||Musharakah & Mudarabah: By Mufti Taqi Usmani
The concept of 'limited liability' has now become an inseparable ingredient of
the large scale enterprises of trade and industry throughout the modern world,
including the Muslim countries. The present chapter aims to explain this concept
and evaluate it from the Shari‘ah point of view in order to know whether or not
this principle is acceptable in a pure Islamic economy. The limited liability'
in the modern economic and legal terminology is a condition under which a
partner or a shareholder of a business secures himself from bearing a loss
greater than the amount he has invested in a company or partner-ship with
limited liability. If the business incurs a loss, the maximum a shareholder can
suffer, is that he may lose his entire original investment. But the loss cannot
extend to his personal assets, and if the assets of the company are not
sufficient to discharge all its liabilities, the creditors cannot claim the
remaining part of their receivables from the personal assets of the
Although the concept of 'limited liability' was, in some countries applied to
the partnership also, yet, it was most commonly applied to the companies and
corporate bodies. Rather, it will be more true, perhaps, to say that the concept
of 'limited liability' originally emerged with the emergence of the corporate
bodies and joint stock companies. The basic purpose of the introduction of this
principle was to attract the maximum number of investors to the large-scale
joint ventures and to assure them that their personal fortunes will not be at
stake if they wish to invest their savings in such a joint enterprise. In the
practice of modern trade, the concept proved itself to be a vital force to
mobilize large amounts of capital from a wide range of investors.
No doubt, the concept of 'limited liability' is beneficial to the shareholders
of a company. But, at the same time, it may be injurious to its creditors. If
the liabilities of a limited company exceed its assets, the company becomes
insolvent and is consequently liquidated, the creditors may lose a considerable
amount of their claims, because they can only receive the liquidated value of
the assets of the company, and have no recourse to its shareholders for the rest
of their claims. Even the directors of the company who may be responsible for
such an unfortunate situation cannot be held responsible for satisfying the
claims of the creditors. It is this aspect of the concept of 'limited liability'
which requires consideration and research from the Shari‘ah viewpoint.
Although the concept of 'limited liability' in the context of the modern
commercial practice is a new concept and finds no express mention as such in the
original sources of Islamic Fiqh, yet the Shari‘ah viewpoint about it can be
sought in the principles laid down by the Holy Qur’an, the Sunnah of the Holy
Prophet ? and the Islamic jurisprudence. This exercise requires some sort of
ijtihad carried out by the persons qualified for it. This ijtihad should
preferably be undertaken by the Shari‘ah scholars at a collective level, yet, as
a pre-requisite, there should be some individual efforts which may serve as a
basis for the collective exercise.
As a humble student of Shari‘ah, this author have been considering the issue
since long, and what is going to be presented in this article should not be
treated as a final verdict on this subject, nor an absolute opinion on the
point. It is the outcome of initial thinking on the subject, and the purpose of
this article is to provide a foundation for further research.
The question of 'limited liability' it can be said, is closely related to the
concept of juridical personality of the modern corporate bodies. According to
this concept, a joint-stock company in itself enjoys the status of a separate
entity as distinguished from the individual entities of its shareholders. The
separate entity as a fictive person has legal personality and may thus sue and
be sued, may make contracts, may hold property in its name, and has the legal
status of a natural person in all its transactions entered into in the capacity
of a juridical person.
The basic question, it is believed, is whether the concept of a 'juridical
person' is acceptable in Shari‘ah or not. Once the concept of 'juridical person'
is accepted and it is admitted that, despite its fictive nature, a juridical
person can be treated as a natural person in respect of the legal consequences
of the transactions made in its name, we will have to accept the concept of
'limited liability' which will follow as a logical result of the former concept.
The reason is obvious. If a real person i.e. a human being dies insolvent, his
creditors have no claim except to the extent of the assets he has left behind.
If his liabilities exceed his assets, the creditors will certainly suffer, no
remedy being left for them after the death of the indebted person.
Now, if we accept that a company, in its capacity of a juridical person, has the
rights and obligations similar to those of a natural person, the same principle
will apply to an insolvent company. A company, after becoming insolvent, is
bound to be liquidated: and the liquidation of a company corresponds to the
death of a person, because a company after its liquidation, cannot exist any
more. If the creditors of a real person can suffer, when he dies insolvent, the
creditors of a juridical person may suffer too, when its legal life comes to an
end by its liquidation.
Therefore, the basic question is whether or not the concept of 'juridical
person' is acceptable to Shari‘ah. Although the idea of a juridical person, as
envisaged by the modern economic and legal systems has not been dealt with in
the Islamic Fiqh, yet there are certain prcedents wherefrom the basic concept of
a juridical person may be derived by inference.
The first precedent is that of a Waqf. The Waqf is a legal and religious
institution wherein a person dedicates some of his properties for a religious or
a charitable purpose. The properties, after being declared as Waqf, no longer
remain in the ownership of the donor. The beneficiaries of a Waqf can benefit
from the corpus or the proceeds of the dedicated property, but they are not its
owners. Its ownership vests in Allah Almighty alone.
It seems that the Muslim jurists have treated the Waqf as a separate legal
entity and have ascribed to it some characteristics similar to those of a
natural person. This will be clear from two rulings given by the fuqaha’ (Muslim
jurists) in respect of Waqf.
Firstly, if a property is purchased with the income of a Waqf, the purchased
property cannot become a part of the Waqf automatically. Rather, the jurists
say, the property so purchased shall be treated as a property owned by the Waqf.
It clearly means that a Waqf, like a natural person, can own a property .
Secondly, the jurists have clearly mentioned that the money given to a mosque as
donation does not form part of the Waqf, but it passes to the ownership of the
Here again the mosque is accepted to be an owner of money. This principle has
been expressly mentioned by some jurists of the Maliki school also. They have
stated that a mosque is capable of being the owner of something. This capability
of the mosque, according to them, is constructive, while the capability enjoyed
by a human being is physical.
Another renowned Maliki jurist, namely, Ahmad Al-Dardir, validates a bequest
made in favour of a mosque, and gives the reason that a mosque can own
properties. Not only this, he extends the principle to an inn and a bridge also,
provided that they are Waqf.
It is clear from these examples that the Muslim jurists have accepted that a
Waqf can own properties. Obviously, a Waqf is not a human being, yet they have
treated it as a human being in the matter of ownership. Once its ownership it
established, it will logically follow that it can sell and purchase, may become
a debtor and a creditor and can sue and be sued, and thus all the
characteristics of a 'juridical person' can be attributed to it.
Another example of 'juridical person' found in our classic literature of Fiqh is
that of the Baitul-mal (the exchequer of an Islamic state). Being public
property, all the citizens of an Islamic state have some beneficial right over
the Baitul-mal, yet, nobody can claim to be its owner. Still, the Baitul-mal has
some rights and obligations. Imam Al-Sarakhsi, the well-known Hanafi jurist,
says in his work "Al-Mabsut":
"The Baitul-mal has some rights and obligations which may possibly be
At another place the same author says: "If the head of an Islamic state needs
money to give salaries to his army, but he finds no money in the Kharaj
department of the Baitul-mal (wherefrom the salaries are generally given) he can
give salaries from the sadaqah (Zakah) department, but the amount so taken from
the sadaqah department shall be deemed to be a debt on the Kharaj department".
It follows from this that not only the Baitul-mal, but also the different
departments therein can borrow and advance loans to each other. The liability of
these loans does not lie on the head of state, but on the concerned department
of Baitul-mal. It means that each department of Baitul-mal is a separate entity
and in that capacity it can advance and borrow money, may be treated a debtor or
a creditor, and thus can sue and be sued in the same manner as a juridical
person does. It means that the Fuqaha of Islam have accepted the concept of
juridical person in respect of Baitul-mal.
Another example very much close to the concept of 'juridical person' in a joint
stock company is found in the Fiqh of Imam Shafi‘i. According to a settled
principle of Shafi‘i School, if more than one person run their business in
partner-ship, where their assets are mixed with each other, the Zakah will be
levied on each of them individually, but it will be payable on their joint-stock
as a whole, so much so that even if one of them does not own the amount of the
nisab, but the combined value of the total assets exceeds the prescribed limit
of the nisab, zakah will be payable on the whole joint-stock including the share
of the former, and thus the person whose share is less than the nisab shall also
contribute to the levy in proportion to his ownership in the total assets,
whereas he was not subject to the levy of zakah, had it been levied on each
person in his individual capacity.
The same principle, which is called the principle of 'Khultah-al-Shuyu‘' is more
forcefully applied to the levy of Zakah on the livestock. Consequently, a person
sometimes has to pay more Zakah than he was liable to in his individual
capacity, and sometimes he has to pay less than that.
That is why the Holy Prophet has said:
'The separate assets should not be joined together nor the joint assets should
be separated in order to reduce the amount of Zakah levied on them.
This principle of 'Khultah-al-Shuyu‘' which is also accepted to some extent by
the Maliki and Hanbali schools with some variance in details, has a basic
concept of a juridical person underlying it. It is not the individual, according
to this principle, who is liable to Zakah. It is the 'joint-stock' which has
been made subject to the levy. It means that the 'joint-stock' has been treated
a separate entity, and the obligation of 'zakah has been diverted towards this
entity which is very close to the concept of a 'juridical person', though it is
not exactly the same.
The fourth example is the property left by a deceased person whose liabilities
exceed the value of all the property left by him. For the purpose of brevity we
can refer to it as 'inheritance under debt'.
According to the jurists, this property is neither owned by the deceased,
because he is no more alive, nor is it owned by his heirs, for the debts on the
deceased have a preferential right over the property as compared to the rights
of the heirs. It is not even owned by the creditors, because the settlement has
not yet taken place. They have their claims over it, but it is not their
property unless it is actually divided between them. Being property of nobody,
it has its own existence and it can be termed a legal entity. The heirs of the
deceased or his nominated executor will look after the property as managers, but
they are not the owners. If the process of the settlement of debt requires some
expenses, the same will be met by the property itself.
Looked at from this angle, this 'inheritance under debt' has its own entity
which may sell and purchase, becomes debtor and creditor, and has the
characteristics very much similar to those of a 'juridical person.' Not only
this, the liability of this 'juridical person' is certainly limited to its
existing assets. If the assets do not suffice to settle all the debts, there is
no remedy left with its creditors to sue anybody, including the heirs of the
deceased, for the rest of their claims.
These are some instances where the Muslim jurists have affirmed a legal entity,
similar to that of a juridical person. These examples would show that the
concept of 'juridical person' is not totally foreign to the Islamic
jurisprudence, and if the juridical entity of a joint-stock company is accepted
on the basis of these precedents, no serious objection is likely to be raised
As mentioned earlier, the question of limited liability of a company is closely
related to the concept of a 'juridical person'. If a 'juridical person' can be
treated a natural person in its rights and obligations, then, every person is
liable only to the limit of the assets he owns, and in case he dies insolvent no
other person can bear the burden of his remaining liabilities, however closely
related to him he may be. On this analogy the limited liability of a joint-stock
company may be justified.
The Limited Liability of the master of a slave Here I would like to cite another
example with advantage, which is the closest example to the limited liability of
a joint-stock company. The example relates to a period of our past history when
slavery was in vogue, and the slaves were treated as the property of their
masters and were freely traded in. Although the institution of slavery with
reference to our age is something past and closed, yet the legal principles laid
down by our jurists while dealing with various questions pertaining to the trade
of slaves are still beneficial to a student of Islamic jurisprudence, and we can
avail of those principles while seeking solutions to our modern problems and in
this respect, it is believed that this example is the most relevant to the
question at issue. The slaves in those days were of two kinds. The first kind
was of those who were not permitted by their masters to enter into any
commercial transaction. A slave of this kind was called 'العبد
But there was another kind of slaves who were allowed by their masters to trade.
A slave of this kind was called The initial capital for the purpose of trade was
given to such a slave by his master, but he was free to enter into all the
commercial transactions. The capital invested by him totally belonged to his
master. The income would also vest in him, and whatever the slave earned would
go to the master as his exclusive property. If in the course of trade, the slave
incurred debts, the same would be set off by the cash and the stock present in
the hands of the slave. But if the amount of such cash and stock would not be
sufficient to set off the debts, the creditors had a right to sell the slave and
settle their claims out of his price. However, if their claims would not be
satisfied even after selling the slave, and the slave would die in that state of
indebtedness, the creditors could not approach his master for the rest of their
Here, the master was actually the owner of the whole business, the slave being
merely an intermediary tool to carry out the business transactions. The slave
owned nothing from the business. Still, the liability of the master was limited
to the capital he invested including the value of the slave. After the death of
the slave, the creditors could not have a claim over the personal assets of the
This is the nearest example found in the Islamic Fiqh which is very much similar
to the limited liability of the share holders of a company, which can be
justified on the same analogy. On the basis of these five precedents, it seems
that the concepts of a juridical person and that of limited liability do not
contravene any injunction of Islam. But at the same time, it should be
emphasized, that the concept of 'limited liability' should not be allowed to
work for cheating people and escaping the natural liabilities consequent to a
profitable trade. So, the concept could be restricted, to the public companies
only who issue their shares to the general public and the number of whose
shareholders is so large that each one of them cannot be held responsible for
the day-to-day affairs of the business and for the debts exceeding the assets.
As for the private companies or the partnerships, the concept of limited
liability should not be applied to them, because, practically, each one of their
shareholders and partners can easily acquire a knowledge of the day-to-day
affairs of the business and should be held responsible for all its liabilities.
There may be an exception for the sleeping partners or the shareholders of a
private company who do not take part in the business practically and their
liability may be limited as per agreement between the partners. If the sleeping
partners have a limited liability under this agreement, it means, in terms of
Islamic jurisprudence, that they have not allowed the working partners to incur
debts exceeding the value of the assets of the business. In this case, if the
debts of the business increase from the specified limit, it will be the sole
responsibility of the working partners who have exceeded the limit.
The upshot of the foregoing discussion is that the concept of limited liability
can be justified, from the Shari‘ah viewpoint, in the public joint-stock
companies and those corporate bodies only who issue their shares to general
public. The concept may also be applied to the sleeping partners of a firm and
to the shareholders of a private company who take no active part in the business
management. But the liability of the active partners in a partnership and active
shareholders of a private company should always be unlimited.
At the end, we should again recall what has been pointed out at the outset. The
issue of limited liability, being a modern issue which requires a collective
effort to find out its solution in the light of Shari‘ah, the above discussion
should not be deemed to be a final verdict on the subject. This is only the
outcome of an initial thinking which always remains subject to further study and
of the Islamic Banks - A realistic evaluation
Islamic banking has become today an undeniable reality. The number of Islamic
banks and the financial institutions is ever increasing. New Islamic Banks with
huge amount of capital are being established. Conventional banks are opening
Islamic windows or Islamic subsidiaries for the operations of Islamic banking.
Even the non-Muslim financial institutions are entering the field and trying to
compete each other to attract as many Muslim customers as they can. It seems
that the size of Islamic banking will be at least multiplied during the next
decade and the operation of Islamic banks are expected to cover a large area of
financial transactions of the world. But before the Islamic financial
institutions expand their business they should evaluate their performance during
the last two decades because every new system has to learn from the experience
of the past, to revise its activities and to analyze its deficiencies in a
realistic manner. Unless we analyze our merits and demerits we cannot expect to
advance towards our total success. It is in this perspective that we should seek
to analyze the operation of Islamic banks and financial institutions in the
light of Shariah and to highlight what they have achieved and what they have
Once during a press conference in Malaysia, this author was asked the question
about the contribution of the Islamic Banks in promoting the Islamic economy. My
reply to the question was apparently contradictory, I said it he has contributed
a lot and they have contributed nothing. In the present chapter an attempt has
been made to elaborate upon this reply. When it was said that they have
contributed a lot, what was meant is that it was a remarkable achievement of the
Islamic banks that they have made a great break-through in the present banking
system by establishing Islamic financial institutions meant to follow Shariah.
It was a cherished dream of the Muslim Ummah to have an interest-free economy,
but the concept of Islamic banking was merely a theory discussed in research
papers, having no practical example. It was the Islamic banks and financial
institutions which translated the theory into practice and presented a living
and practical example for the theoretical concept in an environment where it was
claimed that no financial institution can work without interest. It was indeed a
courageous step on the part of the Islamic banks to come forward with a firm
resolution that all their transactions will conform to Shariah and all their
activities will be free from all transactions involving interest.
Another major contribution of the Islamic banks is that, being under supervision
of their respective Shariah Boards they presented a wide spectrum of questions
relating to modern business, to the Shariah scholars, thus providing them with
an opportunity not only to understand the contemporary practice of business and
trade but also to evaluate it in the light of Shariah and to find out other
alternatives which may be acceptable according to the Islamic principles.
It must be understood that when we claim that Islam has a satisfactory solution
for every problem emerging in any situation in all times to come, we do not mean
that the Holy Quran or the Sunnah of the Holy Prophet (SW) or the rulings of the
Islamic scholars provide a specific answer to each and every minute detail of
our socio-economic life. What we mean is that the Holy Quran and the Holy Sunnah
of the Prophet have laid down broad principles in the light of which the
scholars of every time have deduced specific answers to the new situation
arising in their age. Therefore, in order to reach a definite answer about a new
situation the scholars of Shariah have to play a very important role. They have
to analyze every new question in the light of the principles laid down by the
Holy Quran and Sunnah as well as in the light of the standards set by the
earlier jurists, enumerated in the books of Islamic jurisprudence. This exercise
is called Istinbat or Ijtihad. It is this exercise which has enriched the
Islamic jurisprudence with a wealth of knowledge and wisdom for which no
parallel is found in any other religion. In a society where the Shariah is
implemented in its full sway the ongoing process of Istinbat keeps injecting new
ideas, concepts and rulings into the heritage of Islamic jurisprudence which
makes it easier to find out specific answer to almost every situation in the
books of Islamic jurisprudence. But during the past few centuries the political
decline of the Muslims stopped this process to a considerable extent. Most of
the Islamic countries were captured by non-muslim rulers who by enforcing with
power the secular system of government, deprived the socio-economic life from
the guidance provided by the Shariah, and the Islamic teachings were restricted
to a limited sphere of worship, religious education and in some countries to the
matter of marriage, divorce and inheritance only. So far as the political and
economic activities are concerned the governance of Shariah was totally
Since the evolution of any legal system depends on its practical application,
the evolution of Islamic law with regard to business and trade was hindered by
this situation. Almost all the transactions in the market being based on secular
concepts were seldom brought to the Shariah scholars for their scrutiny in the
light of Shariah. It is true that even in these days some practicing Muslims
brought some practical questions before the Shariah scholars for which the
scholars have been giving their rulings in the forms of Fatawas of which a
substantial collection is still available. However, all these Fatawas related
mostly to the individual problems of the relevant persons and addressed their
It is a major contribution of the Islamic banks that, because of their entry
into the field of large scale business, the wheel of evolution of Islamic legal
system has re-started. Most of the Islamic banks are working under the
supervision of their Shariah Boards. They bring their day to day problems before
the Shariah scholars who examine them in the light of Islamic rules and
principles and give specific rulings about them. This procedure not only makes
Shariah scholars more familiar with the new market situation but also through
their exercise of Istinbat contributes to the evolution of Islamic
jurisprudence. Thus, if a practice is held to be un-islamic by the Shariah
scholars a suitable alternative is also sought by the joint efforts of the
Shariah scholars and the management of the Islamic banks. The resolutions of the
Shariah Boards have by now produced dozens of volumes - a contribution which can
never be under-rated.
Another major contribution of the Islamic banks is that they have now asserted
themselves in the international market, and Islamic banking as distinguished
from conventional banking is being gradually recognized throughout the world.
This is how I explain my comment that they have contributed a lot. On the other
hand there are a number of deficiencies in the working of the present Islamic
banks which should be analyzed with all seriousness.
First of all, the concept of Islamic banking was based on an economic philosophy
underlying the rules and principles of Shariah. In the context of interest-free
banking this philosophy aimed at establishing distributive justice free from all
sorts of exploitation. As I have explained in a number of articles, the
instrument of interest has a constant tendency in favor of the rich and against
the interests of the common people. The rich industrialists by borrowing huge
amounts from the bank utilize the money of the depositors in their huge
profitable projects. After they earn profits, they do not let the depositors
share these profits except to the extent of a meager rate of interest and this
is also taken by them by adding it to the cost of their products. Therefore,
looked at from macro level, they pay nothing to the depositors. While in the
extreme cases of losses which lead to their bankruptcy and the consequent
bankruptcy of the bank itself, the whole loss is suffered by the depositors.
This is how interest creates inequity and imbalance in the distribution of
Contrary to this is the case of Islamic financing. The ideal instrument of
financing according to Shariah is Musharakah where the profits and losses both
are shared by both the parties according to equitable proportion. Musharakah
provides better opportunities for the depositors to share actual profits earned
by the business which in normal cases may be much higher than the rate of
interest. Since the profits cannot be determined unless the relevant commodities
are completely sold, the profits paid to the depositors cannot be added to the
cost of production, therefore, unlike the interest-based system the amount paid
to the depositors cannot be claimed back through increase in the prices.
This philosophy cannot be translated into reality unless the use of the
Musharakah is expanded by the Islamic banks. It is true that there are practical
problems in using the Musharakah as a mode of financing especially in the
present atmosphere where the Islamic banks are working in isolation and, mostly
without the support of their respective governments. The fact, however, remains
that the Islamic banks should have gressed towards Musharakah in gradual phases
and should have increased the size of Musharakah financing. Unfortunately, the
Islamic banks have overlooked this basic requirement of Islamic banking and
there are no visible efforts to progress towards this transaction even in a
gradual manner even on a selective basis. This situation has resulted in a
number of adverse factors :
the basic philosophy of Islamic banking seems to be totally neglected.
by ignoring the instrument of Musharakah the Islamic banks are forced to use the
instrument of Murabahah and Ijarah and these too, within the framework of the
conventional benchmarks like Libber etc. where the net result is not materially
different from the interest based transactions. I do not subscribe to the view
of those people who do not find any difference between the transactions of
conventional banks and Murabahah and Ijarah and who blame the instruments of
Murabahah and Ijarah for prepetuating the same business with a different name,
because if Murabahah and Ijarah are implemented with their necessary conditions,
they have many points of difference which distinguish them from interest-based
transactions. However, one cannot deny that these two transactions are not
originally modes of financing in Shariah. The Shariah scholars have allowed
their use for financing purposes only in those spheres where Musharakah cannot
work and that too with certain conditions. This allowance should not be taken as
a permanent rule for all sorts of transactions and the entire operations of
Islamic Banks should not revolve around it.
when people realize that income from in the transactions undertaken by Islamic
banks is dubious akin to the transactions of conventional banks, they become
skeptical towards the functioning of Islamic banks.
if all the transactions of Islamic banks are based on the above devices it
becomes very difficult to argue for the case of Islamic banking before the
masses especially, before the non-muslims who feel that it is nothing but a
matter of twisting of documents only.
It is observed in a number of Islamic banks that even Murabahah and Ijarah are
not effected according to the procedure required by the Shariah. The basic
concept of Murabahah was that the bank should purchase the commodity and then
sell it to the customer on deferred payment basis at a margin of profit. From
the Shariah point of view it is necessary that the commodity should come into
the ownership and at least in the constructive possession of the bank before it
is sold to the customer. The bank should bear the risk of the commodity during
the period it is owned and possessed by the bank. It is observed that many
Islamic banks and financial institutions commit a number of mistakes with regard
to this transaction:
Some financial institutions have presumed that Murabahah is the substitute for
interest, for all practical purposes. Therefore, they contract a Murabahah even
when the client wants funds for his overhead expenses like paying salaries or
bills for the goods and services already consumed. Obviously Murabahah cannot be
effected in this case because no commodity is being purchased by the bank.
In some cases the client purchases the commodity on his own prior to any
agreement with the Islamic Bank and a Murabahah is effected on a buy-back basis.
This is again contrary to the Islamic principles because the buy-back
arrangement is unanimously held as prohibited in Shariah.
In some cases the client himself is made an agent for the bank to purchase a
commodity and to sell it to himself immediately after acquiring the commodity.
This is not in accordance with the basic conditions of the permissibility of
Murabahah. If the client himself is made an agent to purchase the commodity, his
capacity as an agent must be distinguished from his capacity as a buyer which
means that after purchasing commodity on behalf of the bank he must inform the
bank that he has effected the purchase on its behalf and then the commodity
should be sold to him by the bank through a proper offer and acceptance which
may be effected through the exchange of telexes or faxes.
As explained earlier Murabahah is a kind of sale and it is an established
principle of Shariah that the price must be determined at the time of sale. This
price can neither be increased nor reduced unilaterally once it is fixed by the
parties. It is observed that some financial institutions increase the price of
Murabahah in the case of late payment which is not allowed in Shariah. Some
financial institutions roll-over the Murabahah in the case of default by the
client. Obviously, this practice is not warranted by Shariah because once the
commodity is sold to the customer it cannot be the subject matter of another
sale to the same customer.
In transactions of Ijarah also some requirements of Shariah are often
overlooked. It is a prerequisite for a valid Ijarah that the lessor bears the
risks related to the ownership of the leased asset and that the usufruct of the
leased asset must be made available to the lessee for which he pays rent. It is
observed in a number of Ijarah agreements that these rules are violated. Even in
the case of destruction of the asset due to force majeure, the lessee is
required to keep paying the rent which means that the lessor neither assumes the
liability for his ownership nor offers any usufruct to the lessee. This type of
Ijarah is against the basic principles of Shariah.
The Islamic banking is based on principles different from those followed in
conventional banking system. It is therefore logical that the results of their
operations are not necessarily the same in terms of profitability. An Islamic
bank may earn more in some cases and may earn less in some others. If our target
is always to match the conventional banks in terms of profits, we can hardly
develop our own products based on pure Islamic principles. Unless the sponsors
of the bank as well as its management and its clientele realize this fact and
are ready to accept different - but not necessarily adverse - results, the
Islamic banks will keep using artificial devices and a true Islamic system will
not come into being.
According to the Islamic principles, business transactions can never be
separated from the moral objectives of the society. Therefore, Islamic banks
were supposed to adopt new financing policies and to explore new channels of
investments which may encourage development and support the small scale traders
to lift up their economic level. A very few Islamic banks and financial
institutions have paid attention to this aspect. Unlike the conventional
financial institutions who strive for nothing but making enormous profits, the
Islamic banks should have taken the fulfillment of the needs of the society as
one of their major objectives and should have given preference to the products
which may help the common people to raise their standard of living. They should
have invented new schemes for house-financing, vehicle-financing and
rehabilitation-financing for the small traders. This area still awaits attention
of the Islamic banks.
The case of Islamic banking cannot be advanced unless a strong system of
inter-bank transactions based on Islamic principles is developed. The lack of
such a system forces the Islamic banks to turn to the conventional banks for
their short term needs of liquidity which the conventional banks do not provide
without either an open or camouflaged interest. The creation of an inter-bank
relationship based on Islamic principles should no longer be deemed difficult.
The number of Islamic financial institutions today has reached around two
hundred. They can create a fund with a mixture of Murabahah and Ijarah
instruments the units of which can be used even for overnight transactions. If
they develop such a fund it may solve a number of problems.
Lastly, the Islamic banks should develop their own culture. Obviously, Islam is
not restricted to the banking transactions. It is a set of rules and principles
governing the whole human life. Therefore, for being 'Islamic' it is not
sufficient to design the transactions on Islamic principles. It is also
necessary that the outlook of the institution and its staff reflects the Islamic
identity quite distinguished from the conventional institution. This requires a
major change in the general attitude of the institution and its management.
Islamic obligations of worship as well as the ethical norms must be prominent in
the whole atmosphere of an institution which claims to be Islamic. This is an
area in which some Islamic institutions in the Middle East have made progress.
However, it should be a distinguishing feature of all the Islamic banks and
financial institutions throughout the world. The guidance of Shariah Boards
should be sought in this area also.
The purpose of this discussion, as clarified at the outset, is by no means to
discourage the Islamic Banks or to find faults with them. The only purpose is to
persuade them to evaluate their own performance from the Shariah point of view
and to adopt a realistic approach while designing their procedure and
determining their policies.
Source: Taken (with Thanks) from Darul-uloom