SOAS University of London

Centre of Islamic and Middle Eastern Law

Islamic Law and Finance: Preface & Acknowledgements by Chibli Mallat

One of the most interesting intellectual expressions in the Middle East of the 1980s has appeared in the arcane field of law and finance. Alongside the political turmoil that has accompanied the re-emergence of Islamic militancy, there has developed a discreet but consistent effort at legitimizing legal and financial practices with a different, Islamic, perspective.

A decade after the first systematic attempts to introduce Islamic banks in the world system, it is time to assess some related developments in law and finance. To claim that a society or an enterprise is acting in an 'Islamic' financial way is not sufficient. It is also necessary to look into the details of its operations, to see first whether the claim to novelty in that experience is founded, but more importantly, to examine whether the alternative model is successful. On the level of the state, as in the new Islamic banking laws in countries as different as Iran, Pakistan, and Malaysia, success means the contribution of the banking system as a whole to the growth of the economy. On a micro-economic level, success for an enterprise can only meancompetitiveness, and profit.

It is particularly difficult for the analyst to see clearly into the thicket of a financial system, and in the case of the new Islamic modes, the difficulty is augmented by the unavailability of a model to follow, and of blueprints against which a particular performance can be measured. But there is a further complication, which originates in the composite systems which, on various levels, accompany the inquiry.

I. A multi-layered system

The relatively short story of Islamic law and finance is composite in many ways. The combination of law and finance, to start with, offers a first layer of analysis, for it differs epistemologically from any other example in world history. Islamic finance is not bound primarily by the market place; its first constraint is the Shari'a, the Law. As will appear in all the following essays, Fiqh, jurisprudence, and the Shari'a in general, form the background against which all the attempts in contemporary financial business find guidance and legitimacy. Taxation, insurance, banking, and even simple sales and loans contracts are bound in the theory of Islamic finance by the Shari'a.

Because there is no tradition of an independent field of Islamic economics, the reliance of modern financial and economic transactions on the vast legacy of Islamic law acquires a further dimension, which is cultural. Islam does not claim a fully-fledged economist as its father, and the absence of an Adam Smith or a Karl Marx who might have written at least the outlines of a system of economics has forced the financial world to improvise, or to rely heavily on the wealth of material constituted by the corpus of the Shari'a. In a sense, the combination of law and finance in Islam is inevitable. Finance has nowhere else to turn for guidance but the law.

Composite is also the set of milieux taken as references in these essays. Financial practitioners in the present Islamic world must keep an eye on several areas, simultaneously. Thus, Islamic banks must compare their profits not only amongst themselves, but also with the 'normal' banks. On a macro-economic level, Islamic state banking must also remain aware of the development of other state banking systems, Islamic and non-Islamic.

A third layer in the analysis, as well as in the practice of Islamic financial institutions, is historical. Islamic banks look for precedents in the early history of the Muslim community, because in the uncharted path which is taken at present, the example of the Prophet Muhammad and his Companions offers the solace of a workable model of the past, as well as an ideal to match. The ideal Islamic city looms over the whole financial world which is being constructed at present.

To some extent, this reconstruction is impossible, because the historical totality cannot be fully grasped. But also, the financial setting has obviously considerably changed. Nonetheless, and however difficult the reconstruction may be, it remains an important starting point, and does not only operate in a remote, theoretical, fashion. Through the system expounded by the Islamic law, the life of the Prophet, the Sira, as well as his teachings as have come down to us through his Companions' traditions, the hadith, form a significant part of the law. And it is through these signposts filtered historically and legally that financiers try to accommodate to the archetypal city of Islam.

What ultimately is at stake is adaptation to the modern world in a different, Islamic, fashion. The enterprise is vast, as it involves hundreds of millions of people. But it is also taken seriously. It is said that more than 25 billion dollars are handled by the Islamic Banking system, and this does not include the state systems of Iran, Pakistan and Malaysia. What these essays try to do is to bring some order of analysis in the various efforts to establish a system of Islamic law and finance on solid ground.

II. New essays in a new field

The essays collected in this book are new, To an extent, they could not escape being new, for the field is young. Though the literature has been growing systematically in the past decade, it has paled in comparison with the buoyant practice in the real world. When compared with the volume of transactions and the money involved, or the interest generated by the espousal of Islamic principles by vast Asian states, the literature in the field of Islamic law and finance looks negligible. This, in Goethe's words, is quite understandable, for 'Grey is the theory, and Green the Tree of life'. But there is a specific dimension of the debate that renders this reality even more acute in Islamic law and finance: the practitioners themselves are not at ease with their field. This is not only because it is only a decade old, but because there is a real predicament inherent to the equation. This appears better in the light of the Muslim/Islamic dichotomy.

Many countries and individuals relate to Islam. But countries can be Muslim without being Islamic, though an individual can only be Muslim. One would speak of a Muslim person, not of an Islamic person. The most extreme example of a Muslim, but not Islamic, country would be Albania. Similarly, Iran is Muslim and Islamic interchangeably. The nuance resides perhaps in the conscious adoption of Islam as a system of reference.

That the same distinction cannot be deemed true for individuals may be explained by the fact that Islamicity is not pertinent for individuals. Whether a person consciously adopts Islam as a system of reference will not render him or her less or more Muslim. Whether on the other hand a country or an institution tries to be Islamic, then the whole set of references it has chosen, and the general course it takes, will be different.

The following essays share an interest in approaching institutions in the sense just delineated. What is investigated are the modes of operation of these institutions, as these modes of operation are consciously presented as Islamic. For despite the fact that practice has preceded theory, the theory remains an important part for an activity which is highly conscious of its aims and methods. The institutions and states under analysis in these essays want to recognize in their practices a fulfilment of their choices for Islam, as opposed to any other model.

The attempt to examine with some detail this 'Islamicity' in the field of law and finance will bring the discussion to a wide geographical area, with experiments of countries where millions of people are concerned, such as Malaysia (Jane Comiors), Iran and Pakistan (Abbas Mirakhor), Egypt (Ian Edge, Chibli Mallat); institutions, which by essence are international and cover a large and economically significant area of operations (Volker Nienliaus, David Baldwin and Rodney Wilson), laws (Ian Edge, Nabil Saleli) or taxation systems (Munir Morad). These countries, institutions and systems all share the vindication of Islamicity.

These essays have tried to remain close to practical details. In some instances, the subject-matter was more favourable than others, as is the case in Egypt, where the survey of commercial law by lan Edge is documented by a rich legal tradition. It is too early to assess the performance of state banking in countries that adopted it only two or three years ago, but a first description of the legal texts in Malaysia has been carried out by Jane Connors. In the case of Iran and Pakistan, Abbas Mirakhor goes into more details of the progress of Islamic state banking, as the statutes are relatively older, and followed through more systematically. But practice is not always readily available for analysis, and as Munir Morad's article suggests, it is pointless to talk about Islamic taxation in practice, when there has been no true instance of a systematic attempt at introducing in a contemporary state a system of taxes consciously derived from the Shari'a. Still, one will find that Islamic banks have started to yield results, and some assessment, such as in the articles of Volker Nienhaus, David Baldwin and Rodney Wilson, can be made.

Theory appears predominant in other articles, but there has been a conscious effort on part of the contributors not to diverge too much from the incidence of the new Islamic modes on the real life of finance. Nabil Saleh's chapter develops the constraints on transactions delineated by the Shari'a, and Chibli Mallat's essay shows the incidence of the debate on riba on fundamental articles of the Egyptian Civil Code. In both cases, the importance of the dispositions of the Shari'a is evident.

Finally, it is hoped that these essays will contribute also to opening the debate in areas of the contemporary world that have gone so far intellectually unchallenged. Perhaps the greatest advantage in a field such as this one resides in the necessity to think anew basic issues that have so far been accepted without question. Fixed returns on loans, as exemplified by the concept of interest, are a good example of economic issues which are generally taken for granted. That there might be a financial alternative to related problems, such as the issue of world internal and external debt, is by itself a challenging, but immensely complicated question. As William Ballantyne shows in his introduction to the book, there are grave matters associated with the financial and legal choices of countries which face, as most do, a worrying debt problem. The question of the success or failure of Islamic banking on a State, as well as on the enterprise level, will loom large over the availability of alternative, and realistic, solutions to the problem of world indebtedness.

III. About this book

The essays in this book were presented in an international symposium organized by the Centre of Near and Middle Eastern Studies and the Law Department at the School of Oriental and African Studies, University of London, held in April 1988. That the symposium was a success is owed both to the seriousness and depth of the contributions in a field where many questions with far-reaching consequences have been raised, and to the eagerness of specialists from the business and academic world to discuss the thorny theoretical and practical problems in the world of Islamic law and finance. For their keen interest and their support on the day of the conference, I would like to thank wholeheartedly Albert Hourani, who brought his encyclopedic scholarship to the discussions, Muazzam Ali, Chairman of the International Centre for Islamic Studies, and a pioneer of Islamic finance, Robert Annibale, Vice-President at Citibank, London whose knowledge of finance and development in the countries of the Third World is hard to match, and David Suratgar, from Morgan Grenfell, who combines the best legal scholarship of East and West.

This publication was only possible because of the many dedicated people at the Centre of Near and Middle East Studies, who worked to prepare the material for the printer's deadline. The transliteration of Arabic and Persian words has been simplified, and foreign words are italicized the first time they appear in each chapter. This work is the joint editorial effort of several able people. I would like to mention in particular my fellow editors, David Jorjani, who assisted me in the most difficult tasks, Alan Nicol, Roula Majdalani and Ben Wedeman, who patiently reviewed the texts. We also received the timely assistance of many people, especially Mary O'Shea, Melanie Stimmler, Bridget Hamey, and Diana Crosby. Particular thanks are due to Mark Datko, whose skills in computerese immensely shortened the task. Last and not least, I would like to acknowledge the friendly support of Professor William Ballantyne, who brought his scholarship and vast experience to the whole venture, chaired the conference, and made a great success of the symposium. Of course, I take responsibility for the mistakes that have remained.

Most importantly, I would like to thank Dr Tony Allan, the Chairman of tile Centre of Near and Middle Eastern Studies at SOAS for his gentle and continued trust and his active support. Without him, neither the conference nor the book would have been possible.

London, June 1988