Session 1: Conceptual Framework
Part 1: Introduction
1.1 Objectives for the day
- What do we want to achieve from today’s discussion?
- What practical action points can we take away from today?
- Collectively as a group?
1.2 Rules of engagement
- What is my role?
- I’m here to facilitate discussion and raise important questions.
- My role is not to opine or pontificate.
- It is possible to spend the whole day discussing minute points of law
- If we discuss any point, the conclusions should lead to clear objectives
- g. if we discuss whether a unilateral promise (wa’d) can be enforceable according to Shariah, what objective would such a discussion serve?
1.3 Ingredients of success
For a movement to be materially successful, it must be successful in harnessing three principal things:
1.4 Ingredients of a system
Any system has three key components:
- Conceptual framework / methodology
- Bodies of knowledge
For example, the Islamic legal system:
- Conceptual framework: Aqidah, Usul al-fiqh
- Bodies of knowledge: Fiqh (law), akhlaq (ethics) etc.
- Institutions: madaris, dur al-ifta (knowledge production), ‘amil al-suq (commercial/financial regulator/supervisor), mahakim (adjudication), shurta (enforcement) etc.
1.5 Integrated approach
Focusing on only one level and not the others can lead to fragmented thinking and outcomes. Focusing just on:
- Conceptual framework can lead to à pedantic scholasticism / schism / etc.
- Bodies of knowledge can lead to à terse polemics / “Islamic” knowledge framed in alien paradigms / etc.
- Institutions can lead to à political artifice / misdirected (hyper)activity /etc.
Need an approach that integrates three levels of conceptual framework, bodies of knowledge and institutions to establish institutions that are authentic and have longevity.
1.6 Our situation
– Our conceptual framework (aqida/usul) has been preserved intact for centuries.
– Previous generations have developed bodies of knowledge (fiqh) that served in their time and are useful reference in our time.
– But our institutions in the Muslim world were damaged or destroyed by upheaval and occupation.
1.7 Our experience in the UK
Early generations who came to the West built various institutions to support the Muslim community e.g.
- Religious – masjids etc.
- Educational – madaris etc.
- Social/cultural – community clubs, Muslim scouts etc.
- Political – global, local etc.
- Welfare/charity – Aid agencies, women’s shelters etc.
We have achieved successes in some of the above e.g. charities
Muslims are commended for being prolific is establishing charities and also for being charitable.
We have not achieved significant success in establishing Islamic financial institutions in the UK except on a small scale e.g. Funeral co-operatives (“committees”)
Initially, some people bought into non-Islamic financial institutions e.g. by taking out a mortgage. Others opted out and chose to be “financially excluded” for many years. Some of the latter group have subsequently subscribed to the conventional financial system in various ways for various reasons.
Why have we not built home grown Islamic financial institutions in the UK? Where is the shortcoming?
Body of knowledge?
Suppose when Muslims first came to the UK, the Church said: “well, we don’t use our churches much except on Sundays if at all. You need space to pray five times a day. Why don’t you pray in the churces?” If we had accepted this offer, would we have built masjids?
Are we relying on alien: – conceptual frameworks?
– Bodies of knowledge?
Part 2: Conceptual framework
2.1 Mixing and matching
Is talfiq allowed to address modern day financial questions?
E.g. taking the doctrine of ‘wa’d mulzim’ from the Maliki madhab and the allowance of ‘bay’ al-‘eenah’ from the Shafi’I madhab.
Or must there be a consistent set of usuli principles upon which our answers to modern day financial questions must be based?
Is Talfiq tantamount to dealing with the question at the knowledge level without grounding it in the conceptual framework level?
2.2 Case Study: Pakistan Highway Sukuk Fatwa
Please read attached fatwa in pdf in full
Consider the following language:
“Whilst it would be highly recommended that the Exercise Price for the purchase of the Highway Land pursuant to the Purchase Undertaking should be equal to the market price of the Highway Land at the time of such purchase, the undersigned scholars are mindful of the prevailing circumstances and constraints referred to below and, therefore, do not consider the predetermined calculation of the Exercise Price as being in contravention of Shariah principles.
Each undersigned scholar is of the view that, given the prevailing circumstances, the structure and mechanism as set out above is acceptable within the principles of Shariah and that the above documentation reflects the above structure and mechanism and each undersigned scholar, on behalf of its respective Shariah Board, hereby approves the proposed issue of the Sukuk.
Each undersigned scholar also took into consideration (i) the legal constraints under which this product is being developed; (ii) the need to further develop the emerging Islamic finance industry as an alternative and viable financing system; (iii) the need to facilitate and bring ease to Muslim countries and others who are determined to raise financing according to Shariah principles; (iv) the various existing constraints and restrictions imposed under the various conventional financing techniques available in many Muslim countries; and (v) the prevailing conditions and affairs of the Ummah and the need to remove them from the shackles of riba.”
Consider the role of the following in the fatwa:
- Maqasid (e.g. bringing ease) and noble intentions (e.g. developing an Islamic financial industry)
E.g. can noble intentions override legal considerations?
E.g. can the “substance / effect” of riba be tolerated to give Muslims comfort of avoiding the “form” of riba?
E.g Can political/social considerations override legal considerations?
- Tolerating imperfections when compelled to work within constraints of hostile legal/political/social circumstances and applying the doctrine of darurah
E.g. Can darurah apply in a context of investment where there is no direct fear of loss of life or limb?
Paradox of darurah: If darurah exists, then simple riba would become permissible and there would be no need for an Islamic finance alternative. If darurah does not exist, then what’s all the fuss about?
- Is there a tension between competing political/social considerations?
E.g. Serving the Ummah by developing an Islamic finance industry -v- “dis-serving” the ummah by allowing the effect and outcome of the non-Islamic banking system to prevail in Muslim countries under the guise of the Islamic finance industry (e.g. by creating Islamic banking products that give fixed returns to the provider of finance using combinations of contracts such as ijara, musharaka and wa’ds).
- Is there a paradox of maqasid? i.e. objective is to give strength to the Muslim Ummah by growing an Islamic finance industry (albeit by making compromises) but people soon realise that the Islamic finance industry lacks authenticity and are deterred by it rather than attracted to it.
- Can ends justify the means?
- Are we moving in the right direction?
Session 2: Knowledge Framework
Part 3: Islamic financial principles
3.1 Core doctrines
– Freedom of contract
– Al-Kharaj bi al-Daman
3.2 What is Gharar?
نهى رسول الله صلى الله عليه وسلم عن بيع الغرر …
What is gharar? – Pure trading of risk
Every trade involves a transfer of risk e.g. hiring a bodyguard. The risk of physical harm is transferred to the bodyguard. Is the payment made to the bodyguard therefore bay’ al-gharar? No. Because the bodyguard is hired and paid for his work (i.e. working from 9am to 5pm standing guard, pre-empting danger, providing security advice, etc.). The transfer of risk is incidental to the primary service contract. However, if the risk of physical harm were to be separated from the service contract and sold separately e.g. I pay you £10 now and if I am attacked and suffer x degree of physical harm, you will pay me £1000, that would be a pure risk trade and would be bay’ al-gharar.
3.3 Why is bay’ al-gharar prohibited?
Risk cannot be priced because only Allah knows the future.
Therefore trading risk inevitably leads to a mispricing of risk and therefore some undeserved gain for one party.
ولا تأكلوا أموالكم بينكم بالباطل
Achieving correct prices in a market is called “efficiency” by economists.
Is achieving market efficiency one of the objectives of Islamic law?
3.4 What is Riba?
عن سَعِيدٍ الْخُدْرِيّ رَضِي اللَّهُ عَنْهُ، قَالَ:
جَاءَ بِلالٌ إِلَى النَّبِيِّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ بِتَمْرٍ بَرْنِيٍّ، فَقَالَ لَهُ النَّبِيُّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ: مِنْ أَيْنَ هَذَا قَالَ بلالٌ كَانَ عِنْدَنَا تَمْرٌ رَدِيٌّ فَبِعْتُ مِنْهُ صَاعَيْنِ بِصَاعٍ لِنُطْعِمَ النَّبِيَّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ فَقَالَ النَّبِيُّ صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ: عِنْدَ ذَلِكَ أَوَّهْ أَوَّهْ عَيْنُ الرِّبَا عَيْنُ الرِّبَا لا تَفْعَلْ وَلَكِنْ إِذَا أَرَدْتَ أَنْ تَشْتَرِيَ فَبِعِ التَّمْرَ بِبَيْعٍ آخَرَ ثُمَّ اشْتَرِهِ
البخارى ) )
Bilal visited the Messenger of God (pbuh) with some high quality dates, and the Prophet (pbuh) inquired about their source. Bil¯al explained that he traded two volumes of lower quality dates for one volume of higher quality. The Messenger of God (pbuh) said: “this is precisely the forbidden Riba! Do not do this. Instead, sell the first type of dates, and use the proceeds to buy the other.
3.5 Marking to market
Is the process of selling one type of dates in the market only to use the proceeds to buy the other type a ritualistic heela?
Ibn Rushd (Bidayat Al-Mujtahid wa Nihayat Al-Muqtasid, vol.3, p.184):
“It is thus apparent from the law that what is intended by the prohibition of Riba is what it contains of excessive injustice (ghubn fahish). In this regard, justice in transactions is achieved by approaching equality. Since the attainment of such equality in items of different kinds is difficult, their values are determined instead in monetary terms (with the Dirham and the Dinar). For things which are not measured by weight and volume, justice can be determined by means of proportionality. I mean, the ratio between the value of one item to its kind should be equal to the ratio of the value of the other item to its kind. For example, if a person sells a horse in exchange for clothes, justice is attained by making the ratio of the price of the horse to other horses the same as the ratio of the price of the clothes [for which it is traded] to other clothes. Thus, if the value of the horse is fifty, the value of the clothes should be fifty. [If each piece of clothing’s value is five], then the horse should be exchanged for 10 pieces of clothing.
As for [fungible] goods measured by volume or weight, they are relatively homogenous, and thus have similar benefits [utilities]. Since it is not necessary for a person owning one type of those goods to exchange it for the exact same type, justice in this case is achieved by equating volume or weight since the benefits [utilities] are very similar…”
Thus it is as if the Shariah is saying: “you believe that your one quantity of dates is worth two quantities of the other person’s dates. How can you be sure you have the right price? Why don’t you prove it by exchanging your dates in the market for another monetary commodity (e.g. gold/money/salt) and then seeing whether the other person will accept that amount of gold/money for his two quantities of dates. You may find that using the gold/money you obtain, you can buy the two quantities of dates and have some gold/money left over or you may find that it is not enough and you have to top it up with some gold/money from another source. If you do this, your trade will be “marked to market”. You will avoid inefficiency and mispricing in the market and will avoid devouring the wealth of others without right.”
3.6 Riba and Gharar
Is lending money for interest a pure trading of risk i.e. is riba like an investment and then a swap?
e.g. if the bank invests in the business of the customer, the bank bears the risk of variable profit or loss. The bank then says to the customer: “Let’s do a swap. I will give the variable amount I get from the investment to you and you give me a fixed amount in return.” The effect of this swap is an interest bearing loan by which the commercial risk of the business is transferred from the bank to the customer.
Is Riba an extreme example of a pure trade of risk (bay’ al-gharar)?
3.7 What is Al-Kharaj bi al-Daman?
… أن رجلا ابتاع عبدا ، فأقام عنده ما شاء الله أن يقيم ، ثم وجد به عيبا ، فخاصمه إلى النبي صلى الله عليه وسلم ; فرده عليه ، فقال الرجل : يا رسول الله ، قد استعمل غلامي . فقال : الخراج بالضمان
If you buy goods and find that the seller has deceived you by selling you defected goods, you are entitled to return the goods upon discovering the defect, recover from the seller the “full” purchase price and you do not have to pay the seller for its use between the time of the sale and your discovery of its defects. The reason for this is “al-Kharaj bi al-Daman” or “al-Ghunm bi al-Ghurm”, meaning if the goods were destroyed in your possession – before you returned them to the seller, then notwithstanding the deception of the seller – you would be held responsible for its loss. Thus since you carried the risk of loss, you – and not the seller – are entitled to its yield.
The al-Kharaj bi al-Daman and al-Ghunm bi al-Ghurm principle:
- Means that assuming risk of ownership/loss of an asset entitles the owner to the fruits of its produce.
- Is opposite to bay’ al-gharar and Riba
3.8 What is al-Ghurm bi al-Ghunm?
Conversely, al-Gurm bi al-Ghunm means that if you are entitled to the yields of something, you must be liable for its loss and held responsible for losses caused by it.
e.g If you are entitled to the benefit of an animal and the animal causes the loss to someone’s property, you can be held liable for that loss.
3.9 Application in financial transactions
The landlord must be responsible for major (structural) maintenance of the property. Tenant can be responsible for minor maintenance (usage/wear and tear).
Because as owner, the landlord is entitled to receive the rent so he must be responsible for loss of the asset and for bringing it back to working condition if there is major damage.
Would making the tenant pay for major maintenance by incorporating the cost of major maintenance in the next rental payment be contrary to the Al-Kharaj bi al-Daman principle?
- g. Disconnecting the income earned from an asset from the performance of the asset
The bank buys a property and requires the customer to buy it from the bank in the future at a price determined now. This gives the bank a guaranteed price for the property no matter what happens to the property price in future.
Is this contrary to the Al-Kharaj bi al-Daman principle?
Part 4: Islamic financial product case study:
Musharaka Mutanaqisa (Diminishing Musharaka)
4.1 The product
Step 1: Musharaka Agreement and Wa’d
The Bank enters into a Musharaka (partnership) contract with the Customer to combine their investment to purchase a property.
At the same time, the Bank requires the Customer to sign a Wa’d (promise) to purchase a portion of the Bank’s share of the property each month for the duration of the musharaka. This creates an amortised repayment of the Bank’s capital. Often the Bank signs a similar Wa’d to sell portions of its share of the property in the same way to the Customer.
Step 2: Ijara Agreement
Simultaneously to Step 1, the Bank leases its portion of the property to the Customer who pays rent. Rent is typically not based on market rental rates but is calculated in exactly the same way that interest would be calculated in a non-Islamic mortgage i.e.
No. of days in rental period
Rent = Capital amount outstanding X (Margin + LIBOR) X
The Capital amount outstanding is the amount of the Bank’s original investment that has not yet been paid back to the Bank through the monthly purchases described in Step 1.
Margin in a percentage e.g. 3%.
LIBOR is the London Inter Bank Offered Rate which is the interest rate at which banks in London lend money to each other. Banks will typically use the LIBOR rate every 3 or 6 months, which means that the bank will announce a new Rental Amount every 3 or 6 months by issuing the customer a new Rental Notice.
The number of days in a rental period will usually be 30 days for a home mortgage product.
360 represents the number of days in a banking year.
The Wa’d to Purchase allows the Bank to require the Customer to immediately purchase all of the Bank’s share in certain circumstances e.g. if the Customer refuses to accept the revised Rental Amount provided in a new Rental Payment Notice. This is the mechanism by which the Bank can terminate the lease and effectively “accelerate” or “foreclose” the financing and gives the Customer a choice of either accepting the new Rental Amount, whatever it is, or being compelled to buy the Bank’s share of the property at the original price, no matter what the current market price is.
The Wa’d to Sell can be exercised by the Customer to require the Bank to sell its share at the end of the lease period or during the lease period if it wishes to make “early repayment”. The Wa’ds to Purchase and Sell render what is in principle an operating lease, into a finance lease.
There are also provisions in the Ijara Agreement that allow the Bank to pass on its property insurance costs and costs of major maintenance to the Customer in the form of “Additional” or “Supplemental” rent.
4.2 Shariah Issues
4.2.1 The Wa’d to purchase the bank’s share in the future at a price fixed in advance
Shariah scholars in the Islamic finance industry have allowed the use of wa’ds in Islamic financial transactions to create future obligations on condition that they are (i) unilateral and (ii) documented separately from the main contract, stating that if these two conditions are met, wa’ds do not constitute a bilateral contract.
(i) To be binding or not to be binding … that is the question
The Wa’d is a weapon of mass construction and a weapon of mass destruction. If wa’ds (promises) can be legally enforceable, then one has a very powerful instrument in one’s hands that can be used to effectively engineer the effect of any prohibited transaction. In such a case where any transaction can be engineered using wa’ds, does the question of which transactions are permitted and which are prohibited stop being a juristic determination and become a matter of policy (or perhaps politics)?
If so, there is an issue of separation of powers as in secular legal systems.
Should jurists/judges/lawyers make laws or should that be the job of politicians?
Juristic opinions on Wa’ds
Jurists have three positions on the enforceability of a unilateral promise (wa’d):
- For the majority of jurists, it is not legally enforceable, though morally encouraged.
- For Ibn Shubrimah and others, it is legally enforceable except where it is justified not to enforce it.
- For the Maliki school, it is enforceable if the beneficiary of the promise relies on the promise and incurs a cost. For instance, if the promisor says to the beneficiary: “Get married, I unilaterally promise (wa’d) you £10,000.” If the beneficiary marries in reliance on the promise, then the promise can be legally enforced against the promisor.
Questions on Wa’ds
- Rationale for the majority opinion: If a unilateral wa’d were legally enforceable, an interest bearing loan could be replicated by Party A providing Party B with an interest free loan of GBP100 repayable in a year’s time and Party B simultaneously providing Party A with a “unilateral” promise to give a gift of GBP10 in a year’s time, (representing an effective 10% “interest rate”).
- What is the rationale for the Maliki opinion? Does the Maliki madhab intend that their opinion to legally enforce a plain unilateral promise (wa’d) (i.e. where there is no collateral contractual relationship between the promisor and beneficiary of the promise) can be extended to a situation where there is a collateral contractual relationship between the two?
i.e. can the following two promises be treated as equally binding if the beneficiary of the promise relies on it?
- a) “If you climb this mountain, I promise to give you £100.” (There is no contractual relationship)
- b) “If you unilaterally promise to buy the house off me in a year’s time for £100, I agree to enter into a partnership with you now to purchase the house for £90” (There is a contractual relationship)
- Is a binding unilateral promise (wa’d) analogous to a bilateral contract?
- If a binding bilateral contract is prohibited in a given situation e.g. in a future sale, then can a binding unilateral promise (wa’d) that produces the same effect be allowed in the same situation?
- Is it the bindingness of the bilateral contract that makes it prohibited in the situation of a future sale? If so, does making it a unilateral promise but equally binding make any difference?
- Note that the Maliki position only provides the beneficiary of the promise with an indemnity (reimbursement for loss) in the specific circumstance where it suffers an actual loss as a result of relying on the promise. Is this a sufficient jurisprudential basis for the widespread use of wa’ds documented to be binding all circumstances?
Are promises binding in English law?
English law requirements for valid contract:
(iii) Consideration (something of value going both ways)
(iv) Intention to create legal relations
Consideration makes a contract bilateral. Without consideration, it remains a unilateral promise which English law considers unenforceable (unless specifically drafted as a deed).
Was the English law requirement for consideration to flow both ways before a contract is binding taken from Islamic law as a way of preventing usuary?
Documenting promises as deeds – Shariah arbitrage?
Wa’ds (promises) in Islamic financial transactions are usually documented as deeds. Here there is a degree of jurisdictional arbitrage. The Wa’d is permitted by some Shariah scholars on the basis that it is unilateral. On the other hand, it is often documented in the Islamic finance industry as a deed which effectively makes it binding and enforceable under English law.
(ii) Fixing the price in the Wa’d
AAOIFI Shariah Standard 12 on Sharika (Musharaka) states at Clause 5/7 in relation to diminishing musharaka:
“It is permissible for one of the partners to give a binding promise that entitles the other partner to acquire, on the basis of a sale contract, his equity share gradually, according to the market value or a price agreed at the time of acquisition. However, it is not permitted to stipulate that the equity share be acquired at their original or face value, as this would constitute a guarantee of the value of the equity shares of one partner (the institution) by the other partner, which is prohibited by Shari’a.”
The Shariah basis for the above ruling is expressed on page 225:
“The basis for the impermissibility of a promise by one of the partners to buy assets of the partnership at face value is that this constitutes a guarantee of the capital which is prohibited by Shari’a. The basis for the permissibility of a promise to buy the assets of partnership at the market value is that this does not constitute a guarantee of capital.”
Does fixing the price in the Wa’d contradict the principle of profit and loss sharing in a Musharaka partnership?
In practice, the above prohibition has not been applied consistently in the Islamic finance industry and the practice of using wa’ds (promises) to require the Customer to purchase the Islamic Bank’s share of the musharaka assets at face value continues to be widely approved in the industry, even by Shariah scholars who sit on the AAOIFI Shariah Board e.g. in the IBB Islamic mortgage product. What is the basis/reason for this?
(iii) Is the Wa’d independent and separate?
Does the AAOIFI Shariah Standard 12 imply that even if the wa’d (promise) to purchase is documented as a separate instrument, there is a question as to whether such a wa’d is really independent of the main musharaka contract?
If the wa’d were truly independent, what would be the basis for placing restrictions on the way the purchase or sale price is determined?
Is placing such restrictions in order to prevent one partner guaranteeing the other partner’s capital an admission that the wa’d is inextricably connected with the main musharaka contract?
Would the continuous use of the wa’d in the same manner between counterparties in the Islamic finance industry create a specific customary practice (‘urf khas)?
On the basis of an ‘urf khas, if a certain course of conduct is known and expected by both parties when entering into a contract but not expressly stipulated, Shariah law will nevertheless treat it as an express and operative term of that contract. This maxim is akin to the “reasonable expectations of the parties” test applied in English law when implying terms that are not expressly stipulated in contracts (e.g. Attorney General of Belize v Belize Telecom Ltd  UKPC 10) i.e. is the performance of the wa’d part of the reasonable expectation of the parties when entering into the musharaka contract?
On the above bases, should the facts of the matter be interpreted such that the provision of the Wa’d is seen to be part of a sequence of events and therefore part of the same transaction as the musharaka contract? If so, would the musharaka transaction as a whole be vitiated for containing a provision illegal in Shariah?
The Single Transaction Principle
In Thabo Meli v R ( 1 All ER 373;  1 WLR 288) the defendants attacked their victim with the intention of murder. The victim appeared dead but was not in fact dead. So far, the defendants had not committed muder. Although they possessed the necessary intent (mens rea), they had not in fact committed the act of killing (actus reus). Having thought that they had already killed their victim they then began to think about how to dispose of the “body”. Now with the intent of disposing of a dead body they threw the victim over a cliff. Thus, the act actually causing death was performed when the defendants did not have the intention to kill, such that the requirement that the actus reus and mens rea must coincide in point of time was not met. Nevertheless the conviction was confirmed by the English court on the basis of the “single transaction principle” which allows a conviction where the defendant has both actus reus (act of killing) and mens rea (intention to kill) together during the sequence of events leading to death.
What would a Shariah court conclude?
When do intentions count?
العبرة في العقود بالمقاصد والمعاني لا بلألفاظ والمباني
Is a musharaka contract with a wa’d to purchase documented on a separate piece of paper two separate transactions or one single transaction?
Are the parties’ intentions part of the transaction?
What if they are not expressly stated but are determinable from the conduct of the parties?
What if they are expressed verbally but not in writing?
What if they are expressed in writing but on a separate piece of paper?
What if they are written on the same piece of paper as the main contract and then the paper is torn to separate them?
Paradox of intentions:
Good intentions are claimed to justify allowing prohibited or doubtful practices at a macro level
e.g. “Creating cash flows using Commodity Murabaha and Wa’ds is not ideal but our intention is to make things easier and better and to allow the Islamic finance industry to grow”.
But intentions are denied at a micro level to get Shariah approval
e.g. in a dimishing musharaka mortgage, the bank leases the property to the customer. The bank also requires the customer to sign a wa’d promising to buy the bank’s share of the property in the future at a price fixed now. An onlooker would say that the intention is to protect the bank’s capital and not subject it to the price risk of the property. However, this transaction is approved on the basis that the wa’d is on a separate piece of paper and is therefore a separate transaction without looking at the intention of the parties to conclude that the musharaka and the wa’d are a single transaction.
Question of law or question of fact: The “But for” test
Is a wa’d given in the context of a bilateral contract unilateral or bilateral?
Is this a question of law or a question of fact?
A question of law is determined by looking at the law in the textbook. A question of fact is determined by looking at what is actually happening e.g. one would determine whether traffic on a road is actually going one way or two ways not by reading a road sign or driving manual but by simply observing what is happening on the road.
A practical test to determine whether the wa’d is unilateral or bilateral is the “but for” test: “but for the wa’d given by the Customer to purchase the property at a fixed price, would the Islamic Bank enter into the mushara contract? The Islamic Bank would be asked: “would you enter into the musharaka contract if the Customer does not give you a wa’d (promise) to purchase?” If the Bank’s answer is “No” in other words, that the Bank would not enter into the musharaka agreement if the Customer does not promise to purchase the property, then can it be denied that the musharaka contract is connected to, and contingent upon, the Customer’s promise?
Does this make the wa’d bilateral?
Does this make the musharaka agreement and the wa’d together into one transaction?
4.2.2 The Ijara Agreement
Is benchmarking the rent to an interest rate a problem? Is it a symptom of a systemic problem?
Is it permissible for a Landlord to require a tenant to purchase the Landlord’s house if the tenant refuses to accept an increase in rent?
Can a landlord require the tenant to pay the cost of major maintenance, even if it is bundled into the “rent”?
4.2.3 Shariah compliant versus Shariah based
Is there such a distinction in Islamic law?
Can a transaction be Shariah compliant (i.e. comply technically with the letter of Islamic law) but not be Shariah based (i.e. conflict with the spirit of Islamic law)?
Can the law of Allah be so open to manipulation that it can be used to achieve the opposite of Allah’s intention? If so, then what is the point of divine law?
Session 3: Institutional Framework
Part 5: Building successful Islamic financial institutions
Consensus – Ulama disagree on many issues. But is there a glutinous core that we can all agree on?
e.g. mutual financial institutions
e.g. equity based products with pure profit and loss sharing
Authenticity – Many people, including non-Muslims, are sceptical about Islamic finance and question its authenticity. Can we address this crisis of confidence by going back to basics?
Simplicity – The ordinary public find current Islamic financial products complex and esoteric. Can we keep things simple?
Mainstream – Islamic finance has mainly targeting Muslims in the UK. Can we have a proposition that benefits all people whether Muslim or non-Muslim?
Leadership – How can the ulama, imams and community leaders give leadership and inspire confidence in the community to make this successful? Is there a role of this multaqa in this process?
Partnership – Can we partner or share knowledge with institutions in mainstream British society who share similar values and aspirations as us? E.g. mutuals and friendly societies, JAK Bank etc.
Part 6: Equity based solutions case study:
Musharaka Mutanaqisa (Diminishing Musharaka)
6.1 The product
A True Diminishing Partnership
- There is a true partnership between the Finance Company (who may also be the developer) and the Home Buyer.
- There are no wa’ds requiring the Home Buyer to purchase the Finance Company’s shares or to purchase the property if the rent is increased.
- Rent is charged at market rental rates.
- At intervals, the Home Buyer may make an offer to the Finance Company to purchase a portion of the Finance Company’s share. The price of the sale will be negotiated between the parties and not fixed in advance.
- If the Home Buyer can no longer afford to live in the property, they can move out to a cheaper place and begin to receive rent from this property.
6.2 What are the challenges to setting up such a model?