New Issues in Islamic Finance and Economics: Progress and Challenges

New Issues in Islamic Finance and Economics: Progress and Challenges Hossein Askari, Zamir Iqbal, and Abbas Mirakhor John Wiley & Sons (Asia) Pte. Ltd.

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In the Name of Allah, the All Merciful, the All Beneficent

Contents Acknowledgment Glossary of Arabic Terms ix xi 1 The Development and Progress of Islamic Finance 1 2 Issues and Challenges 47 3 Islamic Finance and Globalization: Convergence and a Boost for Rapid Growth? 75 4 Globalization and Its Implications for Muslim Countries 111 5 Expanding Financial Frontiers 129 6 Reputational Risk for the Islamic Financial Industry 149 7 The Design of Benchmarks for Asset Pricing 179 8 Qard-ul-Hassan-based Microfinance 197 9 Developing the Theoretical Foundations of Economics in Islam 211 10 Islam and Economic Development 243 11 Taxation and Public Expenditure in Islam 263 12 The Scope of the Social Safety Net in Islam: A Case Study 293 References 327 Index 363 vii

Acknowledgment We acknowledge the contributions of Dr. Nadeem ul Haque and Dr. Kazem Sadr in Chapters 7 and 8 respectively. We are also grateful to our research assistant, Shahrzad Daneshvar, for her excellent work. ix

Glossary of Arabic Terms ahadith Plural of hadith (for meaning, see hadith). ahkam Plural of hukm (for meaning, see hukm). ajr-un-kareem A generous reward. al-adl Justice. al-ghurm bil The principle that one is entitled to a gain only ghunm if one agrees to bear the responsibility for the loss. For example, if someone gives finance to someone else, he is only entitled to a share in the profit resulting from the use of that finance if he is also prepared to bear any resultant loss. al-kharaj bil The principle in Islamic jurisprudence that daman entitlement to return or yield (al-kharaj) is for the one who bears the liability (daman) for something, say an asset, and one who does not bear the liability has no claim to the yield. al mal Wealth, property. al-mu minun Those who believe through the heart. amanah Trust. awqaf Plural of waqf (for meaning, see waqf ). ayah A verse of the Qur an. bay Stands for sale. It is often used as a prefix in referring to different sales-based modes of Islamic finance, such as murabahah, istisna, and salam. bay al- ayan Sale of tangible objects such as goods (as opposed to sale of services or rights). bay al-dayn Sale of debt. According to a large majority of fuqaha, debt cannot be sold for money, except at its face value, but can be sold for goods and services. bay al-kali bil A sale in which both the delivery of the object kali of sale and the payment of its price are delayed. It is similar to a modern forward sale contract. xi

xii Glossary of Arabic Terms bay al- inah bay bithaman ajil bay al-mudaf bay almulamasah bay almunabazah bay al-salaf bay al-salam bay al-sifah The sale of something to someone at a given price (usually on credit) and then the purchase back from the buyer, at the same time, at a different price (usually lower but cash). This kind of sale and buyback is prohibited because it effectively means exchanging a given amount of money with a different amount of money, which amounts to riba. It can be used as a subterfuge for riba dealings. A sales contract where payment is made in instalments after delivery of goods. Sale could be for long-term and there is no obligation to disclose profit margins. A sales contract in which delivery of both the commodity and the payment is deferred for example forward sales in modern times. Such contracts are not permitted by the Shari ah. A form of sale prevalent in the days of the Prophet (peace be upon him) in which the sales contract was finalized by the simple act of touching the object of sale. The prophet (peace be upon him) prohibited this kind of sale since the buying party did not have a fair chance of inspection and hence the practice involved gharar. A form of sale prevalent in the days of the Prophet (peace be upon him) in which the sales contract was finalized by the simple act of throwing the object of sale towards the buying party. The prophet (peace be upon him) prohibited this kind of sale since the buying party did not have a fair chance of inspection and hence the practice involved gharar. An alternative term for bay al-salam. A sale in which payment is made in advance by the buyer and the delivery of the goods is deferred by the seller. A sale based on a detailed description of the object of sale.

Glossary of Arabic Terms xiii bay bi thaman al- ajil bay mu ajjal bay muzayadah buyu daman Dar al-islam darar darurah dhimmah faqih fasad fatwa fatawi fiqh fiqhi fuqaha gharar Another term used for bay mu ajjal. Sale on credit, that is, a sale in which goods are delivered immediately but payment is deferred. Sale by auction. Plural of bay (for meaning, see bay ). Guarantee, security. The world (or the abode ) of Islam. Damage, harm, injury. Necessity. (Usually used for the Doctrine of Necessity, whereby something otherwise prohibited becomes temporarily permissible). Liability, responsibility. Jurist who gives rulings on various juristic issues in the light of the Qur an and the sunnah. Mischief, troublemaking, corruption. Religious verdict by fuqaha. Plural of fatwa (for meaning see fatwa). Refers to the whole corpus of Islamic jurisprudence. In contrast to conventional law, fiqh covers all aspects of life religious, political, social, commercial, and economic. Fiqh is based primarily on interpretations of the Qur an and the sunnah and secondarily on ijma (consensus) and ijtihad (individual judgement) by the fuqaha. While the Qur an and the sunnah are immutable, fiqhi verdicts may change due to changing circumstances. Relating to fiqh. Plural of faqih (for meaning, see faqih). Literally, it means deception, danger, risk, and uncertainty. Technically, it means exposing oneself to excessive risk and danger in a business transaction as a result of uncertainty about the price, the quality and the quantity of the countervalue, the date of delivery, the ability of either the buyer or the seller to fulfil their commitment, or ambiguity in the terms of the deal thereby, exposing either of the two parties to unnecessary risks.