Month: April 2023

By Russkykh Pavlo,

Edited by Sanaa Kadi

Are you familiar with the ancient Roman legal principle “Pacta sunt servanda” and its significance in European legal systems? This principle ensures that every valid contract must be fulfilled by the parties involved in good faith, promoting predictability and efficient planning. But what about Islamic business law? Does it have a similar principle, and are there instances where contracts can be violated after conclusion? In this blog post, we’ll explore the concept of contracts in Islamic business law and how it differs from the European legal tradition, shedding light on a lesser-known aspect of contract law.

No business and economic development is possible if the parties can break the contract or refuse to fulfill it. In the European legal tradition, this opinion was enshrined in the main ancient Roman legal principle “Pacta sunt servanda“. According to it, every valid contract is binding for the participants and must be fulfilled by them in good faith. It allows you to ensure predictability, which is ultimately beneficial to the parties to the contract, as it allows you to clearly plan actions and spend a minimum of effort on insurance.

This principle has become the basis of all European legal systems, on the other hand, does Islamic business law have its analogue of the principle and are there examples of contracts which parties can violate after conclusion?

Liam Patrick Nicol, Joel Väisänen and Marc Orti Carceller contend that «The Quran, which is Islam’s first fundamental source of law, includes numerous references to what is known nowadays as the pacta sunt servanda principle. This supports the claim that the notion is not foreign to Islamic law and is compatible with its norms, particularly regarding internal and international ties between Muslims and non-Muslims. » [1] However, the application of this principle is not universal and not every contract must be fulfilled. The Islamic legal tradition in the field of business regulation is based on prohibition. According to Sharia law, not every contract has the right to be concluded by the parties at all. There are exceptions, when prohibition-based contract invalidation can almost always be attributed to the two factors labeled – riba and gharar [2]:

• Gharar – uncertainty. One of the three fundamental prohibitions in Islamic finance. Gharar is a sophisticated concept that covers certain types of uncertainty or risk in a contract. The prohibition on gharar is often used as the grounds for criticism of conventional financial practices such as short selling, speculation and derivatives.
• Riba – this term literally means an increase or addition. Technically it denotes any increase or advantage obtained by the lender as a condition of the loan. Any risk-free or “guaranteed” rate of return on a loan or investment is riba.[3]

Sometimes a contract is recognized as haram, even if it does not have the signs of riba or gharar, but the subject of such a contract is impermissible and forbidden things in Islamic law (For example: drugs, pornography, alcohol).

Also, in order for a contract to be binding and enforceable, not only the subject of the contract, but also the form, must comply with Islamic law and contain:

• ‘ijab – an offer
• qabul – an acceptance
• ahliyyah – capacity
• mahal al-‘aqd – subject matter
• Absence of ikrah– absence of duress
• consideration [4]

Therefore, it can be argued that the doctrine of pacta sunt servanda is recognized by Islamic law, although it is rejected primarily from prohibitions. Thus, a contract that corresponds to the above components, and also does not concern the circulation of items that are haram, does not contain riba or gharar – must be performed in accordance with God’s will, which is reflected in the Qur’an.

Sources

1. Liam Patrick Nicol, Joel Väisänen, Marc Orti Carceller, ‘The pacta sunt servanda principle in Islamic law’ 2021, https://blogs.helsinki.fi/islamic-business-financial-law/2021/12/22/the-pacta-sunt-servanda-principle-in-islamic-law/
2. El-Gamal, M.A, Islamic Finance Law, Economics, and Practice, 2006, p. 46, Cambridge University Press
3. Glossary of terms used in Islamic Banking, by Credit Agricole Corporate and Investment Bank
4. Abdul Jalil, Md & Khalilur Rahman, Muhammad, 2010. Islamic Law of Contract is Getting Momentum. International Journal of Business and Social Science. 1. 175-192

By Schumacher Laurenz,

Edited by Sanaa Kadi

Are you curious about the principles of Islamic Business Law and their origins? Islamic Business Law has a unique concept that stems from its ethical thought. But where do these principles come from and how do they differ from Western business practices? In this blog post, we’ll explore the main body of Islamic Law, called Sharia, and its heavy influence on Muslim religion and philosophy. The normative sources for the lawmaking process can be found in the Quran, as well as in other religious texts like the Sunna (sayings and deeds of the prophet Muhammad) and the Ijmaa (consensus).

One of the most significant differences between Islamic Business Law and its Western counterpart is how loans are seen and handled. While the Christian Church banned interest rates during the Middle Ages due to religious beliefs, the Jewish community started giving out loans with interest rates. Later on, the Christian Church changed their opinion, believing that banning interest rates is “pointless” in a modern world.

However, the Quran mentions Riba, meaning unequal exchanges and fees for borrowing. According to the Quran, trade is permitted, but usury is not. Riba would cause a person negative effects of varying severity in their life as well as in the afterlife(Quran, Surah Al-Baqarah, verse 275; Surah an-Nisa’, verse 161; Surah Ale ‘Imran, verses 130). The prohibition of Riba from the Quran is based on “helping the poor and needy,” instead of putting unreasonably high interest rates on loans to enrich themselves.

Over the centuries, several economic concepts and banking techniques evolved, including early forms of partnerships (Musharaka), limited partnerships (Mudaraba), and capital (al-mal). In the 18th century, Western influence arrived in the banking sector, with the opening of the first Western bank in Cairo. Muslim scholars agreed that interest, which was the basis of the bank’s dealings, is seen as Riba and therefore forbidden according to Sharia Law.

To address this, a different system had to be introduced – a system of loss and profit sharing (Mudaraba), in agreement with the Quran. To this day, Islamic Banking is based on Mudaraba, a system that differs widely from the Western Banking system, which is largely interest-based. Despite being prohibited during the early medieval ages, interest-based banking was finally widely adopted due to the opinion that there is no way around it in a modern world.

But because Sharia, the basis of Islamic Law, is heavily influenced by the ethics brought upon in the Quran, Islamic Banking had to find another basis for a functioning system. Nowadays, it is based on a system of common loss and profit sharing, which ensures that, unlike in the Western hemisphere, banks have an interest in the investment succeeding. This is an excellent example of a banking system that works in a modern world without usury and helps the people who need the support, based on ethics that originated in religion.

Sources:

Quran, Al-Baqarah, Verse 275; Surah an-Nisa’, verse 161; Surah Ale ‘Imran, verses 130.

Presentation Slides Islamic Business Law

https://www.investopedia.com/terms/i/islamicbanking.asp

https://ijaracdc.com/history-of-islamic-banking/

Exploring the ethical aspects of Islamic banking, Hasan Gilani

Abstract:

By Guanyi Lyu

Edited by Sanaa Kadi

What is gharar? 

Although the Prophet Muhammad (pbuh) prohibits the sale of fish in the water and birds in the sky, defining gharar in a legal context remains controversial. There are mainly two opinions. The primary view links gharar to risk or uncertainty. This suggests that minor gharar must be allowed, as Islam accepts genuine risks in business. The maxim “gain comes with risk-taking” supports this perspective.[1] On this point, Murat Çizakça argues that not only excessive risks render a commercial transaction illegal, but also the fact that risks are not fairly shared between the parties.[2]

Scholars like Nehad A and A Khanfar, however, believe that gharar must not be confined to the concept of uncertainty but instead stands for misrepresentation, deceit, or delusion. Unlike common law, which distinguishes between innocent, negligent, and fraudulent misrepresentation, Islam considers all misrepresentation as “serious moral wrong.” Therefore, interpreting gharar as misrepresentation implies that all gharar is haram (prohibited).[3]

How does gharar work?

Assuming the most commonly believed definition of excessive uncertainty, gharar is typically categorised into gharar yasir (minor) and gharar fahish (excessive). Various parameters have been proposed for the categorising practice.

Avoidance ability – If the gharar element is hardly avoidable, it is considered gharar yasir. For example, when purchasing a conceiving animal, uncertainty exists regarding the number and health of the babies to be delivered in the future. However, it is permissible because obtaining information to clarify the uncertainty requires the parties to undergo hardship.[4]

Abundance – If the amount of gharar is small, it is considered gharar yasir. For instance, using a public washroom for payment creates uncertainty regarding the amount of water and paper left for use by each user. Still, it is permissible because the gharar element is minor.[5]

What is gharar to the conventional concept of “uncertainty”, then?

One must bear in mind that all jurisdictions, more or less, prohibit certain uncertainty in transactions; added together, they constitute a spectrum called “the law of uncertainty”. It thus begs to ask: Is gharar just one of the more-prohibited uncertainty, located on the less-risks-allowed end of the spectrum? Or, does it form a distinct genre of law, not located on this spectrum at all but reveals something fundamentally unique?

Team “They are the same thing” – Islamic acknowledgement of certain uncertainty being inevitable in commercial transactions is precisely the reason why certain gharar is permissible. In this sense, both gharar and the conventional “uncertainty” are a matter of extent.

Team “They are distinct concepts” – The permissibility of the permissible gharar is based upon “let’s share the risk”, instead of “alright, these risks we can handle”. In other words, it is not the level of risks that matters, i.e., it is not a matter of extent, but the fairness of the transaction. Moreover, a breach of conventional uncertainty mostly constitutes a breach of contract or legal requirements, whereas the breach of gharar is a breach of Sharia, parallel to being unconstitutional.

[1] Atikullah Abdullah, ‘Islamic Law on Gambling and Some Modern Business Practices’ (2017) 7 International Journal of Academic Research in Business and Social Sciences 738, 742.

[2] Murat Çizakça, ‘Risk Sharing and Risk Shifting: An Historical Perspective’ (2014) 14 Borsa Istanbul Review 191, 193.

[3] Nehad A and A Khanfar, ‘A Critical Analysis of the Concept of Gharar in Islamic Financial Contracts: Different Perspective’ (2016) 37(1) Journal of Economic Cooperation and Development 1, 2.

[4] Nadhirah Nordin and others, ‘Contracting with Gharar (Uncertainty) in Forward Contract: What Does Islam Says?’ (2014) 10 Asian Social Science 37, 41.

[5] Ibid 42.