The principles of Islamic finance

A distinction is made between:
Riba in exchanges (sale/purchase): riba al-buyu’.
Riba in loans: riba al-qurud.

Some scholars opt for a much broader classification and distinguish two types of riba:

– Riba an-nasi’a (deferred): a sum paid for the use of borrowed capital or in exchange for rescheduling the payment of a debt. That is, you grant someone a loan, and he repays you later the sum plus a surplus: in other words, the time allowed for repaying the loan is charged for.

Allah (Glory be to Him) says in the Qur’an on this subject:
“Those who practise (devour) interest rise up only like one whom the Devil, having struck him with madness, beats about at random. This is because they said that trade was nothing other than a form of interest. Yet God has permitted trade and forbidden interest.
….
O you who believe! Fear God and give up what remains of interest, if you are believers.
If you do not, then accept war from God and His Messenger. If you return to the right path, you are entitled to your capital. You commit no injustice and you suffer none.”
Surah 2, verses 275, 278 and 279.

It has been reliably reported from Jabir that the Messenger of Allah (peace and blessings be upon him) cursed the one who consumes usury (riba), the one who produces it, the one who records it and the one who witnesses it. He said that they are all alike. [Reported by Muslim].

– Riba al-fadl (sale or exchange of a good for another of the same kind with a surplus: see the details that follow).
The Prophet (peace be upon him) said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dried dates for dried dates, salt for salt: equal quantity for equal quantity, hand to hand. Whoever gives more or takes more falls into interest.” (Reported by Muslim, no. 1584).

حدثنا أبو بكر بن أبي شيبة وعمرو الناقد وإسحاق بن إبراهيم واللفظ لابن أبي شيبة قال إسحاق أخبرنا وقال الآخران حدثنا وكيع حدثنا سفيان عن خالد الحذاء عن أبي قلابة عن أبي الأشعث عن عبادة بن الصامت قال قال رسول الله صلى الله عليه وسلم الذهب بالذهب والفضة بالفضة والبر بالبر والشعير بالشعير والتمر بالتمر والملح بالملح مثلا بمثل سواء بسواء يدا بيد فإذا اختلفت هذه الأصناف فبيعوا كيف شئتم إذا كان يدا بيد

حدثنا أبو بكر بن أبي شيبة حدثنا وكيع حدثنا إسماعيل بن مسلم العبدي حدثنا أبو المتوكل الناجي عن أبي سعيد الخدري قال قال رسول الله صلى الله عليه وسلم الذهب بالذهب والفضة بالفضة والبر بالبر والشعير بالشعير والتمر بالتمر والملح بالملح مثلا بمثل يدا بيد فمن زاد أو استزاد فقد أربى الآخذ والمعطي فيه سواء

وثبت عنه أنه أتي بتمر جيد فسأل عنه فقالوا : كنا نأخذ الصاع من هذا بالصاعين والصاعين بالثلاثة .فأمر النبي صلى الله عليه وسلم برد البيع وقال :
(( هذا عين الربا ))
ثم أرشدهم أن يبيعوا التمر الرديء بالدراهم ثم يشتروا بالدراهم تمراً جيداً

“Sell gold for silver (in whatever quantities) you wish, provided it is hand to hand. Sell wheat for dried dates (in whatever quantities) you wish, provided it is hand to hand. Sell barley for dried dates (in whatever quantities) you wish, provided it is hand to hand.” (Reported by at-Tirmidhi, no. 1240).

Some details on riba al-fadl:
There is usury (riba) otherwise than by deferral of the due date when silver is sold hand to hand [for cash] with a difference in the value of the two considerations, and the same applies to gold sold for gold. Silver may not be sold for silver, nor gold for gold, except on condition that the two values are exactly alike and that the transaction is made hand to hand. Selling silver for gold is usury, unless the sale is made hand to hand. As for foodstuffs (cereals, dried pulses and other similar food products that can serve as provisions, as well as condiments), one may not sell one of these kinds for the same kind except for a strictly equal value and hand to hand. No term may then be involved. One may not sell on deferred terms foodstuffs for foodstuffs of the same kind or of a different kind, whether or not they are goods that can constitute provisions. But there is no objection to selling fresh fruit and vegetables, and whatever cannot constitute provisions, with unequal consideration, even if the things sold are of the same kind. But the transaction must be made hand to hand. It is unlawful to sell with unequal consideration when the goods are of the same kind and can serve as provisions, such as dried fruit, condiments, foods and drinks (water alone being excepted). In the case of things of different kinds among the aforesaid foodstuffs or drinks, and for all cereals, fruits and other foods, there may be unequal consideration when the transaction is made hand to hand. But unequal consideration, when the values are of the same kind, is lawful only for fresh vegetables and fruit.
Wheat, barley and sult are regarded as one and the same kind for the purpose of determining whether the transaction is lawful or unlawful. The same applies to all the other kinds of dried grapes, and to dates. But dried pulses are regarded as constituting different kinds for the purposes of sale. Imam Malik expressed divergent opinions on this subject, whereas for zakah he always regarded dried pulses as constituting one and the same kind.

Islam encourages trade and calls for a benevolent loan (qard hasan) instead of a usurious loan, and Allah Himself undertakes to multiply the rewards of whoever helps someone by granting him a loan (without interest):
In the Qur’an, surah 2:
2:245. Whoever lends to God willingly, He will repay him many times over. God restricts or extends (His favours). And it is to Him that you will return.

2:280. If your debtor is in difficulty, grant him time until he is able to discharge his debt. If you only knew what merit you would earn by granting him a gracious remission, in whole or in part!

2:276. God will bring usurious profit to nothing and will make the merit of alms grow. God does not love any hardened unbeliever or sinner.

The alternative to the interest-bearing loan that Islam offers to facilitate the purchase of a good, and which Islamic banks use, is the murabahah contract (click here for the details of this contract)

• Maysir and qimar

The prohibition of maysir and qimar is explicitly stated in the Qur’an:
“O you who believe! Wine, divination by the entrails of victims and the casting of lots (game of chance: maysir) are nothing but an impure act of what Satan does. Avoid it!….The Devil seeks only to sow among you the seeds of discord through enmity and hatred by means of wine and gambling, and to turn you away from the remembrance of God and from prayer. Will you not then put an end to it?” [Qur’an, surah 5, verses 90 and 91]

*Etymologically, maysir was a game of chance (surah 2, verse 219 and surah 5, verses 90 and 91). Maysir comes from the Arabic adjective yasir, which means easy: before the advent of Islam, the Arabs regarded these games as an easy way to make money.
*A cause of trouble in society.
*To speculate and to bet are synonyms of maysir.

Qimar and maysir are defined as any form of contract in which the rights of the contracting parties depend on a random event. This is the principle found in particular in games of chance and in betting with stakes.
On gambling with stakes in Islam, click here

•Gharar

This term means uncertainty, hazard.
In Islam, it designates any sale that is random in nature or that contains a vague, imprecise, ambiguous, uncertain or hidden element, or one that depends on another event. It relates in particular to the object of the sale, the price or the delivery time.

Al-gharar thus covers activities that contain an element of uncertainty, ambiguity or deception. In a commercial exchange, it refers to deceit or ignorance regarding the object of the contract (uncertainty as to the materials, or the price of the materials). A “gharar” sale is one in which there is uncertainty as to the object, its quantity, or whether or not it will be possible to deliver it. ‘Gharar’ is regarded as normal in a transaction if it is not excessive and if its impact on the economy or society is minimal.
Example: one cannot sell fish in the water or a bird in the sky: that is excessive gharar.
فإذا كان الغرر يسيرا -ومرد ذلك إلى العرف- لم يحرم البيع، وذلك كبيع المغيبات في الأرض كالجزر والفجل والبصل ونحوها، وكبيع المقاتي (مزارع القثاء والبطيخ ونحوها) كما هو مذهب مالك الذي يجيز بيع كل ما تدعو إليه الحاجة ويقل غرره بحيث يحتمل في العقود.

The prohibition is drawn in particular from the following hadith:
“The Prophet forbade the purchase of an unborn animal in its mother’s womb, the sale of milk in the udder without measure, the purchase of war booty before its distribution, the purchase of charitable gifts before they are received, and the purchase of a fisherman’s catch before it is caught.”

For more information, see also: “Some general principles of sales contracts in Islam”

Tangibility of the asset means that a transaction must necessarily be backed by a tangible, real, material and above all owned asset (e.g. ABS). The preferred targets are real estate, energy complexes, energy, commodities and so on.
Every financial transaction must be underpinned by a tangible and identifiable asset. This is the principle of asset-backing.

•Unlawful investment sectors
Among them:
The tobacco industry
Pornography, erotica…
The alcohol and wine industry (and of course drugs)
The gambling industry
The pork industry and unlawful food
The arms industry (with the exception of States)
The banking industry (except Islamic banking)
The insurance industry (except the takaful industry: Islamic mutual insurance)
The gambling industry (lottery)

In Islam, one may neither sell nor buy what is unlawful.

In summary: Islamic banking products comply with four rules:
Risk sharing,
The materiality of exchanges,
The absence of penalties for late repayment
And no financing of transactions forbidden by the Shari’ah (the creation of breweries, pork butchers, and so on).

SHARI’AH BOARDS, GUARANTORS OF ISLAMIC PRODUCTS

• The boards are made up of doctors of Islamic religion (Shari’ah scholars), all of whom have advanced competence in banking and finance (jurists specialising in FIQH AL-MU’AMALAT and in FINANCE and/or ECONOMICS)
• The boards are mandatory as soon as a financial institution (bank or insurer) claims to distribute Islamic financial products.
• The boards are not permanent, but meet periodically to examine the compliance of products and processes.
• The committee generally comprises 4 to 7 members.
• The committee generally includes scholars from the four recognised Sunni schools (madhhab):
– Hanafi (Central Asia, notably Pakistan, Turkey… )
– Hanbali (Middle East, notably Saudi Arabia)
– Maliki (Africa, notably Morocco, Mauritania, Algeria, Tunisia, Libya, Senegal, Mali …and the United Arab Emirates)
– Shafi’i (South-East Asia, notably Malaysia)

The 4 questions the committee asks before any transaction (P. Moore)

1. Are the terms of the transaction compliant with the Shari’ah?
2. Is this the best investment for the client?
3. Will the proposed investment create added value for the client? For the community? For the society in which the client operates?
4. As a fund manager, would the bank carry out the transaction in the same way as it would if it were acting on its own account?

Islamic finance is part of ethical finance and of SRI (socially responsible investment, and religiously committed as well).