; compare Abu Bakr a1- Kasani (d. 1191), Bada'i' al-Sana'i' (Beirut: Dar al- Kitab al-'Arabi, 1982),5:186. llDepending on the school, even non-ribawi goods can be subject to riba prohibitions, if the genera are identical, sale is with delay (nasi'a), and there is an excess. An example is one milk-ewe now for two milk-ewes later. This paragraph and the next rely heavily on N. Saleh, Unlawful Gain and Legitimate Profit in Islamic Law, 2d ed. (The Hague: K1uwer Law International, 1992), 11-43
75
wheat and dates are both preservable foodstuffs, but of different genus, and therefore can be bartered with excess).'! Here emerge complex casuistic definitions of genera: for example, for the Hanafis and Hanbalis beef and mutton are different genera, exchangeable with excess,while for the Shafi'is and Malikis they are the same genus and can only be exchanged equally. In these rules of sale, note that, except for exchanges within a single ribawi genus, permission or prohibition does not turn on any calculation of price. Nothing prevents the price in a sale on credit (for currency) from exceeding the price for an equivalent present sale, and thus involving an element of compensation for delay in payment. Whatever the prohibition of riba al-jahiliyya means, it does not mean a per se prohibition of a charge for extending credit. In medieval Christian canon law an effort was made to determine the "just price," which would allow one to determine to what extent credit sale prices involved the "selling of time:' 13 Classical and modern Islamic scholars, with near unanimity, do not attempt this," they specifically acknowledge that goods sold on credit (bay' al-nasi'a or bay' mu'ajjal) are priced higher than goods sold for cash, and consider this perfectly natural. 15 A later section will draw out the full consequences of this result, but for now we note that it vetoes a naive understanding of riba as simply a ban on compensation for credit. The law also permits compensation for delay in another form of credit sale, the forward purchase (salam), a contract by which goods specified in the contract (usually fungibles) are purchased for later delivery. This contract is invalid if the purchaser does not pay the price immediately on making the contract. An example would be paying a farmer cash now for a certain quantity and quality of wheat to be delivered on a specified future
12Properly, identity of genus is also part of the 'ilia since both conditions must be met for riba al-fadl to exist. 13SeeJ.T. Noonan, Ir., The Scholastic Analysis of Usury (Cambridge, MA: Harvard University Press, 1957),82-99, showing how medieval just price theory, while acknowledging market prices, sought to prevent excessive gain. 14E.g., Ibrahim al-Shatibi (d. 1388), al-Muwafaqat (Cairo: Maktabat al- Tijariyya al-Kubra, n.d.), 4:41-42; Muwaffaq ai-Din 'Abd Allah Ibn Qudama (d. 946), al-Mughni wa-yalihi al-sharh al-kabir (1972; repro Beirut: Dar al-Kitab al-Arabi, 1983),4:259-264, discussing without disapproval increasing prices in sale for credit risks and delayed payment. See also Rafiq al-Misri, Bay' al-taqsit (Beirut: aI-Dar al-Shamiyya, 1990),39-51. The Fiqh Academy has endorsed this position. Decision 53/2/6, sixth session (1990), FiqhAcademy Journal 1: 447-8. 15Medieval Christianity differed. Noonan, 19. Interestingly, this prohibition proved difficult for later theorists to justify. Ibid., 81, 90-95. 76
date. In such purchases, it is understood that the wheat is sold for less than the spot price of wheat. Thus, in both credit (nasi'a) and forward purchase (salam), i.e., in sales where the countervalue is currency paid either in advance or after delay, the law allows the parties to agree on price differentials compensating for the delay in contract fulfillment.
The Sunna on Riba in Loans

The second hadith ("Every loan that attracts a benefit is riba") is the most important in modern economic life, since it concerns the contract of loan. By loan is meant the loan of fungibles (qard) including money." "Benefit" includes interest on a money loan. The authenticity of this hadith is in much doubt, but the ruling it represents is universally accepted by scholars and can be derived from the rules on riba al-jahiliyya or on sales. Profit on loans is banned without regard to whether the fungible subjectmatter of the loan is also ribawi, i.e., is weighable or measurable (for the Hanafis and Hanbalis) or is food (for the Shafi'is and Malikis). Thus, a fungible textile measured by the yard is not ribawi for either group, and yet cannot be loaned for consumption with excess.
Plumbing the Rules of Riba

What logic drives the rules of riba? For example, why restrict the barter of dates to exactly equal quantities? Who would engage in such a transaction? Why should sale of wheat now for salt later be prohibited, while sale of wheat now for silver later is not? Why should the sale of wheat now for an equal amount of wheat later be offensive, when the loan of wheat for later equal repayment is not? Why should the fact that cotton is measured by weight instead of volume dictate for the Hanafis and Hanbalis
16The Hanafis require that qatd goods be fungibles. al-Fatawa al-hindiyya, 3:201; Kasani, 7:395. A more common view is to allow qard in whatever can be adequately known by description (mawsuf fi al-dhimma, capable of salam sale). Ibn Qudama, 4:355. The Hanbalis define qard even more broadly, including loan of unique objects such as jewelry against return of their value, and this is one Shafi'i view. Ibid.; Ahmad b. 'Abd Allah al-Qari (d. 1940), Majallat al-ahkam al-shar'iyya, ed. 'A. Abu Sulayman and M. 'Ali (Jidda: Tihama Publications, 1981), art. 749.
77
whether it can be sold on credit for iron? For what reason is it forbidden to demand an increase for delay in payment of a debt or a loan, while to demand an increase for delay in paying a purchase price is allowed? Although the uninitiated may assume that Islamic rules on usury equate with a prohibition of interest on credit, or the denial of the time value of money, clearly something much more complex is afoot. Let us essay various rational explanations for these rules, thus departing from the standard method of classical Islamic law. In doing so, we will find a number of intelligible principles that do appear to animate the law, but none that explains all results; as in many areas of law in any legal system, outcomes do not follow from any single policy, but from many which, by competition and cooperation, seem to give the law its final shape. Although few classical scholars acknowledge a need to go beyond the usual 'illas (e.g., measurement by weight, use as currency, repayment of a loan) in order to "understand" riba laws or identify their deeper "causes:' there have been a few attempts to do so, famous perhaps because of their rarity. We will examine two of them, generating three possible rationales for riba. Thereafter we provide two other rationales for riba rules emerging from basic principles (qawa'id) elicited classically,for a total of five: • • • • • Mathematical equivalency Avoiding commercial exploitation Minimizing commerce in currency and foodstuffs Linking lawfulness of gain to risk-taking Using money and markets to allocate and moderate risks
Table 4-a supports the unfolding argument by juxtaposing specific riba-based permissions and prohibitions, while showcasing three of the five rationales. Mathematical equivalency. A first riba rationale emerges from a classic statement by the philosopher Averroes, or Ibn Rushd (d. 1198), who was also a great jurist of the Maliki school.F Though a Maliki, Ibn Rushd announced his preference for the Hanafi 'illa, equality of measure. He suggests that behind the riba provisions is the goal of exalting fairness of exchange, advanced by insisting on exact mathematical equality of exchange whenever that equality is possible and appropriate. Adequate equality is usually achieved by transacting through the medium of currency, the
17Ibn Rushd, Bidayat, 2: 129ff.
78
purpose of which, he notes, is to provide a neutral measure of respective values. If, however, the two countervalues being exchanged have similar uses and are either both measured by volume, both weighed, or both currency, then exact mathematical equality ought to be required. Presumably because delaying one of the two deliveries introduces an uncontrolled element of inequality, the law prohibits all delayed exchanges of goods within these three groupings. Note that for this theory riba al-fadl offers the central instance of riba. This theory does account for permission for sales, both present and delayed, where one (only) of the two countervalues is currency (e.g., wheat for money), since these are exchanges between disparate, unequal, types not conducive to equality, and since the purpose of currency is to provide a neutral measure of value. The theory is weak, however, in accounting for the ban on delayed sales among goods measured the same way (volume, weight, or currency), for example, banning sale of iron now for cotton later. Ibn Rushd offers two explanations for the ban on such sales. First, he suggests that a better way to achieve them exists, namely transacting through the medium of currency. Presumably this serves equality and fairness because the market provides reasonably good estimates of future prices in terms of currency, but why should a similar requirement not apply to nonribawi goods (which may be exchanged with delay)? Perhaps an answer is his second argument, that when measured or weighed goods have "similar uses," exchanges should occur only with equality, and commerce in them is due only to "intemperateness" and should be discouraged. How this applies to exchanges of different genera (e.g., iron and cotton), with or without delay, is unclear, since uses may not be "similar," although it is true that most items measured by volume are fungible foods, and most weighed items are industrial materials. Ibn Rushd does not discuss this issue beyond noting his admiration for a certain scholar's view, that riba applies only to currency and food items measured by volume. An interesting side question is why qard loans without interest are lawful, when sales with delay of a ribawi good for an equal but delayed price in that same good (e.g., ten bushels of wheat now for ten bushels of wheat later) are not lawful. Presumably the latter result is because delay introduces an unreasonable inequality into the exchange. Why are loans different? A technicalfiqh answer is that loans are always presently due, liable to being called at any time, a provision favoring the lender and reducing his market risk. As important is the Prophet's description of qard as a charita-
79
ble act, 18 implying that the lender's voluntary acceptance of the delay in the exchange is charity. Avoiding commercial exploitation. The next two rationales for the riba prohibition emerge from a statement by Ibn Qayyim al-Jawziyya ("Ibn alQayyim," d. 1350), a reformer within the Hanbali school and student ofIbn Taymiyya.'? The first of these is the fear of the strong exploiting the weak. Ibn al-Qayyim argued that the Qur'an shows the reason for its vehement prohibition of riba by contrasting riba and charity. The core case of riba is "payor increase," i.e., riba al-jahiliyya, where one obligated to pay is given an extension against an increase in the debt. This is exploitation of the needy, he says, since only a needy person would pay more for a mere extension of time. To such a person the rich have a duty to give charity, not to take something more from him. The prohibition of other forms of riba, particularly riba al-fadl and riba al-nasi'a, which includes even equal exchanges of ribawi goods with delay, is to prevent that evil from arising in any form. These prohibitions prevent gold, silver, and foodstuffs (the latter are essential for life, and are often used in lieu of money) from being traded like ordinary commodities. Such trading leads inevitably to exploitation of the poor through hoarding and speculation as well as through loans with interest and increasing debts in return for a delay. Note that for Ibn alQayyim, riba rules are comprehensible not because each and every act they prohibit is intrinsically unjust, exploitative, or unfair, but because to prevent such acts from occurring God has taken the precautionary step of excluding certain goods from ordinary commerce. Because of the vehement divine disapproval of such situations, the law does not merely enjoin fairness and enforce it in particular cases; instead, it deploys rules designed to prevent the occurrence of unfair situations. This theory does not, however, directly explain why the rules do not cover sales of fungibles for currency, especially with delay and with increase. Perhaps Ibn al-Qayyim's explanation for this is implied in his statement that those who lack currency and transact by barter especially need protection, compared to those who have currency and access to markets. A common addition to this rationale is that the riba prohibition. by forcing the investor to bear risks, prevents the rich from remaining forever
18Ibn Maja. 19Ibn al-Qayyim, 2:153-164.
82
rich and the poor poor." Fakhr al-Din al-Razi, a great Qur'an commentator, notes one opinion on the reason for the prohibition:
God forbade riba only because it prevents people from busying themselves for gain, because if the owner of the dirham can by means of a riba contract gain an additional dirham whether in cash or credit, it becomes easier for him to win the means of subsistence. He will rarely bear the burden of profit, commerce, and arduous crafts."
Minimizing commerce in currency and foodstuffs. A third rationale, also brought out by Ibn al-Qayyim's exposition, is to suppress the trading impulse with respect to currencies and foodstuffs.F If money is to remain a neutral measure of value, it must not be dealt with as a commodity. Because foodstuffs are often used in lieu of money and because they are basic needs of mankind, they should be treated as much as possible as if they also were neutral and stable values, withdrawn from commerce . . Linking lawfulness of gain to risk-taking. A fourth possible rationale for riba prohibitions is based on a classical legal maxim influential in many aspects of Islamic commercial law, "Gain accompanies liability for loss;'23 which suggests that gain is morally justified only when one faces risk to secure it, while riskless gain is unjust. For example, when an investor puts his capital into property capable of producing yield, such as land or a donkey, he mayor may not reap a profit, but his capital is exposed to danger of loss: a crop may fail; the donkey may sicken and die. The maxim declares that in such situations the investor is entitled to his gain, if any. In an interest-bearing loan, on the other hand, the lender is shielded from the risk oflosing either his profit or his capital- at least as a matter of the borrower's contractual undertakings - and therefore gain is improper.
20See Qur'an 59:7, often cited for this proposition, which requires distributing booty to, among others, the needy and the orphans "so that it may not [merely] make a circuit among the wealthy of you:' 21Razi, :531. Modern authors often point to interest-taking as accentuating un2 fair distributions of wealth, while under Islamic profit-sharing and zakat taxes wealth gravitates to the active and skilled entrepreneur and to the investor who assumes risks and adds value. This, they posit, frames the key distinction between the Islamic and the capitalisteconomic systems. 22lbnRushd makes this point as well. 23"Al-kharaj bi-al-daman" Abu Dawud, Tirmidhi, Nasa'i, Ibn Maja.
83
This argument is closely linked to an observation that most loans not only shield the lender from risk, but they also involve consumables, goods which yield benefits only through being consumed. Unlike a donkey or a farm, wheat or money produces no fruit or yield (kharaj), and are in that sense sterile. A lender who gets compensation beyond exact restitution of his goods is exacting gain from someone in return for nothing, and is therefore unjustly enriched. Gain can fairly be derived from money only when one invests it in property that does yield tangible gain, such as the donkey or the land." Both of these arguments against interest-taking in loans have close parallels in the canon law tradition.P The prohibition of riskless gain is linked to the prohibition of "sale of gharar" or the sale of risk. As we shall see later in this chapter, gharar rules often bar transactions that involve assuming a significant and unknowable risk for compensation (as in buying a runaway horse or the yield from a pearl diver's next dive). Interest loans give rise to similar concerns, in two ways. First, the borrower makes a payment against benefits he hopes to secure by consuming the property borrowed, but these benefits are highly contingent; he makes a fixed payment but may suffer loss (e.g., he borrows money and spends it on goods in the hope of selling them for a profit)." Second, since the borrower also assumes the risk of loss of the borrowed property, he would expect to be compensated for doing so, but instead the very worst situation for him obtains: because the goods are consumables, he derives no yield from the goods (they are sterile); they are certain to be destroyed (through consumption); and yet he pays more to the seller, not less. It is like a wager he is certain to lose. From this viewpoint, riba affords an extreme case of gharar. One can derive from this a conclusion that in a situation where one is guaranteed (at least contractually) to obtain a fixed countervalue, concerns about riba are accentuated. Given this result, riba concerns will be greater for food and other fungibles, because these, unlike non-fungibles, cannot
24Kasani, 7:395-96 (recognizing that for consumables the thing itself represents the usufruct; hence to exact interest is to take a compensation for nothing). 25For Saint Thomas Aquinas's version closely tracking these arguments, see Noonan, 53-57. 26Razi, 2:531. As we shall see, for the Hanafi school this point occasions suspicion as to the lawfulness even of the lease of non-consumables.
84
become totally unobtainable or destroyed, since they will become available sooner or later on the market. Therefore, because they involve less risk, one would expect transactions in them with an excess to come under added scrutiny for riba. Note the subtle linkings of risk and lawful reward. Profits are positively viewed when associated with the risks of ownership of known productive property: risks either of that property's future profitability (due to its yield or to market movements) or of its continued existence. Conversely, when one party escapes risk altogether, profits come under intense scrutiny for riba. Lastly,when the property itself is a risk, or is unknown, unrealized, or otherwise highly contingent, the risks borne by the parties cast doubt on the legality of the entire transaction. Using money and markets to allocate and moderate risks. Why does Islamic law permit compensation for delay in the sale on credit for currency (even for sale of consumables)? Ifwheat is presently worth $1 a pound, why can one sell one hundred pounds of wheat now for $120 in currency after one year, and not sell one hundred pounds of wheat for one hundred pounds of wheat after one year?27Applying the previous rationale ("gain accompanies liability for loss") we see that in both cases, the purchaser, since he gets the wheat right away,assumes the risk of its loss. In the second sale, wheat now for wheat later, the seller is assured of getting his exact wheat back, evading risk (ignoring any change in the value of that wheat), but in the first sale, wheat now for currency later, the seller is exposed to market risk, namely the risk of a market price above $1.20 per bushel. Perhaps this justifies gain in credit sales for money." In a delay sale in ribawi goods which are different (e.g., selling wheat now for any quantity of rice later), again, market risks are inevitable, and there is no equivalence between the goods, so we would expect the transaction to be lawful, as in credit sale for currency, but it is not. Why? Perhaps the argument here would be the reverse, that risks become too great. In this transaction, two highly market-sensitive commodities are exchanged for each other, doubling the risks. As in riba al-fadl or unequal hand-to-hand
27This is a sale, not a qard loan, because the time of payment is fixed. 280f course, repayment in wheat also involves market risks, but one at least gets back exactly what one had before in concrete terms. Compare the canonist venditio sub dubio. Noonan, 90-93.
85
barter within a genus, the law forces the parties to transact through the medium of money. Using markets and money, the parties' risks become reasonable, since the parties presumably gain adequate market knowledge to attain reasonable fairness in their exchange, and since the transaction then is denominated on one side in relatively stable money." (We recall from Chapter 3 the Surma's strong endorsement of the market and market prices.) So this fifth possible rationale is that moderate risk justifies excess, while too much or too little risk incurs a ban, as under the rules of gharar. Clearly, none of the above explanations is wholly satisfactory, but offer something toward comprehendingfiqh results. For our purposes, the relative implausibility of other explanations is as important as the plausibility of the ones already offered. For example, if we attempt to use modern financial economics to explain thesefiqh outcomes, we do worse. For example, understanding riba as prohibiting interest is only partly true, since in the context of credit sales the rules tolerate recognition of the opportunity costs of money. Credit sales may be made at a premium over cash, without any attempt to regulate that premium in relation to a fair price or to the likely forward market price for the goods sold. Similarly, the oft-repeated idea that Islamic law permits gain only when a party is exposed to risks of loss and has no contractual assurance of gain does not hold true; the seller in a credit sale has contractual assurance of gain without any risk of loss. Modern financial analysis and terminologies also run the risk of obliterating distinctions that seem vital to the Islamic system, such as distinctions between: • extending credit in a sale versus extending credit in a loan; • a payment denominated in currency versus a payment denominated in some other fungible (a distinction which disregards the volatility of currencies and the question of inflationj."
29 A last puzzle is why riba al-nasi' a among gold and silver should be prohibited. Here perhaps there is not too much risk (as among goods) but too little, and one reverts to demanding equivalency (exact exchange in qard) or present exchanges. 30Chapter 8 discusses some dimensions of the Islamic legal position on inflation. The OIC Academy earlier declared modern paper currency to be a type of currency like gold and silver. Decision no. 9, third session (1986), in Organization of the Islamic Conference, Islamic Fiqh Academy Resolutions and Recommendations (Jedda: OIC, 1989?), 34. The OIC Fiqh Academy studied the issue of indexation of currency debts and declared it against Islamic law. Decision 4, fifth session (1988), 3:2261. The same volume
86
• contracts with similar economic purposes but with differing legal incidents (e.g., a sale of one hundred pounds of wheat now for one hundred pounds of wheat later versus a loan of one hundred pounds of wheat, since in the latter the lender can demand early repayment; or two contracts, one with the price due at once versus one with price due later; or contracts that differ as to remedies when promised goods are unavailable; and so forthj.!'
GAMBLING (MAYSIR) AND RISK (GHARAR)

As we observed in the previous chapter, the Qur'an condemns gambling (maysir), stating that by it Satan "wants only to sow enmity and hatred among you, and hinder you from the remembrance of God and from prayer." The Sunna speaks about not only gambling but risk or gharar. In the Sunna, gharar refers to a number of transactions characterized by risk or uncertainty at their inception. The following hadiths are representative of the Sunna's instruction on gharar:
The Messenger of God forbade the 'sale of the pebble' [hasah, sale of an object chosen or determined by the throwing of a pebble], and the sale of gharar. 32 publishes several studies of the issue. Thereafter apparently the Academy decided to take the issue under reconsideration, spurred by the example of very high inflation in Turkey. See, e.g., Decision 79/6/D8, eighth session (1994), 3:787-88. Classical law, with narrow exceptions, set itself against recognizing losses in real value as to currencies and other fungibles. Relevant classically debated issues are currency that has become debased and token copper coinage (fulus). See, e.g., Kasani, 7:395. 31 question often asked is whether Islamic law forbids the taking or giving of inA terest in transactions with non-Muslims. Some scholars declare riba permissible under certain conditions in transactions occurring in the "abode of war;' or dar al-harb, which in medieval times referred to non-Muslim regions not under treaty with Islamic states. The views of the majority Shi'ite school, the Twelvers, are much more extensive, incorporating (in one view) even riba gains from dealing with Christian or Jewish residents of Islamic lands. Sami Homoud, Tatwir al-a'mal al-masrafiyya bi-ma yattafiq wa-alshati'a al-islamiyya (Cairo: Dar al-Ittihad al-Arabi, 1976), 210-220. Non-Muslim regions are not usually described today in terms of dar al-harb. In any event, the majority fiqh view is opposed to any exception. 32Muslim.
87
Do not buy fish in the sea, for it is gharar.33 The Messenger of God forbade the [sale of] the covering [copulation] of the stallion. 34 The Prophet forbade sale of what is in the wombs, sale of the contents of the udders, sale of a slave when he is runaway, ... and [sale of the] 'stroke of the diver' [darbat al-gha'is, sale in advance of the yield of a diver's dive, whatever it waS].35 Whoever buys foodstuffs, let him not sell them until he has possession of them.36 He who purchases food shall not sell it until he weighs it [yaktalahu]P [T]he Prophet forbade the sale of grapes until they become black, and the sale of grain until it is strong.P
The Spectrum of Risks and Their Prohibitions

Let us arrange the transactions prohibited in these hadiths on a spectrum, according to the extent that risk is at the core of the transaction, as in a gambling contract. The pure speculation. The hadiths describe a few transactions that seem intentional gambling, being final sales of wholly unknown values: the "stroke of the diver" or whatever a stone lands upon. Also in this category are other obscure pre-Islamic transactions prohibited by the Sunna which, on one set of interpretations at least, seem rudimentary, playful forms of gambling indulged in by merchants: an example would be to sell for a fixed
33IbnHanbal, indicating that its most correct version is handed down on the authority of Ibn Mas'ud, not the Prophet. 34Bukhari. 35IbnMaja, with a weak chain of transmitters. 36Bukhari. 37Muslim. 38Bukhari,Muslim, Abu Dawud, Tirmidhi.
88
price whatever goods (unexamined) the buyer touches (mulamasa). But very little is known about these pre-Islamic contracts beyond their names, with the result that extremely varied interpretations of their nature are offered. The uncertain outcome. A second group of hadiths describes contracts where the countervalue is not only of uncertain value, but may not be realized at all, for example, the sale of a fish in the sea or a runaway slave. Presumably, the sale of goods not yet in one's possession falls in this category. Risk here may seem greater than in the last category, but it is less essential to the transaction. For one thing, it can be easily avoided by making the sale conditional on the relevant risk being eliminated (e.g., the fish caught, the goods obtained, etc.). The unknowable future benefit. Other hadiths describe transactions with still less initial risk, since they transfer valuable benefits which are precisely known and defined, but whose future benefit to the buyer is unknowable, such as the "covering of the stallion" and arguably the "stroke of the diver:' Such a transaction could be infected with the evils of gambling, especially if the buyer had false hopes or paid too much; in other circumstances, perhaps where the contract has become customary and occurs between informed parties, such contracts could become wholly innocuous and indeed indispensable. Inexactitude. A final set of hadiths pose the least element of gambling or risk. They seem only concerned with inexactitude, such as in sales of goods before they are weighed. Here again, such sales may involve deliberately blinding oneself to risks, or alternatively may be thoroughly mundane and practical, such as in the sale of a heap of goods which both parties view but neither measures, or a sale by the pound. How do classical scholars interpret these gharar hadiths? Before describing fiqh rules, let us consider the possibilities. The reason for these prohibitions would not be avoidance of risk per se, since incurring commercial risks - those of the market or supply and demand - is elsewhere approved and even encouraged. Hadiths permit a salam contract in which one pays a year in advance for so many bushels of wheat at harvest time certainly a risky transaction as to price. But they also forbid a salam contract tied to the crop of a particular tree or field. As these rules on salam suggest, a possible interpretation of the gharar hadiths is that they bar only risks affecting the existence of the object as to
89
which the parties transact, rather than just its price. In the hadiths, such risks arise either 1) because of the parties' lack of knowledge (jahala, ignorance) about that object; 2) because the object does not now exist; or 3) because the object evades the parties' control. Therefore the scholars might use one of these three characteristics to identify transactions infected by the type of risk condemned as gharar. With such a reading, scholars would insist that valid sales (and by analogy other binding contracts) exhibit two features: knowledge, i.e., the parties' full knowledge of all aspects of the sale, including the object itself; and existence, i.e., a concrete sale object capable of production (treating (3) above as a special case of (2)). The absence of one of these features cannot be compensated for by the other, and price cannot compensate for the absence of either one. Certainly, such a reading of the texts would ignore the modern custom'? (especially after the advent of insurance) to see risk, however dire, as merely one factor affecting price." Such a conception of gharar, scholars might argue, is needed to achieve the mutual consent (taradin) demanded by the Qur'an. How can parties consent to the transfer of that which may not exist, or that as to which they have no knowledge? They could do so only if risk itself is part of the object of the sale. But to prohibit such sales is arguably the precise intent of the Prophet's rejecting "the sale of gharar." Therefore, the consent needed for taradin is rendered more stringent: it must relate to the specific goods transferred, and be based on certain knowledge. Agreement to risk is excluded, since this is not true consent. Another reading of thehadiths is possible, one which starts from the Qur'anic prohibition of maysir, which mentions as its reasons only enmity and distraction from religion. These reasons resemble the grounds on which many societies prohibit gambling contracts, that gambling leads to individual immorality (the compulsion to gamble) and to social harms. A scholar in39Richard A. Posner, The Economic Analysis of Law (Boston: Little, Brown & Co., 1992), 12, 102-109. Probability theory easily determines the value of a gambling contract (expected value is possible gain times chance of winning). All contracts binding someone to a future performance can be seen as performing an insurance function, shifting risk for a price. Fiqh acknowledged and permitted contracts to serve this function as to many risks (e.g., market fluctuations, credit risks in sale), but not others (e.g., wagers, sale of nonexistent or unknown objects). 40 Also, by seeking out the assured existence of a concrete thing, and distinguishing the risks affecting that existence from risks of price, this reading ignores how market disasters can wipe out value completely.
90
spired by the Qur'anic text might read the gharar hadiths as intended only to suppress the gambling instinct. As we noted, each of the contracts condemned in the hadiths could harbor a gambling transaction, but could also be innocent. If gambling were the criterion for illegitimacy, the law might allow for more uncertainty in contracts, as to both existence and knowledge, and open the door more widely for upholding consent or taradin. These two positions are summarized in Table 4-b:
Table 4-b. Poles of Interpretation of Gharar
Scope for valid consent (taradin) 1 Position A Position B Restrictive Broad
Ghararvs. maysir? Gharar dominant Maysir dominant
Evils to avoid?
Ignorance, nonexistence Enmity, distraction from prayer
Classical Fiqh Rules on Gharar

Looking now at positions actually taken by classical scholars, we find the vast majority adopting Position A in Table 4-b. Prohibitions of maysir and gharar generally translate into prohibitions of contracts involving either 1) nonexistence ('adam) of the subject-matter; or 2) ignorance (jahala) of any material aspect of the transaction." Thus, the majority of scholars as a general rule void sales of nonexistent or uncertain objects without any consideration of the degree of risk involved. Whenever risks of nonexistence or ignorance enter into a contract from its inception, then gharar rules threaten to invalidate that contract, regardless of the degree of risk actually involved, and regardless of whether the assumption of the risk is agreed to and compensated. The schools most characterized by Position A are first the Shafi'i, and then the Hanafi. This has led to highly restrictive rules. For example, the
41Cf.A.L. Corbin, Corbin on Contracts (St. Paul: West Publishing Co., 1960), sec. 728: "An aleatory promise is one the performance of which is by its own terms subject to the happening of an uncertain and fortuitous event or upon some fact the existence or past occurrence of which is also uncertain and undetermined." "Aleatory" is derived from the Latin alea, a game of dice.
91

Islamic Law and Finance Almeezan by Frank

Uploaded by

Copyright:

Available Formats

Islamic Law and Finance Almeezan by Frank

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Islamic Law and Finance Almeezan by Frank

Uploaded by

Copyright:

Available Formats

LAWS SERIES

ISLAMIC LAW AND FINANCE

ISLAMIC LAW AND FINANCE RELIGION, RISK, AND RETURN

Preface Chapter 1 Part I -

Chapter Chapter Chapter Chapter Chapter

Chapter 10 Chapter 11 Glossary Bibliography Index

DETAILED TABLE OF CONTENTS

Islamic Finance as the Application of Islamic Law

Detailed Table of Contents

Qur'an and Sunna on Contract and Commerce

Islamic Lawsof Usury, Risk, and Property

The Sunna on Riba in Loans Plumbing the Rules of Riba

Detailed Table of Contents

Islamic Law of Contract

The Law of Islamic Financial Institutions and Instruments

131 138 138 139 140

Detailed Table of Contents

Islamic Financial Instruments: A Primer

Detailed Table of Contents

198 198 199 199 200

The Opportunity Rate of Capital and Islamic Capital Structure

Derivatives in Islamic Finance

Detailed Table of Contents

228 229 230 231

Innovation in Islamic Financial Products

Islamic Law and Finance

Islamic Law and Finance

THE ORIGINS OF ISLAMIC FINANCE

GROWTH IN ISLAMIC FINANCING

Islamic Law and Finance

CURRENT BANK PRODUCTS

Islamic Law and Finance

THE IMPACT OF RELIGIOUS SCHOLARS

Islamic Law and Finance

Islamic Law and Finance

THE POTENTIAL OF ISLAMIC BANKING AND FINANCE

Islamic Law and Finance

GOALS AND METHOD OF THIS BOOK

The Islamic Law of Finance Frank E. Vogel

Islamic Finance as the Application of

Islamic Law and Finance

Islamic Finance as the Application

Islamic Law and Finance

Islamic Finance as the Application

RELIGIOUS LAW (SHARI~ AND FIQH)

Islamic Law and Finance

RELEVANCE OF THE RELIGIOUS LAW TO BANKING AND FINANCE

Islamic Finance as the Application

Islamic Law and Finance

Islamic Finance as the Application

Islamic Law and Finance

OBSTACLES TO THE APPLICATION

OF THE ISLAMIC LAW

Islamic Finance as the Application

ISLAMIC LAW AND ISLAMIC ECONOMICS

Islamic Law and Finance

Islamic Finance as the Application

STRUCTURE AND METHOD OF CLASSICAL LAW IN THEORY AND PRACTICE

Wamic Law and Finance

Ijtihad, or Derivation from Revealed Sources