Khalil has a diverse educational and professional experience in both Information
Technology and International Law. Working as a senior IT consultant for a range of multi-national corporations, he holds a law degree from the US (J.D.) in addition to International Law training at the Hague Academy and Strasbourg International Institute of Human Rights. He is a Bi-lingual and Bi-Cultural Arab-American with extensive knowledge of the MENA region. Khalil currently hold a position as an International law consultant for a Geneva based foundation.
Imagine, in a perfect world, that you found an Islamic bank that is fully compliant with Shari'a law. The Jurists have done their homework; no loopholes are to be found, and created instruments that meet your high moral standards. The choice is yours, said the bank manager, we have developed instruments in accordance with Shari'a law. These instruments are easy to understand and our bank is strictly Islamic therefore funds are not commingled with Riba money. We only implement sound investments with low risk or uncertainty avoiding Gharar. You narrowed down your choices to modern Murabaha or a diminishing Ijara, and for an added assurance the bank manager states that a local index is used to calculate the profit, not LIBOR. You contemplate these options and you tell the bank manager that you are ready to close the deal. Not too fast, the bank manager said, we have to exchange promises today, nonbinding he adds, and we will see you tomorrow to sign a contract.
Assuming you are a novas buyer and do not know what a contract is, so you rush home to your computer and lookup few definitions of what a contract is and you finally find a definition that sounds simple enough to understand; A contract is an agreement between two or more entities to do, or to refrain from doing, a particular thing in exchange for something of value. Contracts generally can be written, using formal or informal terms, or entirely verbal. If one side fails to live up to his/her/its part of the bargain, there's a "breach"and certain remedies for solving the differences are available (see reference link).
You contact a lawyer friend to validate your newly acquired legal knowledge and she adds, to your surprise, the most important element of a contract is not mentioned in the contract so be careful. How can the most important element of a contract not be mentioned you ask? She explains that it is the implied covenant of good faith and fair dealing, a general assumption of the law of contracts, that people will act in good faith and deal fairly without breaking their word, using shifty means to avoid obligations, or denying what the other party obviously understood, she replied.
This is an Islamic bank you answered and the principle of good faith is required by the Qur'an. As stated: "Woe to the fraudulent dealers. "Good faith is always presumed as long as the contrary is not proven."Not to confuse you the lawyer adds that good faith is universal. The concept of good faith is considered especially important in both the common law tradition and the lex mercatoria (international customary law) and, as a result, was codified in the 1980 Convention of Contracts for the International Sale of Goods or CISG (see reference link).
Law and religion throughout history have been trying to create a balance in protecting contracting parties. They both agree that both parties to the contract must be able to have an arms length negotiation, if one party has a major advantage then the contract is voidable and classified as a contract of adhesion. With this note from your friend, sounding more confused than before, you end the phone call, go to sleep and walk to the bank the next morning. You sign a one page contract that includes no excessive penalties in case of default on your end.
But wait! It is not a perfect world we live in nor there an Islamic finance Utopia, so wake up and face reality. As I mentioned in previous articles (see reference link), thumping through samples of Islamic finance contracts , most are long enough to earn you a law degree by the time you are done with reading it or trying to comprehend it. Some of the offered instruments are confused and confusing not to mention excessive remedial fines and the tilted playing field favoring the bank over the customer. The future of modern Islamic finance globalization relies on the short market history. No matter how long or brief the contract terms are, the implied covenants of good faith and fair dealing are paramount to the enforcement of such contracts. Doing some market research and interviewing few customers who bank with Islamic financial institutions made me realize that such customers know very little about the basic principles of Islamic finance.When pressed, they answer, I do it in good faith and the burden is on the bank to be accountable before God!
Most patrons of Islamic finance institutions presume that avoiding major prohibitions in Islam deems a contract valid. The prohibitions, against riba and gharar, have led jurists of Islamic law to focus on the objective elements of the contract, such as its implementation and its subject matter, instead of more subjective elements like intent. Keeping this in mind, there are two rules: (1) property in the object of sale passes as soon as the contract is concluded (after offer and acceptance) and; (2) There cannot be unfair exploitation. Speaking of exploitation, here are a couple of examples of such practices: An Islamic bank that has branches through out the Arab world finances appliances on one condition; a cosigner is required for every $500 of equipment purchased to guarantee the client would not default. If leaving a person who is pressed for need to go find a minimum of two cosigners to buy a decent appliance is not exploitation, what is?
The Holy Qur'an equates unjust dealing with Riba, verse 278 of Surah Al- Baqarah states: "O ye who believe! Fear Allah and give up what remains of your demand for riba, if ye are indeed believers."and verse 2: 279 says "If you do it not, take notice of war from Allah and His Messenger. But if ye turn back, ye shall have your capital sums. Deal not unjustly and you shall not be dealt with unjustly.
Another example is requiring two cosigners who are bank customers for a home purchase, although the home is still technically mortgaged to the bank. The same guarantee is never offered for the loan applicant in case the bank defaults or goes out of business. Maybe the inadequacy in my perception to see fair dealings such practices or is it?
Not to generalize, the notion above does not mean that all Islamic finance houses apply unconscionable practices. I am mindful of many banks that employ the best and the brightest to perfect the process of producing fully Islamic compliant instruments with an audit mechanism to perfect their application. The fact remains that a substantial minority is tainting the image of the conformant majority, abusing the trust of their clients under the veil of Islamic banking. The time is now to create an auditing entity that certifies any institution that claims to practice Islamic laws with an auditing arm to protect their clients who bank with them in good faith.
The Accounting and Auditing Organization for Islamic Financial Institutions, has come a long way to create standards, however such organization needs to have the force of law to certify and audit existing and new institutions to conform and adhere to acceptable standards and best practices of Islamic finance.
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