Is Islamic Banking Islamic

Is "Islamic Banking" Islamic?
Analysis of Current Debate on Sharī'ah Legitimacy of Islamic

Banking and Finance
Author(s): MUHAMMAD TAHIR MANSOORI
Source: Islamic Studies, Vol. 50, No. 3/4 (Autumn - Winter 2011), pp. 383-411
Published by: Islamic Research Institute, International Islamic University, Islamabad
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Islamic Studies 50:3-4 (201 1 ) pp. 383-41 1
Is "Islamic Banking" Islamic?

Analysis of Current Debate on Sharl'ah Legitimacy of
Islamic Banking and Finance
MUHAMMAD TAHIR MANSOORI
Abstract
This paper studies the doctrine of hiyal in classical Islamic law and its application in
the modern Islamic finance. The paper argues that most of the hiyal used in modern
Islamic finance belong to the category of makhārij i.e. way out or cleaver answers to
difficult problems. It also discusses the methodology of talflq and its Shañ'ah po tion.
According to the author , majority of the Islamic banking transactions are largely
Shañ'ah compliant. They comply with the requirement of a valid contract as they are
free from ribā, gharar, maysir and other Shañ'ah prohibitions. There are , however ,
certain transactions which represent stratagems and thus , defeat and frustrate the
objectives of SharVah. Such transactions and practices should be avoided by the Islamic
banks.
On 28th August , 2008 , a fatwa was issued by the Shañ'ah scholars at Dār al-Iftāy
Jāmi'ah al-'Ulūm al-Islamiyyah, Binnoñ Town , Karachi , which declared present
Islamic banking un-Islamic. This was followed by a number of fatwas favouring and
opposing Islamic banking. This paper aims to analyze the current debates on the
SharVah legitimacy of Islamic banking. It examines the objections raised on Islamic
banking to see whether the current Islamic banking practices are inconsistent with
SharVah principals and ideals or they are Shañ'ah compliant.
Introduction
Shari'ah Legitimacy of Islamic banking has been a subject of intense debate

and controversy among the Islamic scholars, economists, and finance experts.1
1 For the objections and concerns of Shari'ah scholars regarding Islamic banking see, Rufaqâ Dār
al-Iftā wa al-Irshād, Murawwajah Islāmī Bankārī: Tajziyãti Mutālah , Shar'i Jā'iza, Fiqhi Naqd-o-
Tabsarahy (Karachi: Maktabah Bayyinât, Jāmi'ah al-'Ulūm al-Islāmiyyah, Binnori Town, 2008);
Dār al-Iftā', Ghayr Sūdi Bankārī , (Karachi: Dār al-Iftā' wa'1-Irshâd, 2010); Mufti Abdul Wahid,
Jodid Ma'āshī Masā'il aur Hazrat Maulānā Taqï Usmānī key Dalā'il kā Jā'izah (Karachi: Majlis
Nashriyât Islām, 2008); Mufti Ahmad Mumtāz, Ghayr Sūdi Bankārī ēk Munsifanah ' Ilmī Jā'izah
(Karachi: Jāmi'ah Khulafā* Rāshidīn, 2010).
A considerable number of religious scholars hold the view that current Islamic
banking practices are un-Islamic. Islamic banking is mere hilah i.e. subterfuge
to circumvent Sharī'ah prohibition on ribā. The products developed by
Islamic banks are only stratagems not real Islamic alternatives to conventional
finance. The Sharī'ah scholars assert that the Islamic banks heavily rely on the
methodology of talfìq i.e. borrowing between schools of law to choose such
opinions which suit their interest. This attitude is a sort of following whim
and caprice. They also contend that Islamic banks use fixed return modes such
as murābahah, ijārah and diminishing mushārakah which are not real Islamic
alternatives. The use of these modes frustrates and defeats higher purposes of
Islamic economics and finance. The Mushārakah and Mudārabah, in the
opinion of these scholars, are the only legitimate alternatives to conventional
interest based financing. In the analysis of these scholars, the maqãsid al-
Sharī'ah related to Islamic economics and finance are being ignored in Islamic
banks. Because of reliance on stratagems, and replications and adaptations, the
Islamic finance is losing its merit and substance.
This paper aims to analyze the current debates on the Sharī'ah legitimacy
of Islamic banking. It examines the objections raised on Islamic banking to see
whether the current Islamic banking practices are inconsistent with Sharī'ah
principals and ideals or they are Sharī'ah compliant.
Discussion in the paper has been divided into the following sections.
Section one deals with the issue of hiyal i.e. stratagems in modern Islamic
finance. Section two analyses the debate on Talfìq i.e. eclecticism and
borrowing between schools in Islamic finance.
Section three discusses the Sharī'ah legitimacy of fixed return modes such
as Murābahah and Ijārah in Islamic banks.
Section 1: Hiyal in Modern Islamic Finance

Before we investigate and explore the application of hiyal in Islamic finance, it
is pertinent to explain the meaning and concept of hilah in classical Islamic
jurisprudence.
Hilah literally means an artifice, device and stratagem. Technically it may
be described as the use of legal means for extra-legal ends that could not,
whether themselves are legal or illegal, be achieved directly with the means
provided by the Sharī'ah. It enables persons who would otherwise have had no
choice but to act against the provisions of sacred law, to arrive at the desired
result while actually conforming to the letter of the law. Thus, Hiyal (legal
artifices) constitute legal means by which one can arrive at judicial results
otherwise prohibited by the law.2
2 See Fr. Buhl, "Hiyal" Encyclopaedia of Islam (London, Luzac & Co, 1986) 3: 510.
IS "ISLAMIC BANKING" ISLAMIC? 3g5
Hilah in Islamic jurisprudence is used in two meanings. Firstly, as tricky

solutions to difficult problems without frustrating the purpose of law. They
are clever uses of law to achieve legitimate ends. They are employed to
overcome inconvenience in law. Such Hiyal (plural of hilah) are considered to
be lawful. The Hanafi and Hanbali jurists prefer to call them makhārij i.e.
outlets rather than Hilahs 3 Secondly, as device and subterfuge to circumvent
certain Shari'ah prohibition or to evade certain obligation. Such Hiyal are
declared unlawful by the Fuqaha .
An example of a clever use of law is indirect exchange of superior dates
with inferior dates, suggested in the Hadith of Hadrat Bilāl (R.T).4 In
transactions where dates are exchanged for dates, Islamic law requires equality
on both sides. The question is whether they should be equal in quality or
quantity. Now if a person wants to exchange his inferior quality dates with
superior quality, he has to ignore quality difference and exchange it on the
basis of equality in weight on both sides. Any difference in the quantity will
make the transaction, a transaction of Ribā al-Fadl. The solution to this
problem is to sell dates of inferior quality in market and buy from the
proceeds of sale of the dates of required superior quality. In this way the
parties can overcome a difficulty without jeopardizing the letter of Islamic
law.
Unlawful Hilah is used either to circumvent a prohibition or to evade
obligation. An example of Hilah intended to circumvent Shari'ah prohibition
on Ribā is Bay' al-lnah, i.e., is to sell a property on credit for a certain price
and then to buy it back at a price less than the sale price on prompt payment
basis, both the transaction take place simultaneously in the same session of
contract.5 For example, A sells a commodity to B for Rs. 100/- on one-year's
credit. A, then buys the commodity back for Rs 80/- from B on immediate
payment. In the above case, A is a creditor and B is a debtor, A has advanced
loan of Rs. 80/- under the cover of sale transaction in which he earns a surplus
of 20 rupees. Another form of bay' al-'tnah is to sell commodity on cash and
then buy it back at a higher price to be paid at some specified time in future.
In this case, the prospective debtor sells an object for cash to the prospective
creditor. The debtor immediately repurchases the object for a higher amount
3 Abu Bakr Muhammad Ibn Ahmad al-Sarakhsī, Kitāb al-Mabsūt (Beirut: Dār ai-Ma' rifah, 1978),
30: 209; Ibn al-Qayyim, I'lām al-Muwaqqîn 'an Rabb al-'Ālamīn (Cairo: Maktabah al-Kulliyah
al-Azhariyyah, 1968), 3: 205; Zafar Ahmad Usmānī, 'Ilā 'l-Sunan (Karachi: Idārat al-Qur'än wa
'l-'Ulūm al-Islamiyah, n.d.,) 18: 423.
4 See, Bukhari, Sahib, Kitab al- Wakãlah, Bāb al-Wakālah ß al-Sarf, Hadīth No. 2303.
5 Muhammad b. Ahmad al-Qurtubî, al-Jami' li abkām al-Qur'an (Cairo: Dar al-Kutub, al-
Misriyah, 1353/1935), 3: 359-360.
■jg£ MUHAMMAD TAHIR MANSOORI
payable at a future date. Thus transaction amounts to a loan with certain

increase.
The majority of Muslim Jurists considers this transaction invalid because
the intended objective of the transaction opposes the objective laid down by
the Lawgiver.6 This form of transaction, in their view, is nothing more than a
legal device aimed at circumventing the obstacle posed by the prohibition of
ribā. It is a fictitious deal in usurious loan transaction that ensures a
predetermined profit without actually dealing in goods or sharing any risk.
The example of hïlah intended to evade some Sharī'ah obligation is gift of
Zakatable amount before completion of one year in order to avoid Zakãh.
Similar to this is a situation where a person combines scattered animals to
reduce the amount to be paid on account of Zakah. For example, a person
owns forty sheep and his two sons also have forty sheep each. They combine
them together as single property to give one sheep instead of three sheep on
account of Zakah. Conversely, a person has forty sheep. He gives twenty to
another person so that he is exempted from obligation.
The last category of unlawful hiyal is reflected in a famous Sharï'ah
Maxim: "Every legal artifice whereby nullification of a right or affirmation of a
wrong is devised is unlawful?1 It suggests that a legal artifice which serves as
means to violate some established principle of Islamic law and defeats the
intention of the law, is unlawful. Conversely any legal artifice that does not
contravene an established legal principle is valid and permissible in Islamic
law.
A hïlah affected on a debt transaction is generally treated as unlawful hilah
because it intends to give some extra benefit to the creditor. Buy-Back
agreement and sale with right of redemption belong to this category. A
famous maxim states: hïlah affected on debt is a hïlah on Ribā} Some examples
of hiyal on debt transaction are: to mortgage a house with the creditor and
allow him to stay in it, or to sell an object to the prospective debtor for an
exaggerated price and then immediately lend him some money or to buy from
him certain commodity at a lower price or to lease him some asset at a rental
higher than its prevailing market rate.
Despite the fact that the word hïlah is a value-neutral word and it does not
necessarily mean subterfuge, playing around law, wile trick, deception,
circumvention of prohibitions, nonetheless these meaning and nuances are
6 Zaķī Badawl, Nazriyyah al-Riba al-Muharram (Cairo: al-Majlis al-A'lā li Rî'âyat al-Funūn,
1940), 203.
7Walld Ibn Rashld al-Sa'idān, Talqïn al-Afhām al-'Illiyyah bi Sharh al-Qawâ'id al-Fiqhiyyah ,
www.manzilat.org. 116
8 See, Sidqi Borno, Mawsu'ah al-Qawa'id al-Fiqhiyyah (Beirut: Mu'ssasah al-Risälah, 2003), 1: 201.
IS "ISLAMIC BANKING" ISLAMIC? 337
prominent both in the classical and modern Islamic legal usages of the term.
Ibn Taymiyyah (d. 728/1328) explains that when the word hīlah is used
unqualified, then it conveys the meaning of such legal devices whereby
Sharl'ah prohibitions are circumvented like the legal devices used by Jews.9 Ibn
al-Qayyim (d. 751/1350) says that in the common usage of Fuqahã', hīlah
means unlawful and reprehensible tricks.10
Treatment of Hiyal in Islamic Law Schools
Schools vigorously differ on the legitimacy of hiyal. Their views fall across
spectrum: The Hanafīs and Shāfi'īs take the most lenient position. They
declare them valid. Even the apparently subversive artifices are valid in these
schools although immoral. Bay' al-lnah (buy-back agreement) for instance, is
lawful in Shāfi'I School. Their argument is that it is the external form of
contract and not the underlying intention that determines the validity of a
contract or otherwise.11 The Hanafī jurists allow nikāh tahlīl, intervening
marriage to facilitate remarriage between divorced couple after thrice
repudiation (irrevocable divorce of major degree).12 They also allow bay' bil
wafa i.e. Sale with right of redemption under need.13 Hanbalī jurists have taken
a balanced position on the issue. They allow only those legal devices that
provide a way out from a difficult situation and consequently overcome
inconvenience in law.14 Mālikī jurists condemn Hiyal and declare them invalid.
They even block ways that may lead to an evil. They call it Sadd al-dbarā'i' . In
the following lines, we will discuss the approaches of schools for the treatment
of hiyal in some detail.
Hanafī approach in Hiyal
As noted earlier, the Hanafi jurists have taken a liberal and flexible position on
' See, Ibn Taymiyyah, al-Fatawâ al-Kubrā (Beirut: Dar al-Ma'rifah, 1978), 3: 191.
10 Ibn al-Qayyim, Ighāthah al-Lahßn, min Masäyid al-Shaytän (al-Riyadh: Maktabah al-M'ārif,
n.d.), 1: 385.
11 Muhammad b. Idrīs Shāfi'I, al-Umm (Cairo: Makhtabat al-Kulliyāt al-Azhariyyah, 1961), Kitāb
Ibtāl al-Istihsān, 7: 279-279; Muhyuddin Nawawï, Rawdab al-Tālibīn iva 'Umdah ¿/-Muftiyín
(Beirut: al-Maktab al-Islāmī, n.d.), 3: 261.
12 Alā' al-Dïn Kasaní, Badā'i' al-Sanāi'i' ß Tartïb al-Sharā'i' (Beirut: Dar al-Kitab al-' Arabi, 1982),
3: 187.
13 Muhammad Amin Ibn 'Ābidīn, Radd al-Muhtar 'alā al-Durr al-Mukhtar (Cairo: Mustafa al-Babi
al-Halabi, 1966), 5: 272.
14 Ibn al-Qayyim, I'lām al-Muwaqqi'in , 3: 148. Hanbali jurists are inclined towards
impermissibility of Hiyal. See, Ibn Taymiyyah, al-Fatwãwã al-Kubrā, 3: 97-405; Iqâmab al-datīl
'alā Ibtāl ai-Tahiti; Bayânh ai-Dahl 'alā Ibtāl al-Tahlil, ed. Faihān al-Matayri (Cairo: Maktabah
Lajnah, 1416/1996).
2gg MUHAMMAD TAHIR MANSOORI
hiyal. Sarakhsl (d. 490/ 1097) claims that majority of fuqahã' regards hiyal
lawful. Only a small group of rigid people disapproves it out of ignorance and
lack of understanding of the Qur'ân and Sunnah.15 As such, Hanafīs are
inclined towards permissibility of hiyal. In the classical Hanafi books many
instances of legal devices are observable where the boundaries between lawful
hiyal and unlawful hiyal appear to have blurred. Al-Fatãwã al-Hindiyyah
(compendium of Hanafi legal opinions) offers many legal devices whereby a
lender can charge certain increase on his amount from the borrower. In one
case Ibn 'Ābidīn (d. 1252/1836) suggests that if a creditor wants to give
extension in time to his debtor against some increase in amount, he may buy
some commodity against the amount of debt from the debtor and than sell the
same commodity to him on credit at a higher price. For example he wants to
increase the amount of loan from 10 dirham to 13 dirham, for extension in
time of repayment, he can do it by buying commodity for 10 dirham (which is
the amount of loan) from debtor, and sell it on credit for 13 dirhams. Ibn
Abidin claims that in this way he would be saved from indulging in ribā .16 We
notice here that the solution suggested by Ibn 'Ābidīn, clearly violates the
purpose of law. It is a subterfuge to circumvent prohibition of ribā.
Hanafi jurists have also allowed Bay' bi'l Wafã which carries the attribute
of ribā. This is a transaction in which a person in need of money sells a
commodity to a lender on the condition that whenever the seller wishes, the
lender (the buyer) would return the purchased commodity to him upon
surrender of the price.17 The reason for its designation as wafã is the promise
to abide by the condition of returning the subject matter to the seller if he too
surrenders the price to the buyer. Like bay' al-'īnah, this too is legal device for
ribā. The purchaser in this case is a creditor who benefits from the object held
in his custody as pledge till the debtor pays him back his amount and retrieves
his object. Islamic injunctions on pledge clearly provide that the creditor is not
entitled to make profit out of the pledged property. Any profit drawn from it
is interest. The Muslim jurists generally treat bay' bi'l wafã as mortgage.
In another form, the borrower who owns certain property, sells that
property to the lender, leases it back, pays rent on it (equaling interest), and
then invokes the right to repurchase the property for the original sale price.18
Mālikī Approach in Treatment of Hiyal

Mālikī jurists take the most strict position on hiyal. They condemn hiyal and
15 Al-Sarakhsl, al-Mabsut, 30: 209.

16 See, Ibn 4 Abibdin, Tanqih Fatawa al-Hamidiyyah (Beirut: Dar al-Ma'rifah, n.d) 2: 245.
17 Ibn 'Ābidīn, Radd al-Muhtarf 4: 341.
18 Al-Fatawa al-Hindiyyah (Beirut: Dār al-Fikr, 1991), 3: 209.
IS ■ ISLAMIC BANKING" ISLAMIC?
declare them invalid. Shātibl (d. 790/1388) writes:
The prominent meaning of hilah is to do an act which is apparently permissible

with the purpose to nullify and violate some Shari'ah rule. Thus the ultimate
purpose of that act is to offend established principles of Shari'ah. For instance
when a person makes gift of Zākāt soon before the completion of year, he in fact
does this, to evade the obligation. This goes without saying that to make gift in
itself is a permissible act and abstention from Zākāt is prohibited act. Now when
he combines a permissible thing, with a prohibited one, he in fact intends to
escape Zākāt. Otherwise, making gift in itself is permissible but if it aims at
avoiding Zākāt then it is unlawful.19
To establish unlawfulness of hiyal, Shātibl argues that Shari'ah was

revealed for the purpose of regulating benefits which are universally
applicable. He further argues that the ahkãm of Shari'ah are not the ends per
se. They are meant to realize certain objectives. These objectives are in fact the
interests which the Shari'ah seeks to achieve by these ahkãm . Now when a
person performs certain act that defeats that interest, he in fact violates the
will of the law-giver.20
Mālikī jurists are so strict on unlawfulness of hiyal that they do not
acknowledge even the lawful means which most probably lead to an evil
which is equal to benefit in its strength. Mālikī jurists call it sadd al-dhrā'i f
which is permanent principle of legal reasoning in Mālikī School. Imam
Shātibl has described sadd aldhrā'i f as use of a thing which has a benefit
(maslahah) as a means to realize some unlawful end or to get to an evil
(mafsadah).21 Another Mālikī jurist, Qarâfî defines it in the following words:
Sadd al-dhami means to block the ways leading to corruption in order to

eliminate it. If an act which is itself free from corruption (; mafsadah ) is used as
means to corruption, Imām Mālik prohibited that act in many cases.22
Thus Sadd al-dhara'i ' refers to an act which has a benefit but most
probably leads to an evil which is equal to the benefit. The concept of Sadd al-
dhara'i' observes Kamalī, is founded in the idea of preventing an evil before it
actually materializes. It is therefore, not necessary that the result should
actually happen. It is rather the objective expectation that a means is likely to
lead to an evil result which render the means in question unlawful even
19 Ibrahim b. Musa Shatibī, al-Muwãfaqãt (Dār ibn 'Affan, 1997), 4: 201.

20 Ibid., 2: 385.
21 Ibid., 4: 199.
22 Shahab al-Dln al-Qarafi, al-Furuq (Beirut: 4 Alam al-Kutab, 1367 AH), 2: 32.
390 MUHAMMAD TAHIR MANSOORI
without realization of the expected results.23

The relationship between means (dharā'i') and bilah is that both lead to an
evil. But the means i.e. dharā'i ' are not always associated with illegal motive.
Sadd al-dharā'i' basically contemplates preventing an evil before its occurrence.
The question of intention to procure a particular result cannot be reliable basis
for assessing the means that leads to that result. The question of intention of
perpetrator is not relevant to the adjective determination of the value of
means. A hïlah, on the other hand is always exercised with intention and with
the purpose to circumvent some Shari'ah prohibition. In bay' bi'l wafa', as we
have observed earlier, the goods sold are in nature of mortgaged property. The
transaction of sale authorized the purchaser to benefit from the purchased
goods which should not be permissible in the case of direct mortgage. Thus,
the sale with right of redemption (bay' bi'l wafã ) was adopted as a tricky
device to circumvent the prohibition of benefiting from mortgaged property
held as security with the creditor. Now since the bilah violates the spirit of
Islamic law, it should be condemned and discouraged. Similarly, a dbari'ab
should also be discouraged as long as it leads to unlawful end.
Hanbalī Approach
Hanbalī Jurists make distinction between the bilah to overcome inconvenience
in law and the one that circumvents Shari'ah prohibitions. They call the
former makhārij, and consider them valid.24 Ibn Qudãmah (d. 620/ 1223) a
renowned Hanbalī, jurist alludes to these categories of biyal in his celebrated
work al-Mughni. He writes:
"Unlawful hilah means to do an act which is apparently permissible with the

intention to achieve some unlawful purpose such as to do a prohibited thing or
avoid some obligation or nullify a right. The permissible hïlah, on the other
hand, is sought to overcome difficulty and inconvenience (in law), with the
purpose to abstain from an unlawful act or thing."25
Ibn al-Qayyim has devoted a full chapter to discussion on hiyal. Like his
contemporary Mālikī jurist Shātibī, he emphasises the role of intentions in
juridical acts. He writes:
Intention is the essence of every juridical act. The act follows the intention. If the
intention is valid, the act will be valid and if the intention is unlawful, the act
23 Muhammad Hashim Kamali, Principles of Islamic Jurisprudence (Cambridge: The Islamic Text
Society, 1985), 394.
24 Ibn al-Qayyim, I'lam op. cit., 3: 148; Muwwafiq al-Dīn Ibn-Qudamah, al-Mughnī (Cairo:
Maktabah al-Qāhirah, 1968), 6: 116.
Ibn Qudãmah, al-Mugbnï, 6: 116.
IS "ISLAMIC BANKING" ISLAMIC? 39^
would be unlawful. Thus if a person enters a sale transaction which he intends to

be a means for ribā transaction, the sale transaction would be treated as ribā. The
outward form of contract does not make it a sale transaction.26
Ibn Qayyim regards hiyal inconsistent with the spirit of SharVah. He

compares hilah with sadd al-dharā'i' (plugging means towards unlawful ends)
and concludes that doctrine of hiyal is in sharp contrast to the principle of
Sadd al-dharā'i' in that the lawgiver through sadd al-dharā'i1 intends to block
the means towards unlawful ends whereas hilah, opens means towards
unlawful ends.27 Ibn al-Qayyim does not allow a Mufti to use hiyal in legal
28
reasoning.
To prove the undesirability of hiyal, Ibn al-Qayyim cites the badith in
which Holy Prophet (s.a.w.s.) cursed the Jews for circumventing the
prohibition of fat of animals. The badith reads: "May Allah (SWT) curse the
Jews, when Allah (SWT) declared the fat of such animals unlawful, they
melted it and enjoyed the price they received."29 They thought that the
prohibition did not apply to this new form. Thus, they continued benefiting
from fat. Another form of benefit they devised was to sell it and enjoy the
price. Ibn al-Qayyim after quoting this badith writes: "KhattabI said: This
badith provides a proof that a hilab is invalid when it leads to commission of
prohibited act. The mere change of word form and title does not change the
bukm and effect, if there is no change in substance."30 Thus in the opinion of
Ibn al-Qayyim intention and purpose of law is the touchstone to determine
the validity or invalidity of a juridical act.
Imam Ibn al-Qayyim in his book gives a number of solutions to difficult
problems which serve as precautionary measures which a prudent person
should take before entering a transaction. Ibn al-Qayyim's solutions are more
close to makhārij than to stratagems and subterfuges. Following statement of
Ibn al-Qayyim will explain the point.
If a person asked another person: Buy this commodity from this person at this
price and I will buy it from you and will give you certain profit on it. The person
thought that if he bought, the orderer might change his mind and refuse to buy
it. In that situation he would not be able to return it to seller. The hilah in such
situation is that he should buy it with khiyar al-Shart (stipulated right of
cancellation) for three days or more, and then present the goods to the orderer
26 1'lam al-Muwaqqiln, 4: 217.

27 Ibid., 3: 190, See for the principle of Sadd al-dbara'i', Abū Zahrah, Usui al-Fiqh (Beirut: Dār al-
Fikr al-'Arabl, 2010), 228.
28 See, I'lam, op. cit, 4: 230.
29 Bukharī, Sabīh, Kitab Ahadith al-Anbiyā', Bah Mā dbukïra 'an Isra'il, Hadlth No. 3425.
10 I'lam, 3: 138.
y)2 MUHAMMAD TAHIR MANSOORI
for sale. If he buys it at a stated price, the transaction will be enforced, but if he
refuses he can return goods to original supplier by envoking his stipulated right
of revocation i.e. Khiyar al-Shart.n
The case under discussion is that of "Murābahah to purchase orderer. "

Imam Ibn Qayyim instructs that in case the buyer apprehends that orderer
will decline to buy promised goods, he should, as a precautionary measure,
stipulate in the purchase contract his right to return. As such this solution is
more in nature of a precautionary device than a stratagem or unlawful hilah. It
can also be described as a risk-management device. Thus the hiyal in Hanbali
School are generally used in the sense of makbārij.
Use of Hiyal in Islamic Banks
In Islamic finance, hiyal have been in practice since its inception. In Pakistan,
in 1984 the State Bank introduced twelve modes of financing. Many of them
represented stratagems and subversive hiyal. But gradually the size of such
hiyal was decreased. Now most of the hiyal in practice are in the nature of
makhārij. They are wise answers to difficult problems rather than unlawful
hiyal. They are cleaver uses of law to achieve legitimate ends. There are,
however, some devices which certainly fall under the category of unlawful
devices as they defeat the higher purposes of Islamic economics and finance.
These legal devices have badly affected the originality and authenticity of
Islamic banking. Here we will deal with such hiyal in Islamic finance. It is
pertinent to note that the opponents of Islamic banking, generally regard all
the legal devices practiced in Islamic banks as unlawful hiyal while the
proponents identify them as makhārij , rather than subversive hiyal.
Unlawful Hiyal in Islamic Finance

The legal devices discussed under this title are the hiyal that frustrate the
purpose of law and circumvent Sharī'ah prohibition on ribā. The list of such
legal devices includes bay' al-'Inah , tawarruq and Commodity Murābahah
transactions. Sale and lease back Sukūk also partially fall in this category as
they have the properties of bay' bi'l waß' which has been declared invalid by
the International Fiqh Academy.
Bay' al-'īnah
Bay' al-'īnah i.e. buy-back agreement is one of the transactions that defeat the
purpose of Islamic law. In Pakistan, buy-back was one of the twelve modes of
31 Ibid., 4: 24.
IS ■ ISLAMIC BANKING" ISLAMIC? 393
financing prescribed by the State Bank of Pakistan. In 1992 the Federal Shariat
Court and Shari'ah Appellate Bench of Supreme Court in 1999 held buy-back
void. Since then it is no longer practiced in Pakistan. Auditing and Accounting
Organization for Islamic Financial Institutions has ruled for its invalidity.32
The Islamic banks in Malaysia still rely on buy-back agreement as mode of
finance. The bank, for instance, sells piece of land to the customer on credit
and then buys it back for cash at a lower price. The difference in price is the
bank's profit which is determined in advance. The reason for its practice in
Malaysia appears to be is that the Shafi% jurists hold such contract valid. The
unlawfulness of purpose in their opinion does not affect validity of contract as
long as illegal intention is not explicitly mentioned in the contract.
Tawarruq
Tawarruq is a transaction whereby a person who is in need of money, buys a

commodity on credit from a certain person and then, sells it in the market on
cash at a price less than the one at which he purchased from its owner. It is
called Tawarruq because the purpose of this transaction is to obtain wariq
(silver) i.e. money or finance by a needy person. For example, A is in need of
Rs. 20,000. He approaches B with the request to sell him certain commodity
on credit. B sells him a computer worth Rs.20,000 for Rs.30,000 on credit to
meets his immediate need of money. A sells it in the market on cash for
Rs.20,000/- and gets money. He is indebted to B for Rs.30,000/-.
The classical Muslim jurists have divergent views about its legal status. A
considerable number of Muslim jurists hold it invalid. In their opinion the
motivating cause of the transaction is to get loan against certain increase. It is a
subterfuge and a legal device to obtain money against a certain increase.
Besides, it is an exchange of money for money with surplus from one side.
Mālikī School holds tawarruq invalid. The authoritative Mālikī text
"Mukhtasar Khalil explains Mālikī position on Tawarruq ." The author writes:
"If a person asks the other: Lend me eighty and I will return to you one
hundred." The other person says: It is not lawful but I will sell you a commodity
worth eighty for one hundred. This is disapproved in Mālikī School.33
Hanafl School has two divergent positions on Tawarruq . Zayla'I

(d. 743/1342) identifies tawarruq as bay* al-%nah and disallows it. He says:
The form is which bay' al- Inah is practiced is that a needy person approaches a
merchant and requests him to lend him some money. The merchant wants to
32 Sharrah Standards for Islamic Financial Institutions, Murabahah to purchase orderer , AAOIFI,
1429 A.H/2008 A.D., 307, Sharrah Standard no.8, Article 2/2/3.
33 Dardlr, al-Sharh al-Kabīr (Beiruit: Dar Sadir, n.d.), 3: 89.
earn from the transaction but at the same time he does not want to be indulged
in ribā. So he sells him a cloth worth ten for fifteen on credit so that could sell it
for ten (which is the real value of cloth) on cash and meet his need. This is
unlawful and reprehensible.34
Ibn Humām (d. 861/1457) another Hanafi jurists allowed it though

considered it less preferable.35
Shafil jurists emphasize that external form of contract should be
according to the requirement of Islamic Law. They are not concerned with the
underlying intention.36 From this it can be concluded that they acknowledge
the validity of tawarruq.
Hanbalī scholars hold tawarruq valid. Al-Mardawī (d. 699/ 1299), a
renowned Hanbalī jurist writes:
If a person needs cash, and for that purpose he buys a commodity whose value is
hundred for hundred and fifty, it is lawful. This is the ruling of Imam Ahmad.37
Hanbalī jurists generally regard tawarruq permissible. Imam Ibn

Taymiyyah and Imām Ibn al-Qayyim, two prominent Hanbalī scholars,
however, do not agree with the acknowledged viewpoint of their school. They
equate tawarruq with bay' al-lnah (buy-back agreement).38 Those who approve
of tawarruq rely on the texts that permit sale such as the verse: Allah (SWT)
has permitted sale and forbidden usury (al-Baqarah 2: 275).
They, however, lay down certain conditions for its validity. These are:
1. There is a real need for transaction. The person undertaking

tawarruq needs money and he is unable to get loan from any source.
However, if he can get loan, then he is not allowed to enter
tawarruq.
2. The contract in this form should not be similar to a Ribā contract.
This occurs where the seller expressly mentions that he is selling one
thousand (which is the real price) for twelve thousand, because this
amounts to exchange of money for money with excess. It is,
however, lawful if he apprises the prospective debtor of its real price
and his profit margin.
M Zayla'ï, Tabyïn al-Haqã'iq (Beirut: Dār al-M'arifah, n. d.), 4: 163.

15 Ibn Humam, Sharh Fatb al-Qadir (Beirut: Dār al-Fikr, n.d.), 7: 212, 148; See also, Ibn 'Ābidīn,
Radd al-Muhtār, 5: 325-326.
36 See, Nawawï, Rawdah al-Talibln 3/201, 3: 416.
M-Mardawî, Kitāb al-Insāf (Beirut: Dār Iņyā' al-Turāth al-'Arabï n.d.), 4: 337.
3* Tlam al-Muwaqqiïn, 5: 86; Ibn Taymiyyah, Al-Fatāwā al-Kubrā, 19: 302.
IS "ISLAMIC BANKING" ISLAMIC? ļņļ
3. The debtor (buyer of commodity) should not sell it before taking its
possession.
4. The commodity should not be sold to the same creditor (seller in this
case) at a less price.39
The Fiqh Academy of Muslim World League in its 15th session had also
allowed tawarruq with certain conditions. It, however, reviewed its fatwa in its
17th session and declared current tawarruq practices by the Islamic banks
invalid.40
Presently, The procedure of tawarruq transaction in the Islamic banks is
as follows:
The bank arranges a commodity for its customer from international market and
then sells it to him on credit. The bank also agrees with the customer that it will
sell it in the market for him. This can be illustrated by the following examples:
A, a customer approaches B, a bank with a request to lend him Rs. 10,000/-. B

purchases an item for Rs. 10,000/- from C, a dealer on cash, and sells it to A, for
Rs. 12000 on a credit of one year. B, then in its capacity as the agent of A, sells it
to C for Rs. 10,000/- on cash and hands over Rs. 10,000/- to A, the customer.
It is worth-mentioning that Hong Kong Shanghai Banking Company

(HSBC) and many other banks use tawarruq as mode of personal financing.
The working of tawarruq in HSBC is that it buys metal from international
brokers and then sells it on to customers at a pre-agreed price that is payable
over an agreed term. The customer appoints the bank its agent to sell the metals
to a third party in the market. The proceeds are credited to creditor's account.
It is evident from the above mentioned practices of tawarruq in the banks
that it is only a legal device (hīlah) to circumvent the obstacle posed by the
prohibition of Ribā by making it a sale transaction while in fact it is an
interest-bearing loan transaction. It is a credit vehicle and technique to provide
cash liquidity to the customer against an increase over and above the amount
of finance. In the present tawarruq even the possession of commodity is not
taken by the prospective debtor. The commodity also does not move into his
risk and liability. Main objections raised on tawarruq practice are as follows:
1. This is a trick to get cash now for more cash paid later.
2. There are effectively only two parties i.e. no real, unconnected third
party.
"Ibid.
Qarãrãt al-Majma' al-Fiqkì li Rābitah al-'Alam al-Islāmi, Seventeenth session, Makkah 13-17
December, 2003
3. There is a concealed buy-back action.

4. The metal, subject matter of tawarruq does not move at all in
relation to tawarruq sales; this renders the metal virtually wholly
irrelevant since it serves simply as a prop to enable these deals to be
transacted.
5. Tawarruq does not involve any kind of risk that is associated with
normal and genuine commodity trading activities.41
Sale and Lease-back Sukūk
Sukūk have been defined by the Accounting and Auditing organization for
Islamic Financial Institutions (AAOIFI) in its Sharl'ah Standard No. 17 as:
"Certificates of equal value representing undivided shares in ownership of
tangible assets, usufruct and services or (in the ownership of) the assets of
particular projects or special investment activity, however, this is true after
receipt of value of Sukūk, the closing of subscription and the employment of
funds received for the purpose for which the Sukūk were issued."42 The
standard gives examples of fourteen different types of investment Sukūk such
as Ijārah Sukūk , Salam, Sukūk, Mudãrabah Sukūk, Mushārakah Sukūk etc. out of
these Sukūk , Ijãrab Sukūk are the most popular Islamic investment certificates
which are rapidly gaining ground in the capital market.
There are three parties to the structure of Ijārah Sukūk : the originator
(beneficiary) of Ijārab Sukūk ; the Special Purpose Vehicle (SPV) the issuer of
Sukūk and the investors (Sukūk holders). The beneficiary creates SPV as an
independent legal entity that acts as trustee for investors. The originator/
beneficiary sells specific asset to SPV. Sukūk are issued against that asset. The
proceeds of sale and paid to the originator. It lease back asset and pays rentals
to investors through SPV. It also gives undertaking to buy it back on expiry of
lease. Pursuant to this unilateral undertaking, it buys the asset at its face value.
In Pakistan, WAPDA and Motorway Sukūk are two important sovereign
Sukūk which were based on sale and lease back structure. WAPDA needed
finance to enhance power generation capacity at Mangia. So it issued Sukūk
worth 7000 million rupees against ten turbines installed at Mangia. For this
purpose, WAPDA First Sukūk Company was created to act a SPV. The asset
i.e. turbines were leased back to WAPDA for a period of seven years.
41 See, Salman H. Khan, "Organized Tawarruq in Practice: A Sharl'ah Non-Compliant and

unjustified Transaction", New Horizon, London, Institute of Islamic Banking and Insurance,
Oct-Dec. 2010, 16-21; see also Sārni Ibn Ibrahim Swaylim, Qadãyã fi al-Iqtisãd wa al-Tamwîl al-
Islāml (Riyadh: Dār Kunūz Ishbãliya, 2009), 313-435.
42 Sharī'ah Standards for Islamic Financial Institutions, Investment Sukūk, 1429 A.H/2008 A.D.,
307, Sharl'ah Standard no. 17, Article 2.
IS "ISLAMIC BANKING" ISLAMIC? 397
WAPDA gave an undertaking that it would buy it back at the end of lease
period at face value.
The above structuring of sovereign Ijārah Sukūk has been contested by
many Shari'ah scholars. In the analysis of these scholars the most controversial
and objectionable feature of this type of Sukūk is the buy-back arrangement in
it in explicit or implicit form.43 As we mentioned above the SPV in case of
sovereign Ijārah Sukūk is created by the Government which is the initiator, of
and beneficiary from Sukūk. The Government gives undertaking to buy it at
face value. This is in nature of put option to SPV. SPV, being a subsidiary of
Government, is under obligation to exercise this option in favour of
Government, the beneficiary.44 So it is almost certain that assets are reverted
back to the Government on maturity. This is also similar to bay' bi'l wafa'
another controversial transaction of classical Islamic jurisprudence. In bay' bi'l
wafā' a person, who is in need of money sells an object on the condition that
after certain period he will buy it back from the buyer at face value i.e. at the
price of first sale. International Islamic Fiqh Academy has declared this
transaction invalid.45 The reason of its invalidity is that it puts restriction on
proprietary right of owner as he is not allowed to dispose it of through sale or
gift, rather it binds him to sell it back to the first seller, at face value. This
transaction is closer to lending than selling. The seller in the first transaction is
borrower and buyer the lender. The property remains with the lender as
mortgage from which he benefits. This is established fact that any benefit
drawn from mortgaged property is ribā. After the expiry of loan period, the
first debtor, pays price and gets his assets back. The second sale in above
structure is in fact return of loan amount to the lender.
Besides the above buy back and bay' bil wafa feature in above Ijārah
Sukūk, there are also some other controversial features in the arrangement.
Some of such features are as follows:
1. In most of the cases, the ownership of the sold asset remains with the
originator. It is not clear in what way the certificate holders own the
asset.
2. Major maintenance of the leased asset is undertaken by the lessee

(originator/beneficiary) which means that the risk related to owner-
ship has not been transferred to the owners.
45 Salman Syed Ali, Islamic Capital Market Products, Developments and Challenges, Occasional
paper No. 9 (Jeddah: Islamic Research and Training Institute, 2005), 52, 53.
"Ibid.
Majma' al-Fiqh al-Islāmī, al-Qarãrãt wa al-Tawsiyãt, seventh session, Jeddah, 9-14 May, 1992,
no. 67/4/7.
■jçg MUHAMMAD TAHIR MANSOORI
3. On dissolution event (even in case of destruction) the lessee is bound

to purchase leased property. This means that the risk is borne by the
lessee.
4. Almost all Sukük guarantee the return of principal to the Sukük

holders at maturity in exactly the same way as conventional bond.
This is accomplished by binding promise from either the issuer or
the manager to repurchase the asset represented by the Sukük at the
started price at which these were originally purchased by the
investors.
Moulana Taqi Usmáni, a renowned and leading Sharl'ah scholar of

Islamic finance has expressed his dissatisfaction over a number of ijärah Sukük.
His main concern has been that these Sukük violate the maqãsid ů-SharVah i.e.
higher objectives of Islamic Law and Islamic Finance. In a working paper
presented before the Sharl'ah Board of AAOEFI, Moulana Usmáni describes
current ījārah Sukük , contrary to objectives of Sharī'ah. He observes:
"If we consider the matter from the perspectives of the higher objectives of
Islamic Law or the objectives of Islamic economics, then Sukük in which are to
be found nearby all of the characteristics of conventional bounds are inimical in
every way to these purposes and objectives. The whole objective for which ribā
was prohibited is the equitable distribution among partners of revenues from
commercial and industrial enterprise. The mechanism used in Sukük today,
however, strike at the foundations of these objectives and render the Sukük
exactly the same as conventional bonds in terms of their economic results."46
In order to make Sukük transaction Sharī'ah compliant, it is necessary

that these issues be addressed, otherwise it will remain a replication of
conventional bonds. In the present form, many sovereign Sukük are mere
stratagems to circumvent ribā.
Hiyal as Makhārij in Islamic Finance
As opposed to subversive hiyal stated above, there are certain legal devices
which do not frustrate the purpose and spirit of law. They are clever uses of
law to achieve legitimate ends. Legal devices in Islamic banks predominantly
belong to this category. Following examples can be cited to prove this
proposition.
46 Taqi Usmáni, Sukük and Their Contemporary Applications, 13.
IS * ISLAMIC BANKING" ISLAMIC? 399
Case No. 1: Penalty for Default in Islamic Banks

In conventional Banking where interest-based loans are advanced to the
customers, the amount of loan keeps on increasing according to the period of
default. On the other hand, once the price is fixed in Murābahah and Ijārab
financing, the two major financing products in Islamic banks, it cannot be
increased. However, this restriction is sometimes exploited by dishonest
customers who deliberately avoid to pay the price at its due date, because he
knows that he will not have to pay any additional amount on account of
default or late payment.
In order to resolve this issue, some contemporary scholars have suggested
that the dishonest customers who default deliberately should be made liable to
pay compensation/ penal charges to the financial institution for the loss it may
have suffered on account of such default.47
It is argued in favour of charging compensation that the Holy Prophet
(peace be upon him) has condemned the person who delays the payment of his
dues without a valid cause. In well-known badith he has said:
"The well-off person who delays the payment of his debt, subjects himself to
punishment and disgrace."48
This badith allows corporal punishment for the delinquent debtor as well
as blacklisting the delinquent debtor and exposing him in the public. This
ruling, however, does not apply to the case of genuine default. The financial
institution therefore, should verify the causes of default. If it is established that
the default of the customer is due to poverty, no penalty or compensation
should be charged or claimed from him, rather he should be given respite until
he is able to pay.49 The Holy Qur'in says: "And if he (the debtor) is short of
funds, then he must be given respite until he is well off." (2: 280).
Some contemporary scholars have suggested that some fine i.e. a certain
quantity of money should be imposed on the defaulter. Such a fine can be
proportional to the sum of money involved. It can also be related to the actual
period of delay. But this proposal has not been accepted by the majority of
Muslim jurists because it makes the fine similar to ribā. The International Fiqh
Academy of OIC has also rejected the proposal. In its judgment in 1990, it
held: "If the buyer/debtor delays the payment of installments after the
47Nazïh Hammad, "Manhaj al-Fiqh al-Islāmī fi 'Uqübah al-Madin al-Mumātil," Majallah al-
Buhūth al-Fiqhiyyah al-Mu'āsirab, Riyadh, 14 (1992), 01: 22-23.
4g Ibn Hajar al-'Asqalanī, Fath al-Bāri, Sharh Sahīh al-Bukhāri (Beirut: Dar al-Ma'rifah, 1379 AH),
5: 62.
Muhammad Taqi Usmáni, Sukūk and Their Contemporary Applications , 133.
4QQ MUHAMMAD TAHIR MANSOORI
specified date, it is not permissible to charge any amount in addition to its

principal liability, whether it is made a precondition in the contract or it is
claimed without a previous agreement, because it is Ribā, hence prohibited in
Sharī'ah."*0 In another resolution adopted in 2000, it reaffirmed the above, but
added: "It is permissible to include a Penalty Provision in all financial
contracts except when the original commitment is a debt. Imposing a Penalty
Provision in debt contract is usury in the strict sense."51 It also lays down that
the loss that may be compensated includes actual financial loss incurred by the
partner, any other material loss and the certainly obtainable gain that he
misses as a result of his partner's default or delay. It does not include moral
loss. These resolutions provide some relief only to those affected by delays in
fulfillment of salam/istisnã' obligations. The amounts owed in installment
sales and murābahah sales having become debts remain outside their purview.
The latest response to the challenge came from the Accounting and
Auditing organization of Islamic Financial Institutions (AAOIFI), Bahrain.
This response makes a penalty for default automatic. AAOIFI has suggested a
self-imposed penalty on the customer. The Sharī'ah standards of AAOIFI,
which represent a successful attempt by the contemporary Muslim scholars at
harmonization and standardization of Sharī'ah views on Islamic banking, have
suggested that: 'the contract of murābahah should consist of an undertaking
from the customer to pay an amount of money or a percentage of the debt, to
be donated to charitable causes in the event of a delay on his part in paying
installments on their due date. The Sharī'ah supervisory board of the Financial
Institution must have full knowledge that any such amount is indeed spent on
charitable causes, and not for the benefit of the Financial Institution itself.'52
This rule is based on a ruling given by some Mālikī jurists who say that if
a debtor is asked to pay an additional amount in case of default, it is not
allowed by Sharī'ah , because it amounts to charging interest. However, in
order to assure the creditor of prompt payment, the debtor may undertake to
give some amount in charity in case of default.53
The State Bank of Pakistan also favours this solution. In its guidelines
relating to Murābahah , it says:
It can be stipulated while entering into the agreement that in case of late payment
or default by the client, he shall be liable to pay penalty calculated at a certain
50 Majallah al-Fiqb al-Islāmī, Jeddah, Islamic Fiqh Academy, OIC, vol. 1, No. 6: 193.
51 Ibid., vol. 2, No. 7: 9.
52 Sharī'ah Standard No. 8, Murabakab to the Purchase Order, Accounting and Auditing
Organization for Islamic Financ, 2008, Article 5/6, 126.
53 This is the opinion of Muhammad ibn Ibrahim ibn Dinar. See, Hattab al-Mālikī, Tahrìr al-
Kalām fi Masā'il al-Iltizām (Beirut: Dār al-Gharb al-Islāmī, 1984), 71-76.
IS " ISLAMIC BANKING" ISLAMIC? 4Qļ
percentage per day or per annum that will go to the charity fund constituted by
the bank. The amount of penalty cannot be taken to be a source of further return
to the bank (the seller of the goods) but shall be used for charitable purpose. The
bank can also approach competent courts for award of solatium which shall be
determined by the courts at their discretion, on the basis of direct and indirect
costs incurred, other than opportunity cost.54
From this discussion, it can be concluded that AAOIFFs ruling on

penalty for default is an effective mechanism to deter the delinquent debtors
from intentional and deliberate default that causes harm to the financial
institutions. Thus, compulsory charity suggested by AAOIFI serves as a way
out (makhraj) for the problem of delinquent debtor.
Case No. 2: Islamic Solution to Discounting

In conventional banking, the financial institution discounts a trade bill and
pays to the client, the holder of bill an amount that is less than the face value
of bill on account of payment before time of maturity. The bank for instance
pays to the client who holds a bill payable after three months Rs. 45000/-
instead of Rs. 50,000/- when he wants money before the time of maturity of
his bill. This is obviously rifó, prohibited by sharVah.
The Islamic banks instead of discounting bill, give Qard-e-Hasan up to the

value of bill to the client, and then as agent of the client collect the bill from
the drawer i.e. debtor of the client and charge agency fee for this task. In the
above example, the bank will give him Qard-e-Hasan of amount Rs.50,000/-
and it will charge Rs.5000/- as collection fee. Here we observe that Islamic
banks also undertake discounting and earn profit in the transaction but unlike
conventional banks they do it in sharī'ah complaint manner. The Council of
Islamic Ideology has approved this device as an alternative to discounting.55
Case No. 3: Hedging against Fluctuation in Value of Currency

In conventional banks, hedging against fluctuation in value of currency is
affected through foreword and future currency contracts in which both the
counter-values are deferred to a future date, while Islamic law requires that
both the counter values should be exchanged in the same session of contract.
54 State Bank of Pakistan, Model Agreements for Islamic Banks , 2004, http://www.sbp.org.pk/
press/essentials/Essentials%20 of %20Islamc.htm.
55 Council of Islamic Ideology, report on Elimination of Interest from Economy of Pakistan ,
Islamabad, 1980. See for the legitimacy of this transaction, Taqi Usmáni, Takmilah Fath al-
Mulhim (Damascus: Dār al-Qalam, 2006) 1: 363.
4Q2 MUHAMMAD TAHIR MANSOORI
In Islamic banks, hedging against future devaluation of currencies is

affected through unilateral promise to buy/sell given by the client i.e.
importer or exporter. This is done in the following manner:
(i) A customer (exporter/importer formally requests the bank for a

forward promise to buy/sell foreign currency to hedge against
foreign currency rate fluctuation in future.
(Ü) The bank issues to the customer "promise to sell/purchase" as the

case may be as per approved format. This promise to sell/purchase
records the promise between bank and customer to sell/buy foreign
currency at a future date.
(iii) The customer signs and returns the "promise to sell/purchase" to the
bank.
(iv) The actual transaction takes place on maturity date and both counter
values are exchanged.
The hedging can also be done through the execution of back to back
interest free loans using different currencies without receiving or giving any
extra benefit provided these two loans are not contractually connected to each
other.
Case No. 4: Fresh Murābahah Facility

Another variation of the above, as an acceptable alternate to discounting
through acceptable hiyal in the sense of makhārij without compromising on
the letter and spirit of Shañ'ah is as follows:
(1) The Islamic bank, instead of discounting accepted trade bill of

Rs.50,000/, holds the bill as a security till its maturity, say after three
months.
(2) Fresh Murābahah facility for say Rs. 45,000/ is extended to the
customer, in which the cost price of Rs. 45,000/- plus profit portion
of say Rs. 5,000/ totaling Rs. 50,000/ is to be paid by the customer,
on maturity date, which matches the maturity date of the accepted
trade bill held as security.
(3) On the maturity date of the trade bill, the Bank collects the bill from
the drawer, i.e. debtor of the client. This amount is then used to
settle the amount payable by the customer on maturity date under
the Murābahah facility.
IS "ISLAMIC BANKING" ISLAMIC? 4Q3
In the above cases, the solutions provided by Islamic banks, are in fact
clever answers to difficult problems whereby difficulty in the law is overcome
without frustrating the purpose of law. In modern Islamic finance, the
products and transactions are generally in nature of makhārij rather than
subversive hiyal.
Section 2: Financial Engineering through Talfiq

A major objection raised on Islamic banking is that it relies on financial
engineering through the device of Talfiq i.e. borrowing between schools of law
to reach intended objectives. Through Talfiq Islamic financial Institutions pick
and choose from various schools of law such rulings that suit their interest.
Talfiq is a jurisprudential principle that suggests that a jurist adhering to a
particular school of law, abandons the jurisprudence of that school on a
particular matter and adopt a competing point of view offered by another
school if the latter is more practicable and conforms most to the need of the
time. A classic example of Talfiq (borrowing between schools) and Takhyir
(eclecticism) in the modern Islamic legal history is "The Dissolution of Muslim
Marriage Act, 1939" which is primarily based on Mālikī School. It is a popular
law on judicial separation in Pakistan, India and Bangladesh which was
proposed by the leading Hanafī jurists having regard to the fact that Hanafī
law did not contain provision enabling a wife to obtain decree of dissolution
from the court on many grounds mentioned in the Act.
Islamic banks rely on talfiq and takhyir in their rulings. In Murābahah
transaction for instance, the ruling on binding nature of promise given by the
client is taken from lbn Shubrumah Mālikī. The ruling suggests that client is
bound to buy goods which he has promised whenever the institution acquires
for him from the market. The popular concept of compulsory charity payable
by the delinquent debtor is based on the individual opinion of Mālikī jurist
Muhammad lbn Ibrahim lbn Dinar, while the popular position of the Mālikī
School on the issue is that charity is not enforceable at law.56 Freedom of the
institution from the liability of defect (bay' bi Shart barā' 'ahd al-dhimmah) is
taken from Hanafī Law.57 This law allows a seller (bank in this case) to sell a
commodity with the condition that it will not be hable for the defect that the
buyer discovers in the commodity later on. Non-disclosure of agency to the
supplier is allowed by the Hanafī Law.58 As such, the customer, acting as the
agent of bank for purchasing Murābabah commodity for the bank is not bound
56 Hattab, Tabrtr al-Kalam fi masā'il al-Iltizam (Beirut: Dar al-Gharb al-Islami, 2011), 71-76.
57 'Alā' al-Dîn Kasanī, Badā'i' al-Sana'i', 5: 276.
Al-Marghīnānī, al-Hidãyah (Beirut: Dar Ihya' al-Turath al-' Arabi, n.d.), voi. 3, Kitab al-
Wakãlah, 142.
4Q4 MUHAMMAD TAHIR MANSOORI
to disclose the agency to the supplier. The permissibility of 'Arbūn, or down

payment and right of seller to retain it in case the buyer does not buy the
contracted goods is based on the view point of Hanbalī School although the
other three schools disallow 'Arbūn.59
These instances are quoted to show that Islamic banks widely and
excessively employ the device of talfiq whereby they pick some rules from a
school of law and some from another to achieve intended objectives and goals.
Revisiting the Debate on Talfiq
Is the methodology of Talfiq and Takhyir employed by the Islamic financial

institutions and the scholars engaged in fatwa on Islamic banking un-Islamic?
A close examination of classical and modern texts of usul-al-Fiqh reveals
that talfiq has not been prohibited absolutely in Islamic jurisprudence. The
Jurists allowed it with certain conditions. There are many instances where a
jurist of one school gave fatwa according to the opinion of another school
when he observed that his own school was deficient on that point and that the
competing view was more practical and served best the interest of public.
The later Hanafī jurists for instance, allowed charging fee for teaching
Qur'ân, leading prayer, keeping in view the larger interest of Sharī'ah. This
ruling was constructed on the Shāfi'ī law although their own school did not
allow it.
Some modern Sharī'ah Scholars allow recourse to talfiq with the
following conditions:
1. There is compelling need for talfiq and deviation from the original
school to another school.
2. The view best serves the general welfare.
3. It does not violate any already established Ijmā'.
4. An individual opinion of a jurist in a school is not generally

approved for the purpose of fatwa but if it is endorsed and adopted
by a large number of jurists later on, then it is valid for fatwa and
judgment.60
Some 'ulama have laid down some extra conditions for eclecticism and
moving between schools for the purpose of selecting lenient view.
59 Majma' al Fiqhi al-Islamī, al-Qarārāt wa al-Tawsiyat, Eighth session, Brunei Dar al-Salam, 21-
27June.1993.no. 86/3/8.
60 Ashraf 'Ali, Thãnawi, Hilah Nājizab (Karachi: Dar al-Isha'at, n.d.), 15-16.
1. The purpose of adopting lenient view of other school should be to

remove severe hardship.
2. The permission to adopt lenient view and concessionary rule of
other school should issue forth from the experts of shari'ah, and the
people of upright character. They should have done this through
collective ijtihād.61
In Islamic finance, a fatwa predominantly meets this criterion. The

scholars engaged in production of fatwa in the field of Islamic finance observe
these conditions. An individual opinion of a jurist is adopted by Islamic banks
only when it is endorsed and approved by the majority of contemporary
jurists associated with prominent fiqh councils and institutions such as
International Fiqh Academy, Jeddah and Fiqh Academy of Rabitah al-'Ālam
al-Islāmī. Thus, it does not remain an individual opinion; instead it becomes a
majority opinion of prominent jurists.
A talfìq , is however, regarded undesirable and detested when it is
undertaken under the dictates of one's whims and caprice not in the quest of
truth.
This can be illustrated by the following examples:
1. A person divorces his wife thrice in one session. He does not take
her back following the majority opinion which considers triple
divorce as irrevocable divorce. Then he divorces his other wife in the
same manner but treats it a revocable divorce relying on the opinion
of Ibn Taymiyyah and Ibn al-Qayyim, and consequently takes her
back.
2. A person sells his house and does not acknowledge for his neighbour
the first right to buy or refuse. In doing so, he follows Shāfi'ī school
which does not recognize pre-emption (Shufah) for neighbour. On
the other hand when a house is sold in his neighbourhood, he claim
his first right to buy or refuse following Hanafl school which rules
for validity of Shufah for neighbour.
In these two examples talfiq been followed only to satisfy one's own
desire. Such talfìq is not approved in any school of law.
Talfiq in Modern Islamic Jurisprudence
It is pertinent to mention here that two versions of talfìq and takhyir are
observable in the modern Islamic jurisprudence.
61 Kamal al-Dïn, al-Misbah fi Rasm ai-Mufti (Beiut: Dar Ihya al-Turath al-' Arabi, n.d.), 461-470.
First and the mild version of talfiq is that the jurist belonging to particular
school looks beyond his school when he finds that his own school is deficient
on a particular issue. So, instead of exercising his ra'y and personal judgment
(i.e. ijtihād), he borrows view from the other school. While doing so, he does
not lose his primary identification with his original school. This form of talfiq
and takhyîr is generally observable in the field of family law in Muslim
countries where the scholars and legislators, despite their affiliation and
adherence to particular schools, have borrowed views from other schools. In
Egypt, for instance, the code of Muslim personal law is primarily based on
Hanafī law, which is the school of majority of scholars, jurists, and legislator
involved in legislation on family law. Nonetheless, many provisions in the
code are of non-Hanafl origin. Hudüd laws in Pakistan are also primarily based
on Hanafī jurisprudence, but the views and rulings of other schools have also
been incorporated in the law.
Second and radical version of talfiq is "to disregard the divisions between
the schools altogether and pick whichever rules are found to be the best
without bothering where rule came from.
The Sharl'ah rulings of International Fiqh Academy and AAOIFI on
Islamic banking and finance are manifestations of this tendency. The legal
scholars at International Fiqh Academy, Jeddah and the Accounting and
Auditing Organization of Islamic Financial Institutions (AAOIFI) in their
rulings borrow from all schools and select from variant viewpoints the one
which in their opinion is more practical and is best suited to the needs of
Muslim community. They consider all the schools of law as their common
legal heritage, and for practical purpose they regard them as one single school
of law. Thus, the modern Fiqh institutions have practicality removed the
schools boundaries and made fiqh one unified field of alternative rules, from
which legal scholars pick freely. This methodology is especially observable in
the field of Islamic banking and finance.
Some modern Sharī'ah scholars allow talfiq in mu'āmalāt not in ibadãt.
Renowned Sharl'ah scholar, Wahbah Zuhayli says:
"In the field of mu'āmalāt (civil transactions), it is necessary that we borrow from
each school and adopt the opinion that serves most the interest of people and
their well being even if this practice entails talfiq i.e. eclecticism.62
Zuhayli does not find any sharī'ah justification for prohibition of talfiq
and eclecticism. He writes: "the assertion that sharī'ah forbids talfiq and
eclecticism" is against the sharī'ah principle that suggests that "difference of
62 See Zuhayli, Usui al-Fiqh al-Islāml (Damascus: Dār al-Fikr, 1986), 1152-1153.
opinion among Ummah is mercy." It also contradicts the principles of ease,

and removal of hardship on which legislation in sharVah is built."63
Some early jurists do not prescribe any condition for picking lenient
views from schools. In the opinion of Qarãfl and ibn humām, common man is
allowed to follow any lenient opinion found in different schools.64
In our opinion, if a lenient position of a school is adopted by the sharl'ah
scholars collectively (as is the case of International Fiqh Academy) and the
opinion is for the benefit and well being of ummah at large, then it is no way a
kind of caprice and whim. It is close to maslahah Mursalah whose legitimacy
and validity is approved in Islamic jurisprudence. The early fuqaha have
always taken care of the elements of ease, facilitation, removal of hardship and
public interest in their legal verdicts. For this purpose, Hanafī jurists
introduced doctrine of Istihsān and the Mālikl jurist's doctrine of maslahah
mursalah.
On the basis of istihsān, a jurist can deviate from a rule of precedent (a
general rule) to a concessionary rule, if the rule of precedent causes unbearable
hardship for the people.65
The fuqaha even allow departure from general rule on the basis of hajah
(need), besides darurh (extreme necessity). Shātibī defines hajah as an interest
which when observed relieves distress and difficulty, and which when not
observed, leads in most cases to the loss of desired objectives. So if this type of
interest not observed, those subjected to the rule of Sharl'ah would generally
suffer difficulty and distress; but this would not amount to corruption and
chaos that is expected as a result of the collapse of essential interests.66
The Islamic law acknowledges hajah as a cause of granting concessionary
laws. In the opinion of Imam al-Haramayn Juwainî, a hajah when it is
collective and universal, can make the prohibited things permissible like
darurah.a Examples of needs which are advanced to the degree of necessity are,
permission of the contracts of salam (advance purchase of goods with future
65 Ibid.
64 Qâdî Baydâwî, Tahdhïb Sharh al Isnawî (Ciaro: al-Maktabah al-Azhariyyah li Turāth, n.d.),
3: 266.
"Doctrine of istihsān has been proposed by Hanafī jurists to overcome rigidity and
inconvenience in law. It is similar to equity in the modern jurisprudence. To understand the
concept of Istihsān see, al-Sarakhsi, Usui al-Sarakhsī (Beirut: Dār Kutub al-'Ilmiyyah,1993),
2: 200-201; 'Abd al-' Azīz al-Bukhāri, Kashf al-Asrār (Cairo: Dār al-Kitāb al-Islāmī, n.d.), 4: IDO-
SI; Ahmad Hassan, Analogical Reasoning in Islamic Law (Islamabad: Islamic Research Institute,
1986), 409-422.
66 Shātibī, al-Muwāfaqat, 2: 11.
67Imām al-Haramain Juwayni, al-Burhān ft Usiti al-Fiqh (Bierut: Dār al-Kutub al-'Ilmiyyah,
1997), 2: 82. For further details see: 'Ali Haydar, Durar al-Hukkām Sharh Majallah al-Ahkdm al-
'Adaliyyah (Beirut: Dār al-Kutub al-'Ūmiyyah, n.d.), section no. 32.
4Qg MUHAMMAD TAHIR MANSOORI
delivery), istisnā' (contract of manufacturing on order), bay' bi'l waß' (sale

with right of redemption). The permission of bay' bi'l waß' was granted by the
ulama of Bukhara owing to the need faced by the pole there to obtain loan
through redeemable sale. It is worth mentioning that this need no more exists.
The International Fiqh Academy has declared bay' bi'l waß' invalid being a
stratagem for ribā.6*
From this we may conclude that eclecticism, and moving between schools
is not against Sharī'ah. This methodology has roots in Islamic jurisprudence.
The jurists in past have borrowed from different schools, when they felt need
for it. The complex nature of modern transactions requires that reliance
should not be made on one particular school, rather all available views and
opinions of classical jurists be examined and the appropriate one be selected
for fatwã.
Section 3: Sharī'ah Position of Fixed Return Modes
A very common objection raised on Islamic banks is that they frequently use
trade related modes such as murābahah and ijārah which guarantee them a
fixed revenue. In murābahah the bank, on the request of client buys goods and
sells them on cost plus profit basis. It is a fiduciary sale. So the client is
informed in a transparent manner of the profit margin added to the cost price.
In Ijārah, the bank purchases assets that are required by the customer and then
leases to him for a given period. At the end of lease period the client usually
purchases the asset against the security deposit with the bank.
In both the cases of murābahah and ijārah the bank gets a fixed return in
the forms of profit and rentals respectively. Now the objection is that the
bank does not share any liability of loss with the customer, which is against
the precepts of Sharī'ah. This is true that participatory modes like mushārakah
and mudārabah are the ideal modes of Islamic finance, but they are not the
only lawful modes of financing. Murābahah, ijārah are equally legitimate
modes. To equate them with interest based modes of conventional banks,
would mean to reject their permissibility which is clearly established in Islamic
law.
Risk Element in Murābahah and Ijārah
Although murābahah and Ijārah are fixed return modes, but they involve a
number of risks that make the transactions different from interest based
transactions of conventional banks where the banks lend money without
68 Majma' al-Fiqh al-Islāmī, al-Qarārāt wa al-Tuwsiyãt, seventh session, Jeddah, 9-14 May, 1992,
no. 67/4/7.
sharing any liability for loss. In murābahah , bank bears all risks related to
trading. If the commodity in the possession of banks or client while working
as agent of bank, is destroyed before it is sold to client, the risk is exclusively
borne by the bank. Another possible risk related to murābahah is refused by
the client to buy promised goods from the bank.
Similarly in ijãrah , the bank bears ownership related risks and liability
such as major maintenance of leased asset and accidental repairs. It also bears
the risk of destruction of asset. In case the asset becomes non-functional, the
leasing bank cannot change rental for that period. The profit earned by the
bank in murābahah and ijārah is, therefore, lawful because it is against the risk
and liability for loss borne by the bank.
The question arises here why are Islamic banks reluctant in pursuing
equity participation and profit and loss sharing which are the distinguishing
features of Islamic finance. The answer to this question perhaps lies in the role
the bank assumes in relation to depositors. The Islamic banking acting as
mudārib (managing partner), for investors is bound to protect the interest of
depositors i.e. the investors and to invest their money in less risky avenues.
This goes without saying that participatory modes carry risk larger than the
one involved in trade related modes. This is also a fact that participatory
modes such as mushãrakah and mudãrabah are workable in an environment of
honesty and fairness in dealing in the society. Their application requires high
moral standards in the society. In societies where businessmen are in the habit
of hiding their real profits and keep double accounts, it is very risky for the
bank to commit its resources for long term equity investments. The possibility
of getting an unscrupulous and dishonest partner in profit and loss sharing
arrangement, may incur losses to the bank which in turn will harm the
interest of depositors. Besides the equity financing needs sufficient expertise to
undertake project appraisal, which is presently lacking in Islamic banking
industry.
Mushãrakah as real Islamic alternative?
It is generally believed that real Islamic alternatives to interest bearing

financing are mushãrakah and mudãrabah. But the fact is that Islamic law does
not make any distinction between the murābahah and ijãrah on the one hand
and the mushãrakah and mudãrabah on the other hand. They are all equal in
status as far as their validity and legitimacy is concerned.
It should also be noted that mushãrakah and mudãrabah are workable in
an atmosphere of honesty and fairness in dealing in the society. In an
atmosphere where the businessman keep double accounts of profits and are
reluctant to disclose their real profits, handing over depositor's money to the
4ļQ MUHAMMAD TAHIR MANSOORI
businessman would entail high risk for the institution and depositors. The
Qur'ân has acknowledged dishonesty as common phenomenon in partnership.
It says:
"And verily many partners (in business) wrong each other expect those who
believe and do acts of righteousness and they are very few.*69
Holy Prophet (S.A.W) has emphasized observance of honesty in a

number of ahādith. The holy Prophet (S.A.W) said that Allah says:
I am the third of the two partners as ling as they do not cheat one another. But
when one of them cheats the other, I leave them (i.e. they are deprived of
blessing and favour of Almighty is Allah).70
He also said:
"Allah almighty is with the two partners unless they defraud each other."71
These sources establish that honesty is a pre-requisite for any partnership

business.
Keeping these factors in consideration, the Islamic banks are presently
reluctant to commit their funds for long term financing on profit and loss
sharing basis. Instead, they rely on murābahah, ijārah, diminishing
mushãrakah, and Salam which are short term financing modes with a fixed and
certain return.
Despite the Sharï'ah legitimacy of above mentioned short term trade
related modes, one must admit that they are not consistent with the long term
objectives of banks and their social welfare agenda. Short term financing is
concerned with the financing of already produced and not with the creation or
increase of production facilities like factories and plants, infrastructure etc.
From the data given in the IRTI (Islamic Research and Training Institute of
the Islamic Development Bank) study it appeared that most of the finance
being provided by the Islamic banks went to the trade sector.
It is further noted that trade financing constituted up to 90 percent of
total financing of Islamic banking worldwide. Comparative data shows that
financing through mudārahah and mushãrakah modes have actually declined
over the latter half of the 1980s.
69 Sad, 38: 24.

70 Abū Dāwūd, Sunan, Kitãb al-Buytť, Bāb fi al-Sharikah, No. 3383.
71 Al-Dār Qutnï, Sunan , kitãb al Buyu' No. 2934 (Beirut: Mu'assasah al-Risālah, 2004), 3: 442.
IS "ISLAMIC BANKING" ISLAMIC? 4ļ ļ
Conclusion
There is no doubt that Islamic bank does not deal in money. Borrowing and
lending with interest is not allowed in it. Money has no intrinsic value. It is
merely a medium of exchange. Islamic bank, on the other hand, deals in assets.
So the Islamic banking is an asset based banking.
We have noted in the preceding pages that Islamic banks observe Sharī'ah
prohibitions such as ribā , gharar (excessive uncertainty), qimãr (gambling) in
their dealings. Their transactions are free from these prohibitions. Islamic
banks also adhere to Sharī'ah law of contract. A transaction in Islamic bank
generally fulfills the requirements of a valid contract. The question is: are the
maqãsid al-Sharī'ah i.e. objectives of Sharī'ah and high purposes of Islamic
finance also observed in the current Islamic banking? This question warrants
serious consideration and examination. It appears that maqãsid al-Sharī'ah have
not been given proper place in the present scheme of Islamic banking. In many
cases, the transaction does not generate any real economic activity and
exchange of benefits. Tawarruq and sale and lease-back Sukuk are two such
cases where maqãsid have been ignored. These are the cases where boundaries
between conventional banking and Islamic banking appear to have been
blurred. The Islamic banking experts defend their position by emphasizing the
Sharī'ah compliance of these transactions. Sharī'ah compliance, in their
analysis, means adherence to contract mechanics.
In order to maintain its separate Islamic identity, Islamic banking should
be more focused on maqãsid al-Sharī'ah and high purposes of Islamic finance
rather than on the contract mechanics. In this way it will be a truely Sharī'ah
based banking rather than mere a Sharī'ah- compliant banking.
$ ^ $

Is Islamic Banking Islamic

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Is Islamic Banking Islamic

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Is "Islamic Banking" Islamic?

Analysis of Current Debate on Sharī'ah Legitimacy of Islamic

Islamic Research Institute, International Islamic University, Islamabad is collaborating with

Is "Islamic Banking" Islamic?

Shari'ah Legitimacy of Islamic banking has been a subject of intense debate

Section 1: Hiyal in Modern Islamic Finance

Hilah in Islamic jurisprudence is used in two meanings. Firstly, as tricky

payable at a future date. Thus transaction amounts to a loan with certain

Treatment of Hiyal in Islamic Law Schools

Hanafī approach in Hiyal

Mālikī Approach in Treatment of Hiyal

15 Al-Sarakhsl, al-Mabsut, 30: 209.

declare them invalid. Shātibl (d. 790/1388) writes:

The prominent meaning of hilah is to do an act which is apparently permissible

To establish unlawfulness of hiyal, Shātibl argues that Shari'ah was

Sadd al-dhami means to block the ways leading to corruption in order to

19 Ibrahim b. Musa Shatibī, al-Muwãfaqãt (Dār ibn 'Affan, 1997), 4: 201.

without realization of the expected results.23

"Unlawful hilah means to do an act which is apparently permissible with the

would be unlawful. Thus if a person enters a sale transaction which he intends to

Ibn Qayyim regards hiyal inconsistent with the spirit of SharVah. He

26 1'lam al-Muwaqqiln, 4: 217.

The case under discussion is that of "Murābahah to purchase orderer. "

Use of Hiyal in Islamic Banks

Unlawful Hiyal in Islamic Finance

Tawarruq is a transaction whereby a person who is in need of money, buys a

Hanafl School has two divergent positions on Tawarruq . Zayla'I

Ibn Humām (d. 861/1457) another Hanafi jurists allowed it though

Hanbalī jurists generally regard tawarruq permissible. Imam Ibn

1. There is a real need for transaction. The person undertaking

M Zayla'ï, Tabyïn al-Haqã'iq (Beirut: Dār al-M'arifah, n. d.), 4: 163.

A, a customer approaches B, a bank with a request to lend him Rs. 10,000/-. B

It is worth-mentioning that Hong Kong Shanghai Banking Company

3. There is a concealed buy-back action.

Sale and Lease-back Sukūk

41 See, Salman H. Khan, "Organized Tawarruq in Practice: A Sharl'ah Non-Compliant and

2. Major maintenance of the leased asset is undertaken by the lessee

3. On dissolution event (even in case of destruction) the lessee is bound

4. Almost all Sukük guarantee the return of principal to the Sukük

Moulana Taqi Usmáni, a renowned and leading Sharl'ah scholar of

In order to make Sukük transaction Sharī'ah compliant, it is necessary

Hiyal as Makhārij in Islamic Finance

46 Taqi Usmáni, Sukük and Their Contemporary Applications, 13.

Case No. 1: Penalty for Default in Islamic Banks

Muhammad Taqi Usmáni, Sukūk and Their Contemporary Applications , 133.

specified date, it is not permissible to charge any amount in addition to its

From this discussion, it can be concluded that AAOIFFs ruling on

Case No. 2: Islamic Solution to Discounting

The Islamic banks instead of discounting bill, give Qard-e-Hasan up to the

Case No. 3: Hedging against Fluctuation in Value of Currency

In Islamic banks, hedging against future devaluation of currencies is

(i) A customer (exporter/importer formally requests the bank for a

(Ü) The bank issues to the customer "promise to sell/purchase" as the

Case No. 4: Fresh Murābahah Facility

(1) The Islamic bank, instead of discounting accepted trade bill of

Section 2: Financial Engineering through Talfiq

to disclose the agency to the supplier. The permissibility of 'Arbūn, or down

Revisiting the Debate on Talfiq

Is the methodology of Talfiq and Takhyir employed by the Islamic financial

2. The view best serves the general welfare.

3. It does not violate any already established Ijmā'.

4. An individual opinion of a jurist in a school is not generally

1. The purpose of adopting lenient view of other school should be to

In Islamic finance, a fatwa predominantly meets this criterion. The