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Western Jurisprudence at Banking Matter www.AssignmentPoint.com www.AssignmentPoint.com 1 Influence of Western Jurisprudence at Banking Matter These concepts, like others in Islamic law, came from the "prescriptions, anecdotes, examples, and words of Muhammad, all gathered together and systematized by commentators according to an inductive, casuistic method."Sometimes other sources such as al-urf, (the custom), al-aql (reason) or al-ijma (consensus of the jurists) were employed. www.AssignmentPoint.com 2 During the Arab Agricultural Revolution, a social transformation took place as a result of changing land ownership giving individuals of any gender, ethnic or religious background the right to buy, sell, mortgage and inherit land. Based on the Quran, signatures were required on contracts for major financial transactions concerning agriculture, industry, commerce, and employment. Copies of the contract were usually kept by both parties involved. There are similarities between Islamic economics and leftist or socialist www.AssignmentPoint.com 3 economic policies. Islamic jurists have argued that privatization of the origin of oil, gas, and other fire-producing fuels, agricultural land, and water is forbidden. The principle of public or joint ownership has been drawn by Muslim jurists from the following hadith of the Prophet of Islam: Ibn Abbas reported that Muhammad said: "All Muslims are partners in three things- in water, herbage and fire." (Narrated in Abu Daud, & Ibn Majah) Anas added to the above hadith, "Its price is Haram (forbidden)" Jurists have www.AssignmentPoint.com 4 argued by qiyas that the above restriction on privatization can be extended to all essential resources that benefit the community as a whole. Aside from similarities to socialism, early forms of proto-capitalism and free markets were present in the Caliphate. An early market economy and early form of merchant capitalism developed between the 8th and 12th centuries. A vigorous monetary economy developed based on the wide circulation of a common currency (the dinar) and the integration of previously independent www.AssignmentPoint.com 5 monetary areas. Business techniques and forms of business organization employed during this time included early contracts, bills of exchange, international trade, long-distance early forms of partnership (mufawada) such as limited partnerships (mudaraba), and early forms of credit, debt, profit, loss, capital (almal), capital accumulation (nama almal), circulating expenditure, capital, revenue, capital cheques, promissory notes, trusts (waqf), savings accounts, pawning, bankers, transactional loaning, money accounts, exchange changers, rates, ledgers, www.AssignmentPoint.com 6 deposits, assignments, the double-entry bookkeeping system, and lawsuits. Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world. Many of these concepts were adopted and further advanced in medieval Europe from the 13th century onwards. The concepts of welfare and pension were present in early Islamic law as forms of Zakat one of the Five Pillars of Islam, since the time of the Rashidun caliph Umar in the 7th century. The www.AssignmentPoint.com 7 taxes (including Zakat and Jizya) collected in the treasury (Bayt al-mal) of an Islamic government were used to provide income for the needy, including the poor, the elderly, orphans, widows, and the disabled. According to the Islamic jurist Al-Ghazali the government was also expected to stockpile food supplies in every region in case a disaster or famine occurred. The Caliphate was thus one of the earliest welfare states. In the 1960s and 70s Shia Islamic thinkers worked to develop a unique www.AssignmentPoint.com 8 Islamic economic philosophy with "its own answers to contemporary economic problems." Several works were particularly influential, Al-Sadr in particular has been described as having developed "almost the single-handedly notion of Islamic economics" In the 1980s and 1990s, as the Islamic revolution failed to reach the per capita income level achieved by the regime it overthrew, and Communist states and socialist parties in the non-Muslim world turned away from socialism, Muslim www.AssignmentPoint.com 9 interest shifted away from government ownership and regulation. In Iran, it is reported that "eqtesad-e Eslami (meaning both Islamic economics and economy) ... once a revolutionary shibboleth, is indubitably absent in all official documents and the media. It disapperared from Iranian political discourse about 15 years ago. Property The Qur'an states that God is the sole owner of all matter in the heavens and the earth. Man, however, is God's www.AssignmentPoint.com 10 viceregent on earth and holds God's possessions in trust (amanat). Islamic jurists have divided properties into three categories: (a) Public property (b) State property (c) Private property a) Public property Public property in Islam refers to natural resources (forests, pastures, uncultivated land, water, mines, oceanic resources etc.) over which all humans have equal right. Such resources are considered the common property of the community. www.AssignmentPoint.com 11 Such property is placed under the guardianship and control of the Islamic state, and can be utilized by any citizen, as long as it does not undermine the right of other citizens over it. Some types of public property can not be privatized under Islamic law. Muhammad's saying that "people are partners in three things: water, fire and pastures", has led some scholars to believe that the privatization of water, energy and agricultural land is not permissible. Other types of public property, such as gold mines, were www.AssignmentPoint.com 12 allowed by Muhammad to be privatized, in return for taxes to the Islamic state. The owner of the previously public property that was privatized has to pay zakat and, according Shiite scholars, khums as well. privatization and In general nationalization the of public property is subject to debate amongst Islamic scholars. Public property thus, eventually, becomes state or private property. b) State property: State property includes certain natural resources, as well as other property that www.AssignmentPoint.com 13 can't immediately be privatized. Islamic state property can be movable, or immovable, can be acquired through conquest, or peaceful means. Unclaimed, unoccupied and heir less properties, including uncultivated land (mawat), can be considered state property. During the life of Muhammad, one fifth of military equipment captured from the enemy in the battlefield was considered state property. During his reign, Umar (on the recommendation of Ali) considered conquered land to be state property, instead of private property (as was usual practice). The reason for this www.AssignmentPoint.com 14 was that privatizing this property would concentrate resources in the hands of a few, and prevent this property from being used for the general good of the community. The property remained under the occupation of the cultivators, but the taxes collected on it went to the state treasury. Muhammad said "Old and fallow lands are for God and His Messenger (i.e. state property), then they are for you". Jurists draw from this the conclusion that, ultimately, private ownership takes over state property. www.AssignmentPoint.com 15 c) Private property: There is consensus amongst Islamic jurists and social scientists that Islam recognizes and upholds the individual's right to private ownership. The Qur'an extensively discusses taxation, inheritance, prohibition against stealing, legality of ownership, recommendation to give charity and other topics related to private property. Islam also guarantees the protection of private property by imposing stringent punishments on thieves. Muhammad said that he who dies defending his property was like a martyr. www.AssignmentPoint.com 16 Islamic economists have classified the acquisition of private property into three categories: involuntary, contractual and non-contractual. Involuntary means are inheritance, bequests, and gifts. Noncontractual is acquisition involves the collection and exploitation of natural resources that have not previously been claimed as private property. Contractual acquisition includes activities such as trading, buying, renting, hiring labor etc. A tradition attributed to Muhammad, with which both Sunni and Shi'ite jurists agree, in cases where the right to private www.AssignmentPoint.com 17 ownership causes harm to others, then Islam is in favor of curtailing the right in those cases. Maliki and Hanbali jurists argue that if private ownership endangers public interest, then the state can limit the amount an individual is allowed to own. This view, however, is debated by others. Market Islam accepts markets as the basic coordinating mechanism of the economic system. Islamic teaching holds that the market, through perfect competition, www.AssignmentPoint.com 18 allows consumers to obtain desired goods, producers to sell their goods, at a mutually acceptable price. The three necessary conditions for an operational market are said to be upheld in Islamic primary sources: • Freedom of exchange: the Qur'an calls on believers to engage in trade, and rejects the contention that trade is forbidden. • Private ownership. • Security of contract: the Qur'an calls for the fulfillment and observation of contracts. The longest verse of the Qur'an deals with commercial contracts www.AssignmentPoint.com 19 involving immediate and future payments. Islam promotes a market free from interferences such as price fixing and hoarding. Government intervention, however, is tolerated under specific circumstances. Islam prohibits the fixation of a price by a handful of buyers or sellers who have become dominant in the market. During the days of Muhammad, a small group of merchants used to meet agricultural producers outside the city and bought the entire crop, thereby gaining monopoly over the market. The produce was later www.AssignmentPoint.com 20 sold at a higher price within the city. Muhammad condemned this practice since it caused injury both to the producers (who in the absence of numerous customers were forced to sell goods at a lower price) and the inhabitants of Medina. The above mentioned reports are also used to justify the argument that the Islamic market is characterized by free information. Producers and consumers should not be denied information on demand and supply Producers are expected conditions. to inform www.AssignmentPoint.com 21 consumers of the quality and quantity of goods they claim to sell. Some scholars hold that if an inexperienced buyer is swayed by the seller, the consumer may nullify the transaction upon realizing the seller's unfair treatment. The Qur'an also forbids discriminatory means of transaction. Government interference in the market is justified in exceptional circumstances, such as the protection of public interest. Under normal circumstances, government non-interference should be upheld. When Muhammad was asked to www.AssignmentPoint.com 22 set the price of goods in a market he responded, "I will not set such a precedent, let the people carry on on with their activities and benefit mutually." Natural Capital Natural capital is the extension of the economic notion of capital (manufactured means of production) to goods and services relating to the natural environment. Natural capital is thus the stock of natural ecosystems that yields a flow of valuable ecosystem goods or www.AssignmentPoint.com 23 services into the future. For example, a stock of trees or fish provides a flow of new trees or fish, a flow which can be indefinitely sustainable. Natural capital may also provide services like recycling wastes or water catchment and erosion control. Since the flow of services from ecosystems requires that they function as whole systems, the structure and diversity of the system are important components of natural capital. In Natural Capitalism: Creating the Next Industrial Revolution the authors see the world's economy as being within the www.AssignmentPoint.com 24 larger economy of natural resources and ecosystem services that sustain us. This implies that we should attribute value to things such as human intelligence and cultures to hydrocarbons, minerals, trees, and microscopic fungi. The authors argue that only through recognizing this essential relationship with the Earth's valuable resources can businesses, and the people they support, continue to exist. The book has many practical suggestions for companies interested in a sustainable future. www.AssignmentPoint.com 25 According to the authors, the "next industrial revolution" depends on the espousal of four central strategies: "the conservation of resources through more effective manufacturing processes, the reuse of materials as found in natural systems, a change in values from quantity to quality, and investing in natural capital, or restoring and sustaining natural resources." Natural capital is described in the book Natural Capitalism as a metaphor for the mineral, plant, and animal formations of the Earth's biosphere when viewed as a www.AssignmentPoint.com 26 means of production of oxygen, water filter, erosion preventer, or provider of other ecosystem services. It is one approach to ecosystem valuation, an alternative to the traditional view of all non-human life as passive natural resources, and to the idea of ecological health. However, human knowledge and understanding of the natural environment is never complete, and therefore the boundaries of natural capital expand or contract as knowledge is gained or lost. Perhaps due to resource scarcity in most Islamic nations, this form of economics www.AssignmentPoint.com 27 also emphasizes limited (and some claim also sustainable) use of natural capital, producing land. These latter revive traditions of haram and hima that were prevalent in early Muslim civilization. How western jurisprudence is Influence at Banking Matter This risk-sharing model has continued to shape the liabilities-side of Islamic banks’ balance sheets, with few exceptions in Europe and the United States, where regulators have required Islamic financial providers that function www.AssignmentPoint.com 28 as banks to guarantee deposits. The Assetsside of Islamic banks and financial providers, on the other hand, has utilized multiple structured-financial models to replicate loans and fixed-return securities that limit the banks’ exposure to credit risk. The transformation from the idealistic profit-and-loss sharing model of Islamic economics which continues to be hailed as the “Islamic ideal” by industry practitioners and commentators to replication of modern financial products and markets in “Islamic” garb coincided with the increased importance of classical methods of Islamic www.AssignmentPoint.com 29 jurisprudence and a limited rhetorical role for Islamic economics. Early models in the subcontinent during the 1950s and in Egypt during the 1960s notwithstanding, the true beginnings of Islamic banking and finance occurred in the mid 1970s. Islamic jurists including the Shiite scholar Baqir al-Sadr and many Sunni scholars in Egypt, Saudi Arabia, and elsewhere collaborated with Islamist bankers to replicate loans using ancient contract forms. Baqir al-Sadr, in his classical work The Non-Usurious Bank in Islam had attempted to use similar structured www.AssignmentPoint.com 30 products to replicate guaranteed bank deposit on the liabilities side. However, since risk-sharing depositors were clearly beneficial to the shareholders of Islamic banks, and because the latter drove innovation in Islamic banking through the retention of lawyers and religious scholars, most of the “innovations” were restricted to the assets-side of the balance sheet. www.AssignmentPoint.com 31