islamic jurisprudence - rice universityelgamal/files/booksbox.pdf · accomplishment should be...

Out of the Books and out of the BoxOut of the Books and out of the Box

Mahmoud A. El-GamalMahmoud A. El-GamalRice UniversityRice University

Islamic Jurisprudence:Islamic Jurisprudence:

“Updating our understanding ofSharīca Rules”, 14:00IIFF, Dusit Hotel, Dubai.March 19th, 2002

Dubai: IIFF, March 19, 2002 © Mahmoud A. El-Gamal Slide #1 of 10

Economic Analysis of the LawEconomic Analysis of the Law

“Often the true grounds of legaldecision are concealed rather thanilluminated by the characteristicrhetoric of opinions. Indeed, legaleducation consists primarily oflearning to dig beneath therhetorical surface to find thosegrounds, many of which may turnout to have an economic character”(p.23)

“ A ... meaning of justice, perhapsthe most common, is – efficiency.An effort will be made ... to explainsome of these prohibitions ineconomic terms, but most cannotbe... Always, however, economicscan provide value clarification byshowing society what it must giveup to achieve a non-economic idealof justice” (p.27)

Richard A. Posner, Economic Analysis of the Law,4th ed., Little, Brown and Co., Boston, 1992


A Rare Instance ofthe Economic nature of “Justice”

“It is thus apparent from the law that whatis intended by the prohibition of Ribā iswhat it contains of excessive injustice(ghubn fāhish). In this regard, justice in[exchange] transactions is achieved byapproaching equality. Since the attainmentof such equality in items of different kindsis difficult, their values are determinedinstead in monetary terms (with theDirham and the Dīnār). For things that are not measured byweight and volume, justice can bedetermined by means of proportionality. Imean, the ratio between the value of oneitem to its kind should be equal to the ratioof the value of the other item to its kind.

For example, if a person sells a horse inexchange for clothes, justice is attained bymaking the ratio of the price of the horseto other horses the same as the ratio of theprice of the clothes [for which it is traded]to other clothes. Thus, if the value of thehorse is fifty, the value of the clothesshould be fifty. [If each piece of clothing'svalue is five], then the horse should beexchanged for 10 pieces of clothing. As for [fungible] goods measured byvolume or weight, they are relativelyhomogenous, and thus have similarbenefits [utilities]. Since it is not necessaryfor a person owning one type of those goodsto exchange it for the exact same type,justice in this case is achieved by equatingvolume or weight since the benefits[utilities] are very similar...”

Ibn Rushd, M. Bidāyat Al-Mujtahid waNihāyat Al-Muqtasid , Dar Al-Macrifah,Beirut, 1997 (vol.3, pp.183-184)


In Contrast:The pseudo-economics of some contemporary jurists

“As for futures contracts, there has not beenany evidence that they have a legitimatepurpose for which a Sharcī means ofaccomplishment should be found. In fact,whatever takes place in futures markets isnot meant to effect actual trading. Instead,the intention [there] is profitablespeculation, which is more akin to gamblingthan to trade. In this regard, we have mentioned thatthere are two types of traders in futuresmarkets: The first are speculators whoneither intend to sell or buy commodities,but merely wish to capitalize on the spreadbetween sales and purchase prices. This isclearly an illegitimate objective ofprofiteering without true trade, and profitsfrom non-guaranteed commodities, which isforbidden by a clear [Canonical] Text.

The second-type futures traders try to hedgewhat they already possess. Thus, they deal infutures to avoid possible losses, as we havedescribed previously. However, such hedgingis only needed for goods that they wish tomonopolize for a long period. Indeed, if theysold the commodities a few days afteracquiring them, they would not need tohedge. Rather, they only deal in futureswhen they wish to monopolize somecommodities for a longer period to increasetheir profits.[A grossly-misunderstood quotation from a text onfutures, stating that a farmer may need to hedge therisk of falling prices over a long holding period] Thus, it is clear that merchants only needfutures to hold goods for a considerableperiod, which most often is done out of theillegitimate objective of monopoly…”

[Arabic reference suppressed out of respect (1998, pp. 142-3)]. In an argument that there is no need to find an Islamicalternative to modern futures, and that if one was needed, salam would do, one of the main scholars of Islamic Financewrote:


The Books and the Box

• Jurisprudence books arehistorical documentations ofapplications of the Sharīca tospecific legal and economicconditions.

• The historical record is drivenby the two time-dependentinstitutions of Qadā’ (justice)and Futyā (consultation)

– The stated justification for aruling may not help us tounderstand the maqsid(objective) and hikmah(reason) of the ruling

– Only the cillah (instigatingfactor) must be stated

• In the absence of a sophisticatedlegal system, named-contractrules of a madhhab providedlocal followers of that schoolwith “the legal fine print” fortransactions known to be devoidof prohibited factors (e.g. Ribā orGharar) at the time of the ruling(e.g. Murābahah, ‘Ijārah,Mudārabah, Salam, etc.)

– A transaction satisfying thatfine print need not bepermissible today, and

– A permissible transaction todayneed not satisfy that fine print


““ConventionConvention”” ( (√ℵ∈⇔↓√ℵ∈⇔↓):):Islamic Jurisprudence as a historical Islamic Jurisprudence as a historical followerfollower

Appeals to “convention” (√ℵ∈⇔↓) reference count: Al-Mabsūt (Al-Sarakhsī,Hanafī) 130 references Badā’ic Al-Sanā’ic (Al-Kāsānī,Hanafī) 95 references Radd Al-Muhtār (ibn-cĀbidīn,Hanafī) 237 references Sharh Mukhtasar Khalīl (Al-Kharshī, Mālikī) 1182 references Al-Majmūc (Al-Nawawī + Al-Subkī, Shāficī) 60 references Al-Mughnī (ibn-Qudāma,Hanbalī) 102 references

Appeals Relate to all contracts,including:

Deposit contracts: even if unrestricted,are restricted by √ℵ⊂

Acceptable forms for partnershipcapital: determined by √ℵ⊂

Acceptable conditions in contracts(esp. leases and credit sales):

Typical phrases:

“≥ℵ°÷↓ � �Φ∈⇑ √ℵ∈⇔↓” and

“ΕΛ±↓ℵπ⇔↓ � �Φ∈⇑ ℵ°ϑΦ⇔↓ √ℵ⊂”


““Form above functionForm above function””::The Books and the Box: Anachronistic ConventionThe Books and the Box: Anachronistic Convention

Operating vs. financial leases:

Jurists require lessors to maintainsubstantial ownership (cost of repair,etc., c.f. Usmani, Taqi, Introduction toIslamic Finance, 1998, pp. 165-9)

Those rulings are based primarily onRadd Al-Muhtār of ibn-cĀbidīn(Damascus: 1783-1836 C.E.). Recallthe latter’s 237 references to √ℵ⊂,including in leases!

Differentiation between sellingclaims on the asset and claims on itsreceivables result in arcane modes ofsecuritization

Historical vs. contemporary notions ofguaranty, risk, etc.:

“Return is justified by commensuraterisk” is a tautology when applied tofinancial markets

In modern legal frameworks, there aremany more forms of entitlement, otherthan partial ownership (e.g. milk al-manfacah), total ownership (e.g. milkal-raqabah wa l-manfacah), easementrights (huqūq al-’irtifāq), etc.

It is better to present the jurists with auseful, and commonly used contract,instead of trying to re-package moderndealings in historical juristic terms


Contemporary examples ofContemporary examples of““Function above formFunction above form”” (out of the box) (out of the box)

Joint liability companiesaccepted as Rein (cinān)partnerships with mutualguaranty (in defiance of theHanafī prohibition; c.f. ibn-Al-Humām) Joint stock companies:

Have legal personality

Managers are paid profitshares (‘Ijāra bi-l-Gharar,or two contracts in one)[Mudāraba+‘Ijāra]

In 1948, Al-Azhar Iftā’Committee permitted sheeppartnerships where oneparty provides labor inreturn for all the milk, butboth parties share woolaccording to capital shares(two contracts in one?)

Based on √ℵ⊂, c.f. Dr. cAlī Al-Khafīf, ⇑ζℜ↓ τϕη⇔↓ � ∝°∧ℵς⇔↓ )


Two main problems withTwo main problems with““Form above function?Form above function?””

Consider contracts A and B, oneforbidden and the other permissiblebased on juristic analogy (©ϕ∏ ℘°ϖ⋅). If contracts A and B are shown to beeconomically identical (in the Arrow-Debreu sense; A≡B), do we:

Forbid B, through theapparent analogy (τΧ⊗ ℘°ϖ⋅)?

Permit B, while forbidding A allows for the fallacy ofcomposition; avoids iterativeanalogy = ℘°ϖ⋅ ν⊂ ℘°ϖ⋅)?

Or, revoke the earlier falsejuristic analogy based on theeconomic analysis of its proof(οϖ⇔) and reasoning (Εν⊂)?

The fallacy of composition and newhiyal (a.k.a. “Islamic FinancialEngineering”):

If A≡B+C, and the juristsforbid A, see if they accept Band C (e.g. sukūk al-salam,Murābaha lil’āmir bishshriā’)

If B is forbidden, but A ispermissible, and A≡B+C, tryto get jurists to accept C (e.g.synthetic embedded options)

Search the historical books ofjurisprudence for A, B or C

In all cases, charge the customer apremium for the relatively inefficient“Islamic” (or “Islamized”) alternative


Case Study: DJII screening rules

• Asymmetric screening rules(hotels vs. companies with interest-bearing debt < 33%):

– Is 33% or more of a hotel’sbusiness illicit? Isn’t Ribāmore illicit than alcohol?

– Induces sectoral bias(NASDAQ-bias of DJII)

• Asymmetric treatment of existingvs. newly assumed debts:

– Invites the creation ofSPEs, and other accountingtricks to hide interest-bearing debt

– Gives an unfair advantageto non-Islamic-run firms

• Hard financial ratio cutoff rules:– An extra source of volatility

for Islamic funds– Pro-cyclical:

• good companies canacquire new debt and mustbe dropped

• poor credit companiescan’t acquire new debt andmay be kept

– Sell low, buy high!• when price falls, market

cap falls, debt ratio rises• Much better Islamic portfolioselection rules can be devised!


Economic Analysis of Islamic Law

• When we study the economics ofclassical jurists (ibn Taymiyyah, ‘ibnRushd, ibn Al-Qyyim, Al-Ghazali,...),we should not look to import theirthought into our current times

• Instead, we should look to replacetheir outdated economic thought withour state of the art knowledge, andreplace their historical setting withour current legal technology

• We would thus utilize their methodsof understanding the Sharīca in lightof the best knowledge of their times

• Otherwise: To imitate an original

… is to miss the point!

• To advertise my work and inviteyou to this research program:

– “An Economic Explication of theProhibition of Ribā in ClassicalIslamic Jurisprudence”:(Forbidden Ribā is the unbundledtrading in credit)

http://www.ruf.rice.edu/~elgamal/files/riba.pdf

– “An Economic Explication of theProhibition of Gharar inClassical Islamic Jurisprudence”:(Forbidden excessive Gharar isthe unbundled trading in risk)

http://www.ruf.rice.edu/~elgamal/files/gharar.pdf

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