STRUCTURING ISLAMIC FINANCE TRANSACTIONS – Book Sample
Examining the role of lslamic law
The field of lslamic finance is the revival of a classical approach to commercial transactions. The efforts of a relatively small group of Muslim activists in the 1950s and 1960s began a revival among modern Muslims seeking to organise their financial affairs without riba. Their work reflected the view among Muslims that Islam is a complete way of life and is not separated from commerce.
The revival was embarked upon in the absence of continuous transacting and litigating in the field of commerce under lslamic rules and applying Islamic concepts. The notable early concepts were tested by economists such as Dr Ahmed Elnaggar or merchants such as Saeed Al Lootah.1 These first endeavours in Mit Ghamr, Egypt, and Dubai had to struggle against adverse political trends and often had limited Shari’a research to support them.
Forty years later, the field of Islamic finance is globally accessible. lslamic institutions and consultants offer solutions and alternatives to consumers in both emerging and developed markets. Yet, many Muslims question the efficacy of many lslamic institutions or financial instruments. Certainly, there are important issues with regard to specific offerings and approaches to developing riba-free systems and instruments.
The fact that we are reviving a specific values-based approach to finance means that we must engage in significant historical research. This research is not carried out in a vacuum. ‘New research should seek to meet the needs of contemporary life in a light of critical evaluation of modern experience.” For instance, the Shari’a does not endow the corporation with a personality, meaning, rights and duties, similar to a natural person, but almost all western laws do. This, and a variety of other legal and organ- isational matters, are pertinent to the changes in gtobal commerce and communications that require. high-quality research into authentic lslamic resources in order to define truly permissible commercial outcomes for the devote Muslim with respect to relevant and fair-priced transactions and structures.
In this book, we work with the consensus of modern lslamic scholars on the core methods of commerce now practised in the field of lslamic finance. We will work through relevant examples of concepts and transactions and analyse the components that make them permissible. But, first, we will look at the underlying framework that is the Shari’a. In the next two chapters, we expand upon these principles to discuss their application to permissible commercial practices and contracts as accepted most widely by
today’s active Shari’a scholars.
Maqasid a/ Shari’a
‘The aim of Shari’a is to make people happier in this world and the here after.’3 This is seen to lead to the concept of taysir. or making things easy. This relates closely to raf’al hard or the removal of hard- ship. Such important objectives of Shari’a are meant to assure that there is no hardship in religion. The compiler of hadith. Tirmidhi, reported: ‘You have been sent in order to make things easy, not as ones
who make them difficult.’4 Ultimately, these are meant to lead to the achievement of the public good or maslahah.
Often, a survey of bankers and lawyers active in the field of lslamic finance will throw up two firmly rooted replies to a primary query about their understanding of Shari’a. The first is to indicate that one is merely an order-taker and that it is the Muslim consumer (banker or otherwise) who defines the Shari’a parameten. The second Is to retreat behind the defence that one is not Muslim and not obliged to know more than fundamental transaction-structuring rules that have been proven in the market. Neither is an objectionable reply, but neither reply will guide one to the sound basis of structuring a platform for the sound and logical growth of Islamic financial business.
Anyone who will contribute to the field’s evolution must have a rudimentary understanding of the the- ological and philosophical underpinnings of Shari’a. The first principle of lslamic theology is tawhid. This is the most stringent approach to monotheism and constitutes the fundamental Qur’anic message. Adherence to tawhidic theology means that the Muslim accepts the concrete rules established by God and His Messenger. the Prophet Mohammed (PBOH). These rules seek to define the tawhidic lifestyle and achieve a very clear set of values relating to this life, namely: human life. human intellect, proper- ty, honour and conscience.5 The safeguarding, in order of priority, of these five values should allow each human to live a quality life in which he or she is free to exercise his or her conscience and worship God in the most uninhibited and loving manner.
The protection of these five values leads to two clear principles that will become repetitive themes of this book. Foremost, within the specific framework of the Shari’a. there is substantial freedom of choice in almost every aspect of life, including commerce. Second, property may be freely held or traded. (This is independent from a separate theological argument that all worldly property is held by human beings in trust for its factual owner God; or that human beings are merely the caretakers of this world and its contents.) With these tools, we are able to have clarity as to the ends or goals of the Shari’a, its maqasid.
An understanding of the magasidallows for comfort with ibaha or permissibility. This is a defining prin- ciple of mu’amalator commerce in lslamic legal terminology. Ibn Taymiyyah wrote that ‘Unless God and His Messenger have decreed them to be forbidden. But, God the most High never prohibited a contract in which there is a benefit for the Muslims and does not inflict any harm upon them.’6 Kamali expands…
These freedoms, however, do not exist in a vacuum. The role of humans as defined in the Qur’an is as khulafa’a or stewards, wardens of this created world. As a result, the Shari’a is applied to protect that which is created. Within rules of protection. not only are the five ends to be protected; but all that is created. Among the principles to be applied are the prevention of waste,8 israf. The human inclination is often to be excessive in all things, and the Qur’an prescribes a cure in Zakah.
These purifying dues are a balancing feature that reminds the Muslim of his role as a custodian or steward. Wealth and own- ership bestowed upon us for a temporary time oblige its management in a way that is beneficial to all, without causing harm.9 Zakah, which is not a prominent topic in this book, provides an indirect outlet for wealth accumulated in any one place to provide help to others. Another outlet for wealth to be driv- en to help others is the charitable trust or waqf, which is outlined in Chapter 3 .10
Although man is limited to his destiny or qadr, beyond a certain point, the free will of humans is con- strained by divine providence. In this book, we emphasise the realm of commerce and finance within the freely chosen acts of humans, as freely chosen to be circumscribed by the Shari’a. Certain accom- panying principles including israf and qadr are not expounded upon further as they travel beyond the realm of theologically governed commerce into other aspects of theologically shaped, but not specifi- cally commercial, life.
Sources of law
Qur’an and Sunnah
If the concrete rules of Shari’a are those established by God and His Messenger, then they must be found in specific places. The Qur’an, which Muslims believe as the immutable and final revelation of God, is the primary source of law and contains the rules explicitly established by God. Qur’anicverses making precise injunctions and offering specific guidance are called the ayat a/-ahkam. When it comes to com- merce, there are only three clear rules that are established among the ayat a/-ahkam: the forbidding of riba: the admonition to avoid consuming one another’s wealth inappropriately: and to engage in com- merce through written contracts.11
The paucity of explicit Qur’anic legislation on commerce drives the Muslim to the authentic sayings and reported actions of the Prophet Mohammed (PBOH). Collectively, these are termed the Sunnah. The ori-
gin of the term is a haditht 12 of the Prophet: ‘Follow my Sunnah… and that of the rightly guided caliphs
who would succeed me; hold onto it firmly and guard yourself against innovations, for every innova- tion is a mischief.’13 Often, this hadith is taken as proof that Islam is against any form of innovation. In fact, the specific reference is to innovation in the defined beliefs and practices of Islam. Muslims have,
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