Understanding Islamic Finance - Doha Academy of Tertiary Studies

6Trading in Islamic Commercial Law6.1 INTRODUCTIONThe growth in wealth is an acknowledged pursuit approved by the Sharī´ah and both societyand individuals are encouraged to increase their wealth. This growth or development takesplace through the production of goods and exchange of values among parties in the market.Further, Islamic law does not limit profits or fix prices; it promotes the free flow of goods inan open environment for achieving such goals. All that Islamic law requires human beings todo for establishing a just economic system is to avoid Riba and Gharar along with fulfillingsome other rules and principles of business to ensure that “the (wealth) may not make a circuitbetween the wealthy among you”. 1 While Riba is strongly prohibited in Islamic law, trading isnot only permitted, but also encouraged. Study of the Holy Qur’ān and the Sunnah of the holyProphet (pbuh) reveals that Islam is favourably inclined to promote commercial and tradingactivities. 2Islamic banks have to operate on the basis of profit and not Riba, and the profit canbe earned mainly through activities in three areas: trading, leasing and PLS contracts.Accordingly, we have to distinguish profit from Riba and then find out the rules prescribedby the Sharī´ah for earning legitimate profit. In this chapter we shall discuss various aspectsand general rules for Bai‘/trading that may be applied for trade-based modes like Bai‘Murabaha, Mu‘ajjal, Salam, Istisna‘a, etc. Since banks’ funds invested through these modestake the form of a debt, these can be regarded as debt-creating modes of financing and thefinance-user stands obliged to pay back the entire amount (or its equivalent, in cases of Bai‘Salam), like a debt.While both trading and Riba-based activities generate returns and increases in the capital,the increase generated by the former is welcome, whereas that generated by Ribais forbidden. The Arabs engaged in trading and were used to a number of false/wrongpractices. The Sharī´ah condemned those practices and imposed various restrictions tomake the trade activities legal, just and decent. It is, therefore, an issue of paramountimportance that any increase/addition/growth to be termed “Riba” should be clearly distinguishedfrom the increase in one’s wealth as a result of trading, and the rules of tradingand tradable goods be identified to make trade transactions distinct from Riba-basedtransactions.1 Holy Qur’ān, 59: 7.2 Holy Qur’ān, verses 4: 29, 10: 67, 14: 33, 16: 12, 17: 12, 28: 73, 45: 12, 61: 73–77, 62: 10, 78: 11, etc.