Jurisprudential Foundations of Money and Capital Markets (book)
Jurisprudential Foundations of Money and Capital Markets is a Persian-language book that explains the fundamental rulings of Islamic contracts and transactions. The authors, Sayyid Abbas Mousavian and Hasan Bahari Qarameleki, in eight chapters, examine the concept and general principles of the science of fiqh, the foundational principles of transactions, general and specific regulations of contracts, options to rescind (*khiyarat*), rescission (*faskh*), and mutual cancellation (*iqalah*) in the money and capital markets from the perspective of Shia and Sunni Islamic jurisprudence.
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| Book Information | |
|---|---|
| Author | Abbas Mousavian and Hasan Bahari Qarameleki |
| Language | Persian |
| Pages | 572 |
| Publication Information | |
| Publisher | Imam Sadiq University Press |
- Abstract
According to the authors, due to the rapid pace of developments in financial markets, the principle of validity (*asl al-sahhah*) and the principle of bindingness (*asl al-luzum*) have significant application in accepting the legitimacy of new contracts, meaning they cannot be rescinded unless there is clear evidence to invalidate them. The authors emphasize that in Islam, any contract that does not conflict with the general regulations governing transactions is approved. For this reason, they have deemed derivative contracts on stock market indices or interest rate indices, including futures contracts and option contracts, to be void because they conflict with the general regulations of transactions in Islam.
The authors, using a new four-part classification, divide contracts into non-profit, profit-oriented exchange-based, profit-oriented partnership-based, and supplementary. Under each of these categories, they examine several jurisprudential topics and state their respective rulings. Among them is that the effects of inflation on a loan are only considered if the borrower delays repayment. The validity of the sale of debt (*dayn*) and lease-to-own (*ijarah bi shart al-tamlik*) are other views the authors hold.
About the Book and Its Structure
The book *Jurisprudential Foundations of Money and Capital Markets*, authored by Sayyid Abbas Mousavian (an economic jurist) and Hasan Bahari Qarameleki (a researcher in Islamic economics), in eight chapters, seeks to conduct a comparative examination of the jurisprudential foundations of the money and capital markets from the perspective of Shia and Sunni fiqh. This book was published by Imam Sadiq University Press in 1391 SH (c. 2012 CE).
In the first chapter, the authors explain the lexical and technical meaning and importance of fiqh, as well as the various classifications of jurisprudential topics. After stating the common classifications of jurisprudential topics in Sunni and Shia fiqh, they ultimately present their own classification of transactions and types of contracts (pp. 28-35). In the second and third chapters, the foundational principles of the validity and bindingness of contracts are examined, citing verses, narrations, the conduct of the pious (*sirat al-mutasharri'ah*), and the practice of the wise (*sirat al-'uqala'*). The fourth chapter, under the title "General Regulations of Contracts," addresses topics such as the prohibition of unjustly consuming wealth, the negation of harm and causing harm, the prohibition of uncertainty, the prohibition of gambling, the prohibition of usury (*riba*), and an examination of legal stratagems to avoid usury. The fifth chapter is about the legal capacity of the contracting parties and the conditions of the exchanged items. In the sixth chapter, titled "Specific Regulations of Contracts," it extensively explains Islamic contracts in a four-part classification. These contracts are: non-profit contracts (such as loans, deposits, gifts, and charity), primary profit-oriented exchange-based contracts (such as sale, lease, commission, manufacturing contract, settlement, insurance, key money, debt, and promissory notes), profit-oriented partnership-based contracts (such as partnership, profit-sharing, crop-sharing, and irrigation contracts), and ancillary contracts (such as guarantee, transfer of debt, suretyship, and mortgage). The seventh chapter is dedicated to options to rescind (*khiyarat*) and their types, and the eighth chapter to rescission (*faskh*) and mutual cancellation (*iqalah*).
Application of the Two Principles of Validity and Bindingness in the Money and Capital Markets
Before delving into the evidence for the principle of validity and the principle of bindingness of contracts, the authors of the book emphasize that Muslims are not confined to the framework of common contracts from the era of the Prophet's mission. All rational contracts are permissible provided they adhere to general regulations. Furthermore, Islamic thinkers should contemplate designing new financial instruments appropriate for their own time and era (p. 39). According to them, all past jurists considered the primary principle in financial contracts to be invalidity. However, most later jurists believe that the general and absolute statements in the Book and the Sunnah indicate the religious validity of customary transactions, unless there is specific or general evidence for the invalidity of the transaction (p. 41). The authors, by examining jurisprudential texts, have stated that to prove the secondary principle of the validity of contracts, jurists have referred to verses from the Quran such as the Verse of Fulfilling Contracts, the Verse of Fulfilling Covenants, and the Verse of Trade (pp. 42, 52, 53), and hadiths such as "Muslims are bound by their conditions" (p. 61) and "People have authority over their property" (p. 66), as well as to the practice of the Lawgiver and the pious in transactions (p. 71). According to them, some of this same evidence, as well as the practice of the wise and the principle of presumption of continuity, has also been used to prove the principle of the bindingness of contracts (pp. 81-88).
The authors believe that the principle of validity is of great importance in the money and capital markets because the pace of change and development in these markets, in terms of the type of contracts and operational methods, is high. If the principle of the validity of contracts is accepted, all these contracts and methods, as long as they are not contrary to any of the general principles and regulations, are deemed valid and will not be void merely for being new (p. 74). Also, the application of the principle of the bindingness of contracts in the money and capital markets means that all these contracts, unless there is clear evidence for their permissibility to be rescinded, are binding, and they cannot be unilaterally rescinded without the consent of both parties (p. 89).
Application of General Jurisprudential Rules of Transactions in the Money and Capital Markets
The authors of the book, acknowledging that Islam approves any contract that does not conflict with the general regulations governing transactions (p. 93), proceed to examine these general regulations and rules from an Islamic perspective. Before stating the application of these rules to new transactions in financial markets, they trace these rules in jurisprudential teachings and explain their general content, indication, scope, and the opinions of jurists.
- Prohibition of Unjustly Consuming Wealth (*Akl Mal bi al-Batil*): The authors, pointing out that in Islam, transactions that are considered unjust consumption of wealth from a customary, rational, or religious perspective are forbidden, believe that the nature of some contemporary transactions in the financial and monetary markets is an instance of the rule of prohibiting unjust consumption of wealth and are void according to Shia and Sunni jurists; such as derivative contracts on stock market indices or interest rate indices, including futures contracts and option contracts (pp. 106-107).
- Negation of Harm and Causing Harm: Alongside the principle of the religious validity of all rational contracts, the authors believe that according to the rule of *la darar wa la dirar*, if the core of the transaction or one of its conditions or characteristics leads to harm and loss, it is religiously forbidden and entails liability (p. 123).
- Negation of Uncertainty (*Gharar*): In the authors' belief, given that some of the pillars and elements of financial markets are ambiguous and unknown, these contracts are instances of the negation of *gharar*; such as transactions on indices or assets that are ambiguous and questionable in terms of quantity, quality, or payability. However, not every type of risk or high risk should be equated with *gharar*, and contracts such as insurance, futures, and options should not be deemed uncertain (*gharari*) and void (p. 138).
- Prohibition of Gambling: The authors have stated that in today's financial and monetary markets, there are transactions that bear a strong resemblance to gambling because the transaction is based on categories that have no real or even conventional existence and are not considered property or assets by rational people; such as futures or option contracts on stock indices or interest rate indices, which have an abstract existence and are in no way capable of being possessed or delivered, and are in fact a form of betting and gambling on changes in the index (p. 149).
- Prohibition of Usury (*Riba*): According to the authors, the most important indicator distinguishing the Islamic economy from other economies is the prohibition of usury (pp. 149-150).
Abrupt Prohibition of Riba in the Quran
One of the general rules of transactions and contracts is the prohibition of usury (*riba*). There is a difference of opinion among jurists as to whether the prohibition of usury, like the ruling on wine, was gradual or abrupt (p. 154). The authors' view is that by summarizing the verses of the Quran, no evidence or indication is found for the theory of the gradual prohibition of usury, because the date of revelation and the content of most verses on usury are inconsistent with this theory. It seems that the abrupt ruling prohibiting usury was announced with the revelation of Quran 30:39, and this ruling was confirmed with the revelation of other verses, such as verses 275 to 279 of Surah al-Baqarah, rebuking those who had not yet abandoned usury (p. 159).
Application of Riba and Riba Loopholes in the Money and Capital Markets
According to the authors, with the expansion of the capitalist system and banking into Islamic countries about 100 years ago, new issues have arisen concerning usury. Among these are new theories about usury and the justification of interest in the capitalist system, especially bank interest and bonds (pp. 165-177). Alongside the prohibition of usury and justifications for the permissibility of bank interest, the authors also discuss the issue of legal stratagems to evade usury and the disagreement of jurists regarding their legitimacy (p. 181), and that both sides have presented their own evidence. Opposition to the cause and wisdom behind the prohibition of usury is among the reasons for the prohibition of usury loopholes (p. 182), and permissive narrations are cited as evidence for the permissibility of usury loopholes (p. 190). The authors believe that a single ruling cannot be applied to all usury loopholes, but by providing specific criteria, permissible loopholes can be distinguished from impermissible ones (p. 196). In their belief, the absence of a serious intention for the transaction, the transaction qualifying as usury despite a serious intention, and the customary and rational equivalence of the loophole with usury are three criteria for distinguishing permissible and impermissible loopholes. Based on this, cash and credit sales, purchase and lease-to-own of fixed assets, and credit sales and the discounting of commercial papers are examples of permissible usury loopholes (pp. 196-199).
Definition of Asset Value and Types of Assets in the Money and Capital Markets
In the fifth chapter of the book, under the title "Legal Capacity of the Contracting Parties and Conditions of the Exchanged Items," seven conditions for the legal capacity of the parties to a contract are considered, citing jurisprudential texts, which are: puberty, reason, absence of legal restriction (*hajr*), free will, intention, permission to dispose, and specification of the contracting party (p. 215). The difference between the nature of an asset (*mal*) and its value (*maliyyah*) and its realization in objects from the perspective of jurists and economists (exchange value) is also one of the fundamental topics in financial contracts that is addressed in the book (p. 227). Also, types of assets have been divided in one respect into tangible assets (*'ayn*), usufruct (*manfa'ah*), and rights, and for each of these, types have been mentioned, although there is jurisprudential disagreement on some of them (p. 228).
The authors, by referring to the opinions of Shia and Sunni jurists and summarizing their views, have concluded that two main criteria are considered for the asset value of things: 1) the possibility of paying money in exchange for it, and 2) the religious permissibility of its use and the legitimacy of its benefits. Therefore, debt (*dayn*), which is used in capital and money markets, is considered an asset, and there is no obstacle to its purchase and sale, except for reasons such as usury (p. 233).
Classification of Islamic Contracts Based on the Money and Capital Markets
In addition to the general and common regulations of contracts, which they addressed in previous chapters, the authors of the book also deal with the specific regulations of contracts under various titles in the jurisprudence of transactions. In this book, they have examined more than twenty Islamic contracts related to the money and capital markets and the famous fatwas of Shia and Sunni jurists about them. The authors, in a new classification of the chapter on transactions, have presented the contracts in a four-part categorization (p. 243).
- Non-profit contracts, such as qard, deposit (*wadi'ah*), endowment (*waqf*), charity (*sadaqah*), and gift (*hibah*). In this type of contract, individuals are not seeking profit and only perform the act with the intention of beneficence (p. 244).
- Profit-oriented exchange-based contracts, such as sale (*bay'*), lease (*ijarah*), commission (*ju'alah*), manufacturing contract, settlement (*sulh*), debt and siftah, insurance, and sarqufliyyah. In this type of contract, the contracting parties exchange their assets and properties, including tangible assets, usufruct, rights, and financial privileges (p. 273).
- Profit-oriented partnership-based contracts, such as partnership (*shirkah*), profit-sharing, crop-sharing (*muzara'ah*), and irrigation contract (*musaqat*). In this type of contract, the parties provide the necessary conditions for earning profit by combining their capital or by combining labor and capital (p. 386).
- Ancillary (supplementary) contracts, such as guarantee (*daman*), transfer of debt (*hawalah*), suretyship (*kafalah*), and mortgage (*rahn*). This type of contract is supplementary to other contracts and is not the primary objective (p. 416).
Application of the Loan Contract in the Money and Capital Markets
In the authors' belief, the loan contract, one of the most important non-profit contracts, is also one of the most common contracts in the capital market today. Its nature in Islam is that of a transfer of ownership, commutative, and gratuitous contract (p. 246). They consider the loan a binding contract, and the fact that the lender can demand the loaned property from the borrower if no time is specified does not mean the contract can be rescinded or is permissible (p. 247). According to the authors, there is a difference of opinion among jurists regarding the permissibility of the loaned property being non-fungible (*qimi*) (p. 249), and in this case, there is also discussion and opinion about the substitute for the non-fungible loan. According to the majority view of Shia jurists, in a non-fungible loan, the value of the good is the responsibility of the borrower. Some jurists believe that in a loan of a fungible or non-fungible good, if the borrower returns the exact good that was loaned to the lender, it is obligatory for the lender to accept it (p. 251).
The decrease or increase in the exchange value of the loaned property due to various political, economic, or social factors is also one of the important discussions concerning loans: whether this change makes a difference in the amount of debt repayment. According to the authors, this discussion has existed for a long time but has gained more serious importance today. By borrowing money, in the case of a change in the value of money (the loaned property) due to economic developments like inflation, since money is a fungible item, its equivalent is upon the borrower's liability, and they are not responsible for compensating for the decrease in the value of the loan, unless the loan is not paid on its due date and the decrease in the value of money occurs during this delay. In that case, according to the rule of negating harm, compensation for damages is necessary (pp. 253-254).
Application of the Sale of Debt in the Money and Capital Markets
According to the authors of the book, one of the types of sale that is very common in the money and capital markets and for financing working capital is the sale of debt (*bay' al-dayn*), such as the discounting of commercial papers (p. 282). The authors, while acknowledging the scattered and non-centralized nature of the jurisprudential discussions on the sale of debt (p. 283), conduct a jurisprudential review of the types of this sale in two categories: the sale of debt (p. 288) and the sale of debt for debt (p. 299), and then the sale of debt for a price lower than the amount of the debt (p. 305). In their belief, all forms and cases of selling debt to the debtor or to third parties are permissible (p. 299), and regarding the types of selling debt for debt, they also hold the view that these contracts are generally valid (p. 305).
Lease-to-Own
The lease-to-own contract is considered a new topic in the money and capital markets, through which the lessee, at the end of the lease period, becomes the owner of the leased asset if they have complied with the terms of the contract (p. 320). In the authors' belief, this type of contract is valid if conditions such as the lessee having a serious intention, paying monthly installments, and the lessor transferring ownership of the leased item to the lessee are met (p. 322).
Application of Mudarabah and Ju'alah Contracts in the Money and Capital Markets
In the authors' belief, in the group of profit-oriented partnership-based contracts, the two contracts of Mudarabah and Ju'alah have significant application in commerce and the money and capital markets because in both contracts, there is a combination of labor and capital, but *ju'alah* has simpler rulings (pp. 393, 401). According to them, in a *mudarabah* contract, the capital must be used in trade and commerce, and the resulting profit is divided between the owner of the capital and the working agent according to a specified ratio, with no profit belonging to third parties. In this contract, the agent is not liable for the capital, and some jurists do not permit the condition of liability within the contract (pp. 397-399). In contrast, by using a *ju'alah* contract, one can be a partner in the profit and avoid the rulings of *mudarabah*. In the combination of labor and capital according to a *ju'alah* contract, the owner of the capital, such as banks and financial and credit institutions, undertakes that any real or legal person who trades with the capital under their control will receive a percentage of the profit. In this case, it is not necessary for the capital to be a tangible asset, as in *mudarabah*, or for the subject of the activity to be only commerce and the buying and selling of goods; it can be an industrial, agricultural, or service activity (p. 401).
Application of the Guarantee Contract in Bank Facilities
The guarantee contract is one of the contracts in the group of ancillary and supplementary contracts. The elimination of the creditor-debtor relationship and the creation of a new relationship between the creditor and the guarantor is one of the effects of jurisprudential guarantee (*daman*) in Shia fiqh. In this guarantee, the creditor does not have the right to approach the debtor to collect their debt and must claim it from the guarantor. However, in Sunni fiqh, the guarantor's liability is added to the liability of the guaranteed person (the debtor), and the creditor also has the right to approach the debtor (p. 422). According to the authors, the guarantee of bank facilities that is common in banking today is a guarantee in the technical sense of the Sunnis, not the guarantee as understood in Shia terminology. In the guarantee of bank facilities, the core guarantee is not suspended, which would make it void according to the majority view of jurists. Rather, the guarantor's guarantee is suspended on the debtor's failure to pay the debt. Therefore, the bank or financial institution claims its debt from the guarantor only when the debtor has delayed the loan repayment or has refused to pay it (p. 424).
Application of Options to Rescind in Macroeconomics and the Money and Capital Markets
The seventh chapter of the book is about options to rescind (*khiyarat*) and their types. In this book, *khiyarat* are divided into two categories based on their application: common options and specific options, and then the subcategories of each are explained. Common options include seven: option of stipulation, option of breach of condition, option of misrepresentation (*ghabn*), option of defect, option of partial transaction, and option of inspection. Specific options are three: option of assembly, option of animal, and option of delay (p. 478). The authors of the book, at the end of the chapter, point out that at the time these topics were discussed in jurisprudential books, the modern macroeconomic discussions did not exist. However, it should be noted that the foundations of these discussions are stated in narrations and jurisprudential texts, and it is necessary for researchers and scholars to extract these foundations and then apply and make them practical in the various and complex economic branches of today (p. 516).
Application and Difference between Rescission and Mutual Cancellation
The title of the last chapter of the book (Chapter Eight) is "Rescission and Mutual Cancellation" (*Faskh wa Iqalah*). *Iqalah* is where no cause for rescission has occurred, and the parties to the contract simply dissolve the transaction based on agreement and consent. However, in *faskh* (rescission), one of the causes and factors for rescission must be present, and in this case, dissolving the contract is unilateral, and the consent of the other party is not a condition (p. 529). This chapter is organized in four pages and is dedicated only to the topics of *iqalah* because in the discussions and contracts presented in the previous chapters, the issue of rescission for each contract has been discussed in full (p. 529). Despite the principle of bindingness in contracts, according to Shia jurists, *iqalah* is not contrary to this rule and is in fact a rescission that can be implemented in any contract with the consent and will of the parties, except in contracts where the Lawgiver has not permitted *iqalah*, such as the marriage contract and endowment (*waqf*) (p. 532).