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The Effect of Modernity on Islamic Financial Jurisprudence

The increasing call for Western style rationalisation of the law in Muslim countries significantly affected the form of the shariah. The first code of Islamic law, the Majallah, promulgated in 1876, was described as ‘Islamic in content, but…European in form’[1]. This paper posits that modernity has led to the shariah becoming marginalised in the realm of state law, where finance is largely governed by Western-style codes. The shariah continues to play an important function in the private commercial sphere, evidenced by the growth of Islamic financial institutions (IFIs).  Critics argue that while these institutions retain the form of shariah compliancy they don’t always adhere to the spirit of the shariah. It has been suggested that the growth of a shariah compliant banking system rests on the yearning of modern Muslims to achieve a cultural distinctiveness (Kuran)[2]. However, this desire to adhere to the religious standard is in itself evidence that the shariah still plays the function of the basic grundnorm in Muslims’ lives. It must be remembered that the sharia doesn’t just cover law; it covers law-plus (Baderin)[3].  Thus new interpretations through ijtihad are required so that the shariah can be receptive to the social reality.

Shariah

The Shariah[4] constitutes the primary source of Islamic principles and rulings[5]. The sources underlying it include the Quran and the Sunnah (which are divine and immutable), and qiyas (analogical reasoning ) and ijma (juristic consensus) which jurists use to develop the nascent law. The shariah prohibits riba (interest) and gharar (speculation), which are both concurrent features of today’s financial market. Starting from the Ottoman period, the Shariah which had dominated the legal scene for over a millennium-was largely reduced in scope to the areas of personal status (Hallaq)[6]. Through legal transplantation, most Muslim countries have adopted Western style codes. This is the result of hybrid factors; which include the emergence of statehood, capitalism, colonialism, codification all of which come under the ambit of what we now recognise as modernity. This was coupled with the feeling among some in the Muslim world that the shariah was ‘archaic and unsuited for modern purposes’ (Messick)[7]. The form of the shariah, the fact that legal rulings were scattered in the manuals of various jurists and could not be found in a documented form was seen to be a serious flaw.

Shariah in Public Law

However, in the modern world it is clear that the shariah no longer retains its old form or function in state law. The question as to whether charging interest is permissible or illegal has been dealt with by the Arab Civil Codes and Commercial Codes in different manners[8]. But the outcome has been nearly always in favour of allowing the Western system of interest taking to continue. A distinction made between civil law and commercial law[9] allows even the most conservative states to avoid the strict application of riba so they can meet the demands of international trade[10]. This is in spite of the constitutional provisions in many Arab countries which declare Islamic law or Sharia as the main source (as in Egyptian constitution) or a source of legislation (as in Kuwaiti and UAE Constitutions)[11]. Layish asserts that the part assigned to the shariah in modern legislation is the least important and sometimes border on lip service[12]. The shariah’s failure to gain a foothold in codified state law is unsurprising as ijtihad (juristic interpretation) has always been the jurist’s expertise. Historically, there is no tradition of legislation of Islamic law thus it more akin to the common law system (Ahmed)[13].

Shariah in Private Law

Islamic banking and finance are the areas in which contemporary Islamic law is undergoing its most rapid and fertile development[14]. Vogel argues that the surge in Islamic banking and finance is part of the much larger phenomenon of Islamic reassertion[15]. For Muslims this is a way of engagement with a world shaped by a capitalist modernity, whilst adhering to the spirit and even the letter of the shariah (Tripp)[16]. Islamic economics provides axioms and values that propose an ethical system, the foundations of which are social justice, poverty alleviation and wealth distribution[17]. It strongly recommends equity-based modes of financing that hinge on profit and loss sharing (PLS), wherein reward-sharing is related to risk taking (and not risk-shifting as it happens in conventional finance) between transacting parties[18].

However, observers have noted that IFIs have succumbed to the ‘logic’ of global finance (Philips)[19]. Hamoudi criticises IFIs for failing to attract devout Muslims as they have failed to achieve their functional goal of an alternative system of commerce based on notions of social fairness[20]. Critics note trends such as in increase debt based contracts, (eg.Murabahah), which mimic conventional fixed income instruments, as they allow Islamic banks to avoid risk altogether(Brugnoni)[21]. In a Murabaha the IFI agrees to purchase an item on behalf of a client and then sell it to the client on the basis of an agreed markup with payment coming later[22].  However, the markup tends to reflect prevailing interest rates and the bank assumes no real risk given the speed of the transfer of ownership in an electronic market[23]. Although this ‘synthetic’ murabahah breaks no formal rule, it clearly undermines the foundations of Islamic economics. Hamoudi attributes this functional failure to the fact that the rules of Islamic finance are derived through an interpretive system which is based on logic-driven formalism, which divorces the means from the ends[24]. He distinguishes this from his preferred method of functionalism which allows for rules to be purposefully derived achieving particular ends[25]. I agree with Hamoudi’s analysis that to a large extent the shariah is only present in form, but I would also posit that shariah can achieve functional goals through the classical law concept of Maqasid al shariah(purposes of shariah) espoused by Ghazali using the principle of Maslaha (public interest). This was to achieve the five essential elements: religion, life, intellect, offspring, and property[26].

Islamic Finance Ijtihad

Revivalists have come up with varied solutions as how shariah can be successfully implemented through Islamic banking so that it can achieve the maqasid al sharia. Some have argued that the prohibition on interest requires revisiting. One of the most famous early instances of authoritative reinterpretation of the permissibility of interest was the 1904 judgement of Shaikh Muhammad Abduh, the Grand Mufti of Egypt[27]. He claimed that it was permissible to accept returns, at a fixed and predetermined rate, on deposits with the Egyptian post office’s savings fund[28]. Intellectuals who have re-examined the riba have concluded that it referred to a specific practice in pre-Islamic Arabia which consisted of the doubling and redoubling of the principal if the date for repayment fell due and the debtor was unable to pay[29]. This is clearly different to the interest in conventional transactions today.

Thus a modern financial ijtihad would need to be process whereby legal language is taken to yield a particular legal effect suitable to a particular place and time, when it may, in another place and time yield another effect (Shahrur). Shahrur espouses a new methodology for ijtihad; the theory of Limits in which he sets a Lower and an Upper limit for all human actions; the Lower limit represents the minimum required by the law in a particular case, and the Upper Limit the maximum.[30] 

Shahrur asserts that the prohibition on interest is not conclusive in Islam[31]. He uses Q. 2:276 “God has blighted usury and made alms-giving fruitful” to argue that society must support its poor and needy without expecting any return[32]. However, there are others who can repay their debts but without any accumulation of interest. In their case, they only owe the sum borrowed, with no payment of interest (this being the midmost point between the positive Upper limit and the negative Lower Limit)[33]. However, he argues for the majority of the society if they borrow money, they can repay it with interest and without any harm coming to them. But in no case shall the debtor pay an amount of interest that is larger than the principal he borrowed[34]. In other words, the cumulative interest owed shall in no case exceed 100 percent of the original loan, irrespective of the debt’s duration[35]. This represents the positive Upper  limit, defined by the following Quranic terms: “O you who believe! Devour not usury, doubling and quadrupling [the sum lent]” (3:130)[36]. Although this methodology is adherent to the fulfilling the functions of the shariah it has thus far proved alien to the majority of Muslims[37]. Perhaps this is because Shahrur rejects some of the classical methods interpretation, namely Qiyas. He argues that parallels cannot be drawn between the 7th and 20th centuries[38], which are radically different as the first was a mercantile economy and this is a financial economy.

 I would argue that classical principles of Islamic law can be used to adapt the shariah to the modern context. In a society which cannot be divorced from the capital market, maslaha needs to be used. Khallaf argued that this had the same binding power as the explicit injunctions derived from the texts of the Quran and the sunnah[39]. Ahmed argues that external factors can help in the adapting of the shariah. For example standardization of shariah rules are required at both national and international level[40]as well as specific laws and statutes that can support and promote Islamic financial services industry[41]. Ultimately the function of the shariah has remained a constant in the private lives of Muslims as the ideological hegemeony, but the shariah has taken on a new form in terms of government legislation, where it is (in some cases) on par with secular legislation. However, in today’s postmodern world perhaps a codified shariah would not be desirable.

 

BIBLIOGRAPHY

Brinkley Messick, ‘Disenchantment’ in Messick, the Calligraphic State (CUP, 1993)

Timur Kuran, (1996) ‘The Discontents of Islamic Economic Morality’ (86) American Economic Review 438

H A Hamoudi, (2007) ‘Jurisprudential Schizophrenia: On Form and Function in Islamic Finance’ (7) Chicago Journal of International Law 605

Mashood Baderin(2009) ‘Historical and Evolutional Perspectives of Islamic Law in a Continually Changing World.’ The Middle East in London (Jul/Aug).

Habib Ahmed, “Islamic Law, Adaptability, and Financial Development”. Islamic Economic Studies 13, no. 2 (2006): 79-101

A Layish, Contribution of the Modernists to the Secularization of Islamic Law’ (1978) 14 Middle Eastern Studies, p263-277

Wael B Hallaq, Shariah: Theory, Practice Transformations, (CUP:2009)

Wael B Hallaq, A History of Islamic Legal Theories (CUP: 1997)

Frank Vogel, Islamic Law and Finance, Religion, Risk and Return, (1998) Islamic Law and Finance: Religion, Risk and Return Kluwer Law Internationa

Alberto G Brugnoni, In Search of Identity: Islamic Finance and Mutuality, WIEF-UiTM Occasional Papers,

http://wief.org/wp-content/themes/twentyeleven/cms/uploads/images/download/download_86.pdf 

Saleh Majid and Faris Lenzen, Worldwide: Interest And Islamic Banking, 8 March 2011

http://www.mondaq.com/article.asp?article_id=53350&signup=true


[1] Brinkley Messick, ‘Disenchantment’ in Messick, the Calligraphic State (CUP, 1993) pp.54-68, p54

[2]Timur Kuran, (1996) ‘The Discontents of Islamic Economic Morality’ (86) American Economic Review 438, In: H A Hamoudi, (2007) ‘Jurisprudential Schizophrenia: On Form and Function in Islamic Finance’ (7) Chicago Journal of International Law 605, p614

[3] Mashood Baderin(2009) ‘Historical and Evolutional Perspectives of Islamic Law in a Continually Changing World.’ The Middle East in London (Jul/Aug). pp. 7-8.

[4] For the purposes of this essay I shall use the term Shariah and Islamic law interchangeably.

[5]Habib Ahmed, “Islamic Law, Adaptability, and Financial Development”. Islamic Economic Studies 13, no. 2 (2006): 79-101, p83

[6]Wael B Hallaq, Shariah: Theory, Practice Transformations, (CUP:2009), p500

[7] Messick, p55

[8] Saleh Majid and Faris Lenzen, Worldwide: Interest And Islamic Banking, 8 March 2011

http://www.mondaq.com/article.asp?article_id=53350&signup=true

[9] A legal concept which is borrowed from the French law of obligations-another example of legal transplantation.

[10] Comeir-Obeid, p187

[11]Majid and Lenzen, http://www.mondaq.com/article.asp?article_id=53350&signup=true

[12] A Layish, Contribution of the Modernists to the Secularization of Islamic Law’ (1978) 14 Middle Eastern Studies, p263-277, p269

[13] Ahmed Habib, p90

[14] Frank Vogel, Islamic Law and Finance, Religion, Risk and Return, (1998) Islamic Law and Finance: Religion, Risk and Return Kluwer Law International, p21

[15] Vogel, p21

[16] Charles Tripp, Islam and the Moral Economy: The Challenge of Capitalism, (CUP:2006) p105

[17] Alberto G Brugnoni, In Search of Identity: Islamic Finance and Mutuality, WIEF-UiTM Occasional Papers, p30

http://wief.org/wp-content/themes/twentyeleven/cms/uploads/images/download/download_86.pdf

[18] Brugnoni, p30

[19] Philips, p142

[20] H A Hamoudi, (2007) ‘Jurisprudential Schizophrenia: On Form and Function in Islamic Finance’ (7) Chicago Journal of International Law 605, p605

[21] Brugnoni, p25

[22] Hamoudi, p612

[23] Philips, p143

[24] Hamoudi, p605

[25] Hamoudi, p605

[26]F Opwis, (2005) “Maslaha in Contemporary Legal Theory”, Islamic Law and Society 12, no. ii, pp. 182-223, p188

[27]Philips, p127

[28] Philips, p127

[29] Philips, p127-128

[30] Muhammad Shahrur, al-Kitab wal-Quran: Qira’a Mu’asira (Cairo and Damascus: Sina lil-Nashr, 1992)p37 In: Wael B Hallaq, A History of Islamic Legal Theories (CUP: 1997) p247

[31] Muhammad Shahrur, al-Kitab wal-Quran: Qira’a Mu’asira (Cairo and Damascus: Sina lil-Nashr, 1992)p37 In: Hallaq 250

 [32] Muhammad Shahrur, al-Kitab wal-Quran: Qira’a Mu’asira (Cairo and Damascus: Sina lil-Nashr, 1992)p37 In: Hallaq 250

[33]  Muhammad Shahrur, al-Kitab wal-Quran: Qira’a Mu’asira (Cairo and Damascus: Sina lil-Nashr, 1992)p37 In: Hallaq 250

[34] Muhammad Shahrur, al-Kitab wal-Quran: Qira’a Mu’asira (Cairo and Damascus: Sina lil-Nashr, 1992)p37 In: Hallaq 250

[35] Muhammad Shahrur, al-Kitab wal-Quran: Qira’a Mu’asira (Cairo and Damascus: Sina lil-Nashr, 1992)p37 In: Hallaq 250

[36] Muhammad Shahrur, al-Kitab wal-Quran: Qira’a Mu’asira (Cairo and Damascus: Sina lil-Nashr, 1992)p37 In: Hallaq 250

[37] Hallaq (1996) p254

[38] Hallaq, p253

[39] Abd al Wahhab Khallaf, Masadir al tashri’ al islami (1955) In Philips, p68

[40] Ahmed, p93

[41] Ahmed, p94

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