Transcript Structural Compliance of Islamic Finance from

Dr. Azeemuddin Subhani
Structural Foundations
 Ethical Foundations:
= Normative Basis of Finance
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Conventional Finance:
 Distinct from Juridical Foundations
Islamic Finance:
 Embedded in Theological/Juridical Foundations
 Sharp Ethical Focus Since the Global Financial Crisis:
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Ethical Flaws of Conventional Financial System
Ethical Strengths/Compliance of Islamic Financial System
Structural Foundations
 Unique Feature of Islamic Shari’ah:
 Blending of :
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Theological Foundations
Juridical Foundations
Ethical Foundations
 Separate Examination of Ethical Compliance of Islamic
Financial System:
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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:
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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:
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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
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Tijarah
 Q. 2:275 Specifically Singles Out for
Permission:
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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:
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All Exchanges including:
 Commercial
 Political
 Social
Common Element of All Bay’ Contracts:
 Inter-action of Two Heterogeneous and Opposing CounterParties in a Deal
 A Process of Co-Generation
 Commensurate with Creation of Everything in Pairs (Zawjan)
Structural Foundations
 Bay’:
 Defining Characteristic:
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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:
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Inter-action of Money & Labor in Musharaka and Mudaraba
 Trading Contract:
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Inter-action of Money and Commodity in Murabaha
 Leasing Contract:
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Inter-action of Money and Usufruct in Ijara
Structural Foundations
 Riba:
 Extant Scholarly Misconceptions:
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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
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Profit-Making = Money Ultimately Generating More Money
 Islamic Legal Regulation: The Generation of The Effect
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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