ISLAMIC BANKING /FINANCE RESOURCES (from Rice University)
A Basic Guide to Contemporary
Islamic Banking and Finance
Mahmoud Amin El-Gamal1
Rice University
June 2000
1_c 2000 by Mahmoud El-Gamal, All rights reserved. The author is Professor of Economics and Statistics, and holder of the Chair in Islamic Economics, Finance and Management, at Rice University, Houston, TX 77005. elgamal@rice.edu. http://www.ruf.rice.edu/elgamal
Preface
__________ In the Name of Allah, The Beneficent, The Merciful
I was asked by ISNA to produce a short guide to Islamic Banking and Finance for the Muslims of North America. To keep this guide short, we had to define our target audience rather carefully. This introductory guide is meant to address the Muslim who is familiar with the fundamental tenets and sources of legislation in Islam. The reader is not assumed to have elaborate prior knowledge of Islamic financial contracts, but a certain degree of financial sophistication will be required.
This is not a full survey of the field, and it is not a religious guide. It is the work of a single individual, who does not claim any religious authority beyond that which is derived from quoted texts. I tried my utmost to steer away from issues which are or may become controversial. Therefore, I have been careful to limit the discussion of recent fatwas and decisions of jurists and juristic councils. In that sense, this guide falls short of providing the reader with full information about “state of the art” Islamic financial instruments.
This apparent shortcoming is intentional. The field of contemporary Islamic finance is rather young, and marred by a number of shortcomings of its own. It is easy for an economist such as myself to fall prey to the temptation of claiming religious authority from translated texts and quoted opinions. It is also easy for specialized jurists to assume that they understand both the religious and the financial aspects pertaining to a specific contract or transaction.
In both cases, there is a great danger for scholars of religion as well as students of economics and finance to speak falsely in the name of Islam.
I hope to succeed in minimizing this danger by speaking generally about the basic types of contracts used by “Islamic financial institutions” in North America and elsewhere. The generic forms of those contracts have been subjects of extended study by traditional jurists. My goal is to provide a concise summary of the nature of those contracts, and their Islamic foundations in Qur’an, Hadıth, Sunnah, ’ijma‘, and – where necessary – qiyas.
The primary objective of this introductory guide is to explain to the non-specialist curious Muslim the difference between the forbidden financial transactions commonly used in conventional finance, and their Islamically permitted counterparts.
It is important for me to make it clear that I am not endorsing any particular institution or industry which labels itself “Islamic”. There are many honest, sincere, and hardworking Muslim men and women who are currently
struggling to make it easier for Muslims in North America to lead their lives in accordance with the Sharı‘ah, without having to make unreasonable financial sacrifices. Such individuals and groups deserve our support and du‘a’.
However, prudence also dictates that we recall that religion has often been used by individuals with sick hearts to exploit the gullible.
The humble educational aims of this work are two-fold:
1. By alerting the North American Muslims to the differences between conventional and Islamic finance, we may be able to boost the efforts of the sincere Muslims developing or dealing with Islamic financial institutions.
2. By providing a clear basic understanding of the underlying contracts, Muslims may become less prone to making inadvertent errors, as wellas less likely to fall prey to the inevitable exploitative efforts of some
unscrupulous individuals.
I beg the forgiveness of Allah for the mistakes I make, and pray that He makes this effort a fruitful one.
Why “Islamic Finance”?
I would like to preempt two opposing reactions that many readers may have once they recognize that “Islamic finance” is in many ways very similar to (and at times identical with) conventional finance. Some may feel that this similarity is an attempt to dilute the Islamic teachings to simplify our lives, while others may feel that the Islamic Legal distinctions between Islamic and regular finance are artificial means of creating an industry where none is needed. I will be among the first to admit that the terms “Islamic banking” or “Islamic finance” can be quite misleading given the many similarities between Islamic and conventional financial contracts. To explain my point of view about this issue, let me use a good analogy: the issue of “Islamic marriage”.
There are no obstacles that prevent Muslims in North America from having an Islamic marriage, a contract that adheres to the legal requirements of the state as well as the Islamic legal requirements. In certain respects, “a marriage is a marriage”, but in other respects, to abide by all the requirements of the Islamic marriage contract, the Muslim man and woman need to do some extra work. Local Islamic centers, as well as continent-wide organizations like ISNA, provide information and contract-forms to help potential Muslim families abide by both sets of laws (e.g. providing local religious “marriage services”, providing forms for an “Islamic will” to ensure abidance by Islamic inheritance laws, etc.).
Similarly, the notion that “a marriage is a marriage” may be applied in the realm of finance, e.g. “a lease is a lease”. In this domain also, the Muslim needs to ensure that the contract he signs with the lessor or lessee agrees with the conditions of the lease contract (‘aqd al-’ijarah or ‘aqd al-’ıjar) in Islamic jurisprudence. Those conditions are put in place to ensure that the contract would not contain elements of Riba or Gharar, which are forbidden in Islam.
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