National and Global Islamic Financial Architecture:

Prolems and Possible Solutions for the OIC Member Countries

implications of

maqasid

in a variety of ways. At the broadest level, Abozaid (2010: 67) views it

as a vision that protects and preserves public interests in all aspects and segments of life.

Fulfilling the

maqasid

at this level would imply that an economy should ensure growth and

stability with equitable distribution of income, where all households earn a respectable income to

satisfy basic needs (Chapra 1992). Achieving the objectives of optimal growth and social justice in

an Islamic economy would require universal education and employment generation (Naqvi 1981:

85).

The micro-

maqasid

relates to specific issues arising in the operations and transactions of the

Islamic financial sector. Using various legal maxims, Dusuki and Abdullah (2007) and Dusuki

and Bouheraoua (2011) conclude that prevention and minimizing harm should be a key

objective of an Islamic firm. These would include not engaging in harmful activities such as

selling products that harm the consumer, dumping toxic waste harmful to the environment or

residential areas, engaging in speculative ventures, etc.

Maqasid

at the micro or product level

also implies

Shariah

compliance and fulfilling the objectives of contracts. Kahf (2006) views

maqasid

in transactions as fulfilling the objectives stipulated in contacts. These include

upholding property rights, respecting consistency of entitlements with the rights of ownership,

linking transactions to real life activity, transfer of property rights in sales, prohibiting debt

sale, etc.

Two key principles governing Islamic financial transactions are that financing is closely linked

to the real economy and returns are associated with risks in real transactions. The legal

maxims of ‘benefit of a thing is a return for the liability for loss from that thing’ (

al-kharaj bi al-

daman

) and ‘the detriment is as a return for the benefit (a

l-ghurm bi al-ghunm

) (Majallah

Articles 85 and 87) link ‘entitlement of gain’ to the ‘responsibility of loss’ (Kahf and Khan 1988:

30). The implications of these maxims is a preference for profit-loss sharing instruments and

also that the party enjoying the full benefit of an asset or object should bear risks of the

ownership (Vogel and Hayes 1998).

2.3.1. Islamic Modes of Financing

Traditional Islamic modes of financing can be broadly classified into equity and debt

instruments. While equity instruments are

mudarabah

and

musharakah

, debt-instruments

arise from sale transactions. These fixed-income instruments include

murabahah

(cost-plus or

mark-up sale),

bai-muajjal/murabahah

(price-deferred sale),

istisna/salaam

(object deferred

sale or pre-paid sale) and

ijarah

(leasing).

We outline the basic concepts and properties of

these instruments below.

Murabahah/Bay Muajjal

Murabahah

is a sale contract at a mark-up. The seller adds a

profit component (mark-up) to the cost of the item being sold. When the purchase is on credit

and the payment for a good/asset is delayed, then the contract is called

bai-muajjal

. A variant

would be a sale where the payments are made in instalments. These contracts create debt that

can have both short and long-term tenors. In these debt contracts, the supplier of the good has

a claim on a fixed amount that must be paid before arriving at a profit.

For a discussion on these modes of financing see Ayub (2011) and Usmani (1999).