Islamic Finance: Ethical Foundations and Compliance Challenges
Dr. Azeemuddin Subhani
Structural Foundations
Ethical Foundations:
= Normative Basis of Finance
Conventional Finance:
Distinct from Juridical Foundations
Islamic Finance:
Embedded in Theological/Juridical Foundations
Sharp Ethical Focus Since the Global Financial Crisis:
Ethical Flaws of Conventional Financial System
Ethical Strengths/Compliance of Islamic Financial System
Structural Foundations
Unique Feature of Islamic Shari’ah:
Blending of :
Theological Foundations
Juridical Foundations
Ethical Foundations
Separate Examination of Ethical Compliance of Islamic
Financial System:
A Western Perspective
But Not Representative of Islamic Legal Ethos
Islamic Juridical/Ethical Norms
1.
Freedom to Contract
2.
Freedom from
Riba
3.
Freedom from
Gharar
4.
Freedom from
Maysir
5.
Freedom from Price Control and Manipulation
6.
Entitlement to Transact at Fair Prices
7.
Entitlement to Equal, Adequate, and Accurate Data
8.
Freedom from
Darar
(Detriment)
9.
Mutual Cooperation and Solidarity
Structural Compliance
Compliance with
Gharar
and
Maysir
Injunction
Standard Linguistic Meaning of
Gharar
=
Risk/Uncertainty
Legal Status of
Gharar =
Unequivocal
Prohibition
Hence Legal Status of Risk/Uncertainty
=
Unequivocal Prohibition
Yet Risk-Taking/Sharing = Deemed Underlying
Principle of the Permitted Norm of
Bay
’???
Hence Risk-Taking/Sharing = Deemed Foundational
Pillar of the Islamic Financial Architecture
Structural Compliance
Anomaly
:
Risk-Taking/Sharing
= Unequivocal Prohibition under
Gharar
Risk-Taking/Sharing
= Deemed Derived Permission under
Bay’
Unanswered Question:
Compliance of Islamic Financial Practice with Ethico - Legal
Injunction of Prohibition of
Gharar
Compliance of Islamic Finance with Islamic Ethics
Structural Compliance
Controversy
:
Extent of Prohibited Risk-Taking:
If All Risk-Taking Prohibited
How Risk-Taking = Foundation of Islamic Financial System?
Even if Risk-Taking is the Foundation
Why Speculative Transactions are Prohibited?
If Only Excessive Risk-Taking is Prohibited
What Distinguishes “Excessive” from “Non-Excessive” ?
What is the Scriptural Authority for the Distinction?
Structural Compliance
Root of the Controversy:
Mistranslation of the Permitted
Bay
’:
As an Extended Connotation of “Trade”
As against its Specific Connotation of “Bilateral Exchange”
Distinguishing Characteristic of Trade
= Risk-Taking
Hence Risk-Taking
= Deemed Defining Characteristic of Permitted
Bay
’
Hence Risk-Taking
= Deemed Foundation of Islamic Financial Structure
Structural Foundations
Analytical Flaws:
Linguistic Meaning of
Bay
’
= Exchange
≠ Trade
Qur’anic Arabic Equivalent of Trade
Tijarah
Q. 2:275
Specifically
Singles Out for
Permission:
Bay’
(Bilateral Exchange)
Not
Tijarah
(Trade)
Structural Foundations
Tijarah
(Trade) Enjoys:
Qur’anic General Permission
BUT Not Specific Permission as Alternative to
Riba
Alternative to
Riba
is
Bay
’
Extreme Divine Importance of Riba/Bay’
Distinction
Miscomprehension of Riba/Bay’ Distinction
Punishment of Satanic Insanity
Structural Foundations
Bay’
=Bilateral
Exchange
= Negotiation
= Give/Take: Offer/Acceptance
= Mother of All Contracts in Islamic Law
= Islamic Jurisprudence Insulates
Bay
’ Contract Against
All Risks
≠ Risk-Taking
Structural Foundations
Bay
’
Linguistic Meaning:
All Exchanges including:
Commercial
Political
Social
Common Element of All
Bay
’ Contracts:
Inter-action of Two Heterogeneous and Opposing Counter-
Parties in a Deal
A Process of Co-Generation
Commensurate with Creation of Everything in Pairs (
Zawjan
)
Structural Foundations
Bay’:
Defining Characteristic:
Not the
Effect
of the Transaction (Risk/Return)
But the Underlying
Process
of
Generation
of Any
Effect
Not Risk-Taking as Generally Held
But Co-Generation = Inter-action of Opposites
Inter-action Leading to Go-Generation:
= The Only Common Legitimizing Factor of All Islamic
Contracts:
- Participatory
- Trading
- Leasing
Structural Foundations
Bay’:
Participatory Contracts:
Inter-action of Money & Labor in
Musharaka
and
Mudaraba
Trading Contract:
Inter-action of Money and Commodity in
Murabaha
Leasing Contract:
Inter-action of Money and Usufruct in
Ijara
Structural Foundations
Riba
:
Extant Scholarly Misconceptions:
Restricted Technical Meaning of Interest/Usury Only
Riba = 72 Abwab (chapters, kinds)
Deemed Prohibition Rationale: Human Exploitation
Not Commensurate with Direst Qur’anic Punishment for It
Focus of Prohibition:
Incorrect:
Effect
of a Business Transaction
Correct:
Underlying
Process of Generation
of the
Effect
Structural Foundations
Riba:
Islamic Legal Permission:
The Effect
Profit-Making = Money Ultimately Generating More Money
Islamic Legal Regulation:
The Generation of The Effect
Prohibition:
Self-Generation of The Effect (
Ribawi
Method)
Permission:
Co-Generation of The Effect (
Bay’awi
Method)
Structural Foundations
Derived Operative Principles for Ethico-Legal
Compliance:
Prohibition of Risk-Taking (
Gharar
)
Permission of Co-Generation (
Bay
’)
Prohibition of Self-Generation (
Riba
)
Actual Compliance:
Extensive Restructuring Required to Comply with the
Above Operative Principles
Examining the structural and ethical foundations of Islamic finance, this content delves into how it differs from conventional finance, focusing on prohibitions such as riba (interest) and gharar (uncertainty). It also raises questions about the compliance of Islamic financial practices with ethical norms and the foundations of risk-taking within the system.
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Presentation Transcript
Structural Foundations Ethical Foundations: = Normative Basis of Finance Conventional Finance: Distinct from Juridical Foundations Islamic Finance: Embedded in Theological/Juridical Foundations Sharp Ethical Focus Since the Global Financial Crisis: Ethical Flaws of Conventional Financial System Ethical Strengths/Compliance of Islamic Financial System
Structural Foundations Unique Feature of Islamic Shari ah: Blending of : Theological Foundations Juridical Foundations Ethical Foundations Separate Examination of Ethical Compliance of Islamic Financial System: A Western Perspective But Not Representative of Islamic Legal Ethos
Islamic Juridical/Ethical Norms 1. Freedom to Contract 2. Freedom from Riba 3. Freedom from Gharar 4. Freedom from Maysir 5. Freedom from Price Control and Manipulation 6. Entitlement to Transact at Fair Prices 7. Entitlement to Equal, Adequate, and Accurate Data 8. Freedom from Darar (Detriment) 9. Mutual Cooperation and Solidarity
Structural Compliance Compliance with Gharar and Maysir Injunction Standard Linguistic Meaning of Gharar = Risk/Uncertainty Legal Status of Gharar = Unequivocal Prohibition Hence Legal Status of Risk/Uncertainty = Unequivocal Prohibition Yet Risk-Taking/Sharing = Deemed Underlying Principle of the Permitted Norm of Bay ??? Hence Risk-Taking/Sharing = Deemed Foundational Pillar of the Islamic Financial Architecture
Structural Compliance Anomaly: Risk-Taking/Sharing = Unequivocal Prohibition under Gharar Risk-Taking/Sharing = Deemed Derived Permission under Bay Unanswered Question: Compliance of Islamic Financial Practice with Ethico - Legal Injunction of Prohibition of Gharar Compliance of Islamic Finance with Islamic Ethics
Structural Compliance Controversy: Extent of Prohibited Risk-Taking: If All Risk-Taking Prohibited How Risk-Taking = Foundation of Islamic Financial System? Even if Risk-Taking is the Foundation Why Speculative Transactions are Prohibited? If Only Excessive Risk-Taking is Prohibited What Distinguishes Excessive from Non-Excessive ? What is the Scriptural Authority for the Distinction?
Structural Compliance Root of the Controversy: Mistranslation of the Permitted Bay : As an Extended Connotation of Trade As against its Specific Connotation of Bilateral Exchange Distinguishing Characteristic of Trade = Risk-Taking Hence Risk-Taking = Deemed Defining Characteristic of Permitted Bay Hence Risk-Taking = Deemed Foundation of Islamic Financial Structure
Structural Foundations Analytical Flaws: Linguistic Meaning of Bay = Exchange Trade Qur anic Arabic Equivalent of Trade Tijarah Q. 2:275 Specifically Singles Out for Permission: Bay (Bilateral Exchange) Not Tijarah (Trade)
Structural Foundations Tijarah (Trade) Enjoys: Qur anic General Permission BUT Not Specific Permission as Alternative to Riba Alternative to Riba is Bay Extreme Divine Importance of Riba/Bay Distinction Miscomprehension of Riba/Bay Distinction Punishment of Satanic Insanity
Structural Foundations Bay =Bilateral Exchange = Negotiation = Give/Take: Offer/Acceptance = Mother of All Contracts in Islamic Law = Islamic Jurisprudence Insulates Bay Contract Against All Risks Risk-Taking
Structural Foundations Bay Linguistic Meaning: All Exchanges including: Commercial Political Social Common Element of All Bay Contracts: Inter-action of Two Heterogeneous and Opposing Counter- Parties in a Deal A Process of Co-Generation Commensurate with Creation of Everything in Pairs (Zawjan)
Structural Foundations Bay : Defining Characteristic: Not the Effect of the Transaction (Risk/Return) But the Underlying Process of Generation of Any Effect Not Risk-Taking as Generally Held But Co-Generation = Inter-action of Opposites Inter-action Leading to Go-Generation: = The Only Common Legitimizing Factor of All Islamic Contracts: - Participatory - Trading - Leasing
Structural Foundations Bay : Participatory Contracts: Inter-action of Money & Labor in Musharaka and Mudaraba Trading Contract: Inter-action of Money and Commodity in Murabaha Leasing Contract: Inter-action of Money and Usufruct in Ijara
Structural Foundations Riba: Extant Scholarly Misconceptions: Restricted Technical Meaning of Interest/Usury Only Riba = 72 Abwab (chapters, kinds) Deemed Prohibition Rationale: Human Exploitation Not Commensurate with Direst Qur anic Punishment for It Focus of Prohibition: Incorrect: Effect of a Business Transaction Correct: Underlying Process of Generation of the Effect
Structural Foundations Riba: Islamic Legal Permission: The Effect Profit-Making = Money Ultimately Generating More Money Islamic Legal Regulation: The Generation of The Effect Prohibition: Self-Generation of The Effect (Ribawi Method) Permission: Co-Generation of The Effect (Bay awi Method)
Structural Foundations Derived Operative Principles for Ethico-Legal Compliance: Prohibition of Risk-Taking (Gharar) Permission of Co-Generation (Bay ) Prohibition of Self-Generation (Riba) Actual Compliance: Extensive Restructuring Required to Comply with the Above Operative Principles
