Islamic Finance
What is Islamic Finance?
The Islamic Legal Framework The Islamic Legal Framework, or al-Sharī’ah al-Islāmiyyah, can be divided into two branches: (1) Islamic Jurisprudence, ‘Ilm al-Fiqh; and (2) Islamic Theology, ‘Ilm al-‘Aqāid. The latter pertaining to matters of faith and belief; whilst the former is a juristic branch pertaining to Islamic laws. Islamic laws can then be further divided into two key branches: (1) al-‘Ibādāt, matters pertaining to worship; and (2) al-Mu’āmalat, matters pertaining to business and financial interactions, social interactions, penal law, and political and military interactions. The purpose of Islamic Jurisprudence or ‘Ilm al-Fiqh, can be best summarised as a set of rights and responsibilities. The Islamic doctrine of jurisprudence divides law into two sets of rights and responsibilities: (1) the rights owed to God and ones responsibilities towards Him, which can be studied under the first sub-branch of Islamic Jurisprudence, al-‘Ibādāt or matters pertaining to worship; and (2) the rights owed to others or fellow Muslims and human beings, and ones responsibilities towards them, which can be studied under the second sub-branch of Islamic Jurisprudence, al-Mu’āmalat or matters pertaining to the various economic, social and political interactions. Therefore, Islam as a divine religion and ordinance from God seeps into every aspect of one’s life, whether it be in the intimate seclusion of one’s worship of the Creator of the Heavens and Earth, or in the fabric of society in which all humans reside and interact on different levels. Islamic Finance is a key area that governs a Muslims economic, fiscal, and business interaction with other individuals and entities.
The Nature of Islamic Finance
Islamic Finance stems, firstly, from discussions pertaining to contract law. A contract in Islam is a verbal or written agreement born out of a valid offer and acceptance obtained from two legitimate parties within one sitting resulting in a binding sale, agreement or treaty. This in turn obligates the transference of goods and/or services in exchange for monies/goods, as well as ownership and liabilities. Thereafter, there are various doctrines that govern the interaction between parties, such as, rights of recension, inspection, defects, and goods/services being fit for purpose, the nature of valid and invalid goods, services, and monies. Each segment of classical Islamic law of transactions and sales indulge deeply into contracts and agreements and as a result lay down juristic principles which govern these interactions based upon which, the parameters of Islamic Finance are set. For example, in Islamic law, a contract predicated on the consumption, extension or facilitation of usuary or interest as per the laws of al-ribā, are impermissible. Likewise, a contract which contains uncertainty or al-gharar, is impermissible. Similarly, a person selling an item must be in physical or constructive possession of goods. Further, goods or assets must be either of tangible existence or have legal obtainability of possession and ownership.
The collection of these juristic principles, born out of primitive examples of classical Islam law, create a robust financial framework designed to reduce the probability of dispute between parties and uphold economic justice. As such, a Muslim is expected to service the rights of their fellow Muslim and other individuals without falling into an interaction which may lead them to harming another or usurping their wealth. This acute balance is a divinely ordained equilibrium of rights and responsibilities that is the focal point of Islamic Jurisprudence.
Financing in Islam then, is a means of raising wealth to either purchase goods, services or property; or to facilitate agricultural, economic or business enterprises, whilst maintaining the just balance of rights and responsibilities.
Islamic Modes of Financing
In Islam there are several modes of legitimate financing that reside within these divine parameters. Such as (1) al-mushārakah and (2) al-mudārabah: in which parties enter into a type of joint enterprise enabling them to purchase a property or good, the usufruct of which is enjoyed by one party whilst the other benefits from regular repayments with a profit; still, the agreement maintains a balance of shared risks and interests, which is an obvious disadvantage of modern modes of financing. This type of financing could be an ideal alternative to conventional mortgages used to purchase a residential property or real-estate. Likewise (3) al-murābaha is another mode of financing in which the sale of a property or good can be conducted with deferred payments at an increase, whilst avoiding the volatility of interest or usurious loans. This type of financing could be used to purchase a car on loan whilst avoiding interest. Another type of financing is (4) al-ijārah which is predicated on the framework of financial leasing, whereby one party both enjoys the usufruct of a property and is able to obtain complete ownership over a long period of rental payments. Further, (5) al-salam and (6) al-istiṣnā’ are types of forward contracts that can be used to finance agricultural and manufacturing enterprises.
Each mode of financing in Islam has a specific set of rules and conditions that must be adhered to in order to ensure that the divine parameters of Islamic Jurisprudence are not violated. Although many discussions pertaining to these modes of financing exist with in classical texts and manifest as primordial transactions, scholars of Islamic finance and leaders in the industry have developed adapted models that adhere to the base principles and allow individuals and businesses alike to enjoy the opportunities to finance according to their needs.
The predicament however, regarding Islamic Finance, is the ever-changing nature of financial transactions, decade after decade; the impact of globalisation on individual economies; and the change in nature of money and rise in value of intangible assets being used as currency. All these and more pose challenges to scholars of Islamic financing and Islamic industries. For this reason, never before has the study and deep understanding of both Islamic Finance and global economics been so important. It is incumbent on Muslims to both act in accordance with divine law and gain knowledge and study the basic sciences that detail the principles and rules of divine law. And as such, can the equilibrium of rights and responsibilities continue to maintain justice and avoid oppression.
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