Features and Conditions of Salam, Islamic Banking, Bonds, Good and Benevolent Loan - Essay Example

Islamic law and business Name & ID Course Name & Code Instructor’s Name 1st April 2010 Table of Contents Table of Contents 2 Introduction 3 Features and conditions of Salam 3 Property 4 Market 6 Partnerships 8 Companies 8 Good loan/benevolent loan 10 Islamic bonds 10 Islamic insurance 10 Islamic laws on trading 11 Microfinance 11 Islamic economics 11 Conclusion 12 References 12 Introduction In the Quran 2:175 it is stated that, "Allah has made business lawful for you." Numerous countries’ legal systems have been strongly been influenced by the widespread Islam religion. Islamic law is referred to as Sharia and its source is the Koran and the Sunna (found in the Sira and the Hadith) (Trevor and Rifaat, 1999). Sharia law covers all aspects of life. Roughly there are five areas of Sharia law (Kip, 2004): First, Belief-Allah, His books, His prophets, His angels the decrees of God and, the Day of Judgment. Second, is about moralities-giving good counsel, patience, humility, and so forth. Third is about devotions-the Five Pillars, pilgrimage to Mecca, alms, and jihad. Forth, is about transactions-business law, divorce marriage, and disputes. The final area is about punishments-stoning, lashings, amputation, and retaliation. This paper discusses the Islamic law in business which is in the fourth area concerned with transactions. It focus on Features and conditions of Salam, Property, Market, Islamic banking, partnerships, companies, hire purchase, good loan/benevolent loan, Islamic bonds, Islamic insurance, Islamic laws on trading, and microfinance and Islamic economics. The Islamic law of business organization covers laws governing partnerships and companies in accordance to Islamic religion (Trevor and Rifaat, 1999). Features and conditions of Salam There are seven basic features and conditions of Salam which guide business. First, the transaction is considered Salam if the purchase price has been paid by the buyer to the seller in full at the time of sale (Vincent, 2007). Second, Salam can only be effected in commodities whose quantity and quality can be specified exactly (Trevor & Rifaat, 1999). Third, Salam cannot be effected on a product of a particular field or farm or on a particular commodity (Vincent, 2007). Fourth, the commodity’s quality intended to be bought through Salam should be fully specific thus leaves no ambiguity that may translate to a dispute. This means that all the specifics such respects must be extensively mentioned. Fifth, it is also necessary that the amount of the product that is agreed upon in unambiguous term (Vincent, 2007). Sixth, the exact place and date of delivery must be stated in the contract (William et al., 1999). Property According to the Qur'an, God is the sole owner of all matter in the heavens and the earth and man holds God's possessions in trust (amanat) (William et al., 1999). In reference to Islamic jurists, properties have been divided into three categories (Trevor and Rifaat, 1999): Public property, State property and Private property In Islam, public property refers to all naturally occurring resources over which all humans have equal right (Vincent, 2007). These resources are held by the community. These properties are usually guarded and controlled by the Islamic state and any citizen can utilize it so long as he or she does not undermine other citizens’ rights (Mushtaq, 1999). Water agricultural land and energy cannot be privatized under the Islamic law. This follows the famous Muhammad's saying that "people are partners in three things: water, fire and pastures"( Muzzamil,2009). To own a previously public property, one has to pay Zakat and accordind to Shiite scholars one has to pay khums in addition (Trevor and Rifaat, 1999). Natural resources and other properties that cannot be privatized immediately are referred to as state property. These can be both immovable and movable and can be acquired through peaceful means as well as through conquest. Properties which are unoccupied, heir less and unclaimed are also state properties (Trevor and Rifaat, 1999). These properties are held by the state to ensure that resources are not concentrated in the hands of a few people which can limit their use for the good of the community as a whole (Mushtaq, 1999). Thus, people can cultivate the agricultural land but the taxes which are collected usually goes to the state. Muhammad stated that "Old and fallow lands are for God and His Messenger, then they are for you". Jurists conclude from this that, state property is taken over by private ownership (Trevor and Rifaat, 1999). Private ownership of property is recognized and upheld by Islam. Inheritance, legality of ownership, prohibition against stealing, recommendation to give charity is discussed in the Quran. Property protection is guaranteed in Islam by imposing stringent punishments on thieves. In accordance to Muhammad, he who dies defending his property is like a martyr (Trevor and Rifaat, 1999). Acquisition of private property has been classified into three categories by Islam economists. These categories are: involuntary, contractual and non-contractual. Bequests, inheritance, and gifts are involuntary acquisition while the collection and exploitation of natural resources which have not previously been claimed as private property is non-contractual acquisition.Trading, renting, buying, hiring labor are contractual acquisition(Mushtaq, 1999). Maliki and Hanbali jurists argue that the state can limit the amount of private property an individual is allowed to own if private ownership endangers public interest though this view is debated by others (Rafik, 1997). Market Markets are accepted in Islam as the basic coordinating mechanism of the economic system (Trevor and Rifaat, 1999). In accordance to Islamic teaching, the market allows consumers and producers to buy and sell, their goods, at a mutually acceptable price (Vincent, 2007). Islam allows freedom of trade and operation of market forces but this is limited by Shari'ah (Mohamed et al., 2002). Hoarding to make high profits is condemned in Islam although normal buying and selling of goods and services at a reasonable profit is also allowed (Trevor and Rifaat, 1999). The freedom of exchange, private ownership and security of contract are the three necessary conditions for an operational market upheld in Islamic primary sources (Mohamed et al., 2002). Islamic banking This is a banking system activity that is concurs with the ideologies of Islamic law (Sharia) and its practical application through the development of Islamic economics (William et al., 1999). This means that Islamic banking fulfill its tasks in principle with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions) (Vincent, 2007). Sharing of profits and losses and the prohibition of riba (usury), are the basic principles of Islamic banking. Paying or accepting interest (Riba) fees for the money lend is prohibited in Sharia law. This is found in Quran 2:275 where interest is prohibited and trade is allowed (Mushtaq, 1999). Joint venture (Musharakah), cost plus (Murabahah), profit sharing (Mudharabah), safekeeping (Wadiah), and leasing (Ijarah) are terms which are commonly used in Islamic banking (Muzzamil,2009). In an Islamic mortgage transaction a financial institution buys the product from the seller, and the sells it to the buyer at a profit, and at the same time, allowing the buyer to pay the bank in installments in an arrangement called Murabaha (Mushtaq, 1999). In spite of this, there are no additional penalties for payments which are late (William et al., 1999). The bank asks for strict collateral to protect itself against default. In another arrangement called EIjara wa EIqtina, Islamic banks provides assets to the client against an acceptable rental together with a independent undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee(Mohamed et al., 2002). In an approach called Musharaka al-Mutanaqisa, the bank allows for a floating rate in the form of rental (Vincent, 2007). In this approach both the bank and borrower provide capital at an agreed rate to purchase the property. The property is then rented out to the borrower and the proceeds are shared based on the current equity share of the partnership (Mushtaq, 1999). At the same time, the bank's share of the property is bought by the borrower at agreed installments. In case of default, the property is sold and the proceeds shared in accordance to the equity held by the bank and the borrower. In an arrangement called Musharaka, the bank lends money to companies and the bank’s profit on the loan is equal to a certain percentage of the company's profits until the principal amount of the loan is repaid (William et al., 1999). Under Mudaraba arrangement an entrepreneur provides labor while the bank provides capital and the profit and the risk are shared by both the bank and the entrepreneur (Vincent, 2007). Institutions which provide banking products and services are required to establish a Shariah Supervisory Board (SSB) to advise them and to the bank comply with Shariah principles (Muzzamil,2009). Partnerships These are business entities in which two or more persons and profits and losses of the business are shared with each other (Mohamed et al., 2002). In partnership structure profits are only taxed after they are distributed among the partners and not before. Depending on the jurisdiction in which the partnership operates, partners may be exposed to greater personal liability (Trevor and Rifaat, 1999). The modern limited partnership originated from the Mudaraba and Qirad institutions in Islamic law and economic jurisprudence (Jairus, 2007). Mudaraba and Qirad institutions were developed in the medieval Islamic world during which Islamic economics flourished (Mushtaq, 1999). In Italy, the Qirad and Mudaraba institutions were developed in the 10th century as the commenda which was a limited partnership institution for financing maritime trade (Jairus, 2007). Companies In Islam company is referred to “Shirkah" and it means to "join together or intermix" and it has been interpreted as a legal concept "as a contract between partners in capital and profits"(Mohamed et al., 2002). It also means "participation of two or more persons in a certain business with defined amounts of capital according to a contract for jointly carrying out a business and for sharing profits and losses"( Vincent, 2007). Islam jurists emphasize the importance of this concept as a useful method of organizing business relations (Muzzamil,2009). Under Islamic Law (Sharia), companies are of two main classes: property companies and contractual companies. Property companies may be voluntary or mandatory companies. Voluntary companies are where two or more people agree to jointly own property while mandatory companies are established by two or more persons who find themselves in a situation where ownership of property is forced upon them, for example, by inheritance or through endowment (Mohamed et al., 2002). Contractual Companies are established on the contract. They are divided into ‘Mufawadha’ and Aanan. ‘Mufawadha’companies are established when the partners have equal shares in the company as well as equal rights and benefits in profits and management (William et al., 1999). In 'Aanan' companies the partners' shares are variable and not distributed equally between the members (Mushtaq, 1999). Contractual companies can also be classified as capital, work and personal companies. Capital companies are where each of the partners provides a specific share in the capital of the company to conduct a trade together or separately and share in the profits (Mohamed et al., 2002). Work Companies are formed by two or more persons providing efforts as capital for the conduct or performance of a specific work or profession and share in the fees or consideration for such efforts (Kip, 2004). On the other hand, Personal Companies are formed by two or more partners to conduct trade based on the trust and goodwill enjoyed by them in the business community (Vincent, 2007). No provision of a specific capital is required to establish personal companies. Hire purchase Ijarah thumma al bai' is an Islam term which is similar to hire purchase. Ijarah is the first contract which outlines the terms for renting or leasing over a fixed period (Muzzamil,2009). Bai is the second contract which triggers a sale once the term of the Ijarah is complete (Kip, 2004). This enables the customer to purchase the item at an agreed to price. Good loan/benevolent loan This is a loan which the debtor only repays the amount borrowed though the debtor may, at his or her discretion, pay an extra amount (Vincent, 2007). If the debtor pays no interest to the creditor, then this is a true interest-free loan. Some Muslims this type of loan is considered by some Muslims to be the only loan which does not violate the prohibition on riba (Trevor and Rifaat, 1999). Islamic bonds Sukuk is an equivalent of bond. However, no interest-bearing bonds or fixed-income are permissible in Islam (Mohamed et al., 2002). Thus, Sukuk comply with the Islamic law (Shariah) which prohibits the charging or paying of interest (Vincent, 2007). Islamic insurance It is believed by some Muslims that insurance is unnecessary, since the society should help its victims (Kip, 2004). However, there are some Islamic insurance schemes. For instance, there is insurance where a Muslim avails himself against the risk of loss due to misfortune which is known as takaful (Mohamed et al., 2002). Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals (William et al., 1999). Islamic laws on trading Gambling and insuring ones' health or property are prohibited by the Quran (Kip, 2004). The hadith prohibits bayu al-gharar (trading in risk) for example selling the birds of the air (Mohamed et al., 2002). yasir is a financial transaction with a minor risk and is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram (William et al., 1999) Microfinance Microfinance is capable of Shariah-compliancy (Kip, 2004). Islamic microfinance can transform lives of the poor (Rafik, 1997). Some microfinance institutions (MFIs) such as FINCA Afghanistan have introduced financial instruments that accommodate sharia criteria (Mohamed et al., 2002). Islamic economics Islamic economics is the application of Islamic law to economic activity. The paradigm developed by modern Shia scholars seeks not only to enforce Islamic regulations on issues such as Zakat, Jizya, Nisab, Khums, Riba, insurance and inheritance, but to implement broader economic goals and policies of an Islamic society (Trevor & Rifaat, 1999). Islamic economical jurisprudence models are communistic, controlling and are anti-free market (Mohamed et al., 2002).This limited economic model controls the populace of the countries which control them while maintaining their grip upon the purse strings of their nation's wealth (William et al., 1999). Conclusion From this discussion it is clear that some of the Islamic principles may bar free and fair business transactions such as high returns business. It can also interfere with international business especially with non-Muslim countries. References Jairus B. (2007). Islam, the Mediterranean and the rise of capitalism. Historical Materialism 15 (1), pp. 47–74. Kip B. (2004). Islam and business: cross-cultural and cross-national perspectives. London: Routledge Publishers. Mohamed A., Nik M. & Ismail N. (2002). Islam & business-Business & Economics. London: Pelanduk Publications. Mushtaq A. (1999). Business ethics in Islam‎. Dubai: Kitab Bhavan publishers, 1999 Muzzamil S. (2009). Some Key Business Ethics Principles in Islam. Retrieved from http://makkah.wordpress.com Rafik B. (1997). Islamic Business Ethics International Institute of Islamic Thought. Retrieved from http://www.theislamicworkplace.com/Books.html Trevor G., & Rifaat A. (1999). Business and accounting ethics in Islam‎- Philosophy. Dubai: Mansell Publications. Vincent J.C. (2007). Voices of Islam: Voices of life: family, home, and society. 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