Islamic Capital Market Instruments: A Jurisprudential and Economic Analysis (book)

abstract

The book Islamic Capital Market (in persian: بازار سرمایه اسلامی) is a comprehensive study of the Islamic jurisprudential and economic foundations of capital markets and Islamic financial instruments. Authored by the Shīʿī jurist-economist Sayyid ʿAbbās Mūsavīān, the book first investigates classical Islamic contracts from the era of legislation (ʿaṣr al-tashrīʿ) and offers his authoritative interpretations. In the subsequent sections of the book, the history of modern financial instruments—such as various types of shares and securities—in Iran is reported, followed by an exploration of these instruments within the foundations of Shīʿah and Sunnī jurisprudence. The book then examines the experience of Islamic financial instruments (Ṣukūk) in Islamic countries. The author approaches the principles and surrounding discussions of the Islamic capital market through a juristic (fiqhī) methodology, such that this book has become an educational source for postgraduate courses in both ḥawzah and university settings. Mūsawiyān considers valid contracts (ʿuqūd ṣaḥīḥah) to extend beyond the agreements present during the era of legislation (ʿaṣr al-tashrīʿ), and he outlines general criteria for the validity of contracts, such that any contract can be deemed valid if it conforms to these standards.

The prohibition of devouring wealth unjustly (taḥrīm akl al-māl bi-l-bāṭil), the principles of no harm and no reciprocation of harm (nafy al-ḍarar wa-al-ḍirār), the rule of eliminating excessive uncertainty (qāʿidat nafy al-gharar), the prohibition of ribā, and the condemnation of ḥiyal (legal stratagems) used to circumvent ribā are among the principles upon which Mūsawiyān relies. At the end of the book, he also presents twelve proposals for designing Islamic financial instruments based on both economic and Sharīʿah principles.

Introduction to the Book

The Islamic Capital Market is the first volume of the Islamic Capital Market series, authored by Seyyed Abbas Musawiyan (b. 1339 AHsh / 1960 CE – d. 1399 AHsh / 2020 CE), a Shīʿah jurist-economist. This book was published after his earlier work, Islamic Financial Instruments (Ṣukūk), and in fact serves as an edited and expanded version of that earlier publication (p. 57). Both books have been reprinted multiple times and are used as textbooks and supplementary material for postgraduate and doctoral programs across various fields of economics, finance, and Islamic jurisprudence.

At the beginning of certain chapters, the author explicitly references his own previous works or those of other scholars, specifying their details. The bibliography, index of Qurʾānic verses and ḥadīths, and general and thematic indices form the concluding sections of the book. The discussions presented offer a complete and comprehensive treatment of capital market topics within Islamic jurisprudence—both Shīʿah and Sunnī. The Islamic Capital Market was first published in 1391 A.Hsh (2012 C.E.) by the Research Institute for Islamic Culture and Thought (Pazhūhishgāh-I Farhang wa Andīshah-yi Islāmī), and its fourth edition was released in 1400 A.Hsh (2021 C.E.).

Structure of the Book

This book is organized into three main sections: (1) the theoretical (jurisprudential and economic) foundations of the Islamic capital market, (2) conventional (traditional) financial instruments, and (3) Islamic financial instruments (Ṣukūk). Prior to these core sections, the author provides an extensive introduction covering key concepts and terminology relevant to the capital market. At the end of the discussion, in his concluding remarks, the author presents nine proposals for implementing new instruments in the capital market that align with the principles and foundations of Islamic jurisprudence (pp. 749–754).

Jurisprudential and Economic Foundations of the Islamic Capital Market

In the first part of the book, titled The Theoretical Foundations of the Islamic Capital Market, Mūsawiyān endeavors to examine and derive conclusions regarding the jurisprudential principles and fundamentals governing contracts and transactions.

Contracts Beyond the Agreements of the Era of Legislation

Mūsawiyān begins with the principle of the validity of contracts (aṣl ṣiḥḥat al-ʿuqūd) and presents six justifications for it (pp. 63–91). He argues that—contrary to the belief of some—not only does Islam not confine Muslims to the forms of contract common during the era of the Prophet’s mission, but it also, through its general guidelines, invites scholars to design modern financial instruments and develop contracts suited to their own time and context (p. 63). He concludes that: “From the perspective of Islamic jurisprudence, all rational transactions (muʿāmalāt ʿuqalāʾī) in any era and time are valid, unless a particular transaction is explicitly or implicitly prohibited through a specific or general evidence” (p. 92).

He then examines the principle of the validity of transactions in the Civil Code of Iran, which—based on Islamic jurisprudence—recognizes the principle of contractual freedom in Article 10 (p. 92). The next discussion concerns the principle of the binding nature of contracts (aṣl luzūm al-ʿuqūd) and its six evidences: the verse commanding fulfillment of contracts (Āyat al-Wafāʾ bi-l-ʿuqūd), the verse commanding fulfillment of covenants (Āyat al-Wafāʾ bi-l-ʿahd), the verse on trade (Āyat al-Tijārah), the ḥadīth “al-muʾminūn ʿinda shurūṭihim” (“Believers are bound by their conditions”), the ḥadīth prohibiting unauthorized disposal of others’ property, the practice of rational people (sīrat al-ʿuqalāʾ), and the principle of presumption of continuity (istiṣḥāb). The author’s final conclusion is that any agreement or covenant that is regarded by custom and rational people as a valid contract is also valid and binding in Sharīʿah, unless there is specific evidence establishing its invalidity or permissibility to dissolve it (p. 97).

General Regulations for Capital Market Contracts

The five major topics addressed in Chapter Two of the first section of the book are: 1. The prohibition of devouring wealth unjustly (taḥrīm akl al-māl bi-l-bāṭil),

2. The principle of no harm and no reciprocation of harm (qāʿidat lā ḍarar wa-lā ḍirār), 3. The rule of eliminating excessive uncertainty (qāʿidat nafy al-gharar), 4. The prohibition of ribā, and 5. Legal stratagems used to circumvent ribā (ḥiyal al-ribā). Mūsawiyān presents and synthesizes the views of Shīʿah jurists on these subjects while also expressing his own perspective.

Regarding akl al-māl bi-l-bāṭil, he maintains that “any form of appropriation or ownership of another’s property which is considered, according to custom, to be devouring wealth unjustly is prohibited in Sharīʿah” (p. 119). The rule of lā ḍarar wa-lā ḍirār implies the negation of real harm and reciprocated harm, and this apparent meaning should be preserved as far as possible, without defaulting to metaphorical interpretations. Moreover, this principle is not confined to the domain of transactions, but extends to multiple areas of worship as well (p. 132). In discussing nafy al-gharar, Mūsawiyān considers all excessively uncertain transactions to be invalid. If such a transaction is carried out with the intention of deceit or manipulation, it also falls under a legal ruling of prohibition. However, the contract of ṣulḥ (settlement) is an exception in Sharīʿah, due to its inherent nature of reconciliation and mutual understanding regarding two considerations that may be ambiguous. That said, even ṣulḥ is impermissible if entered into with the aim of deceit (p. 155).

Legal Stratagems of Ribā

On the topic of ribā and its legal stratagems (ḥiyal al-ribā), the author addresses the nature of ribā during the era of legislation (ʿaṣr al-tashrīʿ), the Qur’ānic prohibition of ribā, the theory of gradual prohibition, the two main types of ribā—ribā al-qaṛḍ (usury in loans) and ribā al-muʿāmalah (usury in transactions)—as well as contemporary views. He also defines legal stratagems, presents the evidences for their permissibility or impermissibility (pp. 155–210). He rejects the theory of gradual prohibition of ribā (p. 166), and critically examines six modern theories about ribā, such as: the notion that ribā only applies to interest charged for extending the repayment period, ribā fāḥishah (excessive usury), consumption loans, or the claim that ribā is a necessary economic function in the modern age (pp. 173–186). In Mūsawiyān’s view, ribā and interest (faʾidah) differ essentially in both concept and definition, and each pertains to a different stage of economic history (p. 181). Moreover, he argues that not all ḥiyal (legal stratagems) to circumvent ribā can be treated the same; a distinction must be made between permissible and impermissible ḥiyal (p. 207). He also offers criteria for differentiating between them (pp. 207–210).

Specific Regulations for Capital Market Contracts

After outlining Islam’s general perspective on transactions and contracts, the author turns in Chapter Three of the first section to the specific regulations of capital market contracts, examining them from the standpoint of Islamic jurisprudence. This chapter extensively discusses and critiques fifteen major topics: loan (qarḍ), debt (dayn), sale (bayʿ), lease (ijārah), commissioned work (jaʿālah), manufacturing contract (istisnāʿ), agency (wakālah), partnership (shirkah), silent partnership (muḍārabah), sharecropping (muzāraʿah), irrigation partnership (musāqāt), endowment (waqf), settlement (ṣulḥ), guarantee (ḍamān), and assignment of debt (ḥawālah) (pp. 211–324).

Microeconomic Foundations of Financial Instruments

In Chapter Four, Mūsawiyān explains the microeconomic foundations of financial instruments, emphasizing their alignment with the goals and motivations of issuers and buyers. Based on religious texts and the prescriptions of the Lawgiver (al-Shāriʿ), he identifies two main goals for Muslims: benevolent and otherworldly aims, and material profit (pp. 327–330).

In discussing material profit for issuers and buyers, he stresses that the claim that Islamic economics is limited to interest-free loans (qarḍ ḥasan) or profit-and-loss partnerships is baseless. Islam, due to its comprehensive nature, views all beneficial, productive, and profitable transactions and economic activities positively (p. 332).

Macroeconomic Foundations of Financial Instruments

The author outlines four goals and foundations for the macroeconomic dimension of financial instruments: 1. Compatibility with economic growth, 2. Economic justice, 3. Suitability for fiscal policies, and 4. Compatibility with monetary policies. He concludes that the long-term success of financial instruments depends on observing eight micro and macroeconomic criteria, though not all criteria hold equal weight. For instance, in microeconomics, if a financial instrument does not align with the motivations, attitudes, and preferences of customers, it will fail and disappear in the short term. In macroeconomics, alignment with economic growth and justice is essential, and an Islamic state must prevent the spread of instruments that conflict with growth and justice (p. 341).

Conventional (Traditional) Financial Instruments

In the second part of the book, titled “Conventional (Traditional) Financial Instruments,” Mūsawiyān explores four traditional instruments—meaning those predating the modern era: bonds, treasury bills, common stocks, preferred stocks, and short selling of shares. These instruments were invented in Western countries and then imported to Islamic countries, including Iran. For each of these instruments, he first provides definitions and classifications, then discusses their economic roles and functions, and finally analyzes their Sharʿī (legal) nature.

Bonds (Awraq al-Qarḍ)

Regarding the legal nature of bonds, the author categorizes them into four types:

Interest-bearing bonds,
Revenue bonds,
Lottery bonds, and
Discount bonds.

He cites and critiques the opinions of jurists and legal authorities on each type, focusing primarily on loan (qarḍ), ribā, and the legal basis for their prohibition (pp. 364–370). One topic in this chapter is the history of bond and treasury bill issuance in Iran, most of which occurred before the revolution between 1941 and 1975 (pp. 357–361). According to the author, all justifications for permitting bonds lack a valid Sharʿī foundation, and based on the definition of ribā, any loan that stipulates an additional amount and requires the borrower to repay more is ribā and ḥarām (pp. 366–370).

Common Stocks (Awraq al-Sihām al-ʿĀdiyyah)

The author examines the legal status of common stocks, which are a new phenomenon with no precedent in classical jurisprudence, in three stages:

Legitimacy of transactions involving joint-stock companies,
Legitimacy of joint-stock companies as a newly emerged phenomenon, and
Legitimacy of joint-stock companies as an instance of the contract of partnership (ʿaqd al-shirkah) (pp. 387–399).

Mūsawiyān concludes that as long as the business activities of public joint-stock companies are permissible in subject matter and are conducted in compliance with Sharʿī rulings, the formation and operation of such companies within a legal framework pose no legal problem (p. 399).

Preferred Stocks (Awraq al-Sihām al-Mumtāzah)

On the legal nature of preferred stocks, Mūsawiyān categorizes them into six types and evaluates them (pp. 409–415). Ultimately, he considers the dividends of two types—

Non-cumulative fixed-return preferred shares, and
Non-cumulative participatory shares—
To be free of Sharʿī objections.
However, he regards the dividends of other types—

Such as cumulative fixed-return shares, cumulative participatory shares, and floating-rate return shares— As impermissible and falling under the category of prohibited legal stratagems to justify ribā (p. 415).

Short Selling of Stocks is Ribā-based

Short selling of stocks is a commonly used instrument in the capital market. In the jurisprudential analysis of short selling, the author uses four classifications: loan (qarḍ), sale of earnest (bayʿ al-ʿarbūn), lease (ijārah), sale with an option (bayʿ al-khiyār), and a new contract.

Mūsawiyān does not consider short selling to align with the concept of loan (qarḍ), as the profits and other rights of the stock remain with the lender, not the borrower (p. 424). He also rejects the alignment of short selling with sale of earnest and points out that some jurists have questioned the validity of such a sale. In this transaction, the buyer provides the seller with something on the condition that, if the goods are taken, they count as part of the price; otherwise, the goods belong to the seller (p. 225). Regarding the alignment of short selling with lease (ijārah), Mūsawiyān raises objections, noting that the preservation of the leased item is an essential condition, while in this case, the stock is borrowed with the intent to sell, and neither party intends to retain the physical asset (p. 426). He also discusses the similarities and differences with sale with an option (bayʿ al-khiyār) but finds the comparison inadequate (p. 427).

After dismissing all these comparisons, he rejects the idea that short selling is a new contract that should be considered within its own framework. He argues that no new legal phenomenon has occurred, and the essence of short selling is ribā-based (p. 427). To correct short selling, the author proposes a solution based on simultaneous spot and forward sales of stocks and elaborates on this approach. He also includes the opinion of the Shariʿah committee of the Securities and Exchange Organization (pp. 427–430).

Islamic Financial Instruments (Sukūk)

The second half of the book (Section Three) focuses on Islamic financial instruments, specifically Islamic securities (sukūk). In thirteen chapters, the author examines three categories of sukūk regarding their nature, history, and jurisprudential perspectives. After the first chapter, which covers the principles, foundations, functions, and types of Islamic securities, interest-free loans with or without prizes are discussed in Chapter Two. Mūsawiyān, after explaining the secondary markets for these instruments and analyzing their economic aspects in terms of micro and macroeconomic criteria, concludes that interest-free loans, due to their limitations, are an appropriate tool for charitable purposes within society. He also notes that the Central Bank cannot intervene in the secondary markets for these instruments (p. 472).

Endowment of Money is Invalid

In Chapter Three, the author discusses endowment of money and the experience of Islamic countries (e.g., Islamic Development Bank’s endowment fund, Kuwait, Qatar, Malaysia, Bahrain, and Oman). He explains that in Jafari jurisprudence, the endowment of money is invalid. He considers the solution through agency contracts (wakālah) unfinished and proposes using the contract of settlement (ṣulḥ) and completing the required time frame for such plans (pp. 487–490). At the end of this chapter, he includes several fatwās from religious authorities confirming that the endowment of money is not valid (pp. 491–496).

Murābahah Securities: A Combination of Contracts, Some Are Jurisprudentially Problematic

Some Muslim thinkers have designed murābahah securities based on the features of murābahah sale, which have been implemented in some Muslim countries such as Malaysia. In Chapter Four, Section Three, titled “Murābahah Securities: Short-Term Financial Instruments,” Mūsawiyān explains that murābahah securities can serve important functions. He details four types of murābahah instruments:

Murābahah financing securities (p. 498),
Murābahah liquidity securities (p. 502),
Murābahah securities for capital formation in commercial companies (p. 503),
Murābahah securities for secured loans (p. 506).

After discussing the secondary market for murābahah securities (p. 509), he delves into their jurisprudential aspects (p. 510). Since the primary and secondary markets of murābahah securities are a combination of agency contracts, cash sales, credit sales, and discount sales (bayʿ al-dīn), it becomes a subject of jurisprudential debate. In the conclusion, Mūsawiyān presents the opinion of the Shariʿah committee of the Securities and Exchange Organization regarding the four types of murābahah securities discussed in the book. According to their view, the first and fourth types (based on murābahah sale, agency, and credit purchase) and the third type (based on agency, continuous murābahah, and sale of commercial shareholding) are considered permissible in both Shia and Sunni jurisprudence. However, the second type (based on sale of the original goods (bayʿ al-ʿaynah), agency, and credit purchase) is deemed impermissible in both Shia and Sunni jurisprudence and should not be used (p. 512).

Possibility of Designing Islamic Financial Instruments Based on Economic Principles and Criteria

In addition to examining the economic and jurisprudential aspects of interest-free loans, endowments, and murābahah, the author discusses in detail nine other types of Islamic securities: forward contracts (salf), lease (ijārah), commissioned work (jaʿālah), usufruct (manfaʿah), manufacturing contracts (istisnāʿ), partnership (mushārakah), silent partnership (muḍārabah), sharecropping (muzāraʿah), and irrigation contracts (musāqāt). For each, he provides a jurisprudential discussion of the instruments.

Salaf contracts: The primary market for salf securities does not have any major issues, but the secondary market has significant jurisprudential problems because a salf contract cannot be sold before its maturity date (p. 524). Solutions are proposed for the jurisprudential problem of these instruments, such as parallel salf (pp. 529–536).
Lease securities: Various types of transactions in the lease securities market are valid or can be corrected according to Islamic jurisprudence. The author mentions six main types of lease transactions and their jurisprudential justifications (p. 554).
Jaʿālah securities: Generally, all transactions in the primary and secondary markets for jaʿālah securities can be considered valid according to the Shīʿī view of Islamic jurisprudence. The author discusses eight main transactions of jaʿālah securities with their jurisprudential justifications (p. 579).

In Chapters Eight through Twelve, Mūsawiyān discusses various types of securities based on their diversity and differing legal rulings, such as: - Securities for financing services (manfaʿah) (p. 590), - Istisnāʿ securities for construction and housing projects (p. 608), - Mushārakah securities (p. 637), - Muḍārabah securities for the commercial sector (p. 690), - Muzāraʿah securities for agriculture (p. 706), - Musāqāt securities for irrigation (p. 710).

Regarding mushārakah securities, the author argues that the current state of these securities, which guarantees a fixed profit, makes them akin to bonds and reduces their effectiveness. He suggests that, like any partnership, profits and losses should be shared among the partners (p. 664).

In the final, seventeenth chapter, the author explores the possibility of converting bank facilities and assets into securities in Islamic banking without interest and its Islamic methodologies, presenting both jurisprudential and practical proposals (pp. 715–747). Mūsawiyān concludes that, among the options for conversion into securities, installment sales and lease-to-own facilities should take priority (pp. 738–739).