SHARIAH LEGITIMACY
OF ISLAMIC BANKING
Is This Banking Really Islamic?
Dr. Mohammad Tahir Mansoori
Dean Faculty of Shariah & Law IIU
Shariah Advisor, Askari Islamic Bank
Background
On August, 29, 2008, A Fatwa was issued by
a group of religious scholars declaring the
present Islamic banking unIslamic and
inconsistent with the principles of shariah.
This presentation aims to analyze the
objections and misgivings expressed in the
Fatwa, to see whether the current interestfree banking is shariah compliant or
otherwise. We will deal with some major
objections expressed in the Fatwa.
Objection No. 1
Murabaha and Ijarah are mere legal devices
(Heelah) not real alternatives to the interest.
Real alternatives are Musharakah and
Mudarabah.
Analysis of Objection
Quran has declared sale and trade as alternatives.
Murabahah is a kind of permissible sales.
Murabahah is in line with Shariah principle:
“Entitlement to profit depends on liability for loss”
Risk and liability involved in Murabahah
1.
2.
3.
i.
ii.
iii.
iv.
Risk of breach of promise by the customer.
Destruction of goods before their sale to the client.
Risk of Defect.
Risk of default/ Late payment.
Liability of Lessor in Ijarah
1.
2.
3.
Ownership related risk are borne by the
bank major maintenance, accidental repairs,
risk of destruction)
In case the insurance claim is rejected, the
loss will be borne by the bank.
In case the asset is non-functional, the
lessor cannot charge rent for that period.
Is Mudarabah/ Mudarabah Real Alternative?
1.
2.
3.
4.
Bank as Mudarib is a custodian and trustee
of depositors. A trustee is bound not to
invest in highly risky transactions.
Musharakh/ profit and loss sharing is
workable in an environment of honesty and
requires high moral standards in the society.
Mudarabah already exists on liability side.
Mudarib is not bound to undertake subMudarabah.
OBJECTION NO. 2
Islamic Banking is based on ‘pick and
choose’ from various schools of thought.
Scholars involved in Islamic banking choose
from different schools that which suits their
interest. (Ruling on the issue of compulsory
charity, binding nature of promise, freedom
from liability of defect, non-disclosure of
agency, Arbun etc are taken from different
schools). This attitude is a sort of following
whim and caprice.
Analysis of Objection


Classical Muslim jurists have allowed moving
between schools under need and
consideration of general good. Hanafi jurists
many times gave fatwa according to Shafi or
Maliki viewpoint.
Shariah ruling on Islamic banking and finance
are a product of collective ijtihad. They are
not issued by few individuals. Collective
ijtihad is stronger than individual fatwa.
Objection No. 3
Islamic Banking is constructed on hybrid
contracts while Shariah prohibits from
combination of contracts (Baitan-fi-Bayah).
Analysis







Meaning of Combination.
Combination of Sale and loan prohibited.
Contingent / Conditional Sale.
Inconsistent
Mutually Consistent.
In Ijarah, sale is not a part of Ijarah.
Execution of Contract in different time
frames.
Objection No. 4
Islamic banking is constructed on the concept
of limited liability of company which is
against shariah . It violates the principle: “alkharaj bil Daman”. The principle suggests
that a person is entitled to the profit on his
investment to the extent of his liability of loss.
If his liability is limited to certain extent, the
his profit should be limited proportionately.
Meaning of Limited Liability
Limited liability in the modern and economic
terminology is a condition under which a
partner or shareholder of business secures
himself from bearing a loss greater than the
amount he has invested in a company so 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.
Analysis of Objection


Concept of limited liability does not affect the
legitimacy and Islamicity of Islamic banking.
Principle of limited liability is applied only to
the case of bankruptcy.
It does not have any effect on the liability of
Rabb-ul-Mal and Mudarib. Any loss caused
by the bank, by its negligence, fraud, will be
borne by the bank and its liability in that case
would be unlimited.


All current account holders (creditors of bank)
are guaranteed by the state bank, so the
concept of limited liability does not have any
effect on creditors of Islamic bank.
Concept of limited liability does not exempt
directors from the liability arising from acts of
fraud.