[The following is an excerpt from a paper that I was invited to write earlier this year]
...It would be helpful for us, however, to briefly
review the proximate causes of the current financial crisis, from the point of
view of a student of the Islamic ethico-legal tradition (fiqh). By
reminding ourselves of the proximate causes of the problems, we clarify and
emphasize the appropriateness of the observations about the theory and practice
of risk management that will follow.
1. Problems
The pain and discomfort that
millions of human beings across the world have experienced in the wake of the
current economic crisis rightly elicits compassion and concern from any member
of the human family.
This pain and discomfort, however, should not leave any informed observer
surprised—least of all a student of Islamic sacred ethics and law (sharī`a).
Muslim theologians (usūliyyūn) and legists (fuqahā’) have taught
for centuries that Islamic sacred ethics and law were designed by God in order
to achieve interests and deflect harms (jalb al-maṣālih wa-dar’ al-mafāsid),
in this life (ḥayāt al-dunyá) as well as in the afterlife (ḥayāt
al-ākhirah).
Therefore, even a casual student of Islamic transactional ethics and law (fiqh
al-mu`āmalāt) should not be surprised to observe that massive and systemic
non-compliance with the basic precepts (mabādī`), principles (qawā`id)
and normative ethico-legal values (aḥkām) of the sacred law that pertain
to this particular arena of human activity, i.e. economics and finance, have
resulted in massive pain, discomfort, instability and hardship.
Although, the instances of
non-compliance that are associated with the current financial crisis are
legion, those that should draw our attention here are summarized in the
following list: 1) interest-bearing transactions, 2) debt sales and 3) derivatives.
1.1 Interest bearing loans
The practice of originating
interest-bearing loans is in direct contravention of the prohibition of usury (ribá).
1.2 Trading in Debt
The practice of creating and
trading financial products that are essentially bundles of debt obligations
resulting from the aforementioned loans (e.g. home loans) contravenes the
prohibition on the sale of debt for cash or for debts. Selling debts obligations for cash is usury
or a practice that leads directly to usury, according to most of the legists.
1.3 Derivative Contracts
The practice of executing
derivative contracts (such as credit default swaps and interest rate
swaps) that are based on the aforementioned securities, and which are meant to
hedge against the risks associated with them, is impermissible since such
contracts are characterized by major indeterminateness (gharar).
2. Solutions
Generally speaking, the solution, sharī`a wise, is to reorient societies away from non-compliant practices and toward compliant practices, where such substitutes
exist. Reorientation would consist of discontinuation [of elements of establish financial practices]…with
appropriate application of the fiqh principles of consideration of
necessity and consideration of exigency.
2.1 Non-Interest Based Financing
Governmental and regulatory authorities should prohibit
interest based financing and replace them with non-interest based financing
methods...