By Timur Abimanyu, SH.

MH

The Washington Post

BASIC PRINCIPLES AND COMPLETION ISLAMIC

ECONOMIC IN COURT DISPUTE
INTRODUCTION
Islam uniquely considers distribution as the economic problem, and Muslims do not share
the obsession of capitalists and communists with production. Because Islam differentiates
between the basic needs and luxuries, there exists no concept of relative scarcity of
resources in Islam. The resources available on earth are sufficient to secure the basic needs
(food, clothing, and shelter) of fifty billion human beings. Such a misunderstanding has
concealed the reality that starvation, poverty, and economic backwardness, result from
maldistribution exasperated by man-made laws and systems. Under the Islamic system,
Nigeria alone could support the whole of Africa, as occurred in the past when, under the
system of Islam, Africa sent food to relieve the famine in Medinah during the rule of Omar
bin al-Khattab.

By using labels like "Third World" and "First World," this economic conspiracy has worked
behind a deceived populace who fail to realize that the "Third World" countries are actually
First World in terms of resources. While organizations like Mercy International and
UNICEF keep the masses content under the circus act of "humanitarian aid," the capitalist
machine works behind the stage to gobble up the resources of the world.

The implementation of Islam would eliminate the stranglehold by which the elites control
the polices of the world and milk its resources. Unlike the current systems, Islam will not
impose any limits on the amount of wealth that an individual can acquire, thus creating and
maintaining an incentive to work. The shortsightedness of limiting production stems from
the man-made ideologies that fail to understand the nature of creation. Because the Islamic
system reflects the wisdom of the Creator, then the implementation of Islam will provide a
society conducive to life that will address the needs of humanity based on the correct
understanding of life. Muhammad (saaw) said, "The son of Adam, if he had two valleys of
gold, would desire a third and would not be satisfied till he bites the dust."

While generating massive abundance and wealth of resources by eliminating all the
restrictions and oppressive systems that prevent production, Islam will safeguard against
abuses of exploitation in acquiring wealth by limiting the way in which wealth is acquired.
For instance, Islam denies the "free" market of Capitalism which has led to the situation of
"survival of the fittest". Such an unrestricted environment has led directly to the current
situation where multinational companies have scavenged the resources of the world like
parasites unrestricted in their "freedom." Under the Khilafah, natural and vital resources
would be categorized as public property and a right of every citizen of the state - Muslim or
otherwise - in accordance with the Prophet's (saw) Hadith that states, "The humans have a
right to three things - water, green pastures, and fire-based fuels (An-Naar)."

In Islam, public revenue from oil and natural resources would be used to secure the needs of
the whole Muslim Ummah, and not to line the pockets of casino owners. The Khilafah
would provide public and vital resources without charge to cover the needs of every
individual and family, and the monopolies that multinational corporations maintain to
dictate the lives of the people would dissipate.

The Shariah also defines certain rules that regulate company structure, effectively
preventing abuse and corruption. For instance, Islam forbids monopolies by outlawing the
hoarding of wealth (Al-Ihtikar), and eliminating copyright or patency laws that would open
the avenue for potential monopolies to develop. Also, Islam protects the ownership of
businesses and companies by restricting ownership of companies only to those who
contribute both capital and effort to the company or business, thus effectively putting the
seal on such concepts as "corporate takeover" from ever becoming a reality.

In the systems of today, the stock market offers no such protection and allows for any
outsider to secure a share in any business or corporation and impose his policies on the
company agenda, even if that individual puts no effort or work into the business. Today,
food manufacturers have cultivated the art of burning surplus food and dumping surplus
milk into the ocean to artificially inflate prices by creating "scarcity," an art that would cease
to exist with the implementation of Islam.

Unlike today's system, which opens all doors for anyone to access wealth by any means,
Islam categorizes wealth in a systematic way that both protects the right of individuals to
access wealth and, simultaneously protects the society and secures the needs of the Ummah.
Islam mandates vital and natural resources as public property while allowing for unlimited
access to luxury items. Also, Islam protects the society in ways that corrupt man-made
systems have overlooked by defining certain needs as "prohibited needs." For instance, to
protect the honor (ird) of the woman, Islam would outlaw all forms of prostitution,
pornography, or any type of sexual bombardment that exploits the charms and physical
attractiveness of women. In addition, Islam would prohibit alcohol and gambling, killing
every industry and institution derived from such filth that has seeped the Capitalist Nations
in a downward spiral of corruption, social turmoil, and moral devastation.

In addition, the form of currency in Islam will break the economic hold of the Kuffar over
the Muslim lands. The Khilafah would link the currency to gold, silver or some other
precious resource. By backing the currency with resources of real value, Islam creates a
stable medium of exchange and eliminates the concepts of linking currencies that allow
nations to manipulate currencies and maintain a monopoly over the financial markets of the
world.

Just a glance at the economic system in Islam suffices to explain the fear and dread that
America and the West have shown towards Islam, and explains the dedication and effort
exerted towards curtailing or suppressing the resurgence of Islam as a system. Such a system
would not only break the grip that the Capitalist nations have secured over the wealth and
resources of the Muslim lands and dethrone their upper hand over the policies of the world,
but would provide the long-awaited solutions to life that they have kept a secret from their
own people with their extensive media manipulation and education. Because the currency in
Islam is linked to gold or other precious resources, the implementation of Islam would cut
the economic chains that America employs by linking other currencies to the dollar.

In addition, the effectivity with which the Islamic economic systems correctly defines the
economic problem and secures the needs of every individual, and eliminates all forms of
economic and social corruption, would provide fuel for the foreign policy of the state that
would enable the Khilafah to easily spread Islam ideologically throughout the world.
For such a system to emerge, the Ummah must revitalize within itself the Islamic way of life
and cultivate the Islamic culture and the Islamic Aqeedah as the sole basis for providing
solutions to its problems. Without the clear conviction in the Islamic Aqeedah and the
comprehensive understanding of the Islamic system, the corrupt regimes will continue to
tame and manipulate the Muslim masses with empty slogans, while behind the curtains, the
feudal landlords of Pakistan will maintain their status and the Gulf sheikhs will continue to
squander the public resources of the Ummah.

When the poor are permanently poor, and the rich, permanently rich, that is oppression! All
around the world today that economic oppression exists, and is constantly increasing, - the
poor grow poorer and the rich, richer. Riba is the cause. A predatory global elite, centered in
the West, but also present around the world, is constantly sucking the wealth of mankind and
impoverishing the masses through riba. Their ultimate objective is to utterly enslave all of
mankind in a new sophisticated slavery. Political, legislative, judicial and legal systems, the
media etc., are all created by the oppressor, and all function to preserve the system of
economic oppression. Allah, the Most High, has strictly prohibited riba. Yet the world
today, including the Muslim world, is saturated with riba. This has confirmed the ominous
prophecy of Prophet Muhammad (s) who prophesied, in a hadith received from Abu
Hurairah (ra), the following:

There will come a time, he said, when you will not be able to find a single person in the
world who will not be consuming riba. And if anyone claims that he is not consuming riba
then surely the vapor of riba (In another text the dust of riba) will reach him. (Abu Daud,
Mishkat)

What is riba? Why it was prohibited? What is the logic behind that? What types of interest
has Islam prohibited? What should we do about this state of affairs?

Dealing with riba (usury or interest) has spread widely among many Muslims today; to the
point that many Muslims do not see any problem with it, either because of lack of
knowledge or absent-mindedness. Despite the fact that all Muslim scholars agree that
dealing with riba (usury or interest) is a major sin because the prophet (S.A.W.) mentioned
explicitly in a hadith reported by Imam Bukhari and Muslim, "Avoid the seven destructive
sins", then he mentioned one of them as, "and dealing with riba (usury or interest)"

Muslims are very particular about Halal and Haram. The confusion, whether interest is same
as usury (Riba) or not, needs a clarification for good. This is a historic fact that usury has
been prohibited in all original texts of Torah, Bible and Qur'aan.

However, practically, Usury or interest is same as a guarantied return to the lender

regardless the borrower makes a profit or not. The Islamic view is truly just and
humanitarian. It requires a lender to participate in the profit as well as loss of the borrower if
any. From Shariah point of view, interest is Riba and it is Haram.

CONTRACTS IN ISLAMIC COMMERCIAL AND THEIR APPLICATION IN MODERN

ISLAMIC FINANCIAL SYSTEM
1.0 Introduction
Islamic commercial law, known as fiqh muammalat in Islamic legal term, constitutes an
important branch of law dealing with issues of contracts and the legal effect(s) arising from
a contract; be it a valid, void or avoidable contract respectively. Contract is Islamic law, on
the other hand is a complex legal discipline in both its jurisprudential foundation and its
practical function. Also contract covers a variety of dealings and transactions to meet the
needs of the society. No doubt, issues of commercial transactions, unlike devotional issues
('ibadat), are ever lasting and bound to change due to the changing circumstances and
situations of both the object and subject of the transactions. Therefore it is not surprising that
the first article of the Majallah al-Ahkam al-'Adliyyah (the civil code of the Ottoman
Empire) endorses the idea that man is social by nature and that social life is essential to him,
stating that, "in view of the fact that man is social by nature, he cannot live in solitude like
other animals, but is need of co-operation with his fellow men in order to promote an urban
society. Every person, however, seeks the things which suit him and is vexed by any
competition. As a result, it has been necessary to establish laws to maintain order and
justice. This approach of theMejelle is seldom found in the other compilation of law.
As mentioned above, contract is a complex legal discipline both in its jurisprudential
foundation and in its practical function. Intellectually, it is perhaps the most rewarding field
of the law in action. The mechanism of contract formation depends on the fundamental
conception of contract(s) under Islamic law, its interrelation with other modes whereby an
obligation may be generated, the extent of the freedom of the parties and the grouping of
contracts according to different classifications, of the close interaction of all these factors.
2.0 Historical Evolution of Contract in Islamic Law
As for the evolution of the law of contract, Islamic law of contract, unlike other legal
systems, starts with Quranic verses which already contain both the rudiments of several
types of nominate contracts as well as certain contractual maxims of general import.
Thereafter, the traditions supplement the Quranic groundwork. The jurists in all Islamic
Schools of law later developed the principles of contract. In the Quran, all in all, there are
only over forty verses on a dozen types of commercial contract. Apart form one important
verse on performing contract that is Quran 5:1 which enjoins believers to "keep faith
contracts" (awfu bi al-'uqud), and the three verses with a common theme of "keeping
promise", nonetheless, there are few verse which reveal a relatively advances stage of
commercial contracts, such as sale and hire, charges in rem of personal guarantee as security
fiduciary contracts such as deposit and the like. The whole idea of having a contract is to
satisfy the consent of both parties to a contract and it seems, not only in Islamic legal system
but also in other legal system, contract is the best available means to reflect the intention an
accordingly the consent of the parties. To this effect, the Quran has already prescribed on the
believers "not to devour your assets among yourself in vanity, except in trading by your
consent". In addition, the Prophet (PBUH) is reported to have said that "The property of a
Muslim is not licit for others to enjoy unless by his consent".
In any case, until the 19th century, no definition of contract is to be found in the treatises of
Islamic law. This is because Islamic law never developed a general theory of contract.
Instead, the overwhelming majority of Muslim jurist have focused on the contract of sale
which they regarded as the model for all sorts of contracts. However, the Islamic Civil Law
Codification which took place in the 19th century, namely both the Majallah al-Ahkam
al-'Adliyyah and Murshid al-Hayran (the 1891 Egyptian version of the Ottoman's Majallah),
started to give a precise definition to a contract. The Majallah, for instance, describes
contract as a little contracting parties obligating themselves with regards a given matter and
binding themselves together with the same as result of connecting an offer with an
acceptance. Also according to the Majallah, "contracting is the connection of an offer with
an acceptance in a lawful manner which marks its effect on the subject of the connection.
3.0 Essential Elements of a Valid Contract
For a valid contract to take place in Islamic law, certain conditions are to be met. From the
foregoing definition of the contract, it appears that a valid contract bases itself on six
elements, namely the offeror and offeree; offer and acceptance; and the subject matter and
the consideration. As for the parties to a contract, they must be legally competent to enter
into a contract. The competence to transact is Islamic law is measured largely by two
aspects, namely prudence and puberty as revealed in the Quran 5:4, "Prove orphans till they
reach the marriageable age; then if you find them if sound judgment, deliver over unto them
their fortune". With reference to an expression of both offer and acceptance, Islamic law of
contract recognizes both express contracts as well as what has been described as contract by
conduct. It presupposes the making of an offer either orally by writing or by conduct. In
certain cases, acceptance may also be implied from a party silence. However, Islamic law is
distinct from other legal systems that it insists on the session of contract (majlis al-'aqd) in
the sense that both the offer and acceptance are to be jointly connected in one single session
without any gap in time or place. Therefore, the session occurs in any natural place where
the parties meet to form their agreement. The session therefore creates the essential unity of
the time and place necessary for the dual declarations of intention and consent.
Based on the above prescription which is agreeable to all schools of law, it may be said that
certain interruptions during the session such as stopping to pray, or discussing other
subjects, changing positions or attitudes, or even falling asleep are held to terminate the
majlis and therefore the offer. Also under this principle of law, the acceptance should be
immediate. However, before the offeree gives his acceptance, the offeror may withdraw his
offer. Again, another provision of law which is attached to Islamic law is the notion of
khiyar al-majlis i.e. right to revoke the concluded offer and acceptance, provided both the
parties are still available in the session of the contract left the session, the right to do so
ceases to exit. As there are various interpretations surrounding the exact meaning of majlis
or session of contract, the present writer, based on certain arguments, is more inclined to
appeal to customary practice of any society to decide on the separation from the session of
contract.
Pertaining to both offer and acceptance, classical Islamic law seemed to insist on the notion
of contracts inter presenters in the sense that the contracting parties should hear other's
declaration which is, it is respectfully submitted, devoid of legal relevance. The writer's
opinion is that contracts inter absentees by means of representatives or modern
communication systems such as the telephone, telex, fax, e-mail, letter are equally valid
provided they are performed in one single session of contract.
As for the subject matter of contract, both the item and consideration, Islamic law stresses
on the following matters, i.e., lawfulness, existence, deliverability and precise determination.
Lawfulness requires that the object must be lawful, that is something which is permissible to
trade. It must be of legal value that is, its subject matter (mahall) and the underlying cause
(sabab) must be lawfull; and it must not be proscribed by Islamic law, nor a nuisance to
public order or morality. Also inherent in the lawfulness of the object is the condition that
the object must be legally owned (or authorized) by the parties to a contract. The issues of
existence presuppose that the object of a contract must be in existence at the time of
contract. Thus, it is illegal for example to sell fetus. Delivery, on the other hand, indicates
that the object must be capable of certain delivery. The classical jurists therefore, prohibit
the sale of a camel which has fled a bird in the air or a fish in water. Finally, the object of a
contract must be determined precisely as to its essence, its quantity and its value.
As for the consideration of price, Islamic law does not restrict it to a monetary price, but it
may be in the form of another commodity. The Islamic prohibition against uncertainty
requires that the price must be in existence and determined at the time of the contract and
cannot be fixed at a later date with reference to the market price, nor can it be left subject to
determination by a third party. In contract of money-exchange (sarf), the rule of riba must be
adhered to render the contract valid. May be spot or in the future.
The capability of the parties to contracts is of prime importance for the validity of the
contract. In Islamic law, no person can validly conclude a legal transaction without first
having attained physical and intellectual maturity that being the equivalent of majority to
enjoy full capacity, a person, whether male or female, should attain physical puberty
(bulugh) and enjoy sound judgment known also as prudence (rushd) in his or her judgment.
The Shafi'i school of law adds a third requisite for majority and that is sound judgment in
regard to religion.
Puberty is attained for boys and girls with (a) the appearance of coarse hair around the
sexual parts of the body al though this sign is not given any significance by the Hanafis with
(b) vouluntary or incoluntary emission of the seminal fluid or with (c) the attainment of a
given age except for Malik himself (not his school), who do not consider age as indicative of
puberty. Other signs of puberty particular to girls are menstruation and pregnancy. As
mentioned above, for the majority of scholars prudence (rushd) equates to sound judgment
in financial matter. As for the argument of the Shafi'is, this is weak simply because an
impious Muslim might well be of sound judgment with regard to business matters. In brief, a
person is deemed of age and enjoys full capacity.
However, between infancy and majority a minor will normally reach the age of discernment
or age of reason (sinn al-tamyiz) admittedly being six or seven Hanafis and Malikis give
value to some transaction performed by a discerning minor; the authorize the discerning
minor to conclude contracts fully beneficial, such as acceptance of gifts of bequests without
his guardian's authorization. He is forbidden to conclude fully detrimental contracts such as
granting loans or guarantees, whereas contracts which could end up by being either
beneficial of detrimental, are subject to the guardian's ratification. Under Hanbali teaching a
minor, whether discerning or not, cannot enter any kind of financial transactions but the
contracts are valid with the approval of the guardian. Shafi'i have disapproved the contracts
of a minor out rightly.
Apart from this general requirement of the legal capacity to enter into any kind of contract,
Islamic law also imposes certain legal interdictions in the interest of third parties. The third
party may confirm or annul the disposition of a person who is interdicted from disposing of
his property. Therefore, the insolvent (al-muflis) is interdicted from disposing of his
property by the judge in the interest of his creditors. Also, a person ill with death sickness is
interdicted in the interests of person's heirs or creditors.
4.0 Classification of Contract
Contract, from an Islamic legal perspective is conceptually divided into two main categories,
namely unilateral and bilateral contract. While the former is gratuitous in character and does
not require the consent of the recipient, the latter is more bound to strict rulings and
guideline since it requires the consent of both the parties to a contract. Also what is normally
'tolerated' in unilateral contract, would not necessarily be the case in bilateral contract.
Therefore, the (strict) conditions required for both the offeree and the subject matter of the
bilateral contract would cease to apply in an unilateral contract. Unilateral contract
comprises of transactions in favor of the recipient such as gift (hadiah, hibah), off-set of the
debt (ibra), will (wassiyyat) endowment (waqf) and loan (qard).
The bilateral contract covers the remaining transactions in Islamic law which can be further
divided into different classifications according to the very purpose and reason d'etre of the
deal and agreement. In this regard, we may perhaps, classify these contracts to six
classifications which are as follows:
1. Contracts of exchange ('uqud al-mu'awadat)

2. Contracts of security ('uqud al tawthiqat)

3. Contracts of partnership (shirkah)

4. Contracts of safe custody (wadi'ah)

5. Contracts pertaining to the utilization of usufruct ('uqud al manfa'ah) and

6. Contracts pertaining to do a work (e.g. wakalah and ju'alah)

This classification is not meant to be exhaustive because in the future many new contracts
with different features, would possibly come to exist on the basis of the doctrine of
permissibility (ibahah), as previously discussed, that would render all commercial
transactions permissible in the absence of a clear prohibition. Nevertheless, the above
classification seems to be quite comprehensive to cover all existing contracts found in
Islamic fiqh literature.
Mention should be made that each of these classifications consists of different transactions
but contribute to the same purpose an reason d'etre of the underlying contract. For example,
contract of exchange, will primarily concern trading as well as selling and buying activities
inclusive of their subdivisions such as cash sale, deferred payment sale, deferred delivery
sale, sale on order, sale on debt , sale on currency, auction sale and so on and so forth.
Similarly other types of contracts also include many sub-divisions relevant to respective
classification. For example, contract of security deal not only with with surety ship (kafalah)
but also with pledge (rahn) and transfer of debt (hiwalah) because the very purpose of these
sub contracts under contracts of security was to protect the interest of the parties to a
contract particularly the interest of the party in whose favor the respective contracts are
concluded. As far as contract pertaining to the utilization of usufruct are concerned, it also
cover a few sub-contract such as ijarah (hire and lease) ariyah (loan of tangible asset), waqf
(endowment), qard (loan of money), etc. The contract of partnership (shirkah) also includes
different types of partnership such as mudarabah (profit and loss sharing) musharakah
(profit and loss sharing), sharikah al-abdan (partnership by contributing effort and skill),
sharikah al-wujuh (partnership based on credit and reliability), muzara'ah (partnership in
farming), musaqat (partnership in fruit trees), etc.
5.0 Reflection and Overview on the Classifications of Contracts
Although contracts in Islamic law of transactions are classified into different categories, it
seems that the basic contract, in many cases and situations are the contract of exchange and
utilization of usufruct. The former presupposes the transfer of ownership while the later the
transfer of usufruct of a property from one party to another. This is clear from the definition
of both sale and hire in Islamic law Sale is defined as "the exchange of one commodity for
another, one of which is called the object and the other the price", or "the transfer of
ownership of property for another. Hire or ijarah is defined as the transfer of the usufruct for
a consideration. Both these two contracts constitute the main activities of commercial
activities because the remaining contracts are largely dependent on these two contracts.
Therefore, the law on sale as the contract par excellence and, next to it, on hire, was greatly
expanded in Islamic law literature. These two contracts are the bases for the other contracts
to take place. In other words, other contracts are dependant on these two contracts to exist
and to give effect. On the contrary, these two contracts, relatively speaking, can be
concluded between two parties without any need for other (supporting) contracts. For
instance, hiwalah, kafalah and rahn cannot stand by itself in the sense that they are all
dependent on the contract of exchange be it sale or lease/hire. In the case of hiwalah which
means transferring a debt from one debtor to another, it cannot take place unless the debt
relationship has already established between the transferee, the transferor and the principal
creditor. The debt relationship, on the other hand, may take place either out of deferred
payment sale or out of direct loan (qard) contract. Hence, it is obvious that hiwalah
originates from the sale transaction (as well as from loan transaction) kafalah, rahn, etc.
This shows, inter alia, that contracts are inter-related to form a complete system of
mu'amalah to ensure justice as well as to meet the needs of people which vary from one
condition to another. Therefore, it is relevant to conclude that Islamic commercial law
consists of many different types of contracts to suit different needs and circumstances. In
other words, theoretically, Islamic commercial law would be able to satisfy the need of a
person to buy a commodity on credit, or the need to have the guarantor against the third
party, or the need to have the fund for business enterprise purposes, or the need to have in
advance the capital to manufacture or produce agriculture produce or perhaps the need to
have a transferee to settle the debt owed by a third party (transferor) and the like.
6.0 Contracts of Exchange (Mu'awadat)
The main contract of exchange in Islamic commercial law is the contract of sale. Sale,
generally speaking, involves an exchange of a commodity for another commodity (barter
trading) or of a commodity for money (sale) or of money for money (sarf). Interestingly
enough, riba which is prohibited by Islamic law, originates or comes to exist from two types
of exchange, namely unequal exchange of two ribawi or usurious commodities (riba al-fadl
or riba al-buyu') or an exchange of money for money with different quantities (riba al-fadl)
or without simultaneous transfer and immediate delivery (riba al-nasi'ah or riba al-duyun) or
involving both possibilities which render the contract of exchange of money for money null
and void based on both riba al-fadl as well as riba al-nasiah. The first impression that comes
across to our mind is that both types of riba, while quite similar to both contracts of barter
trading and currency exchange (sarf), are not similar in any way to an exchange of a
commodity for money. This, among other reasons, makes the trading distinct and free from
any element of interest. However, contracts of exchange dealing with barter trading and
currency exchange are susceptible to riba elements and for this reason, Islamic law has
relatively laid down more strict principles to ensure the legality of these contracts and most
importantly to free these two contracts from both riba al-fadl and riba al-nasiah respectively.
Trading activities i.e., contracts of exchange of a commodity for money however, are
relatively more exposed to the element of gharar, literally hazard or risk. In Islamic legal
terminology, this includes the sale of an article of goods which is not present at hand; or the
sale of an article of goods, the consequence or outcome of which is not yet known; or a sale
involving risk or hazard where one does not know whether the commodity will later come to
be or otherwise. Gharar may render the contracts of trading void or voidable. Several
reasons were given for the prohibition of bay' al-gharar. Some of them were related to fraud
since such a sale amounts to obtaining the property of others by selling unavailable goods
and also the contract may lead to disputes and disagreements between the parties in the
contract. While in Islamic law, an agreement must bring an immediate and certain
obligation.
Therefore, it is not surprising to find that Islamic law has prohibited many pre-Islamic
period's contracts of exchange because they were either uncertain or not known to one or
both parties to the contract which may eventually lead to dispute and injustice. Such
contracts are like bay' al-mulamasah, bay' al-hasat, bay' al-munabadah, bay' al muwafah,
bay'muzabanah, bay al-mukhadarah, bay' al-muhaqalah, al-haml, bay'atan fi bay'ah or
safqatan fi safqah, bay' al-kali bi al-kali, bay' wa salaf, etc. All of the above examples reflect
clearly the hazardous elements that each of them contains and therefore, render the contract
either void or voidable.
From this brief introduction, we may infer that as far as barter trading and currency
exchange are concerned, the principles of Islamic law which govern those transactions are
mire concerned with the questions of equality between two items because these two types of
exchange are vulnerable to riba element. On the contrary, the possibility of riba interference
dies bit arise in the case of trading since trading activities are basically free from riba but are
always exposed to exploitation and fraud. The question of equal amount and simultaneous
transfer of the property being exchanged is irrelevant in trading activities simply because
these two factors do not inflict any legal effect on the sale contract. This, the golden
principle in trading is that the contract should not contain any element of either gharar or
jahalah (lack of knowledge) because otherwise, the contract is deemed either void or
voidable according to the degree of gharar or jahalah respectively. Also, for this reason, it is
respectfully submitted, that the issues of the first possession of the property before the
second sale qabd, the capacity to deliver the property, etc., are always questioned by, and
debated amongst, the jurist only ill relation to trading (alone) because these two issues and
the like are concerned with gharar and jahalah and not with riba.
On the contrary, the issues of gharar and jahalah, have no effect whatsoever in certain
contracts in the Islamic law of transactions because the nature of this type of contract does
not require and demand a precise specification and identification of the property being
transferred from one party to another. This is absolutely applicable to the contracts of
gratuity ('uqud al-tabarru'at) such as hadiah, hibah, wasiyyat, etc. Why gharar affects trading
and not gratuity contracts is a question worth of reflection. The immediate answer would be
that trading differs from gratuity contracts because the former is a bilateral contract which
requires an exact knowledge of the property to fulfill the requirement of legal consent while
the latter does not require such knowledge since the consent of the recipient is not necessary.
Again, the classification of contracts as given earlier would help the jurists to ascertain the
legal position of the respective contracts in a given situation. Interestingly enough, the
difference between the two types of contract such as between the contract of exchange and
gratuity would induce different legal effects e.g. khiyar or the right to revoke the contract.
While khiyar (option) is undoubtedly part and parcel of the sale transaction, it finds no place
in gratuity contract. Should we continue to examine the similarity and dissimilarity between
one type of contract with another in issues pertaining to legal position, rights, obligations,
liability, risk, merits, modus operandi, etc., we would have certainly produced so many
pages on the topic which is not the intention of the present paper.
To be more specific, we should confine our present discussion to the contracts of exchange
('qud al-mu'awadat) which will include a variety of contracts which differ from one another
on terms of specific legal requirements, rights, obligations and liabilities but common to
each other in terns of the result of the contract, namely the transfer of ownership from one
party to another. Therefore, the element common to all contracts under contracts of
exchange is the transfer of the ownership and possession from one party to another. Should
this be absent and lacking in a contract, the contract is no longer a contract of exchange. The
relevant legal maxims which governs this situation is article 3 of the Majallah al-Ahkam
al-'Adliyyah which reads as, "In contracts, attention is given to the objects and meaning, and
not to the words and forms". The maxim clearly states that it is the object and aim of a
transaction which will be determinative to the legal position of that transaction. The maxim
cited is related to another maxim describing the function of intention in all aspects of Islamic
law which reads as follows, "matters are determined according to intention". To illustrate the
maxim governing the legal position of a contract as pointed out by article 3 of the Majallah,
the drafters of the Majallah have cited the case of bay' al-wafa'. Bay' al-wafa' is basically a
sale of commodity on the condition that the seller be allowed to get the commodity back
upon paying its price. Therefore, in bay' al-wafa', the seller by returning the price, can
demand back the thing sold, and the buyer, by returning the thing sold, can ask for the price
to be reimbursed. Also, neither the seller nor the purchaser can sell to another a thing sold by
bay' al-wafa'. This trahsaction is perceived by the Majallah as a pledge contract, not because
of the words and forms used in the offer and acceptance but rather due to the intention and
meaning as it is clearly expressed in the maxim cited earlier.
The case of bay' al-wafa' attracts the attention of the drafters of the Majallah since bay' al-
wafa' is a transaction peculiar only to the Hanafi school of law and furthermore, the
Majallah is primarily based on the Hanafi point of view. In addition, bay' al-wafa' is so
unique because it is termed as a sale while in actual fact, as endorsed by the Majallah itself,
it is rather a pledge (rahn) contract. That is to say, the relationship between the two parties to
that contract could not be between the buyer and seller since the transfer of property and
corresponding consideration is not final and ultimate. Rather, the contractual relationship
would be between mortgagor (seller) and mortgagee (buyer) neither the seller nor the
purchaser can sell to another a thing sold by bay' al-wafa'.
Contracts of exchange in the classical Islamic law of transactions, as mentioned earlier,
include a number of contracts such as bay' al-musawamah, bay' al-murabahah, bay al-
tawliyyah, bay' al-wadi'ah, al-bay' al-mua'ajjal, bay' al-salam, bay' al-istis'na', bay' al-
muqayadah, bay' al-sarf, bay' al-muzayadah, etc. Apart from these types of sale, there are
also other types of sale which are disputable among the jurists such as bay al-'arabiin,
bay'al-'ayyinah and bay' al-dayn. In dealing with these different categories of sale contracts,
the writer is more inclined to classify them into appropriate sections for the sake of
clarification and distinction. The classification is based on certain factors which distinguish
one contract of sale from another. Therefore, with special reference to the thing sold, sales
are divided into four categories as follows:
i. sale of property to another person for a price and this is the most common category of
sale and is consequently specifically called sale
ii. sale by exchange of money for money which is known as sarf transaction which consists
of selling cash for cash
iii. sale by barter i.e., exchange of object for object whereby neither of which is money
payment; each of the two commodities constitute both the price and the object; and
iv. sale by immediate payment against future delivery such as bay' al-salam (forward sale)
and bay' al-istisna' (sale on order). The item of the sale is yet to exist in the future date.
From another perspective i.e., the nature of profit agreed upon in the contract, sales are also
divided into four categories as follows:
1. Musawamah sale which is basically a sale by mutual consent completed and concluded
through negotiations between the seller and buyer in which no reference be made to the
original cost price. It is also a 'profit sale' but the actual cost price and the
amount/percentage of the profit is unknown to the buyer because the seller is not bound,
in musawamah sale, to disclose the cost price.
2. Murabahah sale which is the sate of a commodity for the price at which the seller has
purchased it, with the addition of stated profit known to both the seller and buyer. In
short, it is a cost-plus-profit sale in which the profit is expressly disclosed by the seller.
From this, we can infer that murabahah sale in its original Islamic connotation is simply a
sale. The only feature distinguishing it from other kinds of sale is that the seller ill
murabahah expressly tells the purchaser how much cost he has incurred and how much
profit he is going to charge in addition to the cost. Therefore, if a person sells a
commodity for a lump sum price or instalment basis without reference to the cost, this is
not murabahah, even though he is earning some profit on his cost because the sale is not
based on a 'cost-plus' concept. In this case, the sale is called musawamah. Due to
speciality of murabahah, it has been considered by the jurist as a sale based on trust
(amanah).
 3. Tawliyyah sale which is a sale at cost price without any profit for the seller. It is similar to
murabahah with reference to the basis of the sales, namely amanah.
4. Wadi'ah sale which takes place when the seller agrees to sell a commodity at a lower price
than that of the cost price. Since the seller is selling the commodity at a lower price, it is
also a trust sale.
According to the manner of payment, there are three possibilities of payment pertaining to a
sale contract as follows:
i. Cash sale in which the purchaser is under obligation to settle the purchase price agreed
upon when concluding a contract if the buyer could not settle the payment for one
reason or another, the seller has a right of retaining the thing sold until he has received
the payment of the price.
ii. Deferred payment sale which is payable on installment basis. This is permissible
provided the period thereof is definitely ascertained and fixed manner of payment is
applicable to all types of sale except in the case of bay' al-salam.
iii. Lump sum payment payable in the future. This manner of payment is also lawful
provided the date of the payment is fixed in advance. Also, this manner of payment
would be applicable to all types of sale with the exception of bay' al-salam.
iv. Earnest money (bay' al-'arabun) in which advance payment of sum of money is made to
the seller which constitutes part of the purchase price should the buyer decides to buy
the good. Otherwise, the advance payment is forfeited to the seller.
According to the subject matter of the sale, it can be divided into three categories namely,
sale of commodity (movable and immovable), currency (sari) and debt (dayn). As for the
very purpose of sale contract, it may classified into two categories that are exclusively of
exchange purposes and the other for exchange as well as for financing purposes.
Apart from the previous perspectives on which sales are usually classified, sales are also
divided into a few categories according to the nature of the price whether is has been fixed
from the very beginning or otherwise. This is however, the writer's personal reflection on
certain contracts of sale available in the Islamic law of transactions. These categories are as
follows:
i. The price is mentioned by the offeror and accepted by the offeree. This is the practice in
normal sale transaction whether it involves musawamah or murabahah or salam or
istisna' and other types of sale with the exception of tawliyyah sale since the price
offered in the latter must not go beyond the original cost price.
ii. The price is mentioned by the buyer and later accepted by the seller, seller, in this
context, is not bound by any 'offer' of the buyer but, on the contrary is bound to honor
the highest price offered by the respective buyer or 'bidder'. This is called as bay' al-
muzayadah or bay' man yazid or sale based on auctioning. In this transaction, the price
will be fixed only by the highest offer made by the bidders.
iii. The price in some sale transactions, is divided into two stages; the second payment is
pending on the ultimate decision of the buyer to proceed with the contract or otherwise.
 This takes place in bay' al-'arabun (earnest money) in which the buyer agrees to purchase
a commodity and pays to the seller an amount of money in advance. If he decides to buy
the commodity, the amount paid will be deducted from the purchase price, but if he
declines or fails to buy the commodity, the advance payment is forfeited to the seller.
The fundamental basis of sale contract consists of one piece of property being exchanged for
another. Offer and acceptance are also referred to as the fundamental basis of sale, since
they imply exchange. As for the object, it must be in existence, deliverable and known to the
purchaser. These conditions are applicable to many types of sales except in few contracts
such as bay' al-salam and istisna'.
7.0 Contracts of Utilization of Usufruct ('Uqud al-Manfa'at)
The above type contract is divided into two categories which are the transfer of the usufruct
for a consideration and the transfer of the usufruct without a consideration. The former is a
bilateral contract while the latter is not. The former is known as contract ijarah while the
latter is known as 'ariyah contract. The details of these two contracts are as follows:
7.1 Contract of Ijarah (transfer of usufruct for a consideration)
Ijarah is a word that conveys the sense of both hire and lease. Ijarah is of two kinds, namely
use of corporeal property which may take one of three forms:
a. Immovable property, such as land or premises
b. Merchandise, such as furniture, machinery, etc.
c. Animals.

The second type of ijarah is personal service. The salient features of ijarah contract are as
follows:
i. The lessor must be the absolute owner of the thing or the agent of the owner of his
natural or legal guardian.
ii. The thing given for rent and the amount of rent should be fully and precisely known to
both parties.
iii. In a contract of hire, it is necessary to make known the use to which the thing hired is to
be put, so as to avoid later dispute.
iv. When land is taken for rent, the period must be fixed and the purpose for which it is
rented specified.
v. In hiring an artisan, the benefit should be made known by a statement of the nature and
method of workmanship.
vi. It is the responsibility of the lessor to maintain the property leased in such a way as to
retain the benefit of the property.
vii. If the lessee damages the property hired, the lessor can annul the lease on application to
the court.
viii. The lessee can sub-let immovable property but not movable property.
ix. The thing hired should be treated as a trust in the hands of the user.
7.2 'Ariyah (Lending for Gratuitous Use)
In addition to the above general rules, the contract of 'ariyah requires the following rules;
i. The lender may withdraw the loan whenever he wishes.

ii. The thing lent must be capable of giving a benefit.

iii. The thing lent for use must be defined.

iv. The borrower becomes the owner of the benefit without giving any payment to the
owner.
v. The maintenance of the thing borrowed for use is the responsibility of the borrower.
vi. When lending for use is restricted as to time, place and nature of use, the restriction
are to be observed.
vii. The borrower cannot let or pledge the thing lent for use, the borrower must
immediately return it.
viii. When the lender demands the thing lent for use, the borrower must immediately return
it.
ix. The expense and care of returning a thing lent for use fall on the borrower.

8.0 Contracts of Security

Thus type of contract consists of three contracts which are hiwalah, kafalah and rahn
explanation of each of the contracts is as follows:
8.1 Hiwalah (Transfer of Debt)
Hiwalah means transferring a debt from one debtor (transferor) to another (transferee). Once
the transferee has accepted the transfer of debt, the transferor would be released from any
obligation. Therefore, as a consequence of the transfer of debt (hiwalah), unlike suretyship,
the debtor who transfer his debt and his surety, if ally, are freed from their respective
obligations. The creditor can now claim his debt only from the transferee. The transferee,
after payment, has aright to claim the amount so paid from the transferor. In such a case, the
transferor's claim from the transferee, of any, will be adjusted towards the claim. However,
the transferee would be released from his liability in any of the following four situations:
i. By payment of the debt.
ii. By further transferring the debt to another person if the creditor accepts.
iii. By cantonments by the creditor.
iv. If the creditor dies and person who accepts the transfer is his heirs.
8.2 Rahn (Pledges)
A creditor, whether an individual or a financial institution, prefers to secure a loan either
through personal surety or a pledge. Pledge or rahn is to make a property a security in
respect of a right of claim, the payment for which may be taken from the value of the
property. The main laws relating to pledge, inter alia, are as follows:
i. The contract becomes irrevocable after the pledge is received by the pledgee.
ii. One pledge may be exchanged for another.
iii. The pledge may, on his own accord, all the contract.
iv. Two different creditors may take a common pledge from a single debtor. This pledge
will secure the whole of the two debts.
v. When a debt is partly paid off, it does not become necessary to return the part of the
pledge equivalent to it in full. The pledge has a right to hold the whole until the debt is
paid.
vi. If the pledgor has destroyed or damaged the thing pledged, he must pay compensation.
If the pledge has destroyed or damaged it, the amount of its value is struck off the debt.
vii. If the time for paying the debt has arrived, and the pledgor refuses to make payment,
the pledge may approach the court to compel the pledgor to sell the thing pledged in
order to pay the debt. On his refusal, the court may sell the pledge to pay the debt.
8.3 Kalafah (Suretyship)
Kalafah means to add an obligation to an existing obligation in respect of a demand for
something. This may relate to a person, finance or act (performance). Kafalah relating to a
person involves the production of the person for whom the kafalah (bail) has been given.
Kafalah relating to finance implies an obligation. Kafalah relating to an act or performance
as to ensure the performance of a certain act, the failure of which may render th surety liable
and responsible. One important point to be stressed is that kafalah, unlike hiwalah, would
not release the principal debtor in whose favour the contract is concluded because kafalah is
only an obligation in addition to the existing obligation. Among other rules governing
kafalah are as follows:
i. It is lawful to become surety for surety.
ii. There may be more than one surety for a single obligation.
iii. If persons who are jointly indebted become surety for each other, each of them is
liable for the whole debt.
 iv. The discharge of the surety does not necessarily discharge the liability of the
principal debtor concerned. The opposite scenario will be acceptable as far as the
discharge is.
v. If a delay is granted to the principal debtor for the payment of his debts, a delay is
also granted to the surety principal debtor. But a delay given to the surety is not a delay
given to the debtor.
9.0 Introduction to Conventional and Islamic Banking
Conventional banking in the Western world has been evolved about two and a quarter
centuries ago, having contemporary with the emergence of industrial civilization. The
industrial revolution saw a tremendous expansion in the number of traders, manufactures,
industrialists and other entrepreneurs but whose own financial resources were not enough
for them to embark on their respective industrial activities. Hence a method had to be found.
Thus, the need of financial intermediates gave rise to the conventional banking which later
became the backbone of the modern industrial and financial system. This is simply because
the rate of economic development is always constrained by the availability of financial
resources Economic development needs mobilization of financial resources and
channelisation of these sources to appropriate interested sectors.
The banks in the conventional system, acting as intermediaries, accept deposits from the
public and lend them to the borrowers, regardless of whether these borrowers are individuals
or corporate entities. The bank's profits are mainly attributed to the difference between
interest expended (paid) to depositors, and interest earned (received) from borrowers.
Banking and financial houses in Islamic civilization are normally called masarif. Literally,
sari means turning, sending and employing. In the technical usage, musarafah signifies the
act of dealing, buying and selling and sometimes it has been attributed to change of money.
The sarraf or the money changer became an essential feature of every Muslim market. A
bank with headquarters in Baghdad and branches in other cities was mentioned in Arabic
sources. They carried on business through an elaborate system of cheques and letters of
credit which was so developed that is was possible to draw a cheque in Baghdad and cash in
Morocco. Indeed, it was reported that in Basrah, the center of trade in the East where each
merchant had his own bank account, payment were effected in cheques and never in cash.
The idea of establishing an interest free bank goes back to as early as 1940s. However, the
conditions then were not ready for actual establishment of an Islamic bank as not much
thought had been given to technical details and actual operation of an Islamic bank. A
pioneering experiment of putting the principles of Islamic banking into practice was
conducted in Mit-Ghamr in Egypt from 1963-1967 with special emphasis in educating the
rural Muslims on the operation of the banking system. In Mit-Ghamr project, a number of
accounts were accepted, namely saving accounts, investment accounts and zakat accounts.
In the saving accounts, no interest is payable to depositors but they were allowed to the
withdrawals. Also, they were eligible for a small short term were allowed to the
withdrawals. Also, they were eligible for a small short term free loan for productive
purposes. The funds deposited in the investment account were subject to restricted
withdrawals and were invested on the basis of profit and loss sharing. On the other hand, the
zakat account attracted the payment of zakat to be distributed among the poor and needy.
Mit-Ghamr experiment was short lived up to the year 1967 due to political reason.
In short, the establishment of an Islamic bank at Mit-Ghamr in Egypt (1963), brought a
remarkable impact on the real implementation of banking practices according to the Shari'ah
principles. Twelve years later, through the Organization of Islamic Conference (OIC) an
inter-governmental Islamic bank was established, known as the Islamic development bank.
Later, many private Islamic banks were established by Muslim entrepreneurs including
Dubai Islamic Bank (1975). Dar al-Mal al-Islami (1981), Bank Islam Malaysia Berhad
(1983) and a few other Islamic banking institutions operating on an international mandate in
non-Muslim soil and environment such as the Dar al-Mal al-Islami (Geneva), Islamic
Investment Company (Bahamas) and other places.
Having said this, the philosophy and principles of Islamic banking date back to more than
1,400 years ago, to the Qur'an and the Sunnah of the Prophet (s.a.w). At present, more than
150 Islamic financial institutions operating worldwide. Interestingly enough, Islamic
banking is being discovered by western banks as a mechanism to gain access to the large
pool of Muslim funds. It is not suprising, therefore, that there is an ever-increasing number
of conventional banks providing Islamic investment services to their international clients.
The development of Islamic banking in the twentieth century witnesses the emergence of
such institutions in certain countries where such was possible. This development marked the
widening of the practice of the Shari'ah principles beyond the boundary of the realm of
devotional matters (ibadat) and family and matrimonial matters (al-ahwal al-shaksiyah). The
raison d'etre of Islamic banks, generally speaking, is the followings:
i. the absence of interest-nased transactions
ii. the avoidance of commercial transactions involving gharar (uncertainty)
iii. discouragement of the production of goods and services which contradict the value
pattern of Islam; and
iv. the payment of an Islamic tax, the zakat.
10.0 Islamic Financial System in Malaysia: An Overview
The introduction of the Interest-Free Banking Scheme (known in its Bahasa Melayu
acronym as SPTF, namely Skim Perbankan Tanpa Faedah) in Malaysia in 1993 was
premised on a dual banking system; a full-fledged Islamic banking system operating on a
parallel basis with a sophisticated conventional banking system. So far, Malaysia is the only
do the two systems work on a parallel basis they also utilize essentially the same set of
banking infrastructure. This has significant implications in terms of the cost and speed of
implementing the Islamic banking system.
The Malaysian model has a number of advantages when compared to the other models of
implementing Islamic banking Muslims in countries which have only a conventional system
do not have the opportunity to benefit from the facilities of a modern systems without being
involved in riba. The same is true in the case of the conventional plus system, where the
Islamic banking institutions operate on the fringe of the domestic banking system and the
services they offer are neither as comprehensive nor as sophisticated as the conventional
system. Among Muslim countries which fall under this 'model' are Saudi Arabia, Bahrain,
Bangladesh, Brunei, Egypt, Guines, Indonesia, Jordan, Kuwait, Niger, Qatar, Senegal,
Tunisia, Turkey and United Arab Emirates.
The Islamic banking products offered in Malaysia's dual system are therefore much more
sophisticated and covering a wider range of services compared to the products offered in the
conventional plus system as is the case in the countries listed above. More surprisingly, the
Malaysian model of a dual system has proved to overwhelm the model of Islamic banking in
some countries such as Iran, Pakistan and Sudan which have an entirely Islamic banking
system leaving no room and avenue for conventional banking system. The advantages of the
Malaysian model are as follows:
First, the range of Islamic banking products in a dual system tends to be wider when
compared to the products in a single Islamic system, since in a dual system Islamic banks
have to provide all the services provided by conventional banks.
Second, the Islamic banking products in the dual system, can also be expected to have a
higher level of sophistication compared to the Islamic banking products in the single Islamic
system in other words, Islamic banks operating in the dual system would have no choice but
to create similar sophisticated products on an Islamic basis as did the conventional banks.
11.0 Sources of Fund in Islamic Financial System
As far as sources of fund are concerned, the bank can raise its initial equity (or paid-up
capital) in straight forward way through the Islamic equity-financing contract of al-
musharakah among its initial shareholders. In the case of SP TF banks, the contributors
would be the main banks which shall provide the paid-up capital either on the basis of
mudarabah, musharakah or qard hasan respectively. The public could also be the
contributors through saving accounts, current accounts and investment accounts
respectively. While the first two accounts are basically based on the Islamic contract of
wadi'ah yad dhamanah (safe custody based on suretyship), the third account is originated
from al-mudarabah contract. In short, the sources of fund for interest-free banks may come
from these means which are as follows; shareholders equity, customers' deposit in current
account, customers' deposit in savings account, customers' deposit in general investment
accounts and customers' deposit in special investment accounts.
As mentioned elsewhere, it is not the institution which distinguishes Islamic financial
system from the conventional one it is rather the functions and way they are performed that
make the Islamic financial system distinct. Interestingly, deposit taking is one of the sources
of fund in the Islamic financial system but the institutions do not pay any interest on the
money deposited at the bank. Under the conventional system, the nature of the contractual
legal relationship in the sense that the bank is the debtor and the customer is the creditor.
However, under Islamic financial system, particularly in Malaysia, the Islamic
banks/counters accept deposit for both saving and current accounts under the contract of
wadi'ah (safe-custody) coined together with another contract, namely dhaman (surety ship)
contract. Ultimately, the accounts are opened under the purview of the contract of Wadi'ah
Yad Dhamanah (safekeeping with guarantee).
The very essence of Wadi'ah Yad Dhamanah is that the custodian (the bank) would be able
to utilize the money deposited since the custodian would be solely held liable for any
damage inflicts on the deposited item. On the other hand, the depositors are given the
assurance that they may withdraw their money at any time and above all, their money will
be guaranteed from any damage and the like. Also, adopting this approach would entitle the
banks to reward their depositors a discretionary reward i.e. hibah. The practice of awarding a
hibah to depositors is deemed necessary as interest-free-banking system is operating in a
dual banking system and therefore, it needs to be competitive with the conventional banking
environment. However, interest-free banks are not allowed to declare nor to promise any
amount or rate of hibah up-front as this would be tantamount to riba.
Also, Islamic financial system accepts deposit from the public and private sectors under the
contract of mudarabah (profit and loss sharing). This contract is the basis of both General
Investment Account and Specific Investment Account. While in the former type of account,
the investment project is not defined; the investment project is defined in the latter. Also, the
ratio of profit distribution is normally fixed in the former whereas in the latter, this may be
usually individually negotiated. The contract of mudarabah is a kind of partnership where
one party provides the capital and the other provides the work and management. As in the
case of Islamic financial system, the customers or depositors are the investors who provide
the capital while the bank act as the manager to convert the capital to profit. The profit, if
any will be shared between the two parties based on certain ratio or percentage agreed upon
in advance. However, in the event of a loss in the investment, the customers/investors bear
all the loss as the manager will lose his time, effort and expected profit.
12.0 Application of Fund in Islamic Financial System
In the area of application of fund, interest-free banking system has relied heavily on two
instruments of financing which are murabahah and bay' bithaman ajil. As far as murabahah
(cost-plus-sale) is concerned, interest-free banking system has considered it as a short term
financing mainly used for working capital financing and Letter of Credit for trade financing.
Under this facility, the customer may approach the bank to provide financing for his
working capital requirements to purchase stock and inventories, spares and replacements, or
semi-finished goods and raw materials. The bank will subsequently sell the goods to the
customer at all agreed price comprising its purchase price and a profit margin, and allow the
customer to settle this sale price on a deferred term of 30 days, 60 days, 90 days or any other
period as the case may be. Murabahah as applied under interest-free banking is not only a
financing facility granted for a short period of time but also a deferred payment sale which
must be settled in lump sum because it is stated that on due date, the customer pays the bank
the agreed sale price.
As far as bay' bi thaman ajil (BBA) is concerned, this facility is used particularly in
Malaysia for financing the acquisition of assets and the payment usually is based on
instalment basis payable in longer period compared to murabahah facility repayment. The
contract of BBA has been utilized by the bank to provide the customers medium and long
term financing to acquire items which may include landed property, houses, motor vehicles,
furnitures, stock and shares, etc. However, comparatively speaking, house financing is the
most popular facility granted under BBA either to purchase a new house; or to purchase
existing completed houses; or to build a house on customer's land; or as a refinancing
facility. In addition to murabahah and BBA, the Islamic bank also offers ijarah or lease
financing. It generally involves the purchase by the bank of a specific asset and its lease to
the customer for a long or intermediate plan whereby the bank charges an agreed charge or
rent.
One may question how Islamic financial system could be able to offer alternatives to the
conventional interest-based loans such as housing loan, bridging loan, project financing,
revolving credit/overdraft, share financing, infrastructure financing, discounting of
commercial papers, etc. The following is a brief but comprehensive illustration of various
products which are able to meet the modern needs of finance but at the same time are
compatible with the Shari'ah. We have already dealt with both bay' bi thaman ajil and
murabahah which are useful in terms of financing a customer to purchase a commodity be it
houses, shop houses, land, motor vehicles, consumer goods, shares, education package and
other suitable goods. They are also equally useful for refinancing purposes. In the area of
revolving credit or overdraft, some banks have started introducing Islamic revolving credit
and Islamic overdraft on the basis of hiwalah with the combination of ju'alah (contract of
commission) or wakalah bi al-ajr (agency with fees) which seems to be a good alternative to
revolving credit facility or overdraft offered under conventional banking to finance the
working capital requirement of the company including overhead expenses. Overhead or
utility expenses may include vis a vis water bill, electric bill, rental bill, phone bill, custom
duties, consultancy fees and the like.
In fact, interest-free revolving credit may be made available to a customer provided the
facility is supported by one of the following trade transactions namely, imports documents,
local purchase documents and overhead bill vis a vis utility bills and the like. This facility,
in other words, can only be allowed for purchase of goods like raw materials, semi-finished
or finished goods including goods like machinery, parts and utility bill. Interest-free
revolving credit can only be given to an amount equal but not exceeding the financial value
of the trade transaction as indicated in the supporting documents. However, it is to be noted
that the proceeds of these expenses must be paid to the vendor or supplier either through the
remitting bank or directly, depending on how the documents was received. Proceeds of this
facility should under no circumstances be credited to the customer's account because
otherwise it will be against the principle of hiwalah. Utilizing hiwalah for a service charge
would, it is respectfully submitted, efficiently replace the conventional overdraft and
purchase of Bill of Exchange issued under Documentary Credit or Discounting.
Modern Islamic financial system also witnesses the application of Islamic syndication
particularly in major project and infrastructure financings. Syndication in financing takes
place when a group of financial institutions agree to advance a portion of the fulfilling for a
particular project. This kind of financing becomes more and more popular as the Ministry of
Finance has issued a directive that all major Malaysian infrastructure projects have to have
an Islamic financing component as in the case of Kuala Lumpur International Airport
(KLIA) project at Sepang which has secured a portion of Islamic financing in all its stages
of construction. As the project are normally large and require large financing, one bank may
not be able to provide sufficient financing. Above all, the Central Bank of Malaysia has
prescribed that banks may not provide financing to any single customer in excess of the
Single Customer Limit which is defined as 30% of the Bank's capital fund. In cases where
the financing required is ill excess of the Single Customer Limit, the bank shall arrange for
the balance of the provided by other banks. The arranger, also known as manager, lead
manager and co-manager respectively, would be entitled for certain amount of fees on the
basis of wakalah (agency ship) for his effort and expenses.
Also relevant is the introduction of Murabahah Notes Issuance Facility (MuNIFs) MuNIFs
is the interest-free alternative to the conventional revolving underwriting facility. Under
MuNIFs, the components of revolving and underwriting are also present. Being structured
under the concept of murabahah or cost-plus, the tenderers bid for the purchase price of the
underlying assets. Having purchased the assets they are then sold to the issuers at a mark-up
price and on deferred periods ranging from one month to one year. This selling price, which
the debt created under these contracts of sale, is evidenced by murabahah notes. The debts
created out of the murabahah contracts are then securitized through the issuance of
Murabahah Notes. The notes will be traded on the secondary market among designated
institutions under the concept of bay' al-dayn (sale of debt). Obviously, the notes issuance
could be used, inter alia, for working capital requirements and capital expenditures which
are useful for any project financing. In addition to what has been said, the idea of Islamic
Private Debt Securities (IPDS) would also be significant in promoting the project financing
under interest-free banking operations. A good example of IPDS is the one issued under the
contract of al-musharakah which was undetaen for Sarawak Shell Berhad in 1991. This
musharakah, which falls under the category of musharakah mutanaqisah (decreasing
partnership) is a limited contract of participation in terms of duration. The holders of the
securities are paid periodically a certain amount of profits from the production turnover of
the oil wells based on an agreed proportion, with added bonuses should the turnover exceeds
certain levels. In that scheme, the total amount of the facilities was RM 560 Million (US $
225 Million).
The issuance of Islamic private debt securities is basically based on the concept of
securitization. Securitization refers to the creation of tradable certificates evidencing a debt
arising out of financing facilities. In brief, securitization is a process that makes debt
tradable on the secondary market. The act of securitization is meant for having liquidity
which is known in Islamic law as suyulah. The process of securitization is a form of
financing by converting the assets, tangible or otherwise, into cash without increasing the
leverage on the balance sheet by selling those assets to a special purpose vehicle (SPV)
which in turn issues debt securities to finance the purchase. By so doing, the company would
be able to get cash which is needed for its projects. As for the SPV, it needs to securitize the
debts purchased to be sold to the investors either on the basis of mark-up sale (murabahah)
or profit sharing (mudarabah) by issuing murabahah and mudarabah securities respectively.
In Malaysia, the Islamic view point which is now prevalent is that the company may sell the
debts to the spy under the purview of bay' al-dayn (sale of debt). Also, in respect to
securitization, the financial guarantee is needed to ensure the commitment of the SPV to pay
agreed profit and redemption amount of securities to the investors. Perhaps, the role of the
Rating Agency Malaysia Berhad (RAM) would be very much relevant to measure the safety
of the Islamic securities. Thereof, it has been suggested that the minimum rating to qualify
as an investment grade instrument is triple 'B' ('BBB') whereby anything below triple 'B' will
be considered as a speculation grade investment.
13.0 New Direction for Islamic Financial System
So far, Islamic financial system has been concentrated on debt-financing neglecting equity-
financing which is more appealing for the development of Islamic financial system as the
conventional banks may be likely unwilling or unable to undertake this type of financing.
Equity financing is best represent by both mudarabah and musharakah contracts of
partnership. The reluctance of modern Islamic financial system is likely caused by a few
reasons which are interrelated and subsequently render the Islamic financing based on equity
financing less popular. The first reason, undoubtedly, is due to the high risk to which both
mudarabah and musharakah are exposed.
As both mudarabah and musharakah financing operate on a profit and loss sharing basis,
they are considered as high risk tools because:
i. Returns to the banks are more uncertain as they depend on the performance of the
business.
ii. In conventional financing, banks only assume credit risk but in these two Islamic
tools of project financing, the banks must also undertake the business risk.
Needless to say that banks are conservative and risk averse by nature as they are responsible
not to their shareholders but also to their depositors. As their depositors comprise both small
and large depositors, banks look upon themselves as trustees for these funds. As trustees
they are bound to protect these funds and their depositors to ensure that the banking system
is fair, sound and most importantly safe. This can only be assured if the banks use less risky
financing products.
The second obvious reason behind this reluctance is the question of moral hazard. Naturally,
both mudarabah and musharakah require substantial trust between the banks and their
customers. If a bank acts only as a capital provider as in mudarabah or leaves all aspects of
management to the customer in terms of honesty, integrity, management and business skills.
Equally problematic is the aspect of monitoring and supervision. Musharakah in particular
requires more commitment and effort from the banks compared to other forms of financing
as the bank assumes business as well as credit risks. Given the fact that both mudharabah
and musharakah are equity financing in character, collateral is not a prerequisite.
This inability to secure a lien on the (partner's) assets of the business would require more
careful evaluation of the prospects of the business and hence more precaution in extending
financing. Sharing of business risks also entails more diligence in terms of market research
on the company, the business, competitors, industry, etc by the banks. And, should the bank
decide to participate actively in the management of the businesses, the bank must have
qualified personnel who have the management skills undertake such tasks. Most bankers are
generally trained to do credit analyses, thus lacking in these management skills which are
necessary to protect the banks' interest in musharakah financing.
In addition to these problems, perhaps the issue of matching of funds would be relevant to
our discussion. The bulk of a bank's source of fund is from depositors in the saving or
current accounts. The nature of such deposits is that withdrawals are on demand. The
average tenure for a general investment accounts is 24 months, which is not very long. In
mudarabah and musharakah financing, banks are committing their fund in medium to long
term ventures and as resulting in mismatch of the tenures of sources and uses of fund Most
Islamic banks, being very 'new' and 'young' cannot afford to undertake musharakah as they
have not built up their equity and shareholders fund sources vet. Related to this is longer
period taken to realize the returns from mudharabah and musharakah financing Islamic
banks, being business entities, are primarily concerned with profit maximization especially
at this stage of development. Social obligations are secondary until they could put
themselves in a more stable financial position and establish themselves as better alternatives
to the conventional banks.
Also relevant to the point of discussion is that most Islamic bankers were initially trained as
conventional bankers. It will take some time for them to adapt their way of viewing
financing from conventional perspectives to Islamic perspectives. The issues of collateral,
guarantee, fixed and certain returns, creditworthiness, etc., are still of paramount importance
to Islamic bankers Islamic bankers find it difficult to break away from comparing the return
received from Islamic financing to conventional financing direct comparison is more
straight-forward and easily done in murabahah and bay' bi thanam ajil than in mudarabah
and musharakah.
One problem which is worthy of discussion is the structural issues pertaining to equity
financing. Structural issues are issues related to the existing bank regulations, tax structure
and other regulatory issues. Even though the Islamic Banking Act 1983 gives more
flexibility to Islamic Bank in terms of financing products, other aspects are very similar to
conventional banks, flexibility is not elaborated and in practice, the Interest-Free Banking
Scheme (SPTF) guidelines issued by Bank Negara also do not clearly provide the guidelines
for mudharabah and musharakah financing. Also, there is a limit of 10% shareholding by a
bank in a particular company under the Banking and Financial Institutions Act 1989. This
amount is also insignificant that the entrepreneur has to approach several investors to take
off a new venture. Most banks are still unsure on what they can or cannot do, whether
mudharabah and musharakah financing will affect their capital adequacy ratio, what are the
relevant accounting treatment and the like. Confirmation on any issues requires clarification
from Bank Negara or other regulatory agencies and this could delay a financing exercise.
This eventually could lead to banks taking the easy way out and resorting to other more
convenient tools of financing such as murabahah and bay' bi thaman ajil.
Last but not least, the above reluctant is probably due to the customer or potential partner's
perspective. If they have good projects or business, customers generally would not want the
banks to share the profits and therefore would prefer to borrow. On the other hand, if a
project is not financially attractive and the customer wants the bank to participate in the
equity, the project may be likely rejected by the bank for being not feasible. Also, most
businesses do not want to relinquish management control of their business which may
happen if they enter into musharakah financing contract with a bank.
The above list of problems which seems to discourage the role of equity financing requires a
comprehensive response and solutions to overcome some, if not all, of the said problems. In
this context, the bankers must be creative enough, with the assistance of Shari'ah experts, to
be able to undertake the above challenges positively and constructively and this, surely, will
require the restructuring of the concept and modus operandi of Islamic equity financing to
make it more feasible and attractive. Otherwise, the problems will render the Islamic equity
financing unpopular and impractical from the modern banking perspective.
With regard to the issue of moral hazard and its relation to the question of collateral, it is
respectfully submitted that a few perspective from Islamic law point of view is deemed
necessary. The writer is of the view that collateral could be brought in the agreement of the
project financing particularly to secure the interest of the investor but this practice is meant
only for compensating any negligence committed by the entrepreneur. The collateral
however, cannot be used under any circumstances to redeem the loss due to 'genuine'
reasons it is for this reason, it is respectfully submitted, that the classical jurists disapproved
the practice of taking collateral (rahn) in partnership enterprise. The classical jurists were
silent on the use of the collateral to compensate the loss caused by negligence and improper
practices of the entrepreneur. Therefore, it seems to the writer that the issue is ijtihadi in
nature and hence, it is open for alteration and modification especially to suit the needs of the
modern requirement and above all to protect the interest of the parties involved in a
partnership contract. Perhaps, this newly proposed practice of taking collateral upfront
differs from the classical practice in the sense that the collateral will be ready for any
compensation even before the negligence is committed but it is refundable should there be
no negligence.
The above line of restructuring one aspect of equity financing would be helpful to overcome
the reluctance of some of the financiers to take up equity financing. However, this may not
in favor of the prospective entrepreneurs. They may now be reluctant to come forward to
participate in equity financing since they have to furnish the collateral from the very
beginning and this may put unnecessary burden on them. In this context, perhaps we have to
examine thoroughly both the principle and institution of rahn in Islamic commercial law so
as to contribute in giving some encouragement to the entrepreneurs. Otherwise, equity
financing will remain unpopular.
It may be suggested that the party who shall provide the collateral would be a third party
who is not related to either of the parties in a particular project financing. As Islamic
commercial law allows the third party to be the guarantor as well as to furnish the collateral
on behalf of the entrepreneur on the basis of wakalah, it follows that this third party might
be another financial institution which is willing to take the liability which might arise from
both mudarabah and musharakah. In this context, more research should be undertaken to
examine whether the Islamic bankers could follow the practice of Credit Guarantee
Corporation (M) Berhad which was established since 1972 whose shareholders, among
others, were commercial banks, finance companies and Bank Negara of Malaysia. As the
banking and financing sectors have their Islamic windows, the same would be equally
applicable to Credit Guarantee Corporation. This Islamic Guarantee Window will manage a
separate pool of funds solely for the purpose of meeting the liability of guaranteeing
financing granted under the Islamic Banking concept irrespective of whether the facility is a
debt or equity financing. Or perhaps an Islamic Guarantee Window is to be created
independently from the Credit Guarantee Corporation but to be participated by all financial
institutions offering the interest free banking facilities so that a bigger pool of funds can be
created for this programme. This will be similar to the idea and practice of Islamic Inter-
Bank Money Market facilities. Under this proposed structure, all participating interest-free
financial institutions will be investing under the principle of mudarabah to meet the liability
of the failure of equity financing due to willful negligence or misappropriation or misuse of
funds on the part of the entrepreneur. Profits arising from this investment will be set aside
and accumulated as reserves to meet any liability in respect of financing facilities guaranteed
under this arrangement. In the event this scheme ceased to operate, this fund may be
refunded to all participating institutions provided that all guarantee covers have been
terminated and the Window's liability under this scheme has been completely relinquished.
The establishment of an Islamic Guarantee Window or even Corporation would be useful
and workable provided it is governed by a detailed legal framework so as to establish
negligence or otherwise on the part of the entrepreneur. The failure to have the legal support
would create many tensions not only between the investor and entrepreneur on the one hand
but also between all participating financial institutions in the above scheme of Islamic
Guarantee Corporation on the other. A committee of experts of both Civil law and Shari'ah
law is to be formed to look at the common principles of establishing the act of negligence in
both legal traditions.
As mentioned elsewhere, in the modern application, the banks can screen the client, the
prospective entrepreneur, appraise the project, monitor implementation and, if necessary,
take part in actual management in order to ensure the anticipated results are achieved. These
are issues which need proper and serious attention from all financial institutions
participating in interest-free banking scheme. These issues, relatively speaking, are
everlasting. For this reason, it is suggested that all financial institutions ought to contribute
to fund and establish a central research body which will undertake the research pertaining to
the above issues. The emphasis of the research body would be more on equity-based
products and their implementation. The research team will include bankers legal, tax and
shari'ah experts. It will be a cost rather than profit centre and contributing members will be
required to share in the cost of each product and its application. On the other hand, it is
hoped in the near future, that the Islamic banks are able to have their own yardstick to screen
and evaluate the potential entrepreneurs, to asses the project proposed not only in terms of
profitability and feasibility but also, most importantly, in terms of enhancing the Islamic
world-view in economic and commercial developments be it in manufacturing sector,
service sector, agriculture sector, trading sector, construction sector, etc.
As far as the tax issue is concerned, it has been observed that the current practice that is
dividends are distributed from the profits only after the payment of taxes has two major
implications:
i. Dividend to a bank is one component of income and will be subject to taxes. This
leads to the double tax deduction of dividend income; first at the business' level and
later at the bank's level, which result in lower profit to the bank.
 ii. As dividends are declared after and not before the payment of taxes, a lower return
will be received by the bank.
Therefore, from the company's point of view, interest is an expense while dividend is not.
As dividends cannot be used to reduce tax liability, a company would be more receptive to
enter into as interest-based financing to equity financing. To encourage more equity
financing by banks, dividends paid to the banks should be made from profits before payment
of taxes, just like interest. This would address the current imbalance which is more favorable
towards interest. Another approach could be to treat interest just like dividends so that equal
tax treatment could be accorded to these two items. A more radical approach could be to
"penalize" interest expenses or income so as to make dividend payments and income more
attractive from the taxation point of view, thus encouraging more equity financing by the
banks.
In the context of Islamic banking, the tax reform is deemed necessary whereby the tax rate
should be commensurate the risk taken. Therefore, it is respectfully submitted that as
murabahah is the least risky of the Islamic financial instruments, the profit it generated
should be taxed most heavily and in contrast, mudarabah which is the most risky of all
should not be taxed at all. It should be pointed out that this proposal does not mean that there
will be a loss in revenue for the country because the loss can be more than compensated for
the tax potential of the newly created firms financed by musharakah and the individuals who
are employed under these firms.
As for the high risk that both mudarabah and musharakah would assume, it may be pointed
out that some projects can be quite "safe" if for example the nature of the profit sharing is to
cater for government contracts or established and reputable companies. For open market
projects where the risk is higher, the returns can be negotiated to reflect the higher risks. For
projects of this nature will "force" the banks to be "more professional" and more "business
minded" rather than just be bankers.
Above all, it is worth mentioning that musharakah, in particular, is a very flexible financing
tool and the Islamic banks must exploit this aspect. In other words, it can be implemented in
various ways for example through equity partnership, joint ventures, co-financing and
venture capital. As venture capital funds are common in conventional banking and
operations of such funds by Islamic banks will be quite similar, this will be easily accepted
by most Islamic banks. The main difference is that the projects or businesses to be financed
must be lawful from the Shari'ah perspective. Also, depositors of these funds must know
from the outset that investment would be more long term in nature, returns are uncertain,
irregular, and may be delayed. The potential for equity financing particularly musharakah in
project or infrastructure financing is unlimited and Islamic financial institutions should be
always encouraged to step out from their conventional banking mentality and conservative
stance. Regulatory and tax incentives are always strong impetus for change. Research should
be accelerated so that products are more marketable to both bankers and customers. Training
is another key area to ensure the availability of a pool of well-trained Islamic bankers who
are less resistant towards the Islamisation of the financial industry.
14.0 Conclusion
The foregoing explanation has illustrated that the Islamic financial system has been closely
attached to various forms of transactions available in Islamic commercial law. It also
explains that the system has been working quite well in the past 14 years as it has been able
to meet various needs of the customers, both the depositors and fund users. However, it is
respectfully submitted that more emphasis should be equally given to equity financing
particularly in the are of project financing which constitutes the current need of the nation.
Monetary and Fiscal Policy in Islam
The role and realm of reign of each will be specified, in addition to the set of assumptions
that is derived from the Islamic economic system, which include Zakah, prohibition of
interest, moderation in consumption, the Islamic inheritance system, Hisbah, Qirad, and the
co-existence of private and social ownership of the means of production. Zakah provides a
major means of fiscal policy because it affects the allocation of resources, the level of
aggregate demand and the distribution of income as well since the variations in the volume
and the timing of collection and disbursement of Zakah creates variations in disposable
income and fixed and circulating capital. The importance of this tool is enhanced by the
relatively high ratio of Zakah to income, since it is levied also on wealth.
Additionally, the size of "waiting monetary assets" is influenced. The prohibition of interest,
of course, reduces the degree of freedom of the government in using such tools of monetary
policy as the rate of discount and the open market operations. But then, the Islamic approach
to the issue of "waiting monetary assets" is different, in that these assets are dealt with
through Zakah and a strict requirement of genuineness in business transactions. However,
the central banking supervision and control over the money supply is not reduced but rather
increased by the consideration of money as a "public utility", changes in which must not be
left to the individual interests of monetary intermediaries (banks). The flexibility of Zakah
allows for the intensification of the development efforts. This is always backed by ethics and
values of "construction and improvement" in Islamic teachings. The last tool of economic
policy has to do with the role of the government as an insider of the system rather than as an
outsider. Such a government role is made available through its ownership of the major
natural resources, and al-Hisbah. The distributive objective is built into the system by
Zakah, the State insurance, and the inheritance system. Thus, over accumulation and
excessive concentration of wealth is checked by forces that are working within the system
itself.

Trade and Business

A person who initiates, plans, guides and organizes the whole business is known as the
organizer or the entrepreneur. The whole job of planning and directing any business is also
sometimes called organization.
In the modern industrial- world, organization plays a very significant part and is regarded as
the most important factor of production. It is the entrepreneur who employs other factors of
production, i.e., land, labor and capital, in the, right proportions and makes them work in the'
best possible way so as to get them maximum productivity with the minimum cost.
Entrepreneur is like the captain of a ship, whose function is to steer the ship of industry
safely in the harbor of economic prosperity.
Importance of planning and organization may be judged from the fact that God Himself is
known as the best; organizer. In Surah Al Ahzab it is said that
"For us God sufficed, and He is the best Disposer (Organizer) of affairs" (33:48)
The word "wakiila", one who manages and looks after other people's affairs or business: The
Muslims are in this verse advised to (do their best and then to) entrust their affairs to the
care and trustee-ship of God Who is the best Manager and Organizer of affairs. It also
implies that, as God is the best Manager and Organizer, He likes His creatures to try to be
good organizers of their affairs.
The Holy Quran describes in Sura Hud how Prophet Noah was asked to construct the Ark
under the guidance and supervision of God:
"And make the ark under Our eyes". (XI : 37)
There is another reference to this factor of production in Sura Yusuf, when Prophet Yusuf
interpreted the dream of the king of Egypt and gave him all the information with regard to
the famine, the king brought him back from the prison with honor and dignity in order that
he might get advice from him in the affairs of the state. The Prophet Yusuf then asked him if
he would appoint him organizer over the affairs of the state in these words.
"(Yusuf) said: set me over the store-houses of land, I will indeed guard them well (honestly)
as I am a skilled organizer (who knows his job)". (XII: 55)
Yusuf in this verse requests the king to appoint him an organizer over the affairs of land on
the basis of his two outstanding qualities that knowledge ('aliim) and organizing ability
(hafiidz). In fact these are two essential qualities which make a man successful and efficient
organizer.
In view of the great importance of organization in modern industry, it is absolutely essential
that the right type of persons, who are really fit and qualified for the job, should be
appointed as organizers. The Holy Quran enjoins the Muslims to be very careful in the
appointment of organizers in these words:
"Surely God commands you too make over trusts to those worthy of them". (IV: 58)
It is indispensable for success and efficiency of work that this job is entrusted to those who
are worthy of the responsibility of the office they hold.
The emphasis which Islam has laid on the necessity and Importance of organization can be
well understood through the study of some of its basic institutions. Just look at the
institution of daily prayer and pilgrimage; they cannot be performed without the organizer
(Imam). In fact nothing can be done collectively in Islam without the organizer (Imam).
The Holy Prophet emphasized the necessity of an organizer in these words (Abu Daud):
"When three (or more) persons commence their journey (or some business), appoint one
among you the Imam (organizer)".
The Holy Prophet is also reported to have said that:
"God's hand (of Divinity) is on the organization, he who, separates from it, goes to Hell."
(Tirmizi)
The words "God's hand is on the organization" are very significant. They clearly indicate
that success and prosperity of business would depend to a great extent on the ability and
efficiency of the organizer. The nations, who would train and improve the institution of
organization, would have the service of the best and the most efficient entrepreneurs and
would certainly prosper ; while others, who ignore or neglect this factor of production,
would not make much progress and would be left far behind to suffer in poverty and hunger.

As the foregoing discussion has made clear, one of the basic differences between the Islâmic
system and the Capitalist system with regard to the distribution of wealth is that Capitalism
allows interest, while Islâm forbids it. Now, it would be proper to have a cursory glance at
another aspect of the problem too - what are the consequences that follow from the
interdiction placed upon interest?

In fact, the prohibition of interest has very far-reaching, beneficial, and profound effects on
the whole system of the production of wealth itself. But this discussion would lead us far
beyond the subject of this article. So, for the moment, we shall only summarily indicate the
effects which Islâmic injunctions do have on the system of the distribution of wealth. A very
simple consequence of the prohibition of interest is that it produces a balance and uniformity
in the distribution of wealth. The necessary characteristic of the economy based on interest
is that the profit of one of the parties (i.e., Capital) is assured in a fixed form under all
circumstances, but, contrarily, the profit of the other party (i.e. Labor) remains uncertain and
doubtful. Big commercial enterprises, no matter how profitable they become, can never be
considered immune from risk. In fact, while the "risks" of big business have been decreased
because the means of production are available in an adequate measure, they have at the same
time been increased by certain external factors. The bigger is the enterprise, the greater these
risks are. So, under the Capitalist economy, the balance of the distribution of wealth
becomes very unsteady. Sometimes the debtor has to bear severe loss, while the creditor
goes on minting money. Sometimes, on the other hand, the entrepreneur earns a huge profit,
while the man who has provided the capital gets only an insignificant share from it.

Contrary to it, since Islâm prohibits interest, it would in practice allow only two forms of
investing capital in the modern world- "Partnership" and "Cooperation". Both these forms
are completely free from this injustice and imbalance in the distribution of wealth. Under
these two forms of investment, if there is a loss, it has to be borne by both the parties, and if
there is a profit, both have a proportionate share in it. This mode of investment to a great
extent serves as an effective check on the concentration of wealth, which is the greatest evil
of the Capitalist economy. Wealth, instead of becoming accumulated in the hands of a few,
is so distributed over a very large number of individuals in the society that no injustice is
done to anyone. Under the Capitalist system, economy being based on interest, Capitalists
come not only to own the greater part of national wealth, but also to control the whole
market and to run it in their own selfish interest. As a result of this, the system of "the
supply of commodities" and that of "prices" can no longer function in a natural manner, but
becomes artificial in so nefarious a way that no sphere of life, from economy, manners and
morals to politics, can escape its evil influences.

By prohibiting interest, Islâm has struck at the very root of these evils. Under the Islâmic
system, every one who invests his money has a share in the enterprise and its policy, bears
the responsibility of profit and loss both, and thus he is no longer allowed to have his own
way in business.
A Doubt and its Clarification

It is necessary to clarify a doubt that may arise here. In discussing the evils of the economy
based on interest, we have said that it produces an imbalance in the distribution of wealth,
and that one of the two parties in a business enterprise is necessarily affected by it. Some
people are quite likely to raise the objection that the man who suffers a loss in a transaction
based on interest, suffers it through his own choice - if he deliberately exposes himself to
such risk, why should the law of the Shari'ah interfere with his right to do so?

Even a little reflection would easily solve this problem. A slight acquaintance with the
Islâmic way of life should be sufficient to bring out the principle that, according to Islâm,
the mutual consent of two parties does not always justify a certain transaction. If a man is
willing to get murdered by another man, this fact would not absolve the murderer of his
crime. Even in the case of fornication, which the West in its shortsightedness considers to be
a private affair of the individual, mutual consent of the two parties cannot absolve the
criminals. The question of the distribution of wealth and economic welfare goes much
beyond this. We have already explained, with due quotations from the Holy Qur'ân, that
wealth is in principle the property of Allâh Himself, and that the ownership He has bestowed
upon man is, far from being unconditional and unbridled, subject to certain principles laid
down by Allâh Himself. That is the reason Islâm does not allow the mutual consent of the
parties concerned to be treated as a justification for a transaction which Islâm regards as
intrinsically unjust or which can prove to be detrimental to the collective welfare of society.
This is the raison d'être behind the strong prohibition, in the tradition of the Holy Prophet ( ),
of (buying grain from the caravans coming from the country-side before they reach a town),
of (buying goods brought from the country-side through a middle man in the days of
famine), of (exchanging grain that is yet in the ears for grain that has already been
harvested), of (exchanging fruits on a tree for plucked fruits), and of (taking a fixed amount
of grain from the harvest of a land given on lease), inspite of their being based on the mutual
agreement of the parties involved. Hence, the mere fact that the parties involved have agreed
upon it, cannot serve as a valid justification for a transaction based on interest.

In the early days of Islâm, the objection which people bred in the pre-Islâmic ways generally
raised against the prohibition of interest was this:

"Trade is exactly like interest." (2:275)

The Holy Qur'ân refutes this argument in a concise phrase:

"And Allâh has permitted trade, and forbidden interest." (2:275)

It is worth noticing here that, in refuting this objection, Allâh the Exalted has not enunciated
any principle or purpose of the prohibition of interest, but has, so to say, simply indicated
that since Allâh has declared trade lawful and interest unlawful, one shall have to abide by
this commandment, whether one understands its raison d'être or not. Instead of elucidating
the justifying principles in this place, the Holy Qur'ân has adopted the mode of authority,
which cuts off the very root of all objections to the prohibition of interest.

In short, the prohibition of interest by Islâm is the wisest solution of the problem which, on
the one hand, eliminates many evils of the Capitalist economy, and, on the other, leaves no
need for the adoption of the tyrannical and unnatural economic system of Socialism. This is
the middle way which alone can save the modern world from the two extremes of license
and servitude, and lead it towards a balanced and equitable economic system. The French
orientalist Louis Massignon has said something very pertinent on this point:

"In the conflict between Capitalism and Socialism, only that culture can be assured of a
secure and bright future which not only prohibits interest but also makes people abide by
this prohibition."

So far we have been able to establish one basic distinction between Islâm and Capitalism
with regards to the distribution of wealth - and this distinction is related to the subject of
interest. Now, there is another distinction between the two which one must bear in mind, and
which concerns the relationship between the employer and the employee. This would
necessitate a discussion of the problem of wages.

The violent reaction against the Capitalist system in the present age is largely an outcome of
the conflicts between employers and employees and of the problems arising from the
fixation of wages. Since the Capitalist economy is based on the principle of selfish and
unqualified private ownership, the relationship of "Supply and Demand" between the
employer and the employee is only a mechanical, harsh, and formal relationship which rests
on undiluted self-interest. The employer respects the humanity of the employee (laborer)
only so far as he is obliged to do so in the interest of his own business. As soon as he no
longer feels this obligation, he readily adopts oppressive measures. On the other hand, the
employee is interested in the work of the employer and prepared to carry out his orders only
so long as his livelihood depends on the employer. The moment this dependence is over, he
will unscrupulously shirk his work and even go on strike. This results in a perpetual struggle
between the Laborer and the Capitalist, making it impossible for a healthy rapport to emerge
between the two.

On the contrary, although Islâm does admit the principle of supply and demand as affecting,
to a certain extent, the relationship between the employer and employee, yet it has at the
same time imposed certain restrictions on the supply as well as the demand of labor in such
a manner that their business relationship no longer remains merely mechanical, but becomes
almost fraternal. As to what should the attitude of the employer be towards the employee,
the Holy Qur'ân has made it quite explicit in a short but comprehensive phrase, while citing
the words of Hazrat Shu'aib a.s. Hazrat Shu'aib a.s stood in the position of the employer for
Hazrat Musa a.s and said:
"I do not desire to lay (an undue) burden of labor on you. If Allâh wills, you will certainly
find me to be one of the righteous." (28:27)

This verse makes it quite clear that an employer who is a Muslim and whose ultimate goal in
life is hence to become "righteous", cannot be "righteous" until and unless he has the desire
to protect his employee from the burden of unnecessary labor. The Holy Prophet (s.a.w) has
elucidated this point further in explicit terms:

"Your brethren are your servants whom Allâh has made your subordinate. So, the man who
has his brother as his subordinate, should give him to eat from what he himself eats, and to
wear what he himself wears. And do not put on them the burden of any labor which may
exhaust them. And if you have to put any such burden on them, then help them yourselves
(in this work)." [1]

Another tradition says:

"Pay his wages to the worker before his sweat gets dried." [2]

The Holy Prophet (s.a.w) also said that there are three people who will find him on the Day
of Judgement as their enemy. One of these three is:

"The man who employs a worker on wages, then takes the full measure of work from him,
but does not pay him his wages." [3]

How solicitous the Holy Prophet (s.a.w) was about the rights of the laborer can be gauged
from a tradition which comes down from Hazrat Ali a.s. He reports that before his departure
from this world, the last words of the Holy Prophet (s.a.w) were:

"Take heed of the (daily) prayers and of (the rights of) those who are subordinate to you."
[4]

In consequence of these injunctions, the laborer was able to receive a dignified and brotherly
position in Islâmic society, and we find countless examples of this in the history of the Early
Period of Islâm. One can say with absolute confidence and certainty that it is not possible to
safe-guard the rights of the laborer in a better way.
On the other hand, Islâm has laid down certain other injunctions which bind the employee as
well, and has thus made his relations with the employer still more congenial. From the
Islâmic point of view, the laborer, in undertaking the responsibility of doing some work for
an employer, enters into a contract which he must honor not only for earning his livelihood
but also for his felicity in the other world which is his real and ultimate goal. The Holy
Qur'ân has this to say on the subject:

"O believers, fulfil your bonds." (5:1)

And further on:

"Surely the best man you can hire is the one who is strong and trustworthy." (28:26)

And still further:

"Woe to those who are dishonest in weighing and measuring- those who exact full measure
when they receive their due from others, but give less than due when they measure or weigh
for them." (83:1)

According to the elucidations of the jurists of Islâm (Fuqahâ), the word " "
(underweighing and undermeasuring) in this verse includes in its connotation even the
laborer who receives in full the wages that have been agreed upon, and yet does not give the
full measure of work, and employs that portion of time which he has given away to the
employer in doing some other work, contrary to the wishes of his employer. These
injunctions, thus, declare the shirking of work to be a great sin, and make it quite clear to the
employee that once he has taken upon himself the responsibility of doing some work for an
employer, the work has now become his own, and that he is under the obligation to complete
it with perfect honesty, application, and zeal, otherwise he will not be able to attain the
felicity in the other world which is his real and ultimate goal.

With regard to the problem of wages, in short, Islâm, while admitting to a certain extent the
principle of "supply and demand" has at the same time laid down certain injunctions for the
employer and the employee both, so that the system of supply and demand has come to be
based on human sympathy and brotherhood, and not on self-interest.
One may possibly have a doubt here- that the nature of the injunctions laid down by the
Qur'ân and the Sunnah in order to control the employer and the employee both, is similar to
that of moral precepts, which have no validity from the economic or legal point of view. But
such an objection would arise from an improper understanding of the spirit of Islâm. One
should all the time bear in mind that Islâm is not a mere economic system, but a complete
code of life in which all the spheres of human life function as inter-related parts of a whole.
The attempt to consider any one of these spheres in isolation from others would necessarily
produce many misunderstandings. The true aspect of each of these spheres can emerge only
when it is given its proper place within the total code of life, and is viewed in this
perspective. So, it would not be possible to exclude these so-called "moral precepts" from
any discussion of the Islâmic economy.

Then there is another distinctive feature of Islâm. If one takes a larger view, even these
"moral precepts" are in reality legal injunctions, for the reward or the punishment of the
other world finally depends on them- and it is the reward and punishment which has the
fundamental importance in the life of a Muslim. It is just this "Doctrine of the Other World"
which has not only given the authority of Law to Ethics, but has also been at the back of
"laws" in the technical sense. If you carefully consider the Qur'ânic idiom, you will find that
the notions of "fear of Allâh" and "solicitude for the other world" are always appended to
every legal or ethical injunction. The secret behind it is that, in fact, man can never be made
to abide by laws merely out of fear of human force or coercion until and unless "solicitude
for the other world" is there to keep a constant watch over each and every action, movement
or thought of man. As for that, the several thousand year old history of mankind, which has
been full of numberless oppressions, inequities and crimes inspite of all the legal
imperatives, can easily bear witness to this irrefutable fact. And, in particular, the so-called
"civilized world" of today has made it clear like day-light that the speed with which crimes
have been increasing is far greater than the speed with which legal machinery is being
strengthened to overtake them.

So, the fond belief that the relations between the employer and the employee can be
improved with the help of legal provisions is no more than a self-delusion of the worst sort.
Its real remedy is only the "solicitude for the other world"- and nothing else. And Islâm has
put all possible emphasis on just truth in this matter.

The modern mind, which has gotten itself entangled in the confusions of the worldly life and
has thus lost the capacity to look beyond matter, may perhaps find it difficult to understand
this truth. But it is certain that if mankind is at all destined to attain a peaceful existence, it
will, after a hundred pitfalls, arrive finally at the truth which the Holy Qur'ân has stressed
again and again. The world has already witnessed sufficiently the veracity of this Qur'ânic
concept during the time when Islâm was really functioning as a system in actual practice. In
the history of that period, one would seek in vain for an example of the conflicts between
employers and employees which have been upturning our world for some time past. It was
just these "moral precepts" of the Qur'ân and the Sunnah which made a practical
demonstration of how this problem could be solved in a satisfactory way, and because of
which the history of the Early Period of Islâm is almost free from the violent disputes and
workers' strikes of today. (taken from IQRA a voice of muslim ummah)
Bahrain launches alternative Dispute Resolution Chamber world's first arbitration 'free zone'
The Kingdom of Bahrain today formally launched the Bahrain Chamber of Dispute
Resolution and, in the process, became the first country in the world to establish an
arbitration "free zone" and introduce the concept of statutory arbitration.
The Chamber, an initiative of Bahrain's Ministry of Justice and delivered in partnership with
the American Arbitration Association, the world's leading provider of conflict management
and dispute resolution services, will be known formally as the BCDR-AAA.

Established through unique ADR legislation, the BCDR-AAA will provide the region with a
'best in class' international ADR centre of excellence, but with the distinct added advantage
of operating an arbitration "free zone" under Bahrain's new legislation. As a result, where
international disputes are heard at the BCDR, where the parties involved agree to be bound
by the outcome, the award will be guaranteed and not subject to challenge in Bahrain. This
resolves an issue that has been a significant problem in many parts of the world, despite
existing international conventions. Bahrain's arbitration "free zone" will, therefore, offer
jurisdictional and legal certainty to the recognition of arbitration awards, an essential
component of modern day commercial transactions.

In another global first, Bahrain has also introduced the concept of statutory arbitration for
commercial and financial disputes. Cases that would previously have come before Bahrain's
domestic courts, where the claim is over 500,000 BHD ($1.3m) and involves an
international party or a party licensed by the Central Bank of Bahrain, will now be directed
to the BCDR-AAA for final and binding resolution. The move is aimed at providing
additional benefit to Bahrain's commercial, banking and financial services sectors, which
form a long-established hub within the region.

Speaking today, Bahrain Minister of Justice, HE Sheikh Khaled bin Ali Al Khalifa
commented:

"In establishing the BCDR-AAA, Bahrain has sought to bring the very latest in global ADR
solutions to the region. BCDR has partnered with the world's leading provider - the AAA -
to ensure the highest standards of international best practice are consistently delivered. And
have also enacted cutting-edge legislation that guarantees the independence of the Chamber
itself and, vitally, the interests of its users.

"The BCDR-AAA will provide these users, including Bahrain's legal community,
international legal firms, multi-nationals and governments contracting in the Gulf and
beyond, with a purpose-built solution for the rapid, effective and certain resolution of
commercial disputes. And, by introducing unique elements including an arbitration free zone
and statutory arbitration, we are seeking to set the pace of ADR in modern day commerce.
We firmly believe the Chamber has all the necessary elements to become a leader in its field
and provide Bahrain with another compelling draw for the international business
community."

"The Chamber is also a key aspect of Bahrain's Vision 2030 and National Economic
Strategy. It will help develop the legal services sector offering here in the Kingdom,
stimulate economic trade and further enhance Bahrain's international business and legal
credentials. Essentially, the Chamber will be delivered in full partnership with Bahrain's
legal and commercial communities, especially Bahrain's highly regarded legal profession."

AAA President & CEO William K Slate II added commented:

"The American Arbitration Association is honoured and pleased to partner with the MoJ to
form the BCDR. As alternative dispute resolution grows internationally, public and private
sector legal officials are experiencing its efficiencies and fairness.

"AAA commends His Excellency Sheikh Khaled bin Ali Al Khalifa for his recognition that
arbitration and other ADR disciplines will enable the international business community
served by Bahrain greater dispute resolution flexibility for generations to come as its
practice here evolves,"

Mr. Slate also noted that the AAA had been honoured a year ago when Her Excellency
Sheikha Haya bint Rashed Al Khalifa, one of the most eminent lawyers and arbitrators in
Bahrain and the former President of the United Nations General Assembly, became a
member of the AAA's Board of Directors. Sheikha Haya has also been appointed chair the
BCDR-AAA's independent board of trustees.

Clive Hopewell, Bahrain based partner and head of Middle East for international law firm
Charles Russell LLP, welcomed today's news saying:

"The launch of the BCDR-AAA is confirmation of the maturity and reliability of Bahrain's
business environment and is welcomed by both Bahrain's local and international legal
community who will be working together to ensure its success. The impact of the Chamber
however, is certain to be felt throughout the region and will be a welcome boost to the
business community of the wider region too."

Qatar Projects 2011 - planning to avoid disputes, Patton Boggs

Robert Hager, Managing Partner, Patton Boggs, Qatar looks at the legal aspect of project
development and how to avoid disputes which could cause serious delays in the construction
time frame. He talks to Phil Blizzard at the Qatar Projects 2011 conference about the
important aspect of due diligence.

Berwin Leighton Paisner boosts Abu Dhabi office with hire of two new partners
United Arab Emirates: Thursday, January 27 - 2011
International law firm Berwin Leighton Paisner (BLP) today announced that two of the
Gulf's most highly regarded real estate lawyers are joining its growing Abu Dhabi-based
Middle East and North Africa (MENA) office, further enhancing the office's distinctive
focus on the built environment.
David Nunn, one of the best known lawyers in the UAE real estate market, is joining the
firm in the newly created position of Head of Real Estate for MENA. For almost five years,
he has headed up the Simmons & Simmons' regional real estate team from Simmons' Abu
Dhabi office and before that spent eight years as a partner in its London office.
He has worked on many of the MENA region's largest and most complex real estate
developments, advised on local real estate and planning laws and helped establish a range of
complex finance arrangements, real estate funds, joint ventures and company structures.

Mohammed Kamal is recognised as one of the leading real estate lawyers in the region and
is currently the Head of Real Estate for the Middle East at Hogan Lovells, having joined
them from local firm Al Tamimi, where he spent five years and was a partner. Before his
move to the region he was a partner at a real estate firm in the UK. Mohammed has been
involved with some of the highest profile real estate transactions and projects in the region
and acts for several UAE and Qatari-based institutions and sovereign wealth funds, advising
them on major cross-border investments in the UK and across the MENA region.

These hires significantly enhance BLP's capabilities in the Middle East, as well as the firm's
growing reputation as one of MENA's leading advisors on issues relating to the built
environment, a focus that distinguishes it from other international firms in the region. As
well as office head John Sipling and construction partner Caroline Pope, the firm has six
other lawyers based permanently in Abu Dhabi - including specialists in construction,
hotels, planning, projects and infrastructure and tax - along with more than a dozen other
partners who spend a significant proportion of their time in the region.

The success of the Abu Dhabi office, which opened in 2009, reflects the strength of BLP's
reputation as the leading real estate firm in the UK. With over 60 partners and nearly 300
lawyers in its dedicated UK team, the firm is ranked as the premier firm for all aspects of
commercial property by the major industry directories. The Abu Dhabi team is able to draw
on this wealth of expertise in advising clients in the MENA region, ensuring they receive the
highest quality advice in relation to local issues as well as their investments overseas.

BLP's growth in Abu Dhabi follows announcements about similar success in its other offices
around the world. The firm recently recruited Alistair Duffield, who will head the Singapore
office and joins with five other lawyers, doubling the size of the firm's South East Asia
presence, and in the first half of the financial year, its Moscow office, Goltsblat BLP,
reported a 60% increase in fee income compared to same period in 2009/10.

The London office has also seen significant recruitment in key areas, with notable recent
hires that include James Knox, one of the UK's most highly regarded real estate lawyers, and
Michael Metliss, the former head of SJ Berwin's Property Disputes team. Others include:
Lucy Oddy, a structured finance expert from Clifford Chance; Marion Bloodworth and Lisa
Mayhew, who both joined the firm's Employment practice; and Andrew Hockley, a leading
competition specialist who joined from an in-house role at BP. In 2011 recruits have already
included Daren Allen, former head of Financial Services at DLA Piper, and Jacob Ghanty, a
financial services partner from Pinsent Mason.

John Sipling, BLP's regional head for MENA, said: "Our focus is on providing clients across
the Middle East and North Africa with the highest quality advice on all issues that relate to
the built environment. The recruitment of two of the region's most highly regarded lawyers
for real estate underlines the firm's commitment to delivering this."
David Nunn said: "BLP's reputation in the UK real estate sector is second to none and it has
an increasingly international profile. I am looking forward to working with many of the
industry's leading figures. Our aim is to build a real estate practice, based in the Abu Dhabi
office, that has a similar leading position in the MENA region."

Robert MacGregor, BLP's Head of Real Estate, said: "The Real Estate market is increasingly
global and the Gulf remains a highly influential source of capital. David and Mohammed
both bring with them a wealth of knowledge and contacts across the region, as well as
reputations for delivering the high quality legal advice our clients have come to expect."

=========================

Illustration By Timur Abimanyu, SH.MH.

It is clear, that the basic principle of Islamic economics to Islamic economics and dispute
resolution disputes example of sharia in the country that one of them Arab country of Qatar.
Principles of Islamic economic problems in Indonesia are the same as in international
countries, only in the State of Indonesia the problem of the judicial authority of the General
and Religious Courts and actual authority of this problem can be overcome by a law setting
a clear and unequivocal. Recently there is a seminar by a group of economists who discuss
dualism syaraih authority, whether the authority of the General Court or the authority of the
Religious .....!!! which should not be discussed again because Law had clearly invited to
organize and have available the Book Compilation Economic Law and Sharia will be
followed by the manufacture of Economic Law of Sharia as the law made by legal experts in
the field of Religious Courts.
The existence of a group of people who claim that the Compilation of Islamic Economic
Law ... is not modern is a very wrong statement. Should be proud that the Compilation of
Islamic Economic Law is made by the sons of the Indonesian people that regardless of the
ideology of the Dutch colonial.
And keep in mind……whether Shartia Ekonomic Law Cpmpilation modern or not modern
noproblem .. the main thing is to avoid a legal vaccum in dealing with economic
disputes sharia... and about authority disputes do not need to be reviewed, because
it under Supreme Court, then it is the authority absolud Supreme Court andthe Supreme
Court can only resolve disputes ....the authorization relating to the handling of economic
disputes sharia.

Articles:

:: Corporate Governance in Islamic Banks

By M. Nasser Sulaeiman

:: An Emerging New Mode of 'Finanzkapital' in the World

By M.A. Hussein Mullick

:: Musharakah Financing Model

By Dr Saad Al-Harran

:: A Dynamic Model for Cash Waqf Management as One of

The Alternative Instruments for the Poverty Alleviation in
Indonesia
By Dian Masyita and friends
:: What is the Islamic Ruling on the Issue of Waqfs?
By Shaykh Saalih ibn Fawzan Aal Fawzaan

:: Towards the Revival of Awqaf: A Few Fiqhi Issues to

Reconsider
By Unknown

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