Commerce and Trade: Know your Shariah
Furthermore, Shariah requires that its adherents protect and preserve their wealth and property. Thus, it is prohibited to deal in interest in order to ensure justice prevails; it is prohibited to enter into contracts that are not clear in their terms and conditions; and it is prohibited to excessively speculate and gamble.
There are a number of things which Shariah requires adherence to, because doing so will be in the best interests of the weaker party to a transaction. For example, it is prohibited to exchange a fungible item, like gold, in unequal quantities. Many women buy new jewellery by trading in older pieces. For example, a woman may end up exchanging a 2.5 tolas bangle for another bangle of a newer design that weighs only 2 tolas. This is quite a ubiquitous practice. Shariah guidelines in such a case are simple: if a jewellery item is weighed and sold as gold, then its exchange in unequal quantities equates to the dealing in interest.
The correct way of dealing in exchange of gold or silver jewellery under the Shariah is as follows: the jeweller must first buy the old item from the customer for an agreed price, and issue a purchase receipt specifying the price and weight of gold, and its quality in terms of karats; the jeweller should then sell the new item, and issue another receipt specifying price, weight and quality of the gold, and charges for making and design etc. It is permissible in Shariah to offset prices, by one party paying only the price differential.
Similarly, many commodity traders enter into barter deals by exchanging less of a high quality commodity with more of a lower quality commodity of the same genre: for example, one tonne of a higher-grade basmati rice with more than a tonne of a lower-grade basmati rice. This is clearly prohibited in the Prophetic tradition.
This principle has great implications for the exchange of commodities, and even money. Following this principle, it is not permissible for someone who lends fresh rice at the time of harvest – as new rice is considered less valuable than old and mature rice – to contractually receive a lower amount of old rice at the end of a crop cycle.
Similarly, in an inflationary environment, a lender cannot require a borrower to pay him the principal sum and an additional amount equivalent to inflation rate at the end of the loan period, because the value of money has deteriorated. Doing so is a clear violation of the principle of prohibition of interest.
It is also a common practice to stipulate a penalty clause in loan contracts, requiring a defaulting borrower to pay an additional amount for a delay in payment. This is an unmistakable violation of Quranic guidelines that prohibit such penalties.
In the contemporary debt-based financing system, however, such penalties are now accepted by jurists if they are intended to curb the moral hazard problem – that is, a wilful default – as long as the penalty is given away in charity to a third party.
Although it is permissible to trade in different currencies, it must be observed that Shariah allows exchange of one currency for another one only on a spot basis. Therefore, it is not permissible for someone to pay Rs100,000 today, to receive $1,400 after one month.
In conclusion, it is important that Muslims who follow the Shariah comply with its requirements in social and commercial matters; in order that their lifestyle is commensurate with Islamic doctrines. Doing so will help establish commercial justice – something missing in a country like Pakistan – and pave the way for a better society.
THE WRITER IS AN ECONOMIST AND PHD FROM CAMBRIDGE UNIVERSITY
Published in The Express Tribune, April 30th, 2012.
COMMENTS (33)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ
1732523554-0/Express-Tribune-(9)1732523554-0-270x192.webp "pti leaders from punjab get protective bails")
@politicaly incorrect:
If there is anything of value for an atheist, western or a modern economist to get from Islamic history for the solid generation of wealth and commerce to run an empire on___ It's the Islamic Laws of Rights & Liberties for people and of Trade & Commerce. Even American father of Economy Adam Smith incorporated most of Islamic rules of trade in his success formula. Except of course there is a hitch of Credit & Commerce with Interest/profits and futures & forecasting on top of the list.Now they wish if countries were left to run on there own system of commerce not all had gone down at once like now. That's where double system of trade saves the day.
@Ch Allah Daad: & @Hope During these times where nothing is certain, central banks are cornered, sovereign surplus are held by insolvent institutions. There is no need to look for ways to make returns. Preservation of wealth is key. Buy Gold/Silver in the lowest denomination. @Hum said Gold is gone. Gold was hibernating. Its back! Look at the trend. This Keynesianism is reaching its end-of-term limit. In the long run, we're all dead. Now the long run is here!
@Ch Allah Daad:
Gold is often considered as a good hedge against inflation. or one can also buy shares of gold related companies. so if anyone who really wants to protect the value of his hard earned money and be islamically correct at the same time, then he should buy gold stocks or shares in gold companies. In countries with decent commodity markets (offering online trading options), it is quite convenient to convert your gold into cash (or cash into gold) at any time. You may be surprised that ull get a gud return and very often few points more than what any bank will give you.
Those who are commenting against Shariah Law, its better to understand it first. @Ch. Allah Dad If someone gives loan to somebody then instead of charging interest lender should sign a partnership agreement with the borrower. In such contract one party provides the capital and other manages the project. The profit and loss would be shared between the parties according to a pre-agreed ratio.
kindly read "Introduction to Islamic Finance" by Justice Mufti Taqi Usmani before commenting or proposing any new model. Learn before you Speak..
Let's not just compare Islamic laws with conventional laws. The time value of money basically generates from inflation which is a direct product of interest. Had there been no interest the value of money wouldn't have deteriorated. And let everyone of us lending money to needy people, continue to do so. It may appear a losing trade but only because we fail to recognize the hidden benefits in the world here and the world hereafter. Allah says in Quran "Allah sadqat ko barhata aur sood ko ghatata hai". Going by worldly logic if you give charity your wealth decreases however actually Allah increases it. How? By giving countless ajar and by giving barakah in the overall wealth and by saving from wasteful expenses.
Introducing pure Shariah finance in modern economy is like 'trying to peg a square in a round hole.'
quite informative...cheers
@ Sonia, you did not understand my point. It was just an example. In simple words why a lender would lose and borrower gain in a loan transaction? In best economic systems all parties involved should share profit and loss equally but here I see borrower clearly gaining and lender losing. In my view, lender can charge inflation and reasonable administration cost. Personal loans to friends and relatives or helping needy is not a business transaction,
Gobbledegook!
@Ch. Allah Daad: if ur car is 1.2 million after a YEAR u say, did u just sit all around the year and earn next to nothing that year- considering u gathered 1 million to begin with- u must have a good source of Income!!!!!
@Pakistani All the institutions u talk about - except for corporations are NON-ISLAMIC. U cannot ask them to just leave their ways. As for corporations- I know a company in Pakistan- not national obviously- been working for like almost 7-8 yrs now. It is commercial loan free, no loans on car, no employee insurances (commercial), no vehicle loans and insurances. They have expanded to 2 new sister organisations with similar setups. U just need to have the guts to do it.
Huge embezzlements happen when their is a lot of money floating around and cover ups are easy.
@Saleem Money wasnot and never is STATIC. It is so dynamic tht God Himself had to devise laws to control its flow. Zakaat and trade keeps money in a regular flow- if we keep it that way and let it flow- Interest actually freezes money in some special hands- hands with power to keep them.
@Dr. Dar I understand all your points except for barter!!!! I think barter of a high grade commodity- which will be highly priced, against a low grade commodity- which will be lowly priced, cannot be equal in quantity. Eg: taking ur rice example, 1kg of old rice priced at Rs.90, 1kg of new priced at Rs.60. bartering the two I would like more of new against the old. Sir, correct me if i have misread.
Its quite simple really. Shariah Law and especially clauses regarding finance and economy, are based on social and commercial justice. The lenders and debtors both must be aware of restrictions and prohibitions in light if the Islamic doctrine. It serves as a counter balance to the pro-lending authority finance systems currently in place today. The main objectives in this law address the elimination of interest gain and lack of investment rotation. However, the world works in the opposite direction already and this method is far from an "economic zone" application unfortunately. Any country applying these regulations will have to face a time period of closed market activity before eventually and certainly gaining economic strength. (Because alas, rules laid out by Islam and the prophet CANNOT be doubted)
Islamic Banking:
1) Social Justice
2) Want to earn, share the risk.
@Saleem sahab I agreed.
Ohh Lord, am I REALLY READING AN ARTICLE ON THE EXPRESS TRIBUNE ???
In conclusion, it is important that Muslims who follow the Shariah comply with its requirements in social and commercial matters; in order that their lifestyle is commensurate with Islamic doctrines. Doing so will help establish commercial justice – something missing in a country like Pakistan – and pave the way for a better society.
I think no body is reading up to the last lines of the article above. When somebody talk about Shariah every one who is against it start putting it like a fill in the blank sort of thing in the present scenarios. However an economy based on Shariah will ensure no inflation, no market crashes like we see in present day markets.
@pakistani if u are finance student and dont know what going on in the world of banking then leave the subject u are not understand and what islamic shariah tells us to do and need more information please contact some real scholer of reliegen the best gonna Allama Taqi Usmani sahab.
Gentlemen , the shariah banking is based on the concept of money in a static , closed and non inflationary world. Why because the arab world of the 6th century implemented the laws based on cash economy. @ Ali tanoli the world today is based on credit economy. if credit then interest comes in, inflation comes in due inter action of simple production and consumption. The islamic banking came in because of the 73 oil boom and excess cash in the islamic world and the continuous flood of oil money. Where is there more money one can have the luxury of islamic banking , if you are short and have to borrow internationally, then interest comes in.
I want to start an Islamic Bank. I hear that I don't have to pay interest for the money that people would deposit with my bank. Sweet.
while the interest free shariah law this article talks about is easily implementable at a personal level. it is virtually impossible to have it at an economy wide level. does shariah ask corporations to take no leverage at all? certainly no modern corporation can do that. now take it to another level. what about treasury securities that countries issue? what about IMF loans or world bank loans or Asian bank loans that countries need from time to time for various purposes including projects like building dams or interstate pipelines. Being a finance student i know shariah law is nonimplementable in the real world finance. its just not pragmatic.
@ Hope, sorry, you have no option except to lose money in the long run. There is no investment tool which gurantees you against inflation and depreciation of currency value. I have tried all Islamic and un-Islamic investments but lost money every where. So better spend that money and free yourself from all worries. Also if you need loan, never go to these people, they won't give you anything free. If you have resources, keep that money in a stable foreign country or atleast convert it in dollars or in gold and keep it in a safe place. Obey the golden rule, never put all your eggs in one basket. Its your money and you have to protect it. Everyone else is there to steal it, some in religious garb and some in office dress.
The whole idea behind Islamic Finance is that of social justice. Some people have commented on this thread that we should be forward looking and not behave like bedouins dealing with gold dinars etc, I will advise them to read the history of modern finance especially that of paper money not backed by any tangible asset. In a nutshell, inflation is caused by supply of paper money and interest rate(s). Paper money has created wealth beyond any proportions and one should be mindful of the current turmoil in financial markets which have been stabilized by printing money (fancy name is quantitative easing) and some one, if not us, will pay for this excess supply of money few years down the road. Unfortunately this is the system in which we operate and things won't change unless we have an urge to change them. I think as individuals we should practice social justice in our daily dealings as the above article details. For some one serious "Lords of Finance: The Bankers Who Broke the World" by Liaquat Ahmed is a good read on the de-linking of gold standard from paper money to unleash unprecedented growth and wealth in the last century. Another good read is "Crisis of Islamic Civilization" by Ali Allawi on why the Muslim Ummah failed to enact a monetary system of their own despite the fact that we were on top of global economy for most of the last millennium.
when ever some muslim counrty try to adopt it the whole world start doing hella gulla why??
I dont understand why Shariah Banking or Civil laws are so misunderstood in Non Muslims world.?
I would recommend all to reread the story and specially the topic. We must 'Know our Shariah'...... Shariah does not allow mark-up on loan so if you are looking for mark-up dont give loan if you want to follow the shariah.....its very simple. But if you want some profit on your money then invest it and make some other agreements than loan, like Mudarbah and Musharkah. Share the risk and earn the profit.
WHY A NEEDY PERSON GIVE YOU MORE MONEY THAN HE TOOK IT FROM YOU...when in fact he was a "needy" and your intension was help or what?
sharia law is best law ,its divine law of almighty. it gives FULL rights to women and oppressed people , its better that the man-made laws of western countries
Suppose I have one million and I want invest it some where to get at least an amount equal to current inflation rate in pakistan, What halal options do I have according to the current situation in pakistan ?
Meezan bank gives around 7% which is not enough. Can anybody comment on that ?
Agreed with BlackJack. We have the tendency to say no to every new thing that comes along. Times have changed. The era of gold dinar is gone and finance is much much more complex than our religious "scholars" make it out to be.
Agreed with AsifAmeer, why the lender has to face the consequences of inflation and depreciation in currency value. Suppose I have money to buy a car worth Rs. One Million but istead I lend that money to a needy person who returns me after one year. The price of car is now 1.2 million. Why its me who should suffer? or should I refuse to lend and force needy person to go to commercial lenders.
Similarly, in an inflationary environment, a lender cannot require a borrower to pay him the principal sum and an additional amount equivalent to inflation rate at the end of the loan period, because the value of money has deteriorated. Doing so is a clear violation of the principle of prohibition of interest.
Mr Dar fails the differentiate the originally lent currency and the returned currency had a difference of value (in terms of wealth). I believe its the BORROW who made INTEREST money on the borrowed loan as he returned lesser wealth at the end of the loan.
Excellent piece of work. I wish if Shariah is used by at-least long-beard jewellers and traders even on small trade deals a big chunk of citizen resentment from petty fraud at the point of sale can be eliminated.It becomes clearer why very few muslim countries adopt Sharia law fully - since it does not recognize concepts like the time value-of-money and inflation, thus making it impossible to be part of the global system. For individuals there is no incentive to deploy their capital as an asset - as there is no risk-free interest rate to begin with. It is probably an acceptable system for completely closed markets and for bedouin tribes.
I wish peoples like you Mr Humayon Dar give sermons in the mosques around pakistan this will make peoples a diffrent and true muslims.