by: Mufti Mohammad Daud Khurshid

Islamic jurisprudence has proved over the centuries that it can adapt to any time or place, accept any challenge, and overcome any obstacle. This is because it is rooted within principles derived from the Qur’an and Sunnah. While these principles are stable and secure, they are by no means rigid and stiff. To the contrary, they are flexible, applicable to real-life scenarios of all types. Islamic jurisprudence is like a tree; firmly grounded and unshakable, yet its branches reach far and wide into the sky, providing shade and fruits to all those around it. The evolution of Islamic Finance is an example of this adaptability. This article explores the inception of Islamic Finance and its nature. Subsequent articles will discuss the principles that govern Islamic Finance and a practical application of these principles on Islamic Finance products. In doing so, this series of articles will show the genius of Islamic scholarship in the last century.

A brief glimpse into the inception of Islamic Finance

Finance is not a subject foreign to Islamic jurisprudence. On account of being social creatures, humans often turn to others when in need. Quite often, we find that an individual in need of money will request another who has surplus money for a loan. Interest-based loans take advantage of this weakness, with the wealthy ready to lend money immediately but obligating more in return, effectively creating money out of nothing. Our tradition provided an ethical alternative to such financing in the form of qarḍh ḥasan (benevolent loan), in which loans are given without any excess to be expected in return. These ethical loans are not meant to cheat people of their wealth but are initiated as voluntary contributions in which reward is sought only from Allah. Additionally, finance in the earlier days differed than finance today in another manner; it was not institutionalized in the forms of banks but was done on an individual basis. As a result of these two factors, financing in Muslim communities was never meant for profit. It was a means of assisting each other and seeking Allah’s pleasure. In the wake of colonialism, Muslims found themselves within a different environment. Alongside the many religious, cultural, and political changes, the economic consequences of colonialism and imperialism manifested in the forms of banks, factories, and insurance companies. As a result of industrialization, money was found at a higher concentration then ever before. As a result, individual and ethical financing, built upon assisting each other and seeking Allah’s pleasure, was overshadowed by institutionalized and profit-based financing, a system grounded within interest and satiating one’s endless greed.

In a series of lessons on Islamic Finance, Shaikh Taha Karaan (may Allah have mercy upon him) notes that although institutionalized financing took a turn for the worst, financing isn’t inherently evil. The issue lied within cheating others and using interest to create money out of nothing. Regardless, institutionalized financing had its benefits as well. Individual financing was effective within small groups, amongst friends, and within families. A large-scale project however would be impractical to manage. Institutional financing made this possible, along with providing a higher degree of security and stability. The benefits were many, but was it possible to reap these benefits without the interest-based system institutionalized finance was built upon? Could finance be purified of its unethical and impermissible form whilst retaining its productive and effective nature? Islamic finance was initiated as the answer to these questions and the solution to these problems.  

The vision of Islamic finance was first implemented by Ahmed al-Najjār in Mit Ghamr, a town in Egypt, in the year 1963. Over half a century later, Islamic finance has grown exponentially and has made its way into Muslim and non-Muslim countries alike. However, many Muslims still find themselves hesitant to accept this relatively new venture. Some are held back by fear of change and the unknown. Others are simply too lazy to bother with it. Many truly have their reservations: What is the difference between Islamic Finance and conventional finance? They both earn the same profit, or worse, Islamic institutions charge more! Will changing a few documents and adding on a few Arabic words really make interest lawful? Through the acquisition of knowledge and education, we, at Turāṯh, believe that fear can be transformed into confidence, indifference into engagement, and doubts into clarity. We will now discuss the nature of Islamic Finance and the default approach to transactions. As a disclaimer, we are not arguing that all Islamic institutions uphold these principles. We are presenting the nature of Islamic Finance and the theory that governs it.

The nature of Islamic Finance

As mentioned previously, traditional academia did not discuss institutionalized finance as it did individual finance. However, trade, commerce, and an array of transactions were plentiful within our tradition. When pressed to provide an alternative for the Muslim community, expert financiers joined hand with genius scholarship to give rise to Islamic Finance. After researching the objectives of institutionalized finance, the different chapters of trade and commerce were blended to fulfill these objectives. Transactions that were initially used for trade and commerce were altered to be used for finance. Since different chapters of Fiqh were at play, a high degree of caution was required to ensure that the conditions of each chapter remained intact, otherwise resulting in the invalidity of the transaction. See the following table for products offered in conventional finance and their counterparts from Islamic Finance Institutions:

Islamic Finance was innovative in introducing new products with different goals, yet traditional on account of these products simply being an extension of previous modes and forms of trade and commerce. These products were by no means agreed upon by all scholars, yet this is the nature of Fiqh from its very inception: difference of opinion surrounded by healthy discourse.  In short, Islamic Finance is an extension and mixture of previously codified law, conjured with the attempt to replace conventional finance. Since it’s inception, it was – and still is – subject to academic discourse, differences, and scholarly criticism, yet an alternative differed over within Islamic scholarship is certainly superior to the interest-based loans, a reality considered unlawful by ijmā’ (consensus) of the Muslim Ummah.

The default in transactions is permissibility

Since Islamic Finance is essentially an extension of trade and commerce, the principles that govern the chapters of trade and commerce also govern Islamic Finance. These chapters differ from the chapters of worship on many levels, the broadest of which being their default status. The default in worship is that it must be prescribed within the Sharī‘ah. No one can introduce new acts or different forms of worship within the religion. A 4-unit prayer cannot be evolved into a 5-unit prayer. The obligatory month of fasting cannot be switched to another month for ease. Ṭawāf of the Ka’bah in the days of Ḥajj cannot be substituted by Ṭawāf of another building. The chapters of commerce and trade, on the other hand, are not bound by the same principle. To the contrary, the default position therein is that of permissibility; innovative ideas are welcome and any transaction that is not tainted by prohibited elements is deemed permissible. The logic is simple: whereas actions of worship can only be prescribed through divine revelation, commerce and trade have been prevalent amongst human societies since their very inception. There was no need to teach the community how to trade, the Sharī‘ah merely filtered the existing marketplace of unjust practices and elements that would result in dispute, malice, and enmity.

As a result of the default position in trade and commerce, the jurists do not look at new forms of transaction with the restrictive nature applied to the chapters of worship. Rather, if the checklist of prohibited factors is ticked off, the transaction would be deemed permissible. This is why the prophetic narrations regarding trade and commerce are mostly prohibitions from unjust practices. All remaining transactions would fall under the confines of the Qur’anic verse:

خُذِ ٱلْعَفْوَ وَأْمُرْ بِٱلْعُرْفِ وَأَعْرِضْ عَنِ ٱلْجَـٰهِلِينَ (سورة الأعراف: 199)

“Show forgiveness, enjoin ‘urf, and turn away from the ignorant.” (7: 199)

Al-Sam‘ānī writes in his Qawāṭi’, “Urf is that which people have become accustomed to. It is that which they recognize as a transaction amongst themselves. Therefore, the general customs detailing how possession (qabḍh), protection (iḥrāz), and transacting of wealth (nufūḏh) is conducted is established from the Qur’an itself!” (2011, 1: 104)

This default position is attested to in all 4 Schools of Thought (al-Shafi‘ī, 1990, 3:3; al-Jaṣṣāṣ, 1995, 2:189; Ibn Rushd al-Jadd, 1988, 2:62; Ibn Taymiyyah, 1995, 28:386). This is not surprising as the Qur’an itself alludes to this. Allah Almighty has said,

ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَـٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَـٰٓئِكَ أَصْحَـٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَـٰلِدُونَ

“Allah has permitted transactions (al-bay’) and prohibited interest (al-riba).” (2:275)

Al-Jaṣṣāṣ explains in Aḥkām al-Qur’ān (1995, 2:189) that the word al-bay’ (transactions) is general, and is therefore inclusive of all types of transactions. A transaction is the transfer of wealth for wealth through an offer and acceptance which results from mutual consent. Although the transactions prohibited in the Sharī‘ah, such as ribā-based transactions, transacting with uncertainty, trading in a non-existent item, amongst others, are excluded from this general permissibility, all other transactions still fall under the umbrella of permissibility.

It follows from the previous principle that when a Muslim transacts, and his transaction can be interpreted in a manner that would deem it lawful, or in a manner that would deem it unlawful, the former should be adopted. This is because if the default is permissibility, then there is nothing wrong with interpreting a Muslim’s transaction to be lawful when it is possible. Al-Karkhī has mentioned this rule in a list of 40 that govern Fiqh. He says, “The matters of the believers are understood to be correct and right unless it is evident that they are otherwise.” Al-Nasafī (2018, p. 52-53) explains that if a gold coin and silver coin was to be exchanged for two gold coins and two silver coins, the transaction would be interpreted so that the gold coin is in exchange for the two silver coins, and the silver coin is in exchange for the two gold coins, thereby resulting in permissibility of the transaction. This is because if the gold coin was in exchange for the two gold coins, this would be transacting in excess amounts from the same category (gold for gold), which is ribā. If it is done in a different category (gold for silver), it would be permissible if possession is taken within the gathering. Therefore, this transaction can either be understood in a manner that will lead to its impermissibility; if gold was in exchange for gold, or a matter that will lead to permissibility; if gold was in exchange for silver. Because of this rule, the Ḥanafī School of Thought will understand this transaction in a manner that results in permissibility.

The second part of this principle is crucial to maintaining a balanced approach. A transaction will only be understood in a manner where it is lawful if it is not evident that is unlawful. For instance, in our previous scenario, if the transacting parties explicitly state that the gold is in exchange for gold and the silver in exchange for silver, the transaction will remain unlawful (2018, p. 53). It will not be re-interpreted to be permissible as this is no longer possible. They have explicitly stated that the gold coin is in exchange for the two gold coins and silver coin is in exchange for the two silver coins.

Al-Marghīnānī often refers to this principle with the words: al-taḥarrī/taḥarriyan lil-jawāz, which translates to “on account of seeking permissibility.” For instance, if a chocolate bar is sold for 3 dollars in Canada, the default position would dictate that the transaction be invalid as it has not been clarified whether Canadian dollars were intended or American dollars. However, since the norm in Canada is that transactions take place in Canadian dollars, we will understand the contract to refer to Canadian dollars, because this would result in the transaction being permissible (2019, 4: 395). However, in the case where both currencies are used equally in a country, there is no factor present that would given preference to one over the other. Therefore, the rule of seeking permissibility can not be applied here.

Is Islamic Finance not just a Hilah?

The word ḥīlah in Arabic refers to a ruse or strategism and often carries a negative connotation in the works of the muḥaddithūn (scholars of ḥadīṯh). Due to this negative connotation, Islamic Finance, seen by many as a guise to permit interest, has been victim to much criticism. After all, is gathering chapters of trade and commerce in a manner where institutionalized financing is “islamified” any different than laying out traps for fish on Saturday and capturing them on Sunday? The first step is to understand the nature of ḥiyal from an academic perspective, and then see which category Islamic finance falls under.

In reality, ḥiyal are just an extension of juristic thought, except that they can be used for unlawful reasons just as they can be used for lawful purposes. Al-Shāṭibī explains in his Muwāfaqāt that ḥiyal are of different types:

1. The ḥiyal of hypocrites, such as apparent belief. Prior to this, he discusses ḥiyal which are used to change the rulings of impermissibility into permissibility, or to free oneself of an obligatory matter. For instance, avoiding the obligation of Zakāh by gifting away one’s wealth every time the year is about to pass. The Ummah by large agrees that such ḥiyal are impermissible (2017, 1: 646-653). Al-Imām Abū Yūsuf has explicitly mentioned in al-Kharāj, that one can not, due to any reason, use a ḥīlah to forego Zakāh by any means (1999, p. 93).
2. 1.     Ḥiyal which everyone agrees are permissible. For example, one is permitted to utter statements of disbelief when he is threatened to, as long as he does not believe in those words. This is permissible because protecting one’s life is a worldly interest (maṣlaḥah dunyawiiyah) which is not tainted by any harm (mafsadah), neither worldly nor one of the hereafter. Since there is no harm to one’s worldly life or hereafter, the goals of the Sharī‘ah are in line with him fulfilling his worldly interest, hence permitting him to save his life or limbs by uttering a word of apparent disbelief. Al-Shāṭibī notes that these two categories are categorically clear; the ḥiyal of the hypocrites being impermissible, and the second category being permissible (2017, 1: 654).
3. The third category is quite difficult to get a grasp of. It is not categorically clear whether it falls under the first type or second type. Does the legislator have a goal which would warrant its permissibility, or is it against the interests of the Sharī‘ah which would result in impermissibility? Those who permit these ḥiyal only do so on the basis that using this strategism is in line with what the legislator wants, on account of it being in line with the interests of the Sharī‘ah in this specific ruling. The one who forbids it on the other hand feels that it is at odds with the legislator’s goal (2017, 1: 654).

The early scholars of ḥadīṯh were not fond of ḥiyal, to say the least (Abdul Majīd, 1979, p. 451). Dr. Abdul Majīd, in his excellent work on the juristic approach of muḥaddithūn of the 3^rd century, notes that al-Imām al-Bukhārī wrote his entire chapter on ḥiyal within the Ṣaḥīḥ (his renowned book gathering the most authentic narrations)to rebuke the ahl al-ra’y (the men of intellect), a title often used to refer to the early jurists of Kufa (p. 614).  Regardless, al-Shāṭibī’s superb explanation shows that not all ḥiyal can be painted with one brush. In their love and defense of the religion, perhaps some of the earlier muḥaddithūn considered the individual rulings in category three to contradict the purpose of the legislator. Nonetheless, the jurists who were criticized heavily by the muḥaddithūn did not aimlessly create ḥiyal. They, in their sincerity, were very careful to differentiate these ḥiyal with a moderate approach.

Within early Ḥanafī scholarship, we see a clear differentiation between permissible ḥiyal and impermissible ḥiyal. Al-Sarakhsī writes that those ḥiyal that a man uses to escape the forbidden (ḥarām) or apply the lawful (ḥalāl) are praiseworthy. The disliked ḥiyal are those through which one aims to usurp the right of another, beautify the false, or create doubt in an established right (1993, 30: 210).

Islamic Finance – provided it is in line with the conditions set by the scholars – falls under those ḥiyal that are used to escape the unlawful and live by the lawful. If done with the right intention, such an action will reap great reward. In fact, al-Mīrthī notes that at times, ḥiyal can transcend to being recommended or even obligatory (2005, 6: 418)! When the world is run by the interest-based system, a change overnight is simply not practical. Islamic Finance was created as a gateway to allow for change to be brought in systematically. Unfortunately, failure to recognize this often leads banks to forego their ethics, being Islamic in name alone and not in essence. Such an approach is certainly reprehensible. Al-‘Usmanī writes,

The inception of Islamic Finance Institutions was not to fall in line with the interest-based world system, but rather to open and explore new horizons – albeit gradually – for a just social economic system, the foundations of which have been stipulated in the Shari’ah. Indeed, such a project must be gradual, yet a truly gradual process can only be achieved when the map to achieve this is outlined clearly and precisely, and that the progress to reaching these stages is under continuous supervision. A gradual process never meant the Institutions stop their growth and progress. (Buhūṭh fi Qaḍhāyā Fiqhiyyah Mu‘āṣirah, 2013, 2:269)

Although the nature of Islamic Finance, in being a mix of transactions and a ḥīlah to avoid ḥarām, warrants ease and leniency, it can be misused if not applied correctly. The principle which states that the default is permissibility only does so when there are no prohibited elements found within the transaction. The principle that states the transactions of the believers should be permissible is coupled with the condition that matters which suggest impermissibility are not evident (like explicit statements from the transacting parties or the lack of general norms to give preference to one currency over another). The use of ḥiyal is only praiseworthy when done to avoid the ḥarām and embrace the ḥalāl. If used to cheat others of their rights, or exploit the poor of their hard-earned money, then it is certainly disliked, and dangerously close to ḥarām in certain situations.

To avoid these issues, Islamic Finance Institutions must refer to reputable scholarship for their projects. After all, it is the jurists who are trained to understand the modality of every transaction. The process of understanding the modality of transactions is referred to in recent books of Fiqh as takyīf. By understanding the nature of the transaction, jurists are able ascertain exactly what conditions should be applied. This is because although all transactions share certain conditions for permissibility (such as both transacting parties being sane), different types of transaction are coupled with extra conditions. After a correct takyīf is applied, jurists can see whether the conditions of that transaction are fulfilled or not. If they are fulfilled, this would mean that there are no prohibited elements found, and due to the default status of permissibility, the transaction will be permissible. If not fulfilled, the transaction would remain invalid on account of a prohibited element being present. Nonetheless, takyīf is also governed by principles that will be discussed, if Allah permits, in a later article.

References

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