Introduction to Islamic Banking and Finance. M Kabir Hassan
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Haram (impermissible) in productive enterprise
This section discusses the Islamic guidelines for the consumption behaviour of individuals. These teachings are also relevant for firms to ensure that their product offerings, marketing strategies and sales promotions are consistent with Islamic teachings. Islamic teachings make a distinction between allowable (Halal) and non-allowable (Haram) goods and services. The Qur’an says . . . Eat of that which is lawful and good on the earth . . .13 Therefore, the consumer would only make a choice among Halal consumption goods and Halal investment products. For instance, Islam forbids intoxicants like alcohol or drugs.14 In financial services, Islam forbids Riba (interest)15 and Maysir (gambling),16 for instance.
Islamic juristic experts have classified needs in a hierarchical structure. Al-Raysuni states that Imam Al-Shatibi has classified needs into three categories, i.e. (i) Necessities (Dharuriyah), (ii) Conveniences (Hajiyah), and (iii) Refinements (Tahsiniyah).17 In the hierarchical structure of needs espoused by Imam Al-Shatibi, necessities include such things and activities that are vital to safeguard (i) Faith (Iman), (ii) Life (Nafs), (iii) Wealth (Mal), (iv) Intellect (Aqal), and (v) Progeny (Nasl).18
1.1.3Islamic teachings governing conduct of producer
In the Islamic social framework, wealth inequality does not imply that one segment of the population has any superiority over the other segment of the population. Wealth inequality is only meant to test gratitude, forbearance and fairness in socio-economic relations and exchanges. The Qur’an says: Is it they who would portion out the Mercy of your Lord? It is We Who portion out between them their livelihood in this world, and We raised some of them above others in ranks, so that some may employ others in their work. But the Mercy (Paradise) of your Lord (O Muhammad — PBUH) is better than the (wealth of this world) which they amass.19
Islam permits trade, but warns people to refrain from exploitation, unfairness and deceit. The Qur’an says: Do not devour one another’s property wrongfully, nor throw it before the judges in order to devour a portion of other’s property sinfully and knowingly.20 In another verse, the Qur’an says: Do not devour another’s property wrongfully — unless it is by trade based on mutual consent.21
Islamic teachings on commercial trade strongly prescribe observing fairness in economic exchange. The Qur’an says: And measure full when you measure. And weigh with an even balance. This is better and its end is good.22 In another verse, the Qur’an says: Woe to those that deal in fraud, those who, when they have to receive by measure from men, exact full measure, but, when they have to give by measure or weight to men, give less than due. Do they not think that they will be called to account?23 Moreover, Islam stresses on completing terms of the contracts in letter and spirit in commercial contracts. The Qur’an says: O you who believe! Fulfil [your] obligations.24
Islam permits the motive to earn profit and using the earned profits for consumption and investment. Nonetheless, Islamic teachings discourage wealth accumulation. The Qur’an says: They who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings (O Muhammad) of a painful doom.25
Islamic teachings on commercial trade condemn taking false oaths in order to deceive people. The Qur’an says: You resort to oaths as instruments of mutual deceit, so that a person might take greater advantage than another; although, Allah puts you to the test through this. Surely, on the Day of Resurrection, He will make clear the truth concerning the matters over which you differed.26
In intertemporal trade and commerce, Islam encourages recording the terms of the contract in order to diminish the risk of ambiguity, conflicts and misunderstandings. The Qur’an says: O Believers! Whenever you lend money for a particular period, write and someone among you must write it justly. And the one who can write must not refuse.27
Islamic principles of commercial trade permit transactions on credit, but denounce reneging on debt obligations. Prophet Muhammad (pbuh) said: Any, who takes out a loan, having resolved not to pay it back, will meet Allah as a thief. 28
Islamic principles of trade allow competitive bidding and bargaining, but suggest softness and gentleness in executing trade deals in order to avoid exploitation and undue advantage or disadvantage to others. Prophet Muhammad (pbuh) said: May Allah’s mercy be on him who is lenient in his buying, selling, and in demanding back his money [or debts].29
While selling goods, Islam highly recommends that deceit be avoided. Islamic moral teachings compel the seller to reduce information asymmetry for the buyer in order to allow him a fair chance to evaluate his/her course of action transparently. Prophet Muhammad (pbuh) said: It is not permissible for a Muslim to sell his brother goods in which there is a defect without pointing that out to him.30
On another occasion, Prophet Muhammad (pbuh) stated: The seller and the buyer have the right to keep or return the goods as long as they have not parted or till they part; and if both the parties spoke the truth and described the defects and qualities [of the goods], then they would be blessed in their transaction, and if they told lies or hid something, then the blessings of their transaction would be lost.31
Islamic teachings also discourage getting an unfair advantage over the counterparty. Prophet Muhammad (pbuh) said: Whoever takes a false oath to deprive somebody of his property will meet Allah while He will be angry with him.32
Islamic teachings allow the price mechanism and determination of prices to be driven by market forces without any influences, hindrances, and frictions. To make sure that market price is determined competitively without asymmetric information between the counterparties, Prophet Muhammad (pbuh) forbade a town resident to sell on behalf of a nomad and to manipulate prices upwards.33 Prophet Muhammad (pbuh) disallowed intercepting unsophisticated growers and sellers until these sellers reached the markets with their supply of goods.34 Moreover, in making bids for the acquisition of assets or businesses, it is disallowed to engage in overbidding without having any earnest intention to purchase (Al-Najash).
It is well known that excessive speculation in markets can artificially raise prices and cause the formation of price bubbles. In financial and asset markets, when these bubbles burst, the markets suffer crises. To promote authenticity of trades and weaken the motive of speculation, Prophet Muhammad (pbuh) said: He who buys food grain should not sell it until he has taken possession of it. 35
In modern day businesses, often, there is a need to employ labour to produce goods by working over some capital goods like machinery. In labour-management and relations, Islam, gives significant protection and rights to labour. In order to educate people on the significance of fair treatment of labour, Prophet Muhammad (pbuh) said: I will be a foe to three persons on the Last Day: one of them being the one who, when he employs a person that has accomplished his duty, does not give him his due.36 Prophet Muhammad (pbuh) emphasized timely compensation to the labourer for his/ her services: Give the labour his wage before his sweat dries.37
In another narration, Prophet Muhammad (pbuh) stated, Those are your brothers [workers under you] who are around you; Allah has placed them under you. So, if any one of you has someone under him, he should feed him out of what he himself eats, clothe him like what he himself puts on, and let him not put so much burden on him that he is not able to bear, [and if that be the case], then lend your help to him.38
1.1.4Building blocks of Islamic finance
One of the most distinctive elements of Islamic finance is the non-existence of Riba (interest) in financial transactions.