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As a Muslim, almost every "Shariah compliant" financing contract I came across is not compatible with Islamic Law (Shariah). Unfortunately, we're just taking mo

by apta_ 6y ago

As a Muslim, almost every "Shariah compliant" financing contract I came across is not compatible with Islamic Law (Shariah). Unfortunately, we're just taking modern parasitic and usurious financial contracts, and wrapping them under "Islamic" terms, and selling them as such. Any actual investigation of such contracts reveals that they're nothing but interest and usury in disguise. Islam seriously warns about this sort of behavior. Under Islam, loans are are strictly an act of charity. There can be absolutely no contractual obligation for the lender to receive any benefit of any kind (monetary or otherwise) from the borrower in return for the loan. The borrower is encouraged to return more than the amount he borrowed, purely as a show of gratitude, but it can in no way be part of the contract, and in no way implied one way or another (like "off the record" sort of thing). True Islamic finance is pro risk sharing, with no exploitative and parasitic practices that we see today. Want to start a business? Pitch your idea to an investor willing to put money into it, you put in the effort and he (or multiple investors) puts in the money. If the business succeeds, all parties benefit, if it fails, investors lose their money, and you lose the time and effort you put into it. Fair across the board. Zero debt. Applying actual Islamic finance rules, we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. Now you can bet that Wall Street won't be happy, but time and time again those practices have proven destructive to the economy, and further increase the wage divide.

kasey_junk 6y ago
What about futures contracts?
- apta_ 6y ago
  In Islam, there exists a notion of a Salam sale (بيع السلم), or (advance sale). These are sales contracts in which the price is paid for goods to be delivered at a later time. > The Prophet (ﷺ) came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period." Does that sale describe future contracts (without any other stipulations or clauses, e.g. no shorting, no leverage, etc.)? Note that Islam places restrictions on certain sales. Currencies are to be traded hand by hand, on the spot. For example, it's impermissible to purchase gold using a credit card because the settlement does not take place immediately. So things are a bit more nuanced there, as gold and currencies cannot be bought using Salam sales for example.
  - kasey_junk 6y ago
    Yes that sounds like a classic futures contract to me. I'd never heard that usury rules applied to financial contracts before. Its interesting because advance sales are a positional bet similar to a short sell. Are you allowed to sell the Salam sale contract to a third party? Apologies for all the questions this is fascinating.
    - apta_ 6y ago
      Short selling has several issues. Brokers usually charge a fee for the borrowed asset (stock), this fee is clearly usury/interest. Also, it creates risk with the hope of gaining money, without any corresponding value being created. Shorting exposes three parties to the risk of a stock or asset (the shorter, the original owner, and the new owner), compared to a regular trade where risk is transferred from one party to another, and no new risk is created. I found this article[0] that goes into details about the dangers of short selling (see the sections on margins and overshooting specifically). Salam sales do not have those issues. Furthermore, goods for which the quality and quantity cannot be specified cannot be sold by Salam contracts, as per the Hadith in my previous post (e.g. gems or precious stones since each is considered different), and I've seen at least one source that also exempts stocks from being tradable in Salam contracts due to high uncertainty (called Gharar sales in Islam, also prohibited). As far as selling Salam contracts before they are fulfilled, I do not know. What sorts of issues or benefits can result from selling such a contract before it is fulfilled? Edit: I think it is prohibited as well, as now the buyer is selling something that he does not yet possess. So you have the same item being sold multiple times before taking delivery. This narration should be the basis of prohibition: > The Prophet (peace and blessings of Allah be upon him) forbade selling goods in the place where they were bought until the merchants had moved them to their own location. > Apologies for all the questions this is fascinating No problem! I'll do my best to answer what I know. [0] https://practicalislamicfinance.com/2020/02/17/short-selling-halal-or-haram/ https://practicalislamicfinance.com/2020/02/17/short-selling...
    - apta_ 6y ago
      One important thing to note is that Islam also prohibits chaining together permitted contracts, with the intention being trying to circumvent or dance around the prohibition. For example, you and I can engage in the following set of transactions: I can sell you my phone for a certain price in installments (say $120 over 12 months, and $120 is the fair market value). Then, I go back and buy back my phone from you for $100 cash. The net result is that I paid you $100 and you owe me $120 over the course of the year. This is clearly usury, and placing an item in between is just kidding ourselves. The same applies to more elaborate schemes that involve multiple parties or transactions. For example, it is possible to engage in a futures contract with the intention of gambling (buy oil or some commodity, and never take delivery of it and sell it immediately when the contract is due). This is gambling, your intention was never to actually possess the item, but only to immediately sell and either make a loss or profit.
ganeshkrishnan 6y ago
>we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. These are the very foundations on which modern society is built and which drives the entire humanity forward. Sure, some people have managed to race ahead but on a whole we, as humans, have progressed from clubbing each other for food to arguing anonymously over the internet thanks to all these
- apta_ 6y ago
  With all due respect, this is a very fallacious argument. Just because it is widespread today does not make it acceptable or good in any way or form. It does not mean that it is the cause for our advancement (association fallacy, and correlation vs. causation fallacy). As a matter of fact, I would wager that these practices are a main driving force of the wage gap we see today, causing instability and unrest, inflation, and tons of other problems. We have better solutions, it's just that no politician I've seen so far is going to dare admit that the modern foundations are corrupt. Very powerful people are not going to be happy (note that I'm not arguing for socialism or communism either, they are destructive in their own ways).
- sifar 6y ago
  That is a sweeping (and incorrect) generalization. Except the credit part, all the other things are optional. And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have. Just because we inherited a world where these things exist, the tendency to attribute them all to these things is not wise. I don't know what to call this fallacy.
  - apta_ 6y ago
    > And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have. Exactly. It's not needed. It causes a growth at all cost situation we see today (and one cost is debt slavery for a large portion of the population, increasing the wealth gap).
- srean 6y ago

by apta_ 6y ago

kasey_junk 6y ago

What about futures contracts?

apta_ 6y ago
In Islam, there exists a notion of a Salam sale (بيع السلم), or (advance sale). These are sales contracts in which the price is paid for goods to be delivered at a later time. > The Prophet (ﷺ) came to Medina and the people used to pay in advance the price of dates to be delivered within two or three years. He said (to them), "Whoever pays in advance the price of a thing to be delivered later should pay it for a specified measure at specified weight for a specified period." Does that sale describe future contracts (without any other stipulations or clauses, e.g. no shorting, no leverage, etc.)? Note that Islam places restrictions on certain sales. Currencies are to be traded hand by hand, on the spot. For example, it's impermissible to purchase gold using a credit card because the settlement does not take place immediately. So things are a bit more nuanced there, as gold and currencies cannot be bought using Salam sales for example.
- kasey_junk 6y ago
  Yes that sounds like a classic futures contract to me. I'd never heard that usury rules applied to financial contracts before. Its interesting because advance sales are a positional bet similar to a short sell. Are you allowed to sell the Salam sale contract to a third party? Apologies for all the questions this is fascinating.
  - apta_ 6y ago
    Short selling has several issues. Brokers usually charge a fee for the borrowed asset (stock), this fee is clearly usury/interest. Also, it creates risk with the hope of gaining money, without any corresponding value being created. Shorting exposes three parties to the risk of a stock or asset (the shorter, the original owner, and the new owner), compared to a regular trade where risk is transferred from one party to another, and no new risk is created. I found this article[0] that goes into details about the dangers of short selling (see the sections on margins and overshooting specifically). Salam sales do not have those issues. Furthermore, goods for which the quality and quantity cannot be specified cannot be sold by Salam contracts, as per the Hadith in my previous post (e.g. gems or precious stones since each is considered different), and I've seen at least one source that also exempts stocks from being tradable in Salam contracts due to high uncertainty (called Gharar sales in Islam, also prohibited). As far as selling Salam contracts before they are fulfilled, I do not know. What sorts of issues or benefits can result from selling such a contract before it is fulfilled? Edit: I think it is prohibited as well, as now the buyer is selling something that he does not yet possess. So you have the same item being sold multiple times before taking delivery. This narration should be the basis of prohibition: > The Prophet (peace and blessings of Allah be upon him) forbade selling goods in the place where they were bought until the merchants had moved them to their own location. > Apologies for all the questions this is fascinating No problem! I'll do my best to answer what I know. [0] https://practicalislamicfinance.com/2020/02/17/short-selling-halal-or-haram/ https://practicalislamicfinance.com/2020/02/17/short-selling...
  - apta_ 6y ago
    One important thing to note is that Islam also prohibits chaining together permitted contracts, with the intention being trying to circumvent or dance around the prohibition. For example, you and I can engage in the following set of transactions: I can sell you my phone for a certain price in installments (say $120 over 12 months, and $120 is the fair market value). Then, I go back and buy back my phone from you for $100 cash. The net result is that I paid you $100 and you owe me $120 over the course of the year. This is clearly usury, and placing an item in between is just kidding ourselves. The same applies to more elaborate schemes that involve multiple parties or transactions. For example, it is possible to engage in a futures contract with the intention of gambling (buy oil or some commodity, and never take delivery of it and sell it immediately when the contract is due). This is gambling, your intention was never to actually possess the item, but only to immediately sell and either make a loss or profit.

ganeshkrishnan 6y ago

>we would immediately rule out things like stock shorting, put and call options, margin and leverage trading, mortgages, interest bearing loans, selling debt for debt, and so on. These are the very foundations on which modern society is built and which drives the entire humanity forward. Sure, some people have managed to race ahead but on a whole we, as humans, have progressed from clubbing each other for food to arguing anonymously over the internet thanks to all these

apta_ 6y ago
With all due respect, this is a very fallacious argument. Just because it is widespread today does not make it acceptable or good in any way or form. It does not mean that it is the cause for our advancement (association fallacy, and correlation vs. causation fallacy). As a matter of fact, I would wager that these practices are a main driving force of the wage gap we see today, causing instability and unrest, inflation, and tons of other problems. We have better solutions, it's just that no politician I've seen so far is going to dare admit that the modern foundations are corrupt. Very powerful people are not going to be happy (note that I'm not arguing for socialism or communism either, they are destructive in their own ways).
sifar 6y ago
That is a sweeping (and incorrect) generalization. Except the credit part, all the other things are optional. And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have. Just because we inherited a world where these things exist, the tendency to attribute them all to these things is not wise. I don't know what to call this fallacy.
- apta_ 6y ago
  > And even for credit, I am not sure interest is needed. That leads to the world devouring growth that we have. Exactly. It's not needed. It causes a growth at all cost situation we see today (and one cost is debt slavery for a large portion of the population, increasing the wealth gap).
srean 6y ago