Concepts in Islamic Economics and Finance

Al-Hewalah means to move. The term is typically used where the debtor moves his debt to a third party. For Al-Hewalah to take place, there are two necessary steps that must take place:

1. The third party (”C”) will become indebted to the creditor (”A”) for the original debt under the same terms and conditions, as well as the amount, or the original debt between A and the original debtor (”B”).
2. A new debt will be created, whereby B will be indebted to C, for consideration similar in value to that of the original debt.

Al-Hewalah has been used by the Jewish scholars extensively to get around ribaa. The Muslim scholars, however, have clearly laid down the requirement for the original and the new debt to be of similar value. This difference between the Muslim scholars and the Jewish scholars stems from different core methodologies; the Muslim scholars emphasize the spirit of the law, whereas the Jewish scholars emphasize the letter of the law.

The Hewalah contract cannot take place unless all three parties agree to the arrangement.

Source: Abdelhaleem, 13. 

The primary differences between a Jua’alah and an Ijarah are below:

1. The specified payment in Jua’alah cannot be paid until the task is completed, whereas interim payments are accepted in an Ijarah arrangement. In a Jua’alah contract, payments in advance or interim payments are not legal.
2. Jua’alah has some gharar in it, which is approved by the Shari’ah, whereas an Ijarah contract has no gharar.
3. The Jua’alah contract is a permissible contract, which means it can be invalidated by either of the parties at any time, whereas an Ijarah contract is an obligatory contract which cannot be invalidated after being signed.
4. An Ijarah contract has a specified time-frame attached to it, whereas a Jua’alah contract has no time-frame (though a minority opinion among the Malikies argues that a time-frame is necessary).
5. The Jua’alah cannot be increased or decreased once the task has started.

Source: Abdelhaleem, 6.

Jua’alah is similar to Ijarah, however, it involved a fixed payment for a specific task that is not well-structured. An example of a Jua’alah would be offering a payment for finding a missing item. In a Jua’alah arrangement, the payment is made after the task has been completed.

According to a tradition in Al-Bukhari and Al-Muslim, the Prophet (SAW) approved of taking a sum as Jua’alah for blessing a sick person with the recitation of the Qur’an.

Source: Abdelhaleem, 6.

The Arabic word gharar means risk, uncertainty, and hazard. Unlike ribaa, gharar is not precisely defined. Gharar is also considered to be of lesser significance than ribaa. While the prohibition of ribaa is absolute, some degree of gharar or uncertainty is acceptable in the Islamic framework. Only conditions of excessive gharar need be avoided.

The concept of gharar has been broadly defined by the scholars in two ways.

• First, gharar implies uncertainty.
• Second, it implies deceit.

The Qur’an has clearly forbidden all business transactions, which cause injustice in any form to any of the parties. It may be in the form of hazard or peril leading to uncertainty in any business, or deceit or fraud or undue advantage. Apart from the above simplistic definition of gharar, some definitions of gharar seem to have a parallel in the concept of uncertainty in conventional finance. Gharar is defined by the Hanafi jurist al-Sarakhsi as any bargain in which the result of it is hidden.

Source: Obaidullah, 29.

In light of the Qur’an and the Sunnah, the scholars have defined some norms of ethics in an Islamic economics system. For brevity, we will list them here for now. Each of these will be discussed in further detail later. An Islamic economic system is based on the following norms of ethics:

1. Freedom to contract
2. Freedom from coercion
3. Freedom from misrepresentation
4. Freedom from Ar-Ribaa (interest)
5. Freedom from Al-Gharar (excessive uncertainty)
6. Freedom from Al-Qimaar (gambling)
7. Freedom from Al-Maysir (unearned income)
8. Freedom from price control and manipulation
9. Freedom from impulse
10. Right to trade at efficient prices
11. Entitlement to transact at fair prices
12. Right to equal bargaining power
13. Entitlement to equal, adequate and accurate information
14. Freedome from Darar (detriment)
15. Mutual cooperation and solidatrity
16. Maslahah Mursalah (unrestricted public interest)

Source: Obaidullah, 9-15.

Al-Ijarah (rent/lease/hire) contract has a number of terms and conditions in addition to the common terms and conditions that apply to all contracts. Al-Ijarah contract is more widely used nowadays than ever before, primarily due to the creation of large commercial enterprises since the dawn of the industrial revolution. As such, these terms and conditions should be common knowledge to all Muslims.

1. The property rented or leased must be in a useable condition (i.e., the lessee should be able to use the property for its intended purpose). Similarly, in a hire contract, the employee must be able to perform the job required of him or her.
2. Ijarah has to be for inconsumable goods.
3. The lessee or the employee is not permitted to use the subject in a manner contrary to what is permitted by the contract. Specifically, the lessee or the employee is not allowed to inflict any harm on the subject of the contract.
4. Ijarah contract cannot be made for a task that is a religious obligation. For example, it is prohibited to enter into an employment contract for leading the prayer of making the azaan. Ijarah is valid, however, for teaching the Qur’an or religious sciences, as well as secular subjects because these are not religious obligations.
5.  If the two parties disagree on the value of the reimbursement or the rent/lease on the property, after the contract commences, the word of the lessor/employer is accepted under oath upto the time of disagreement. At that point the contract is then invalidated.
6. The majority of the scholars say that the Ijarah contract does not end by the death of one of the two parties, as long as both parties can fulfill their end of the contract. The Hanafis, to the contrary, deem the contract invalidated with the death of one party.

Source: Abdelhaleem, 11-12.

Though there are various definitions of Al-Ijarah given by the scholars of jurisprudence, they all agree that this contract is a contract on using the benefits or services in return for compensation. In our context, Al-Ijarah refers to a contract to hire, rent or lease. We see the evidence of hire in the story of Musa (Al-Qasas: 26-27) where Musa was hired by his father-in-law to provide a service.

There are two main types of subjects in an Ijarah contract:

1. Tasks, where the compensation is for effort expended of skill used (by an employee or a contractor), and
2. Property, where the compensation is for the use of a property (such as a car or a house).

An Ijarah contract cannot be cancelled unless both parties agree to it or if one of the parties fails to deliver.

The pillars of an Ijarah contract are:

1. Presence of two parties
2. Offer and acceptance
3. Reimbursement or compensation
4. Specified usage

Without any of the above the contract is not valid. A point to note here is the necessity to specify the reimbursement and the usage. If these are missing, the contract is valid only if the two parties agree on them later.

There are a number of conditions attached to an Ijarah contract that will be discussed next.

Sources:

Kharofa, 146-147
Abdelhaleem, 11