Principles of Islamic Commercial Law

A. Ownership and its Limits

Ownership (al-milkiyyah) is an Islamic legal relationship between a human being and prop-           15.15

B. The Nature of Property

Property (mal) was not defined in either the Qur’an, or the Sunna, and as such its defin- 15.16 ition has been left to juristic interpretation.^[1628] While there are some differences between the schools regarding what constitutes mal, some general principles can be abstracted, which may affect the types of trade that can be financed Islamically:

1.      To qualify as mal, something must be naturally desired by man.

2.      It must also be capable of being owned and possessed. So, for example, fish in the sea or birds in the sky are not mal as it is impossible to possess them.

3.      It must be capable of being stored.

4.      It must be beneficial in the eyes of the sharia. Hence, poisonous substances and carrion are not considered mal. Additionally, there appears to be a de minimis threshold here, as small amounts of any good which are incapable of benefiting wider society, such as single ears of corn, are not considered mal.

5.Finally, the ownership of the thing must be assignable and transferable.^[1629]

As a result of this taxonomy, Islamic law makes a distinction between material things (ayn)         15.17

and immaterial things (dayn). Dayn is often considered to be a debt, but can be described as something which is not present, yet to be paid or completed, but is already owned by the creditor under a contract.^[1630] Dayn cannot be described to be in the creditor’s possession; instead, dayn is embedded within their human capacity.^[1631] As such, Foster equates dayn with the common law concept of a ‘chose in action’.^[1632]

15.18       One area in which this debate has surfaced in modern Islamic finance is in relation to intellec­

tual property rights. If these rights are seen as dependent on corporeal matter, then they would be considered ayn. If not, then due to the prohibition of riba described below, they could only be exchanged at par value.^[1633] Furthermore, the distinction proves vastly important to the debt- oriented modern finance industry as the sale of a debt for another debt at a discount (bayal- dayn bi al-dayn) is not valid.^[1634] Therefore, debt may only be traded or assigned at par value.

C.   Riba

15.19       The prohibition of riba is perhaps the most widely known principle of Islamic commercial law. Riba literally means ‘increase’ and has been defined as an unjust enrichment in which one party to an agreement receives a monetary advantage without giving a countervalue in return.^[1636] The Qur’an exhorts generosity and the avoidance of exploitation of those worse off.^[1637] In theory, the prohibition of riba serves to replace zero-sum transactions with more just and equitable ones, as by removing the possibility of charging money for a loan transaction, only charitable loans—either gifts or loans requiring no interest—are available to lenders and these cannot be the source of commercial profitmaking.^[1638]

15.20       Riba’s prohibition can be traced to several verses of the Qur’an, including ‘You who believe, do not consume usurious interest, doubled and redoubled [... ] beware of the Fire prepared for those who ignore [this],’^[1639] and ‘God has allowed trade and forbidden usury.’^[1640] Through qiyas the principle of riba gradually expanded. In Islamic commer­cial law, riba encompasses two related phenomena. First, riba al-fadl, which can be described as the inequality of countervalues in a given exchange of items of the same type—for example, trading an amount of gold for a larger amount of gold or silver,^[1641] or trading one dayn for another dayn at a discount.^[1642] More relevant to modern finan­cial practices is the prohibition of riba al-nasι^,a, which can be defined as the deferred completion of such an exchange, regardless of whether the deferment is accompanied by an increase to one of the countervalues.^[1643] This prohibits charging a time value for money.^[1644]

All four major schools differ in their rules regarding when a transaction will be considered 15.21 ribawi in nature, but it should be noted that over time there has been a trend towards a more rigid and conservative definition of riba.^[1645] This remains true to this day, although the translation of riba in modern editions of the Qur'an has been changed to ‘usury, which may reflect a narrower focus on the prohibition of interest in modern Islamic finance when com­pared to its more expansive prior definitions.^[1646]

D.   Gharar

Gharar is another important prohibition of Islamic commercial law.

With respect to the sales contracts that form the backbone of Islamic trade finance, gharar 15.23 in a transaction can take many forms. Ibn Rushd, a Maliki scholar, wrote that gharar in sales transactions causes the buyer to suffer damage for want of knowledge which affects either of the countervalues to the contract. As such, he specified five conditions that had to be met for gharar to be averted. These are:

1.  The price and the subject matter of the contract must be in existence. This is related

to the rules on the nature of property discussed above.

2.  The characteristics of the above countervalues must be known.

3.  The amount of the countervalues must be determined.

4.      The parties must have full control over both countervalues, to ensure that the trans­action can take place.

5.      If any part of the contract is to be performed on a future date, that date must be defined.^[1651]

15.24        Throughout the history of Islamic law, commercial necessity has dictated that the rigidities of gharar be avoided in certain instances.

E.                              Freedom of Contract and the System of Islamic Nominate Contracts

15.25        In Islam, all obligations to which human beings are subjected arise out of the covenantal encounter between man and God.^[1654] This can be seen in several passages of the Qur'an, for example, ‘verily those who swear allegiance to thee, swear allegiance really to God',^[1655] and ‘Fulfil the covenant of God when ye have entered into it and break not your oaths after ye have confirmed them.'^[1656] The importance of fulfilling one's obligations is made more explicit in the command: ‘Ye who believe! Fulfil all obligations!'^[1657] These passages are the source of the principle of the sanctity of contract in Islamic law.

15.26        Traditionally, Islamic law recognised no specific freedom of contract.

ISLAMIC TRADE FINANCE IN PRACTICE: THE MURABAHA CONTRACT 319 to the buyer as soon as the contract has been concluded.^[1659] It would seem that the objective of the immediate exchange in the contract of sale is to avoid riba and gharar as discussed above.^[1660] Characteristically, the focus is on the subject matter of the contract as opposed to any obligation to which the contract gives rise. However, in practice the system was much more varied. Due to the requirements of business, the exceptions and qualifications far out­number the rule. Such exceptions came to be known as innominate contracts. An example is the bay’ al-salam or forward sale in which the subject matter does not yet exist, but the seller undertakes to make it available at a later date to the purchaser. The non-existent sub­ject matter is a promise given in exchange for immediate payment. This kind of sale would normally be unlawful as the seller sells what is not in existence.^[1661]

Similarly, the extent to which parties to a contract may append conditions (shurut) to an 15.27 agreement has been the subject of much debate, with some schools adopting a more con­servative approach than others.href="#_ftn1662" name="_ftnref1662" title="">^[1662] For the purposes of modern Islamic finance, the liberal view articulated by the Hanbali scholar Ibn Taymiyyah, that ‘the parties decide as they wish the content of their juridical acts and determine the effects on the condition that these ef­fects are not contrary to public order and morals',^[1663] has been adopted. While this gives the appearance of greater party contractual freedom, there are still some important limitations. The most important such limitation in Islamic trade finance is the inability to combine two contracts together, or to make fulfilment of one contract necessary in the fulfilment of another.^[1664]

Due to what has been described as the inherently common law nature of Islamic finance, 15.28 the industry looks to the old nominate contracts to legitimise modern financial practices.^[1665] Now that the sources and general principles of Islamic trade financing law have been enu­merated, the way in which a traditional nominate contractual form has been adapted for modern trade financing purposes will be described.

IV.