General framework for discussion of Islamic finance— 1

Islamic finance over the last three decades or so has grown into a huge industry. It is
huge both in the sense that vast sums of money are handled by Islamic finance, and
also in the sense that a great many scholars have been attracted to it, and they have
helped to invent or justify financial instruments which claim to make it lawful for
Muslims to do things with their money very similar to the things that non-Muslims do
with theirs. Yet, if using the word ‘Islamic’ before ‘finance’ is to mean anything at
all, it should mean the kind of finance that belongs in Islam, the kind that Muslims
acting specifically as Muslims engage in when they are producing and exchanging
goods and services, and generally building up their individual and collective means of
livelihood.

Most ordinary Muslims are, I think rightly, suspicious and cautious about accepting
the permissibility of many of these instruments. It does not help matters that banks
and investment companies run by and for non-Muslims are happy to use these same
Islamic financial instruments because it helps them to attract and keep Muslim
customers.

That sounds very similar to, for example, a supermarket stocking halal meat in the
hope of attracting the business of the Muslims in its neighbourhood. It is indeed
similar, but it is not the same. There are known and clear procedures that must be
followed before meat is called halal, and perhaps it does not matter that, at the final
point of sale, the retailer is a non-Muslim – provided those procedures have been
correctly and fully observed. It is not at all so clear-cut with money. Money is
something abstract and symbolic as well as real and concrete. It is not just a store and
physical sign of value; it is also a means of assigning and exchanging the values of
different goods and services. Accordingly, it permeates all human relationships that
are connected in any way to the exchange of goods and services.

That is why it matters very much to Muslims to know that the money that is
circulating among and around them is, from an Islamic point of view, sound and safe,
and that the transactions being done with that money are also sound and safe. The
scholars engaged in developing, and justifying, Islamic financial instruments are
engaged in the effort to provide Muslims with the assurance that those instruments are
sound and safe from an Islamic point of view.

In order to judge whether and how far those scholars have succeeded in achieving this
goal, it is necessary to step back and ask how we can know if a practice is sound from
an Islamic point of view. Before we can do that we need to take a further step back
and ask whether and how far such a task is possible at all. In other words, before I get
into a discussion of particular instruments and contracts now being offered as Islamic
finance, I want to establish as clear a framework as possible for this discussion. This
is a necessary prelude to reaching a balanced judgement about these instruments and
contracts based on a sufficient appreciation of the external necessities and the internal
assumptions and arguments (some persuasive, some not) which have led Muslim
scholars to seek out some sort of Islamic rationale for various modern financing
techniques.

The world as we find it has in it three distinct orders that overlap and interpenetrate.
The largest order encompasses all creatures, living and non-living, human and non-
human, Muslims and non-Muslims, all together. We can call it “the natural order”. It
 General framework for discussion of Islamic finance— 2

is perceptible and intelligible to human beings; to some extent they can work out how
it operates and, in some measure, influence and control what happens around them.
This order includes the boundaries of time and space, and what modernists in the
West call the laws of nature, to which everyone and everything is subject,
involuntarily. Within that natural order, there is “the religious order” of divine
commands communicated to human beings through God’s prophets and messengers.
This order is addressed specifically to human will, and demands a conscious,
consenting, voluntary obedience. Finally, there is “the Islamic order” of divine
instructions that bind specifically Muslims, commanding or commending them,
through the Book and the teachings of God’s Messenger, salla-l-lahu ‘alayhi wa-
sallam, to live in certain ways and to avoid certain other ways.

Because these three orders exist together in the one same world, it is sometimes the
case that the approval of a certain way of acting as Islamic, as conforming to the Book
and Sunnah, does not at all contradict its being approved by non-Muslims as
“practical’ or “useful” or “sensible” or “healthy” for the individual or for society.
Non-Muslims just like Muslims get hungry and need food; get ill and need medical
attention; get attacked and need to fight; get curious and need to explore and travel.
Then, if Muslims find notably effective ways of serving these needs, we cannot be
surprised if non-Muslims adopt those ways. That is obvious. It is also obvious that the
converse applies: to serve their basic wants and needs, Muslims can in principle adopt
ways that are or were the ways of non-Muslims. That is surely true. But it is also true
to say that, in some instances, no matter how “useful’ or “efficient” certain means are
for the achievement of certain ends, Muslims as Muslims will reject them as
unIslamic. How do they decide when they may and when they may not adopt the
ways of non-Muslims? This is not an easy question. For the time being, let us note
that if we are going to refuse certain financial instruments or transactions as
unIslamic, we cannot do so simply on the basis that they are of “Western” or non-
Islamic origin. We must have a better reason than that.

When we try to implement the rules and norms that constitute the Islamic order, we
are not exempt from the conditions that obtain in the natural order. Accordingly, those
Islamic rules and norms must be implemented with a measure of flexibility. For
example, in a situation of necessity, where Muslims have no freedom of action or
choice, what is normally prohibited is considered lawful for the duration of the
necessity. This indulgence is intended to be temporary, exceptional. It is conditional
on Muslims not desiring that which is normally prohibited. The only reliable proof
that Muslims are not desiring what is normally prohibited to them is that they are
striving to remove themselves from the situation in which they have no freedom of
action to a situation where they do have such freedom. So, even if we are forced to
adopt novel kinds of financial instruments or transactions on the basis that Muslims
are so powerless in the world that they have no choice but to submit to the global
financial order, there is, nevertheless, no compulsion whatever to legitimize such
instruments or transactions by calling them “Islamic finance”.

All humans in the normal state of things have a measure of freedom of action. What
distinguishes Muslims as Muslims is that, in the normal state of things, they strive to
use that freedom of action in obedience to the will of God insofar as that is known to
them through the teachings of Islam. To the extent that they consciously strive to do
that, their lives fulfill the purpose for which the Book tells us they were created,
 General framework for discussion of Islamic finance— 3

namely to worship God. For believing, practising Muslims, the natural order of this
world, its being perceptible, intelligible, useful, beautiful, etc., is the wide space,
provided by the Creator, within which human freedom of will and action are
experienced as a reality. If the natural order were not as reliable as it is, freedom of
will would not be experienced as real. But the natural order is there, real and reliable.
That is why human life in this world can function as an enabling test, a test through
which Muslims learn to perfect their obedience to God’s will and so earn the
promised recompense hereafter. Thus, we should expect from Islamic finance and the
financial instruments it invents or justifies that they help Muslims to (at least) avoid
doing what God has prohibited, and (ideally) help them to do more easily and
conveniently what God has permitted. This is not a matter of clever word games,
clever labeling. Surely Muslims will not accept as permissible the kinds of transaction
they had long believed to be prohibited, even if Islamic economists find clever ways
to label them as permissible.

But, you will ask, how are things known to be permitted or prohibited; how do they
get entered into one or the other category? The answer is that we find out by referring
to Islamic teachings on the matter in question. But then we must ask: how do Islamic
teachings decide the matter in question?

In answering that people often confuse two things – they confuse the authoritative
sources of Islamic teachings, the Qur’an and Sunnah, with the rulings derived from
those sources by Muslim scholars. The confusion leads to very serious difficulties for
Muslims if, in principle or in practice, they accord to the derived rulings the authority
of the primary sources. For reasons that will become clear later, I will use for the
derived rulings the term “doctrines”. For the teachings in the primary sources, I will
use the term “guidance”. Now, we can and do refer to the doctrines that constitute the
Islamic legal and cultural tradition that we have inherited. We study and respect those
doctrines; we learn from them; if we don’t know any better (and 99.9 per cent of the
time we really don’t know any better), we follow them to the best of our ability in our
circumstances. But the promised recompense hereafter for obedience to God’s will
does not depend on our following the derived doctrines; it depends for sure on our
following the guidance in the primary sources. Of course, for most of us most of the
time, because of our deficiencies in `ilm and taqwa, in our knowledge and wariness of
God, following the doctrines is the best way we know of following the guidance.

Because our subject today is Islamic finance, I will try to illustrate the difference
between guidance and doctrine using examples connected to economic behaviour.
The guidance, as presented in and constituted by the Qur’an and Sunnah, contains two
kinds. One kind is quite specific, explicit, concrete instructions to do this and not that;
the other kind is commands or strong encouragements to seek certain outcomes or
goods. Mostly these goods are the virtues (being honest, kindly, fair, just, decent, etc.)
that are connected to those concrete instructions, directly or indirectly. The sum of
these good outcomes, or the supreme good, is `ibadah, worship, because that is what
human beings were created for; worshipping their Creator is their proper function;
doing so well, with ihsan, is what most honours and dignifies human life.

Now, consider a poor man who happens to have two bicycles. One he uses every day;
the other is idle. He decides to rent out the second bicycle for a period of six months,
and this becomes a source of income for him. He takes the risk that the bicycle will
 General framework for discussion of Islamic finance— 4

suffer wear and tear over the rental period, perhaps may never be returned, and so on.
The rental income he gets in this way is lawful. Now consider a rich man who has two
lots of money; one lot he needs for his everyday uses; the other lot is surplus. He
decides to rent out the latter for a period of six months. Money does not suffer much
wear and tear, but how much the same money can buy varies over time; also, there is
the risk that the money may never be returned, or the return of it delayed, and so on.
Yet, despite these risks attached to renting out money, doing so, and the income from
doing so, is forbidden by God and by His Messenger. The language used in the
Qur’an to condemn the practice is exceptionally fierce: those who indulge in riba are
threatened with war from God and His Messenger, that is to say, the sanction against
the practice is not just reserved to the hereafter.

In the example just given, the forbidden act is renting out money, i.e. lending it on
interest. That is a simple matter to understand. It is not at all what modern banks do.
They do not merely lend on interest the money that they possess directly or which
they control as agents on behalf of their depositors. The banks also, as the expression
goes, “create money” by lending on interest money that is not in their possession or
control. Every debt owed to a bank, and the interest on it, even before it is repaid, is
accounted on its books as an asset of the bank, as part of the disposable reserve of
money it can lend out – which it does, again and again. All the levers of state power
are called on to underwrite the authority of banks to, in this way, lend what they do
not have and to charge rent for doing so. This is especially true when there is a
perception that the debts owed to banks may not be repaid, which carries the threat
that those who have deposited their money in the banks will not get it back. Typically,
in such circumstances, the state protects the interests of the banks, not the depositors.
When governments claim that they have guaranteed deposits, what they have done in
fact is to protect the banks from the effects of a panic among depositors which would
lead them to demand their money back from the banks – in practice the banks never
hold enough money to be able to repay all at once the money they are supposed to be
keeping safe. And where on earth would the government get the money from to repay
all the deposits it claims to guarantee on behalf of the banks?

The prohibition of riba is an instance of a specific, explicit, concrete instruction in the

Book and Sunnah. It is directly connected to an assemblage of commands and strong
encouragements: to trust that God does provide for the sustenance of His creatures
(the opposite of the assumption of scarcity of resources); to purify earnings through
the obligatory payment of zakah, and the voluntary payment of sadaqa; to understand
that the poor and needy have a right on the property of those who enjoy a surplus. It is
connected to the general encouragements to deal equitably and fairly, to avoid fraud
and deception, etc., to be benevolent. Economic behaviour is in no way or degree
exempt from the ethical norms that apply to human relationships generally. The
prohibition of riba has also been linked to the prohibition of gambling or speculation
and could be linked to the prohibition of exploiting the weak-minded or minors who
are unable to understand or manage their own affairs. Taken together, these topics
make up the guidance of Qur’an and Sunnah on the direction and management of
economic power and economic relationships. Of particular importance for our subject
is the Qur’an’s strong and clear instruction not to permit wealth to circulate only
among a few; the flow of wealth must not be impeded by hoarding or monopolizing
essential commodities or blocking routes of transit of goods and information, or by
any other means that lead to excessive concentrations of wealth in few hands. An
 General framework for discussion of Islamic finance— 5

example of a pernicious monopoly that is pervasive in modern societies is the one I

just described, the power given to banks to “create money” out of the thin air of
arithmetic, and then charge rent for lending it.

The doctrines that Muslim scholars developed from and around this guidance were
intended to serve that guidance, to make it easier to understand and implement in the
ever-variable circumstances of real-life situations in different regions with different
local customs of trade and commerce. The doctrines were not developed to serve an
economic or political or legal philosophy with a rationale distinct from and
independent of the guidance.

But why was it necessary to do this at all?

If we ask and answer this question properly we will get a very useful insight into the
nature of the doctrines.

Ordinary human experience tells us that to apply any rule fairly you have to do both
of two things: you have to apply the rule consistently in different situations, and yet
you have to apply the rule flexibly enough to take account of the particular
circumstances to which you are applying it. If you apply the rule while ignoring the
circumstances of the particular case, you risk committing an injustice of some degree.
On the other hand, if you do not apply the same rule in the same way to different
cases, you risk the charge of arbitrariness and favouritism. The hardship of finding the
balance between these two needs is what qualifies human judges for recompense
hereafter just for trying, and a double recompense if they happen to find the right
balance.

The Qur’an describes itself and the Prophet as a mercy for mankind. It is one aspect
of that mercy that the guidance of Qur’an and Sunnah has the power to inspire
believers to do both these things – to live by the letter and by the spirit, both. The
reason applied by the Muslim scholars to the guidance was practical reason, the kind
that we use every day to distinguish and balance immediate and long-term priorities,
to choose the course of action expected to result in the most good or the least harm.
This kind of reason is quite different from the abstract reason of the Muslim
philosophers and theologians who defined and elaborated concepts and rational
arguments to promote or defend intellectual propositions with little or no practical
relevance to the duty to follow the guidance of Qur’an and Sunnah. They were not
dealing with the practical problems of Muslims, but with the intellectual or linguistic
problems posed by the philosophers and theologians who came before them. Their
primary point of reference, the primary stimulus or inspiration for their efforts, was
not the Qur’an and Sunnah, but various personages, ideas, arguments and practices
from pre-Islamic or non-Islamic cultural traditions.

For the Muslim scholars of the first centuries who were striving to help Muslims
implement the guidance, the sources were the Qur’anic text and the Sunnah as
recorded in the corpus of Prophetic and Companion hadiths and the historical
tradition. Neither Qur’an nor Sunnah contain doctrines, of a philosophical or
theological or sociological or political or legal or economic or any other kind. The
material of which the guidance of Qur’an and Sunnah is composed contains very few,
if any, formal propositions and arguments. The most typical form the material takes is
 General framework for discussion of Islamic finance— 6

stories: one or more incidents; report of a situation and its outcome; report of a short
sequence of question and answer on a specific occasion. A woman has experienced
such and such treatment from her husband; she reports the same to the Prophet; he
says about it such and such. A man has sinned during the fasting month, he wants to
do expiation; the Prophet says, do this, but he can’t; this other thing; but he can’t; still
another thing, still he can’t; finally, the Prophet finds a way for him. People are
rushing out of Madina to meet the caravans bringing merchandise into the city; they
know the price the merchandise would fetch in the city market, but they want to buy it
cheaper and re-sell back in Madina; the Prophet forbids this.

From this material we do not get a formal discussion, still less a definition, of virtue
or justice or benevolence or the role of women or the role of the head of state, or the
role of the free market, etc. What we get are instances of just and virtuous behavior,
instances of what a woman might do or say that the Prophet commented on, instances
of what he did as head of state in different situations, instances of what he
commended or criticized in the bearing and conduct of those he appointed to positions
of authority, instances of economic behaviour that he witnessed, kinds of buying and
selling, kinds of contract, etc. And among the instances are many variations of
judgement – from outright condemnation all the way to a silent acceptance that is not
approval of a behaviour or utterance, but which is also not a rejection. On the positive
side similarly, there is wide variation from passionate endorsement of the way a
Companion had spoken or acted to a conditional approbation with encouragement to
do still better. Also, and most importantly, there are instances of a matter being
judged strictly on one occasion and judged leniently on a different occasion, because
the judgement would affect persons of different capacity or be carried out in different
circumstances. Within the range of the Sunnah we have examples both of strict
consistency and of gracious flexibility. As noted earlier, both these are needed if we
are striving for the supreme good for all Muslims, individually and collectively,
namely that they worship God well. With Muslims, as with human beings generally,
capacities and opportunities (that is to say, the internal and external necessities that
influence our choices and actions) differ considerably. These difference have to be
taken into account if all are to be guided towards the same goal of worshipping God
and doing so freely and gladly, with good grace.

Regular and sustained exposure to this great wealth of material – and it was normal
for scholars to internalize the Qur’an and much of the hadith corpus by memorizing it
– enables Muslims to know the guidance of Islam and put it into practice. This
happens in the same natural, practical way that children, after regular and sustained
exposure to the language used around them, learn that language as a whole and all its
parts – its words, its varied inflections and intonations suited to different contexts, and
its rules of grammar which tell them when a usage is quite unacceptable or merely
unusual (that is, when it is quite impossible or merely difficult for others to
understand). Of course the analogy is imperfect, but it helps us to grasp the fact that
there were many thousands of Muslims in the early centuries of Islam who, having
lived and studied for decades with the Companions and their Followers, were adept
with the sources of the guidance, and they derived very sensible and practical rulings
from it. Those rulings are not systematically consistent in the way that one expects
from a body of philosophically rigorous and sequential arguments. However, they
were strongly consistent with the letter and spirit of the guidance, and they were
strongly oriented outwards in the direction of the problems and hardships that
 General framework for discussion of Islamic finance— 7

Muslims encountered in trying to live within the natural order according to the
commandments and commendations of the Islamic order.

Over time, perhaps inevitably, patterns of consistencies in the rulings, and in how the
rulings were reasoned, emerged in regional centres. These patterns formed the basis
of the emerging schools in the Islamic legal tradition. Still later, inheriting the
excellent work of the pioneers in that tradition, the later scholars, in spite of the
instruction of those very same pioneers, referred less and less to the sources of the
guidance, and more and more to the derived rulings. Instead of being focused on
understanding the letter and spirit of the guidance, they focused more on
understanding the letter and spirit of the derived rulings. Instead of being oriented
outwards to the difficulties of Muslims in their everyday lives, they became oriented
inwards towards the difficulties within their own work. They strove therefore to
correct and remove inconsistencies among the derived rulings – perhaps forgetting
that there may have been very good practical reasons for those inconsistencies – and
they strove to unify particular rulings on the basis of general legal maxims.
Accordingly, it is right to speak of this later work of institutionalization of Islamic
legal rulings as the construction of schools or doctrines.

Although the greatest scholars always looked outside the arguments and traditions of
their own school to learn from those of other schools and criticize their own, most
scholars did not do this, being content instead with loyal commentaries intended to
preserve and consolidate the work of their school. So, eventually, it became possible
to speak of a Hanafi or a Shafi‘i or a Maliki or a Hanbali position on this or that
matter. This was the foreground of the scholars’ attention and activity; behind it, in
the background, was the consciousness that, despite the differences, all these positions
were all, also, Muslim. Mercifully, now and again, there arose within the community,
clear-sighted and clear-hearted individuals who knew, and who said publicly, that it
should be the other way round. An example is Shaykh al-Islam Ibn Taymiyya, who
refused to be identified as a Hanbali, and insisted on his identity as a Muslim.

From the foregoing discussion, I hope you will understand two things that will help us
to reach a balanced judgement about contemporary Islamic finance. The first is that in
the past, in the response of Muslim scholars to the disputes and difficulties Muslims
faced in their daily lives, we can distinguish two general approaches, respectively
early and late in our tradition.

In the earlier periods, the scholars looked to the guidance of the Qur’an and Sunnah,
and struck a good balance between adhering to the letter of specific, explicit
commands in that guidance and enabling the general outcomes connected to those
commands, which the guidance urges Muslims to establish in their lives, individually
and collectively. In a particular situational context, they might allow a practice that
was on the edge of doing the prohibited so long as, overall, it contributed to
strengthening the Islamic order. As often as not, this was an exercise of patience,
accepting or allowing with some modification pre-existing established practices so as
to give new Muslims or Muslims in a weak position time to adapt to the Islamic order.
The commitment to the guidance of Qur’an and Sunnah is very strong in the earlier
period, and the authority of these sources has absolute primacy. People are
memorizing Qur’an and hadith, they are not memorizing primers of Hanafi or Shafi‘i
rulings.
 General framework for discussion of Islamic finance— 8

In the later period, the scholars looked habitually to the authority of the rulings
inherited in their school or region, and looked to the authority of the original sources
only in a formal, intellectually dull way. They developed a rationale for the rulings, to
give them consistency and clarity and therefore intellectual authority. The result of
this is distinctive definitions of terms (like riba, for example) and elaborated doctrines
(for example, about the role of women, the authority of rulers to fix or not fix prices,
and so on). In practice, these doctrines and definitions, while they professionalize the
work of the scholars, and improve consistency in the application of rulings, also
narrow the field of concern. In the later period, people are looking for conformity
with the derived rulings or consistency with the rationale behind the rulings. The
result is a failure of attention to the general outcomes connected to the commands, so
that Islamic societies do not become more just and fair or more peaceful and
prosperous as a whole, but specifically Islamic rulings are nonetheless being applied.
This makes the Islamic identity of the rulings and perhaps of the society in which they
are implemented mostly symbolic.

As I will show, many of the instruments and transaction contracts that are billed under
Islamic finance are only just Islamic and only in the latter, symbolic sense: they build
or propose legal solutions on the pattern of terminology and contracts in the late
classical fiqh (contracts which, by the way, may have been intended for specific
contexts only), without any regard for whether the general outcome to which these
contracts contribute is even tolerable, let alone desirable, according to the guidance of
Qur’an and Sunnah. But we must also anticipate in our discussion that the guidance of
Islam makes allowance for the burdens of necessity that severely limit freedom of
choice and action, and so it gives people time to adapt and amend, while they strive,
and ask God’s help, to lighten the burdens in their lives and consciences.

Mohammad Akram Nadwi

Oxford