A Basic Guide to Contemporary Islamic Banking and Finance

I was asked by ISNA to produce a short guide to Islamic Banking and Finance for the Muslims of North America. To keep this guide short, we had to define our target audience rather carefully. This introductory guide is meant to address the Muslim who is familiar with the fundamental tenets and sources of legislation in Islam. The reader is not assumed to have elaborate prior knowledge of Islamic financial contracts, but a certain degree of financial sophistication will be required. This is not a full survey of the field, and it is not a religious guide. It is the work of a single individual, who does not claim any religious authority beyond that which is derived from quoted texts. I tried my utmost to steer away from issues which are or may become controversial. Therefore, I have been careful to limit the discussion of recent fatw¯ as and decisions of jurists and juristic councils. In that sense, this guide falls short of providing the reader with full information about " state of the art " Islamic financial instruments. This apparent shortcoming is intentional. The field of contemporary Islamic finance is rather young, and marred by a number of shortcomings of its own. It is easy for an economist such as myself to fall prey to the temptation of claiming religious authority from translated texts and quoted opinions. It is also easy for specialized jurists to assume that they understand both the religious and the financial aspects pertaining to a specific contract or transaction. In both cases, there is a great danger for scholars of religion as well as students of economics and finance to speak falsely in the name of Islam. ii iii I hope to succeed in minimizing this danger by speaking generally about the basic types of contracts used by " Islamic financial institutions " in North America and elsewhere. The generic forms of those contracts have been subjects of extended study by traditional jurists. My goal is to provide a concise summary of the nature of those contracts, and their Islamic foundations in Qur'¯ an, H. ad¯ ıth ¯ , Sunnah, 'ijm¯ a', and – where necessary – qiy¯ as. The primary objective of this introductory guide is to explain to the non-specialist curious Muslim the difference between the forbidden financial transactions commonly used in conventional finance, and their Islamically permitted counterparts. It is important for …