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Commercial Law

By:
Christie S. Warren
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The Oxford Encyclopedia of the Islamic World What is This? Provides comprehensive scholarly coverage of the full geographical and historical extent of Islam

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Commercial Law

Consistent with its overarching values in other areas, Islamic law emphasizes an approach to commercial and business transactions based on values of justice, equality, and fairness. In the world of commerce, these values take the form of prohibitions against usury (ribā), transactions involving excessive uncertainty, insurance contracts, and businesses involving gambling, alcohol, the consumption of pork, pornography, prostitution, and weapons.

Islamic law has traditionally sought to achieve fairness and certainty in contractual obligations by requiring precise definitions, providing clear terms and conditions, and equalizing the roles of contracting parties. Usury, prohibited by sūrah 2:275 of the Qurʿān (“Those who devour usury will not stand except as stand one whom the Evil one by his touch hath driven to madness”), is viewed as exploiting those in weaker bargaining positions, permitting unjustified profit and enrichment, and encouraging speculative or risky transactions. Since Prophet Muḥammad had worked as a merchant before the revelation of the Qurʿān and had become increasingly concerned about unchecked materialism in Mecca, it is perhaps not surprising that the Sunnah prescribes strict rules regulating partnerships, leases, loans, currency exchange, and speculative trading. Prohibitions against transactions that involve excessive uncertainty, which are viewed as similar to gambling, also prohibit insurance contracts, since they, too, are viewed as involving uncertain future events that are in the hands of Allāh alone. In the modern era, these principles have been extended to prohibit derivatives, options, and contracts involving future commodities.

The ban on transactions involving prohibited industries ensures that contracts and commerce do not further activities that are contrary to Islam. For example, transactions involving alcohol may not be financed by an Islamic bank, real estate loans may not be made for the construction of casinos, and banks may not charge interest when lending money to other banks.

Islamic commercial law contains some provisions that are generally unfamiliar to lawyers in other legal systems and that are designed to protect contracting parties. For example, even after a contract is legally concluded, it remains subject to rescission or cancellation in the event that latent defects unknown to the buyer at the time of purchase arise. Similarly, although Western contract law binds parties to long-term contracts unless unforeseeable circumstances render performance impossible, Islamic law releases parties if they simply become dissatisfied with the contract. In contracts involving ongoing relationships such as partnerships or agencies, each party has the right to unilaterally terminate even if the contract is for a fixed period of time.

In recent years, some rules relating to commercial transactions have changed in response to factors that include increased wealth and investment opportunities in Islamic countries, an increased desire by Muslims and non-Muslims to engage in business transactions with each other, and growing communities of Muslims who wish to bank, invest, and buy homes in compliance with their religious values. Modernization strategies, which aim to harmonize traditional Islamic values of morality and equity with the demands of globalization and international business, generally focus on three areas: structuring financial transactions to bring them into compliance with Islamic principles while providing acceptable levels of return for investors, establishing Islamic institutions and markets, and enacting liberalized commercial codes that incorporate sharīʿah as one of the bases, although not the sole basis, of legislation.

Financial transactions may be structured to reallocate risk-sharing and profits by using the Islamic doctrines of murābahah (the sale of commodities at prices that include stated profits foreseen by seller and buyer); mudārabah (a form of trust whereby an owner entrusts funds to a trustee, who returns the principal and an agreed-to share of profits after using the funds for a specified purpose); mushārakah (a partnership of limited duration for the purpose of completing a specific project, and which allows partners to share losses based on the proportion of their capital contributions); ījārah (a type of lease allowing a bank to purchase equipment or machinery and lease it to clients, who may ultimately take absolute ownership); muqaradah (which allows banks to issue bonds to finance specific projects); baiʿmuʿajjal (the practice of purchasing and reselling property on a deferred payment basis) and bāiʿsalam (whereby a price is paid at the time the contract is formulated, but delivery takes place at a future date).

Islamic banking institutions, the first of which was established in Egypt in 1963, do not charge or pay interest and may share profits with depositors. There are now more than three hundred Islamic financial institutions operating in more than seventy-five countries. Compliance with Islamic principles is often overseen by a supervisory board of sharīʿah scholars who issue fatwās certifying that transactions meet applicable standards and practices. In countries in which the exercise of ijtihād, or individual intellectual effort, is discouraged, banking standards are considered the product of the collective reasoning of supervisory boards, and compliance with them is a recommended aspect of Islamic economic life.

In 1975, the Islamic Development Bank was formed as a multilateral development bank of the fifty-six member states of the Organization of Islamic Conference for the purpose of financing infrastructure projects and trade finance operations.

Islamic market indexes were introduced in 1999 to make Islamic-compliant portfolios available to investors. These indexes exclude companies that produce alcohol and pork-related products, providers of non-Islamic financial services, and promoters of prohibited entertainment services. Compliance with Islamic principles is overseen by sharīʿah supervisory boards.

In recent years, updated commercial codes designed to facilitate financial transactions and investment opportunities have been enacted in a number of countries, including Kuwait, Egypt, Bahrain, the United Arab Emirates, and Qatar. These codes tend to liberalize traditional Islamic principles relating to commerce. In some cases they legalize the charging and taking of moderate levels of interest, taking into account the definition of ribā as usurious interest rates, or legitimize contracts containing uncertainty or risk. Traditional interpretations of sharīʿah law still govern commercial transactions in other countries, such as Saudi Arabia, Iran, and Pakistan. The respective roles of sharīʿah law and secular legislation continue to be debated in the field of commercial law in much the same way the discussion is taking place in other areas of Islamic law.

Bibliography

  • Ballantyne, William M., and Howard L. Stovall, eds.Arab Commercial Law: Principles and Perspectives.Chicago: American Bar Association Publishing, 2002.
  • Coulson, Noel J.Commercial Law in the Gulf States: The Islamic Legal Tradition.London: Graham and Trotman, 1984.
  • Hegazy, Walid S.“Contemporary Islamic Finance: From Socioeconomic Idealism to Pure Legalism.”Chicago Journal of International Law7, no. 2 (Winter 2007): 581–603.
  • Karasik, Theodore, Frederic Wehrey, and Steven Strom. “Islamic Finance in a Global Context: Opportunities and Challenge.”Chicago Journal of International Law7, no. 2. (Winter 2007): 379–396.
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