From Classical Jurisprudence To Modern Islamic Finance

For centuries, trade in the Muslim world operated according to the rules of fiqh al-muʿāmalāt we have seen in previous articles: direct commerce, partnerships for maritime trade, lawful deferred payment.

But with the rise of the modern banking system, intrinsically based on interest-bearing loans (ribā) for consumption and investment, Muslims faced a dilemma.

Thus was born, in the second half of the twentieth century, modern Islamic finance. Major contemporary scholars (such as Muḥammad Taqī ʿUthmānī and Yūsuf al-Qaraḍāwī) revisited great classical jurisprudential works to extract ancient contracts and adapt them to the world of banks.

The Basic Principle: Financing Through Assets (Asset-Backed)

The golden rule separating conventional from Islamic finance is:

A conventional bank lends money. An Islamic bank buys and sells (or leases) real assets.

In Islamic finance, money is not a commodity rented against interest. It is a simple medium of exchange. To generate profit, there must be a transaction in the real economy. Here are the four great contracts revived from classical fiqh.

1. Murābaḥa (Sale with Declared Profit Margin)

This is the contract most used by Islamic banks (over 70% of transactions).

In classical fiqh: A trust-based sale (amāna) where the seller states his initial purchase cost and the profit margin he adds. (« I bought it for 10, I resell it to you for 12 »).

Modern application (bank murābaḥa): You want to buy a car for €20,000 but lack funds. Instead of lending you €20,000 at 5% interest, the Islamic bank buys the car from the dealer (it becomes owner and assumes risk). Then it resells that same car to you for €22,000, payable in monthly installments over five years.

2. Ijāra (Islamic Leasing)

In classical fiqh: A simple lease contract (of a good or a person’s services).

Modern application (ijāra wa iqtināʾ / leasing with promise to purchase): Widely used for real estate or business equipment financing. You want a house. The bank buys it and leases it to you. You pay monthly rent. Part of the payment covers rent, another part gradually buys back shares of the house. At contract end, the bank transfers ownership through a symbolic sale or gift.

The difference from conventional leasing is that the Islamic bank, as owner, assumes major ownership risks: if the house burns (without your fault) or a construction defect makes it uninhabitable, structural repairs fall on the bank, and rent stops.

3. Mushāraka (Partnership / Joint Venture)

In classical fiqh: A contract where two or more parties pool capital for a project, sharing losses and profits.

Modern application: Considered the « purest » and ideal form of Islamic finance, though risky for banks. The bank and an entrepreneur invest together in a factory. Future profits are shared according to a ratio agreed in advance (e.g. 60/40). But in case of loss, financial loss is strictly shared in proportion to capital invested. The bank truly shares the entrepreneur’s risk.

There is also mushāraka mutanāqiṣa (diminishing partnership), very popular for real estate: you and the bank buy a house together. You gradually buy back the bank’s shares month after month until you become sole owner.

4. Muḍāraba (Venture Capital Investment)

In classical fiqh: This was the favored contract of Meccan caravans. An investor (rabb al-māl) entrusts capital to an expert manager (muḍārib). One provides money, the other labor.

Modern application: This is the model of Islamic savings accounts. You (the investor) deposit money in an Islamic bank (the manager). The bank invests it in ḥalāl projects (using murābaḥa, ijāra, etc.).

• If the bank makes profit, it shares with you according to a pre-set ratio. (Unlike a conventional account, return is not guaranteed in advance: it depends on real profits generated.)
• If there is a loss, the investor (you) loses financial capital, and the manager (the bank) loses time and labor.

Conclusion of Our Course on Islamic Finance

Across these articles, we have traced the full path of the economy according to Islam:

1. We understood the philosophy: the nobility of fair trade facing the sterile, exploitative nature of usury (Article 1).
2. We defined the rules: strict sale contracts (bayʿ) based on real possession and forbidding gambling and deceptive uncertainty (gharar) (Article 2).
3. We analyzed the economic virus (ribā) in its exchange and deferral dimensions, to safeguard transactions (Article 3).
4. We saw the solidarity mechanism: zakāt, forcing wealth to circulate toward the weakest (Article 4).
5. We applied zakāt in the modern era (Article 5).
6. Finally, we discovered contemporary application: how banks attempt to revive old contracts (murābaḥa, ijāra, mushāraka) in the face of modern capitalism (this article).

Fiqh al-muʿāmalāt is not merely a set of legal constraints. It is a complete system designed to ensure that money remains the servant of humanity and the real economy, not a capricious and destructive master.