Islamic finance and community development

Islam as a paradigm clearly encourages community and brotherhood. The Qur’an says that Muslims are “…one brotherhood…” (Qur’an 49:10). Islam doesn’t merely value and praise communal development, it also mandates and encourages actions that augment or actualise it.

Our attention is often directed to how many Islamic rituals develop and augment a sense of community. The entire Muslim congregation standing shoulder to shoulder in weekly prayer irrespective of class, occupation or ethnicity. Or the Eid celebration, where Muslims from an even larger area gather together as a single brotherhood chanting the Greatness of God. Then there is the Hajj, the ultimate symbol of unity. Muslims travel from every corner of the globe to unite as a single community, wearing the same plain attire, congregating on the same plane all united as sinful servants in front of their Lord.

One area of Islam that is often overlooked in the development of community is Islamic finance. There are numerous aspects of the Islamic financial ecosystem that support the development of a harmonious community. These include the following:

Financial Practices

Islam encourages Muslims to treat human beings in the best way possible. This extends to employment contracts between community members.  In a well-documented hadith, the Prophet ﷺ stated:

“Pay the worker his dues before his sweat has dried up.”

Similarly, he ﷺ taught us that:

“he is not a believer whose stomach is filled while his neighbour goes hungry.”

Both narrations teach us the importance of respect for humanity more broadly as well as our immediate vicinity.

There are also alternate narrations which speak to the specific mannerisms of Muslim in ensuring that their financial dealings do not undermine that of their communal brothers.

He ﷺ said that we should  “  not outbid in a sale in order to ensnare. No man should enter into a transaction in which his brother has already entered…”.

Avoidance of Gharar

Gharar is a concept within Islamic finance that refers to contractual uncertainty or ambiguity. It is impermissible in Shari’ah to conclude a contract or stipulate a condition that involves Gharar. Some instances where Gharar nullifies the contract are the following:

·        If an item is sold without mentioning the price.

·        If the price is left to be determined by one of the two parties of the contract.

·        Somebody purchasing a commodity for an amount of money in a bundle or in his pocket.

When a contract has full clarity and avoids contractual ambiguitythere is significantly less room for conflict and argumentation. When contracts are clear and specified, there is transparency which minimises potential for disagreement.

However, the avoidance of Gharar is not absolute within Islamic finance. One example where Gharar is allowed is in donations. A consequence of this is that where Gharar may be a catalyst for enmity and animosity it is not allowed, however, where the existence of Gharar is actually beneficial for the development of communal bonds it is allowed.

Prohibition of Riba

Allah teaches us “O believers! Do not consume riba, multiplying it many times over. And be mindful of Allah, so you may prosper.” Qur’an (3:130). There are many socially negative impacts of riba (loosely translated as interest) such as:

·        Exploitation. Riba is a financing mechanism that sets up a lender/borrower relationship. The lender has a financial incentive to squeeze the borrower as much as possible to get the loan back with interest - regardless of the borrower’s situation. This contrasts with the Islamic ideal of partnering in some type of risk/reward arrangement.

·        Perpetuation of inequality. Perpetuating and increasing inequality can widen the communal gap between the haves and have nots within a community. The very nature of interest-based financing is that the lender has wealth and benefits from the borrowers’ lack of wealth. Even on national level the interest-based financing system is used to widen this gap and move communities further apart.

·        Capital Misallocation. Investors in a business need to believe in and understand the underlying businesses. Part of the due diligence required is understanding the personnel that run a business – this is especially apparent in small communal businesses. Riba based lenders are primarily concerned about a borrower’s ability to pay - everything else such as the borrowers situation - may be secondary. This may even dissuade investors from investing in projects that relate to communal development.

Remarkably, the Qur’an often juxtaposes Riba with activities that may develop communal bonds. For example:

“Allah destroys interest and gives increase for charities” Qur’an (2:276) or “ … they say, “Trade is no different than interest.” But Allah has permitted trade and forbidden interest…” Qur’an (2:275).

Charity

Islam clearly encourages charitable giving. However, Islam takes it a step further and mandates that a Muslim gives charity on superfluous wealth once every lunar year and usually amounts to 2.5%. This cyclical and methodical giving is an annual reminder that Muslims are part of a greater global faith community (ummah) irrespective of financial status. It is a reminder that those who don’t have wealth have a right to the wealth that Allah has entrusted us with.

One salient aspect of giving in Islam is that it encourages secrecy. Charity given in secret has numerous communal benefits such as the following:

·        Protects the dignity of the receiver of charity, therefore not highlighting the distinction      between the financial status of community members.

·        Discourages the indignity of begging.

·        Helps to conceal who is the giver and who is the receiver.

The Beloved ﷺ taught us that one of those who will “be shaded by Allah under His shade on the day when there will be no shade except His” is the one who “practices charity so secretly that his left hand does not know what his right hand has given.”

Allah Knows Best