Islamic Finance Artifice and Classical Islamic Law
In today's post I want to explore some of the themes I've been advancing in my scholarship respecting both the impossibility of using classical shari'a as the basis for any legal system which could remotely be regarded as modern and, as a consequence, the fact of ideological selectivity in attempting to give life to the classical law. But I want to do it through a practice that has recently developed out of the particular, interesting, contemporary method of Islamic finance known as the tawarruq.
To the unitiated, the tawarruq is an Islamic law artifice wherein a bank assumes the initial role of buyer of an item, say tin, from a warehouse, for sale to a borrower. The bank buys the tin at, say, $50,000 and sells it to the buyer for a higher amount, which is paid back by the borrower in monthly installments over time, and the increased amount reflects a prevailing interest rate entirely. Not being interested in tin, the borrower then immediately, at precisely the same time as the first sale, sells the tin back to the warehouse for $50,000, paid in cash immediately. The tin never changes hands, it stays in the warehouse. The borrower has $50,000 from his sale of the tin, the bank has an obligation to get paid in monthly installments at a prevailing interest rate on a $50,000 sale, and we have an interest rate replicated entirely.
That's not interesting, or new. Ridiculous, but I've discussed it before and not terribly interesting. What IS interesting is some borrowers are a bit nervous about this, and wonder how it actually conform to God's law which they expect to ban interest but which seems to be allowing it. How can this be? To accommodate such borrowers, and to demonstrate that in fact this is different, it's the purchase and sale of tin, it's not a loan, they allow buyers, for an additional fee, to see the tin which they will own, for a fraction of a second if that. Pay me another $100, in other words, and you can see the tin for yourself, even touch it.
The problem arises when one tries to figure out precisely how to characterize this additional feature of the broader deal. If a separate contract, one is left confused if taking the classical law seriously because there is no such thing as a contract to view an asset you might purchase contained in the classical law. The jurists have no such contract. They have contracts for sales, for leases, for partnerships of various sorts, for agencies, for hire (really a subset of lease) but not for viewing things before you might buy them. There is no general theory of contract, that is, pursuant to which one might be able to argue that the mere fact of consensual agreement is sufficient to justify enforcement within particular boundaries.
Generally speaking, modern Muslims do not care. Sanhuri's Civil Code, the dominant code of the Arab world, creates the standard civilian theory of obligation, but does so not so much through reference to strict juristic rules, but instead to broader examinations of the purposes, ideas and theories behind them (what my friend and colleague Clark Lombardi calls neo-taqlid in his book on the Egyptian constitution, and describes far more completely and accurately than I have here). From that analysis, Sanhuri creates a modern template. Others indicate it should not matter why we have a general theory, They might argue that as there is no prohibition against a modern contract mechanism in the classical rules, the sovereign has residual power to enact.
My largest problem with this is that applied more broadly they come pretty close to rendering the shari'a irrelevant in all but certain quite isolated spheres, and those advancing the position very rarely would accept this principle. Starting with the latter theory (if there is no prohibition, then there is permission for the sovereign to act), there is, admittedly, no prohibition against creating a "general theory of contract". There is also no prohibition against malaq. What's malaq? Well under the classical law a man can divorce his wife under talaq for any reason he wants. But a woman needs cause for a judicial separation. So under malaq, if a man asks for a talaq, and doesn't have the cause that would enable him to the separation he would be entitled to as a woman, then he has to pay a $500 million fine or retract the divorce, up to him. Where'd you get that stupid idea in the classical books you ask me? Same place you found the general theory of contract. As long as we get to make stuff up . . . .
Turning to Sanhuri's more sophisticated analysis, and borrowing from my mentor Cherif Bassiouni, the fact that men receive twice in inheritance that of similarly situated women is defended routinely in our times on the basis of the fact that men have more spending obligations to care for family members than women. The justification starts with Qutb but is adopted by countless other Islamists after him. But in modern states, many of those obligations are assumed by the state. So going back to the classical sources and comparing schools of thought and considering purposes, I might be able to develop a pretty decent case that the state should tax male inheritance more, hey let's say at the rate necessary to bring the matter back to parity between the genders. I cannot claim to have done such a justificatory investigation here, certainly not like Sanhuri with obligation. I've more sketched it out as a possibility, but the possibility is very very real.
When you find for me an Islamist group that would accept this taxation plan, or my malaq doctrine, let me know. Until then, I'm going to claim inconsistent application.
But wait, you might say. This looking at the asset isn't a separate contract, it's part of a sale. I look, I inspect, I sell. It's an additional fee attached to the condition of inspecting as part of the sale and jurists clearly allowed sales. So I don't need a separate contract, I just need to add a condition to sale. Just like the other condition that attaches to the contract, which is the bank buys condition on the condition that the borrower buys it from them.
Ah, but that's two stipulations to the sale. Most people who care deeply about Islamic finance when I say this honestly and seriously look straight at me and say, so what? Which is ironic, because in the discussions on prohibitions contained in commerce, if you go back to the classical sources, among the most undisputed are that the Prophet forbade two stipulations in a contract of sale. Modern Islamic financiers may not pay much attention, but it's there, in everyone's work, including Ibn Taymiyya who says it clearly in the fatawa (Sanhuri does not think he does, but Sanhuri is wrong, it's absolutely there). Some say even one stipulation is not permitted but the more permissive allow a single stipulation, not two. So we're up against a separate prohibition, ignored in modernity, but no less valid than the two prohibitions over which the Islamic finance folks do obsess, riba and gharar.
So in the end, this modern practice, it seems to me, cannot be justified on the basis of classical systems. Any justification either runs it straight into other prohibitions, or the justification is so incredibly broad that it would obliterate massive parts of the shari'a. Neither is broadly acceptable, and hence what shari'a must be law and what may be ignored tends to be product of ideological preference not rigorous extension of a consistent and coherent theory.
HAH
To the unitiated, the tawarruq is an Islamic law artifice wherein a bank assumes the initial role of buyer of an item, say tin, from a warehouse, for sale to a borrower. The bank buys the tin at, say, $50,000 and sells it to the buyer for a higher amount, which is paid back by the borrower in monthly installments over time, and the increased amount reflects a prevailing interest rate entirely. Not being interested in tin, the borrower then immediately, at precisely the same time as the first sale, sells the tin back to the warehouse for $50,000, paid in cash immediately. The tin never changes hands, it stays in the warehouse. The borrower has $50,000 from his sale of the tin, the bank has an obligation to get paid in monthly installments at a prevailing interest rate on a $50,000 sale, and we have an interest rate replicated entirely.
That's not interesting, or new. Ridiculous, but I've discussed it before and not terribly interesting. What IS interesting is some borrowers are a bit nervous about this, and wonder how it actually conform to God's law which they expect to ban interest but which seems to be allowing it. How can this be? To accommodate such borrowers, and to demonstrate that in fact this is different, it's the purchase and sale of tin, it's not a loan, they allow buyers, for an additional fee, to see the tin which they will own, for a fraction of a second if that. Pay me another $100, in other words, and you can see the tin for yourself, even touch it.
The problem arises when one tries to figure out precisely how to characterize this additional feature of the broader deal. If a separate contract, one is left confused if taking the classical law seriously because there is no such thing as a contract to view an asset you might purchase contained in the classical law. The jurists have no such contract. They have contracts for sales, for leases, for partnerships of various sorts, for agencies, for hire (really a subset of lease) but not for viewing things before you might buy them. There is no general theory of contract, that is, pursuant to which one might be able to argue that the mere fact of consensual agreement is sufficient to justify enforcement within particular boundaries.
Generally speaking, modern Muslims do not care. Sanhuri's Civil Code, the dominant code of the Arab world, creates the standard civilian theory of obligation, but does so not so much through reference to strict juristic rules, but instead to broader examinations of the purposes, ideas and theories behind them (what my friend and colleague Clark Lombardi calls neo-taqlid in his book on the Egyptian constitution, and describes far more completely and accurately than I have here). From that analysis, Sanhuri creates a modern template. Others indicate it should not matter why we have a general theory, They might argue that as there is no prohibition against a modern contract mechanism in the classical rules, the sovereign has residual power to enact.
My largest problem with this is that applied more broadly they come pretty close to rendering the shari'a irrelevant in all but certain quite isolated spheres, and those advancing the position very rarely would accept this principle. Starting with the latter theory (if there is no prohibition, then there is permission for the sovereign to act), there is, admittedly, no prohibition against creating a "general theory of contract". There is also no prohibition against malaq. What's malaq? Well under the classical law a man can divorce his wife under talaq for any reason he wants. But a woman needs cause for a judicial separation. So under malaq, if a man asks for a talaq, and doesn't have the cause that would enable him to the separation he would be entitled to as a woman, then he has to pay a $500 million fine or retract the divorce, up to him. Where'd you get that stupid idea in the classical books you ask me? Same place you found the general theory of contract. As long as we get to make stuff up . . . .
Turning to Sanhuri's more sophisticated analysis, and borrowing from my mentor Cherif Bassiouni, the fact that men receive twice in inheritance that of similarly situated women is defended routinely in our times on the basis of the fact that men have more spending obligations to care for family members than women. The justification starts with Qutb but is adopted by countless other Islamists after him. But in modern states, many of those obligations are assumed by the state. So going back to the classical sources and comparing schools of thought and considering purposes, I might be able to develop a pretty decent case that the state should tax male inheritance more, hey let's say at the rate necessary to bring the matter back to parity between the genders. I cannot claim to have done such a justificatory investigation here, certainly not like Sanhuri with obligation. I've more sketched it out as a possibility, but the possibility is very very real.
When you find for me an Islamist group that would accept this taxation plan, or my malaq doctrine, let me know. Until then, I'm going to claim inconsistent application.
But wait, you might say. This looking at the asset isn't a separate contract, it's part of a sale. I look, I inspect, I sell. It's an additional fee attached to the condition of inspecting as part of the sale and jurists clearly allowed sales. So I don't need a separate contract, I just need to add a condition to sale. Just like the other condition that attaches to the contract, which is the bank buys condition on the condition that the borrower buys it from them.
Ah, but that's two stipulations to the sale. Most people who care deeply about Islamic finance when I say this honestly and seriously look straight at me and say, so what? Which is ironic, because in the discussions on prohibitions contained in commerce, if you go back to the classical sources, among the most undisputed are that the Prophet forbade two stipulations in a contract of sale. Modern Islamic financiers may not pay much attention, but it's there, in everyone's work, including Ibn Taymiyya who says it clearly in the fatawa (Sanhuri does not think he does, but Sanhuri is wrong, it's absolutely there). Some say even one stipulation is not permitted but the more permissive allow a single stipulation, not two. So we're up against a separate prohibition, ignored in modernity, but no less valid than the two prohibitions over which the Islamic finance folks do obsess, riba and gharar.
So in the end, this modern practice, it seems to me, cannot be justified on the basis of classical systems. Any justification either runs it straight into other prohibitions, or the justification is so incredibly broad that it would obliterate massive parts of the shari'a. Neither is broadly acceptable, and hence what shari'a must be law and what may be ignored tends to be product of ideological preference not rigorous extension of a consistent and coherent theory.
HAH
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