Voices of Islam (170 page)

All Muslim merchants and fi who observe the faith avoid the
haram
or
mamnu‘
—forbidden activities that constitute major sins for the believer. The Shari‘a provides clear guidance about the forbidden. For instance, Jabir ibn Abdallah reported that the Prophet Muhammad forbade the sale of wine, the carcasses of animals that had died, swine, and idols. All of these are forbidden to Muslims in the Qur’an, but this hadith adds the further proviso that Muslims should avoid making a profi on forbidden things, even by selling them to those for whom they are not forbidden.
33

In the world of investing, the Islamic perspective allows Muslims to buy stocks listed in the global markets so long as the company in which one invests is not engaged directly in forbidden activities. Determining this requires a processes similar to that used by the socially responsible asset manager.
34
Income derived from forbidden or doubtful transactions must be purified and may be taken from the dividend or gains upon sale prior to distribution to investors. The screening process follows two general proce- dures. The first procedure is applied at the industry level and the second at the financial level. From the perspective of the Shari‘a, Muslims are not allowed to enrich themselves in ways that are contrary to the rights of God, to the rights of the contracting parties, and even to the rights of third parties. In asset management, this means first and foremost avoiding specifically for- bidden areas of investment, which include those banks and insurers that are involved with
riba
(discussed below); the sale, production, and distribution of alcoholic beverages; gambling; unsavoury entertainment; and the like.
35

Although it is relatively straightforward to identify
haram
or non- permissible businesses, the screening of fi ncial instruments is only

208
Voices of Life: Family, Home, and Society

beginning to evolve. For example, a growing plurality of modern scholars permits one to invest in a company so long as its exposure to interest is lim- ited to fi percent or less of revenues, because it is incidental and the core income is permissible.
36
But, what if a stock represents an investment in a company with significant borrowings at interest?

When it comes to deciding how much debt may be carried by a company in which one invests, modern Islamic scholars look to a hadith in which the Prophet Muhammad stated that ‘‘one third is big or abundant.’’ A further ruling relating to ‘‘mixture’’ (
khalut
) has been adapted to govern the modern mixture of borrowed funds with nonborrowed funds in a company’s capital structure. As a result, Islamic scholars have concluded, ‘‘The majority deserves to be treated as the whole thing.’’
37
Thus, a listed company borrow- ing more than 33 percent of its capital is not a permissible target for invest- ment, and a listed company that has cash and monetary equivalents of 50 percent or more is treated as if the assets are cash: its sale is impermissible as it is buying money for money at a different price.

Thus, over more than 1400 years since the Qur’an was revealed, Muslims have become adaptive, yet they have remained committed to the application of the Shari‘a in the regulation of commerce. However, even though one usually finds pluralities or majorities of scholars agreeing on a particular inter- pretation, seldom is the majority great enough to constitute a true consensus, or
ijma‘.

Some have argued that the traditional schools of Islamic jurisprudence are incapable of addressing modern problems. This is because of a prevalent view among Western scholars of Islam and some Muslims that traditional
ijtihad
has ceased to inform civil law and commerce. However, the traditional schools of jurisprudence have well-defined methods to analyze classical texts and prior scholarly views and provide a clear approach to problem solving and legal decision making on the basis of each school’s approach to
usul al-fiqh.

When we examine modern legal rulings and scholarly research, we find that
ijtihad
remains a viable and lively tool, albeit applied with great care. When a Muslim jurist or Islamic scholar engages in
ijtihad,
he realizes that an error in judgment not only affects him but also has repercussions that may affect many other people as well. Thus, he pursues
ijtihad
with great caution. In Islam, the role of the
mufti,
the person eligible to issue a
fatwa,
is fundamen- tally a marriage of the spiritual and the legal.
38
The qualifications of a
mufti
require a broad mastery of skills: ‘‘The prerequisites for being a mufti are that a person be knowledgeable of the law with regard to primary rules, secondary rules, disagreements, and [legal] schools; that he possess the tools of inde- pendent reasoning (
ijtihad
) in their entirety; and that he be familiar with whatever he needs in order to derive judgments; namely, [Arabic] grammar, biographical information, and commentary on the verses that are revealed with respect to the laws and the narratives in them.’’
39

Islam and Business
209

When it comes to the
fi
of commerce, the emphasis of the various schools is on assuring that the businessperson knows the boundaries of per- missibility and illegality relating to the chosen practice. The businessperson must behave with decency and fairness and he must seek a mutual benefi for all participants in a transaction. The Prophet Muhammad, may peace be upon him, said, ‘‘The accepted [pleasing to God] transaction is the transaction that takes place with mutual benefit for both the buyer and the seller.’’
40

CENTRAL CONCERNS OF THE SHARI‘A IN COMMERCIAL LAW

The concept of secularism—the separation of worldly life from religious life—is not the same for Muslims as it is for most Westerners. If a person is truly a steward of the created world on behalf of God, its true owner, then that person’s freedoms are constrained by the responsibilities of stewardship in such areas as sociology, politics, economics, and law. In other words, under the Shari‘a, all social sciences are interdependent.
41
However, in most Muslim societies, much of the time, life is similar to the way it is in a so-called secular society. Tolerance and the rule of law are meant to pervade Islamic social life just as they are in the West. An intriguing example is the Islamic marriage contract, which is a civil contract defi ng rights and obligations and not a holy sacrament.

In commerce, the starting point for this interdependence of faith and sec- ular life is the belief that all worldly wealth is a trust given to humanity by God. As a result, a businessperson never truly transacts with his or her ‘‘per- sonal’’ property; rather, the transaction is with property entrusted to one’s control for the duration of one’s life. This means that the Shari‘a necessarily interferes in the dynamics of transactions to assure that each party acts in accordance with God’s justice. Historically, this has meant that Muslim jurists have placed great emphasis on the terms and procedures of contract law and contractual relations, and the nature of contracts remains a matter of great concern for Muslims today. This is because violations of the rules of contracts are among those areas that are most liable to cause injustice in commercial dealings.

Unlawful Interest (Riba)

The Qur’an explicitly bans a practice called
riba
in four separate verses. Each of these Qur’anic verses affirms the absolute nature of the prohibition. However, the details of what
riba
entails in actual practice are not clearly defi ed.
42
In order of revelation, the verses of the Qur’an that forbid
riba
are the following:

210
Voices of Life: Family, Home, and Society

That which you give as
riba
to increase the people’s wealth increases not with God; but what you give in charity, seeking the goodwill of God, multiplies many-fold.

(Qur’an 30:39)

For taking
riba,
even though it was forbidden to them, and their wrongful appropriation of other people’s property, We have prepared for those among them who reject faith a grievous punishment.

(Qur’an 4:161)

Oh Believers, take not
riba,
doubled and redoubled, but fear God so that you may prosper. Fear the fire, which has been prepared for those who reject faith, and obey God and the Prophet so that you may receive mercy.

(Qur’an 3:130)

Those who benefit from
riba
shall be raised like those who have been driven to madness by the touch of the devil; this is because they say that ‘‘trade is like
riba,
’’ while God has permitted trade and forbidden
riba.
Hence, those who have received the admonition from their Lord and desist [from taking further
riba
], may keep their previous gains, their case being entrusted to God; but those who revert shall be the inhabitants of the Fire and abide therein forever.

(Qur’an 2:274)

The Qur’an warns that anyone who is involved with the practice of
riba
faces the wrath of God and His Messenger on the Day of Judgment. The details that allow one to determine what this term means are found in the Hadith. The attempt to create lending practices that do not depend on
riba
has led to the development of the field of Islamic banking, which has achieved exceptionally high growth rates in recent years.
43
Unlike commer- cial banks in the West, an Islamic bank is obliged to erect screens against the practice of
riba
and seek socially beneficial returns. Modern Islamic banks rely on
ijtihad
to adapt classical opinions on sales and leasing to the develop- ment of a process of ethical and socially responsible banking that respects the Qur’anic ban on
riba.
The development of Islamic banking has not been without controversy or challenge. A major reason for this disagreement is the fact that there are only six hadiths that give clues to the meaning of
riba
in a modern context.
44
However, a scholarly consensus is beginning to emerge, especially in the Gulf region, about the current state of Islamic banking and about the best ways to improve the system.

The scholarly view of
riba
turns on traditions like that of Anas ibn Malik in the ‘‘Book of Sales’’ in the
Sunan
of Bayhaqi, who reported that the Prophet Muhammad said: ‘‘When a person grants a loan and the borrower offers him

Islam and Business
211

a dish [in payment for something other than a dish], he should not accept it; and if the borrower offers a ride on an animal [in payment], he should not ride, unless the two of them have been previously accustomed to exchanging such favors mutually.’’
45
The classical interpretation of
riba
is that there are two forms of
riba: riba al-nasiyya,
which is interest on a loan of money; and
riba al-fadl,
which is a repayment in excess when commodities of the same type are traded.
46
According to the concept of inductive reasoning by analogy (
qiyas
) in Islamic law, these interpretations of
riba
are applied to any monetary commodity, whether it is mentioned in the Hadith or is a new custom that is found in modern commercial markets. According to the classical understanding of
riba,
the trading of money for money, whether it is in the form of a hand-to-hand transaction or a loan over time, is not an approved business practice under the Shari‘a. This notion is based on the idea that money is not a ‘‘commodity’’ in itself, merely reflecting a ‘‘time value’’ for a return. Rather, money is a measuring tool and value determinant, devoid of its own integral value.

Deception in Business Transactions (Gharar)

The Prophet Muhammad, may peace be upon him, said, ‘‘Do not contract to buy merchandise on the way to the market, but wait until it is brought to the market [so that its fair price is established].’’
47
The Prophet also said, ‘‘It is impermissible to sell a thing if one knows that it has a defect, unless one informs the buyer of the defect.’’
48
These traditions are examples of ethical exhortations against the practice of
gharar.
The majority of Islamic scholars consider
gharar
as ‘‘both ignorance of the material attributes of the subject matter of a sale, and uncertainty regarding its availability and existence.’’
49
The description of
gharar
in the Hadith is broad and implies an insistence on contractual transparency, full relevant disclosure, and fairness in the transacting environment. Restrictions on the practice of
gharar,
which may range from explicitly forbidding certain actions to tolerat- ing an incidental oversight, are important means of preventing one party from improperly consuming the wealth of another.

Gharar
literally means ‘‘deception.’’ Hence, the best definition of
gharar
in business is ‘‘deception based on preventable ambiguity or uncertainty.’’ In Shari‘a, for
gharar
to invalidate a contract, the deception must not be trivial, it must relate to the object of the contract, and it must conflict with established business practice. However, in the view of many jurists, certain forms of
gharar
may be tolerated if an overriding public interest or benefi (
maslaha
) is involved.
50
The key to the assessment of
gharar
is that the deception that is to be prohibited must be based on a
preventable
uncertainty. This does not apply to the idea of risk in general, which is normal in the ordinary course of business.
51

212
Voices of Life: Family, Home, and Society

The practice of full disclosure and the maintenance of open and transpar- ent markets are some of the best ways to prevent
gharar.
As a result, many Islamic scholars take comfort in the forms of disclosure and consumer protections that are utilized in modern Western markets. Many scholars believe that these highly regulated consumer markets should be emulated in the developing economies of the modern Muslim world.

CONTRACTS

The Arabic word for contract is
‘aqd,
which comes from a root that means ‘‘to bind or tie tightly.’’ The strength of the ‘‘binding’’ defined by this word is given in its Qur’anic usages, which refer to the highest order of mutual binding, whether among believers or between God and human beings: ‘‘Oh you who believe, fulfill your contracts’’ (Qur’an 5:1). The concept of the contract in Islamic law is similar in many ways to that in Western legal systems. The Shari‘a distinguishes among contracts, promises, commitments, dispositions, and expressed intentions.
52
Whenever one or more of these actions are undertaken, it becomes an object of law and is thus subject to specific rules in the Shari‘a.

In order to be valid according to the Shari‘a, a contract must be a freely undertaken mutual binding of two legally competent parties. Typically, a contract in Islam relates to the exchange or use of property (
milk
) or money (
mal
).
53
The contract is binding so long as its object is not repugnant to the Shari‘a. In addition, a valid contract must offer a provision for the contracting parties to withdraw from the agreement. ‘Abdallah ibn ‘Umar reported that the Prophet Muhammad said, ‘‘There is no [binding] transaction between two persons that undertake a transaction until they separate [after concluding the transaction], but only if there is an option to annul it.’’
54
If one party fails to abide by the terms of the contract, his action may be subject to a penalty. Although Islamic jurists prefer written contracts to unwritten agreements, unwritten agreements have specific rules that affect the enforceability of the contract.

Islamic law bestows extensive rights and privileges upon contracting parties. According to a famous hadith, ‘‘Everything that is not prohibited is permissible.’’
55
However, a contract should not contain any stipulation that frustrates the nature and purpose of the contract itself.
56
For instance, payment for a good or a service or delivery of a good or a service may be deferred, so long as the stipulation is properly recorded and witnessed.
57
The leading schools of Islamic law differ somewhat over the nature of contracts and contractual obligations, but they do not differ over the key principles of a contract. Moreover, when a jurist finds an invalid stipulation in a contract, like most Western judges he will usually limit his action to

Islam and Business
213

requiring the removal of the invalid stipulation. If a single invalid stipulation does not affect the overall terms of a contract, the contract is allowed to remain in force.

Unilateral assertions, such as verbal promises made during a negotiation, imply an obligation to act in a certain way. However, they do not have the legal stature of a contract, in which two parties make specific commit- ments to one another. Under Islamic law, a promise is not regarded as an implied contract; rather, it is seen as a unilateral expression of the promisor’s willingness to perform an act, transfer a right, or refrain from doing something. A contract entails both a legal and a moral duty to carry out its provisions and is fully enforceable under the law. A promise, however, is solely a moral obligation, and thus may not be enforceable.
58

In order to be legally valid, an Islamic contract must include a formal offer (
ijab
) and a formal acceptance (
qabul
). Once written or verbal state- ments confi the offer and the acceptance, the contracting parties are liable for their obligations under the contract.
59
A valid contract under the Shari‘a, however, also requires that the terms of the contract must be permissible under the Shari‘a: an object of sale must be specific and free from
gharar,
and generally, the object should exist at the time of the con- tract.
60
The Islamic law of contracts accepts certain modifi due to unavoidable contingencies. The theory of contingencies is based on a core concept of equity and justice at the heart of the Shari‘a.
61
Likewise, certain options allow contracting parties to validate the offer and acceptance of their proposed counter-parties. The key principle is that the contract should be transparent. According to DeLorenzo, ‘‘By insisting that Muslims transact by means of a specifi set of well-defi contracts, the Shariah ensures that all parties have every opportunity to understand what they are getting themselves into when they transact. The classical Islamic system of
mu‘amalat
(transactions) is so highly articulated for precisely this reason. While the scriptural foundations of that system may be abbreviated, owing to their delineation of principles rather than specifics, the dynamic of
ijtihad
inherent to
fi h
has ensured that Muslim jurists, and especially Shariah boards, continue to comment and build upon the theoretical constructs.’’
62

In general, Islamic scholars and jurists have been traditionally quite comfortable with allowing a business-friendly approach to contracting and contract fulfi For instance, one party may appoint a third party to fulfi his or her obligations as an agent. This gives rise to the broad concept of agency (
wakala
) in Islam. Muslim jurists have granted substantial liberty for the contracting parties to appoint an agent to complete a transaction. This might even include a seller appointing the buyer as an agent to outsource goods for sale to the buyer as the seller’s agent.
63