Gharar in Islamic Law - Assignment Example

? Gharar in Islamic Law (Part 2) No: Gharar in Islamic Law Introduction Islamic bankingtoday has now become a reality. The number of Islamic Banks / financial institutions is increasing day by day. New Islamic Banks are established with handsome capital. Conventional banks on realizing the importance of Islamic banking opened separate window to deal with the Islamic banking transactions. Their operations are manned by the experience and knowledgeable human resource (Obaidullah, 2005). Another major contribution of the Islamic banks is that being under supervision of their Shariah Boards they presented a wide range of questions concerning modern business to Shariah Scholars, hence, providing them an opportunity to understand the contemporary business practice and trade but also to evaluate it in the light of Shariah and to find out other alternatives which may be acceptable according to the Islamic principles (Vogel and Samuel, 1998). Islamic Laws Islam is a complete code of life and encompasses everything in life. It influences families as much as international relations and certainly includes all financial matters. It sources are the Quran and the Sunnah and the consensus of the opinion of the great jurists and interpreters of Islamic Law. If none of cited provide guidance on a particular matter then there is qiyas or analogy by which jurists and scholars compare an issue of today with a similar one described in the Quran or Sunnah and draw conclusions from the principles involved (Usmani, 2001). In all mattes of finance, the essence of Islamic law is perhaps based on a verse from the Quran that says “Do not usurp one another’ possessions”. The object of Islamic finance is to eliminate injustice and exploitation in financial dealings and to create an equitable distribution of wealth by encouraging effort and mutual co operation. It is believed that this, in turn, will increase productivity and goodwill, alleviate economic hostility and inspire all the members of a society with a feeling of having common economic goals (Al-Qardawi, 2001). However, because the law is derived from writings that predate modern life, the interpretations can be difficult. In the finance sector, banks appoint Shariah boards to consider transactions that the bank wishes to engage in and decide whether they meet the Shariah requirements. However, boards in different banks may often come to different conclusions (Obaidullah, 2005). Almost all transactions entered into by banks are based on legal contracts that conform to local law (or in many cases, English Law) and often add Shariah compliance as an additional requirement. This has not proven to be an easy legal basis for business, although only a few cases have come to the courts, the courts have ruled that only one law can be applied (Ghafoor, 1995). London Rulings Two cases are worth studying a) Islamic Investment Company of Gulf Ltd v Symphony Gems & others (London High Court 13.02.02) b) Beximco Pharmaceuticals Ltd & others v Shamil Bank of Bahrain EC (Royal Courts of Justice, London 11 & 12 December, 2003) In the later case, the banking expert on Islamic Law and former director, Center of Islamic and Middle Eastern Law on the invitation of the court gave following observations (Usmani, 2001): The precise scope and content of Islamic Law in general, and Islamic banking in particular are marked by a degree of controversy within Islamic world, best exemplified by the fact that the actual practice of Islamic banking differs widely within the Islamic world (Usmani, 2001). In the absence of any agreement on the boundaries of Islamic Banking or indeed on what ought to be the precise ingredients of a Morabaha agreement, it is in practice up to the individual banks to determine the issue. In the absence of any legal prescription as to what does and what does not constitute Islamic banking or finance, most Islamic banks, including those in Bahrain, seek the advice of Islamic Scholars who examine and approve particular agreements and forms of agreement, the role of the Religious Supervisory Committee to formulate the bank’s interpretation of the Shariah (Ghafoor, 1995). Strictly interpreted the Shariah refers to the divine law as contained in the Quran and Sunnah. However, most of the classical Islamic law on financial transactions is not contained as rule / law in the Quran and Sunnah but is based on the often divergent views held by the established schools of law. The particular form and contents of Morabaha agreement is not the same. If a bank’s Religious Supervisory Board is satisfied that the bank’s activities are in accordance with Shariah law, that concludes the matter, so there being no provision in Bahrain law or Islamic law generally, for an appeal by a customer of the bank against the Board’s ruling and certification. Finally, even if the relevant agreements amounted to agreements to pay Riba, the principal sums advanced could validly be claimed (Usmani, 2001). Hence, Morabaha Agreements should be in accordance with Islamic law, all that is required is certification by Shamil Bank’s Religious Supervisory Board and the principal amounts are dispensed in accordance with the terms of Morabaha Agreements (Usmani, 2001). Role of Shariah Board Religious Shariah Boards have an important role to play. They have to safeguard the banking practices, ensuring that the principles of Islam are not violated (Ghafoor, 1995). The bankers are typically professionals who may not have the required experience and knowledge in terms of Islamic Banking Transactions. Therefore, it is incumbent upon the Shariah Boards of respective banks to educate their manpower to smoothly run the business strictly in accordance with the tenets of Islam and Sunnah (Ahmed and Shabbir, 2009). Working closely with the professional bankers they have to play the role of developing innovative products which suites the requirement of the customers. Further, they are in contact with other Shariah Boards to find out the solutions of the Riba free transactions (Ghafoor, 1995). In the first place the concerned Board examines the transactions and operations of the bank to ensure that the transactions are being done in accordance with the Islam laws. If it feels that a particular transaction should not be allowed since ambiguous in terms of Shariah and Sunnah. Then there is a need to sit with them to draw a structure or to remove the ambiguities in the transaction to make it shariah compliant (Ghafoor, 1995). Basic difference between capitalist and Islamic Economy Islam does not deny the market forces and the market economy. Even the profit motive is acceptable to a reasonable extent. Private ownership is not totally neglected. However, the basic difference between the capitalist and the Islamic economy is that in capitalism, the profit motives are unbridled. The desire of making more money is not controllable. However, these are to be controlled through legislation by the Parliament. Interest, gambling, speculative transactions tend to concentrate wealth in the hands of few main cause of creating a monopolistic approach (Usmani, 2001). Whereas Islam recognizes the private ownership, profit motive and market forces by putting in certain divine restrictions on the economic activities. These instructions are being imposed by the Almighty Allah whose knowledge is supreme and cannot be compared with the knowledge of any human being. The usury or interest, gambling, hoarding, dealing in unlawful goods or services, short sales and speculative transactions are some examples of cited divine restrictions. All these prohibitions combined together have the cumulative effect of maintaining balance, distributive justice and equality of opportunities (Usmani, 2001). Assets Based Financing One of the most important factor of Islamic financing is that it is an asset based financing. The conventional concept of financing is that the banks and financial institutions deal in money and monetary papers only. Hence, they are forbidden in most countries from trading in goods and making inventories. Islam on the other hand does not recognize money as a subject matter of trade, except in some special cases. Money has no intrinsic utility, it is the only a medium of exchange. Financing in Islam is always based on illiquid assets which creates real assets and inventories (Ahmed and Shabbir, 2009). The ideal instruments of financing in Shariah are Musharakah and Mudarabah when a financier contributes money on the basis of these two instruments it is bound to convert into the assets having intrinsic utility. Profits are generated through the sale of these real assets. Financing on the basis of Salam and Istisna also creates real assets. The financier in the case of Salam receives real goods and can make profit by selling them in the market. In the case of Istisna financing is affected through manufacturing some real assets, as a reward of which the financier earns profit (Saleh, 1986). In conventional financing, the financier lends money to the client on interest. After giving the interest bearing loan, the financier has nothing to do with its usage. In the case of Murabahah no money is advanced by the financier. Instead the financier purchases the commodity by itself or through its agent as per the requirement of the customer. Since the transaction cannot be completed unless the client assures the financier that he / she wishes to purchase the commodity (Usmani, 2001). In the conventional financing system loan can be given to any profitable business without taking into account its morality. The aims of the financial institution are to dole out profit from their investments. Conventional banking is not bound to follow the divine or religious restrictions in terms of their transactions. In interest bearing loan the amount is to be repaid by the borrower which keeps on increasing with the passage of time. In the Islamic mode of financing a selling price once agreed cannot be amended / altered even the customer failed to meet his / her obligations. The seller cannot ask for higher rate of return on investments. In Shariah there is no concept of charging over and above agreed terms. However, failure to meet commitment by the customer on time attracts penalty. The penalty so imposed on the customer should go to the charity (Ahmed and Shabbir, 2009). Gharar The gharar contains uncertainty in a contract or sale where the goods may or may not be available (the bird in the air or the fish in the water). It shows ambiguity in the consideration or terms of a contract. As such the contract would not be void. An example tainted with gharar is an agreement to sell goods which have already been sold (Vogel and Samuel, 1998). The permissible mode of Finance in Islam as under: Mudaraba and Musharaka The above mentioned mode of financing come closest to the Islamic concept of profit or loss sharing. Mudaraba In mudaraba involves number of investors who entrust their capital to a mudarib who in turn pools capital and entrusts it to one or more third parties who are in need of capital to finance their business. mudarib merely act an agent and is not responsible for any loss to be arisen. The investor received his / her Principal plus agreed share of profit. The profit is divided between the investor and the entrepreneur in proportion as agreed in the contract. In case of loss investor has to bear the loss (El-Gamal, 2002). Musharaka This is more like a joint venture between the bank and its client. Each party contributes to the project in the form either of working capital, assets, technical and management expertise. There are no fixed rules, each case being dealt with on its own merits. There is no restriction on the length of the contract. A project may last for a few weeks or a few years. Profits are shared on an agreed basis but any losses are shared by the capital providers in proportion to the contribution (Al-Qardawi, 2001). Murabaha Murabaha is a term in Islamic Fiqh and it refers to a particular kind of sale having nothing to do with financing in its original sense. If a seller agrees with his purchaser to provide him specific commodity on a certain profit added to his cost it is considered murabaha transaction. The basic ingredient of murabaha is that the seller discloses the actual cost he or she has incurred in acquiring the commodity and then adds some profit thereon. This profit may be lump sum or may be in fraction (Al-Qardawi, 2001). Salam Salam is a sale whereby the seller undertakes to supply some specific goods to the buyer at a future date in exchange for an advanced price fully paid at the time of the agreement. The basic purpose of such sort of financing is to meet the requirement of the small farmers who needed money to grow crops. They were allowed to sell their products in advance against payment (Obaidullah, 2005). Istisnaa Like Salam, Istisnaa is a kind of sale where the goods are being sold which does not exist at the time of contract. The goods always required for manufacturing purpose. The manufacturer agrees to produce the goods with materials to an agreed specification. It is not necessary to pay the full price in advance and payments may be made in agreed installments over time. Nor is it necessary to fix an exact time of delivery but the purchaser may fix a maximum time. If this time exceeded the purchaser may not be bound to accept the goods or pay the price. The contract is irrevocable after the commencement of manufacturer unless the goods delivered to not meet the contracted terms (Usmani, 2001). Ijarah It means give something to someone on rent. It can be used for any transaction when the services of someone are hired by someone else. It could be used where the services of a doctor, lawyer or laborer were hired to provide service. In terms of financing the property is to be rented out to someone by someone. It amounts to leasing. The right to use the property is transferred but the ownership remains with the owner. There should be an agreed period of lease and agreed consideration. All the liabilities emerging from ownership remain with the lessor but those emerging as user of the property remain with the lessee (El-Gamal, 2002). Generally there are two types of contract a) one is specified the rental to be paid during the tenure of lease and b) lessor unilaterally promises to sell the assets to the lessee at the end of lease period at an agreed price or to give the assets to the lessee. This arrangement meets Shariah requirement. Now the lease becomes one of the major instruments in the Islamic mode of finance (Saleh, 1986). Elements of Riba and Gharar are present in the contractual documents. The transactions if carried out under the mentioned products (cars, stocks and property) require Murabaha Financing. The important ingredients of the Murabaha Financing Agreement are The Preamble: it is an integral part of the agreement; Definitions: incorporation of the terms: a) Account b) Agency Agreement c) Agreement d) Client Financials e) Declaration f) Due dates g) Goods h) Murabaha Account i) Purchase Price j) Security k) Security Deposits; Purchase and Sale Agreement; Mode of Payment; Representation of the Client; Representation of the Institution; General Covenants of the Client; General Covenants of the Institution; Warranties of the Institution; Security; Risk of Loss; Takafol; Damages; Governing Law and Jurisdiction; Set off; Acceleration; General; Execution of document by the Counterparts ( The Institution and The Client); Dated; Witnesses; Schedule of Documents: a) Agency Agreement b) Declaration c) Promissory Note d) Description of Security (Ghafoor, 1995). Conclusion There cannot be two opinions that the Islam clearly prohibits interest bearing (Riba) and the speculative trading (Gharar). Keeping in mind the cited prohibitions, financial structures of all Islamic products should be free from Riba and Speculation. Some of the scholars are of the view that some of the products of Islamic financing based on Islamic prohibitions. The eye catching cases are the products of financial markets. Take the example of Salam and Istisnaa. Cited products are used hedging methods with reference to Islamic bonds known as Sukuk. If issuer of mentioned bonds intends to hedge against interest rate or exchange risk rate, therefore they have to use the former methods (Ghafoor, 1995). The aforementioned methods are identical to conventional. Hence, chances of involvement of Riba or speculation or both cannot be ignored. To avoid riba or speculation free transactions, innovative products should be in place to refrain from such transactions which against the teachings of Quran and Hadith. Besides mentioned products there is a possibility of interest element in the establishment of letter of credit. The solution of this problem is nothing but to have excess liquidity with the foreign banks. Now it is crystal clear that conventional banking which deals with the products that contains Riba and Speculations are un-Islamic. However, the products introduced by Islamic banks / financial institutions and approved by their respective Shariah Boards are valid and considered Islamic wherever the Islamic banking is in practice. References Al-Qardawi, Sheikh Y., 2001. The Lawful and the Prohibited in Islam. Egypt: Al-Falah Foundation. Ahmed, Imran and Shabbir, Ghulam, 2009. Frequently asked Questions on Islamic Banking. 15 Jan 2012. El-Gamal, Mahmoud A., 2002. Islamic Finance: Law, Economic and Practice. Cambridge: Cambridge University Press. Ghafoor, A. L. M. Abdul, 1995. ‘Islamic Banking’. Interest Free Commercial Banking. Netherlands: APPTEC Publications. Obaidullah, Mohammed, 2005. Islamic Financial Services. Jeddah: Islamic Economics Research Center. Saleh, Nabil A., 1986. Unlawful Gain and Legitimate Profit in Islamic Law: Riba, Gharar and Islamic Banking. Islamic Economy, 3. pp. 115-124. Also available at Usmani, Muhammad Taqi, 2001. An introduction to Islamic Finance. Washington: CQ Press. Vogel, Frank E. and Hayes, Samuel L., 1998. Islamic Law and Finance: Religion, Risk, and Return. Netherlands: Kluwer Law International. Read More