Contracts and Deals in Islamic Finance. Kureshi Hussein

tradition I have to recognize the team at International Centre for Education in Islamic Finance (INCEIF) in Kuala Lumpur, Malaysia. I thank Professor Yusuf Saleem for encouraging me to write my first paper on salaam, which was published in the ISRA Journal of 2014; Professor Ezamshah for his eloquent explanation of risk and how to price risk; Professor Rosly, who painstakingly answered every question I had; Professor Azam, who is as elegant as he is knowledgeable; Professor Razak for dropping the one pearl of wisdom that the rate of zakat should be the minimum profit rate applied to a credit financing contract; Professor Pisal for his humorous anecdotes; and last but not least, Professor Yusuf. I also thank Mohammad Ghaith Mahaini for urging me to write in the first place.

      I would be doing an injustice if I did not extend a word of thanks to all my fellow students who tolerated me for a year, when I asked question after question, hogging the professor's attention. Izzaty, Nur Fatin, Tariq, and all the rest, thanks for putting up with me. I also congratulate INCEIF for providing students from all over the world a platform to study Islamic law and finance. Few places are left in the Muslim world where one can “argue” on shariah in a nondogmatic environment. Professor Ahsenne has to be congratulated on that.

      The face of INCEIF for me has been Dr. Abbas Mirakhor, Dr. Al Habshi, and the famous D. Vicary to whom I am indebted for the wonderful institution they have set up.

      I acknowledge the warmth and hospitality of the peoples of Malaysia who gave me and my family a home and an environment conducive for me to finish my program.

      I give a warm acknowledgment to the support of my mother, Mrs. Bilquise Azam Kureshi, who patiently mentored me through the challenges of going back to school at the age of 42. I acknowledge “team oomi zoomi,” which consists of Inaya, Azam, and Sophiya, who were forced to be separated from their homeland and loving grandparents, Mamajaani, Mamo, and Dado, to keep me company while I finished my studies and the book. Finally, I cannot thank Hannah, my wife, enough for putting up with missing out on her career and my mood swings. I am indebted to you for that.

      A final word of acknowledgment to Septya Iriani Mukhsia, whose input was invaluable and without whom the book possibly would never have been finished. I also acknowledge OCBC AL Amin Bank Berhad for affording me a scholarship to finish my studies. They have not supported the book directly but their financial help certainly made it possible for me to continue my research.

      I thank Moorad Choudhry, who is possibly one of the most prolific writers on banking and finance. To him I owe a word of thanks for the encouragement. Gladys and Jeremy at John Wiley & Sons, thank you for patiently taking all my calls, and then again, where would you find a writer who submits material weeks before deadlines?

– Hussain Kureshi

      I acknowledge my family, which has always been supportive of my projects. Even though my two boys, Zidaan and Araz, would rather play with me, they understand the value of work. I also acknowledge my colleague and office manager, Nasir Rabbani, who for many years has organized, documented, researched, MS “Excel-ed,” and made available anything and everything upon request. His work has always been invaluable.

      My thoughts and ideas have evolved through people I've met along the way – friends, restaurant owners, entrepreneurs, emerging market CEOs, financiers, investors from New York, Hong Kong, Kuala Lumpur, Islamabad, Karachi, London, Singapore – people such as Glen Taylor, Yee Hui Wong, Punit Khanna, Kaman Leung, Iqbal Latif, and many more.

      And last but not least, I acknowledge my coauthor, who did the heavy lifting for this project. Hussein is passionate, thoughtful, and driven by what he believes.

– Mohsin Hayat

      Product Offerings

      Introduction

      The authors of this work would like to develop the understanding of the concepts of shariah and Islamic finance as the book progresses so that readers make up their own mind about the conclusion we offer. We encourage active reading and analyses and not passive reading, as we have been fortunate enough to have had mentors and teachers who encouraged learning, questioning, and understanding and not mere dogmatic rote learning.

      The reader must understand that within the universe of Islamic finance money cannot be lent from one party to another with the intent of making a gain on the repayment of the loan. Conventional finance is built on the permissibility of this transaction whether it takes place between a depositor and a bank or it takes place between a borrower and a bank. To date, the aim of Islamic Finance has been to replicate the cash flows that take place in disbursing and servicing a loan with a sequence of sale contracts. For the best part of financial engineering in the industry, spot sales are combined with deferred payment sales to construct cash flows that resemble those of a loan. The underlying “sales contracts” must involve a permissible asset and the sale contract must abide by the laws of contracts of bai. Thus, much of the discourse in Islamic finance is a legal discourse based on the rights and obligations imparted to various parties in various contracts under varying circumstances.

      Before proceeding further we therefore wish to highlight some salient features and legal maxims that affect the conduct of affairs of trade in Islam. As we have all learned our religion from our mothers, fathers, and tutors, whose memories are very sacred to us all, we do not want to tread on any sensitive grounds without giving due warnings.

      We request the reader to consider what rules, if any, other than the rule of riba, apply to commercial transactions in Islam. The first “rule” that may come to mind is to be “fair” in one's dealings.

      The texts offer no specific standards of “fairness,” but offer stories that give guidelines or parameters of what can be deemed fair. We discuss the rule of one-third in due course as well as to expound on it. The texts have been very specific, to the decimal place on one commercial transaction, which is that of inheritance, where detailed methodologies of calculation are ordained for the distribution of wealth of a deceased. Specific workings are also offered for the calculations of zakat. The texts, however, do not offer specific calculations of how a merchant, trader, or manufacturer may calculate his or her profit margin on goods or services rendered, so the discussion of riba is not about excessive interest or unfair interest, it is about interest in its absolute sense of the term, which is money returned in excess of money borrowed.

      There are other parameters of legal rulings within the discourse of Islamic commercial law, and this extends to three or four additional prohibitions. Shariah discourages elements of uncertainty in contracts, or gharar, and it forbids speculation and gambling, or maysir. The texts also admonish hoarding of goods, admonish purchasing goods from caravans outside the city limits before they enter the city to inflate prices, and prohibit the circulation of wealth among the few. Some can argue that these five or six principles are sufficient to develop a judicious and fair economic system.

      The Muslim world has manifested various economic models in various times in history. In peace time, there seems to be a preference for free markets, and in war time, there seems to be preference to command economic policies, especially in the distribution of wheat.

      This work does not tackle the topic of using fiat money in an economy and having a gold-backed currency, as this is the work of currency experts and monetarists, both of which we are not.

      To revert back to our legal maxims, we have identified four core legal maxims and two supplementary ones, which are all that is available for a believer to follow in order to develop an economic system of which a financial system is a part.

      The reader should be aware that Islam stipulates specific conditions under which an individual has a right to earn a profit. These conditions are that an individual may be either a provider of capital, or a provider of labor, or assumes certain liability for events (or assumes risk) in order to be entitled to any profit from any economic venture. We discuss this in detail in subsequent chapters.

      The reader should be additionally aware of the prohibition of certain trade practices, like selling what one does not own. This was a prohibition identified in the texts by the Prophet Muhammad (saw), but the Prophet (saw) extended exceptions to this condition for certain specific kinds