.....(Hal-ku-dhigyo Dhaxal-gal Noqday) = ..... President, C/raxmaan A. Cali: ''Jamhuuriyadda Somaliland dib ayay ula soo Noqotay Qaran-nimadeedii sidaa awgeed, waa dal xor ah oo gooni u taagan maanta (18/05/1991) laga bilaabo''...>>>>> President, Maxamad I.Cigaal:''Jiritaanka Jamhuuriyadda Somaliland'' Waa mid waafaqsan xeerasha u-degsan Caalamka! Sidaa darteed, waa Qaran xaq u leh in Aduunku aqoonsado''...>>>>> President, Daahir R. Kaahin: ''Jamhuuriyadda Somaliland waa dal diimuqraadi ah oo caalamka ka sugaya Ictiraafkiisa''...>>>>> President, Axmed M. Siilaanyo: ''Jamhuuriyadda Somaliland, Boqol sano haday ku qaadanayso helista Ictiraafkeedu way Sugaysaa! Mar dambena la midoobi mayso Somalia-Italia''.....[***** Ha Jirto J.Somaliland Oo Ha Joogto Waligeed *****].....

Thursday, December 22, 2011

Islamic Finance: The Way Ahead for Somaliland? (Part 1: Introduction)

Islamic Bank by Kojach @ Flickr

Somaliland has been standing on its own two feet for the last twenty years. And it is doing relatively well! On the whole, self-rule and self-reliance has brought on its wake congruous determination, and engendered respect for the current, as well as, to the previous government. This awakening, I think, is based on innate political savvy of the ordinary man on the street, which, in turn, emanates from seminal degree of respect for the rule of law, or at least, the realisation that only with the safeguarding of peaceful coexistence between various sub-clans, Somaliland may achieve its highly sought after goal of self-determination, despite of all exogenous obstacles.

This, in turn, led to a commendable level of political stability of a nation, unrecognized internationally. A step forward, in this process towards self-determination, has been witnessed in the peaceful transition of governmental powers from the previous President, Mr. Dahir Riyale Kahin, to the current incumbent Mr. Ahmed M. Mahmamoud Silanyo.

It is as a result of such determination that, today, the Government and Parliamentarians of Somaliland are seeking to build a consensus amongst its populace to maintain estimable regard for the principles of the rule of law, and to indoctrinate the people of Somaliland to give due respect to the constitution of this nation, and in this pursuit are promulgating laws which are hoped to secure their revolution, long-term.

It is in this regard, now, that a Paliamentary committee is debating a law which will regulate the financial/banking contractual obligations and specifically debating whether such transactions should be based on Islamic principles (i.e. a banking based on Islamic principles of finance), or ‘conventional’ principles (i.e. banking principles in which banks will charge interest) or a mixture of the two.

It is my opinion, as a legal practitioner, that Somaliland will be well advised to promulgate banking laws based on Islamic principles of finance. The Somaliland people are inherently biased toward the tenets of Sharia, generally. They have a natural affinity towards Islamic law and jurisdiction, and this predisposition is reflected in their unwavering adherence to Islam, whence nearly 100% of the people are Sunni Muslims. It follows that the people of Somaliland are more likely to support a banking system based on Islamic principles than a ‘conventional banking’ system.

In addition, banking systems based on Islamic principles of finance are showing to be resilient against failure and have is proved easily integrated into global financial systems, although most globalized instruments are based predominately on ‘conventional’ principles. And as American President Barak Obama put it when commenting on the risks of dealing with a conventional financial system in a recent speech (December 2011):

Now, for many years, credit cards and home equity loans [both based on Riba transactions] papered over this harsh reality. But in 2008, the house of cards collapsed. We all know the story by now: Mortgages sold to people who couldn’t afford them, or even sometimes understand them. Banks and investors allowed to keep packaging the risk and selling it off [sale of debt to a third party]. Huge bets — and huge bonuses — made with other people’s money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn’t have the authority to look at all.

It was wrong. It combined the breathtaking greed of a few with irresponsibility all across the system. And it plunged our economy and the world into a crisis from which we’re still fighting to recover. It claimed the jobs and the homes and the basic security of millions of people — innocent, hardworking Americans who had met their responsibilities but were still left holding the bag.

The concerned committee should have the courage and foresight to instill a banking regime based on Islamic financial law. It is my opinion, that such a move will be most beneficial to the people of Somaliland who, I opine, are most likely to receive this system and to use it for their financial business. Over the coming weeks we will talk in more depth about the types of Islamic Financial instruments which can be utilized for the success of the financial services industry. But before we dive into the specifics, we must first talk about the differences between an Islamic and conventional financial system.

What is Prohibited?

The term usury, in western oriented terminology, defines a transaction in which the lending of money is made at an exorbitant rate of interest. Exorbitant interest refers to an financial transaction where the lender demands from the one to whom the money is lent an unusually high or large rate of interest for the lent money.

One therefore needs be clear about the circumstances under which the two terms (usury and interest) are employed interchangeably: therefore, although one may, for the purpose of writing this legal opinion use the term interest interchangeably with the term usury (and vice-versa), occasionally, the reader should be aware and forewarned that the two terms are not the same term when viewed through the lens of ‘conventional’ financial systems. When used in connection with ‘conventional’ financial systems, usury implies that the lending transaction is made at an illegal or exorbitant rate of interest far above fair market value for the loan or which has not been sanctioned by government policies.

One should be cognizant of this fact: a western bank (or a conventional banking) will charge a specific set interest rate to its customers (this may vary subject to the type of transaction), but the rate will not be considered usury, because it is ‘legal’ as it is inline with the fair market value of interest typically chargeable for the type of loan at issue and it is within established legal criteria.

On the other hand, interest, of whatever magnitude is forbidden (haram) and not sanctioned by Sharia (Islamic Law). Indeed, any transaction in which the element of interest is present is considered to usurious.

Riba (ربا)

Islamic fiqh forbids literally any add-on to the original amount loaned. Such transactions become usurious if in exchange for the lent gold the lender receives more then he lent to the borrower. Any transaction, to avoid becoming usurious, has to be carried out in a way which is called “measure for measure.” In an Islamic finance system one cannot exchange X amount of gold (or any item of value) for “X plus Y” amount of gold (or any item of value). This type of transaction is haram because the add-on interest (the ‘plus Y amount’) received by the lender on top of the original lent amount is called Riba.

At a fundamental level, riba is money which someone earns but has not performed work for. There are two types of riba discussed by Islamic jurists: an increase in capital without any services provided or risk taken by the lender. This type of riba is prohibited by the Qur’an. The second type of riba is prohibited by the Sunnah and it entails exchanges of unequal quantities of any commodity (which are physical goods like gold or frankincense or sheep).

The definition of riba in classical Islamic jurisprudence was “surplus value without counterpart.” When currencies were first introduced in the Islamic world, repaying a debt with a higher number of units of this currency was not considered riba. At the time, jurists were concerned with the real value of money, which was determined by its weight rather than its numerical value or the amount of physical pieces handed from one to another.

For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars if there was an equal aggregate weight of gold. In other words, the value of the loan was calculated in terms of the total weight of the gold lent rather than the amount of coins lent because at the time there was no standardized exact weight of a dinar. Two classic examples of a riba transaction are below.

(i) Conventional Banking transactions where a depositor deposits certain amount of money in a bank and then awaits the accumulation an increase on the deposited amount – i.e. the usual method of dealing of ‘conventional’ banking, which is based on Riba interest; and

(ii) The sale by the bank of debt owed to it by the debtor to a third party. The Qur’an states:

يَا أَيُّهَا الَّذِينَ آمَنُواْ لاَ تَأْكُلُواْ الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُواْ اللّهَ لَعَلَّكُمْ تُفْلِحُونَ

3:130 O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.

وَأَحَلَّ اللّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا

2:275 Allah has permitted trade and as forbidden interest.

There is no difference of opinion between any of the schools of thought on the subject matter of the prohibition of Riba in Islamic Sharia. Islamic Sharia considers Riba as a tool of oppression and a means to unjustly take others’ money by exploiting their needs and circumstances. Hence it forbids a Riba transaction altogether and promotes Charity as an alternative. The Prophet Mohammad (PUBH) said: “God has judged that there shall be no riba” [Last Sermon]. The crimes of dealing in Riba are so serious that God has declared war against those who deal in Riba.

Prophet Mohammad (PBUH) has cursed anyone who deals with Riba, the one who takes it, the one who pays it and the one who records it, as their sins are considered equal under the Quran. Riba is considered to be a greater sin than that of eating pork or drinking alcohol. Prophet Mohammad (PBUH) had declared the practice of Riba worse than adultery: worse than “to a man committing adultery with his own mother”.


Any financial transaction that lacks defined parameters of certainty are also forbidden by fiqh. Many ‘conventional’ financial instruments are are characterised by an element of Gharar (غرر or excessive uncertainty). The Prophet has forbidden Gharar transactions: لايجوز بيع الغرر. Transactions where the basis of the transaction is unclear or ambiguous are Gharar transactions. There many different transactions which maybe classified as Gharar; however, here are two examples, which are relevant to ‘conventional’ banking way of business:

• Contracting for a camel before the camel is born. This is Gharar because there is uncertainty that the mother will ever give birth, so paying money or anything of value to a dealer or the owner of the mother which is conditioned upon the birth of the baby is an uncertain transaction.

• When a customer delivers their car to a garage and tells the garage to fix what is broken. If the garage does not provide the customer with an exact quote of how much the maintenance will cost yet will not give the keys to the car back to the customer until the customer has fully settled their bill – this is also a Gharar transaction. The type of uncertainty here comes not from the presence of the thing being bought (as in the first example) but rather from the price point of the contract.

Gharar transactions are at times difficult to define, but whenever there is uncertainty to any of the essential elements of a conveyance (or any financial transaction) the issue of gharar should be addressed.

In the coming installment we will discuss in more detail some of the typical scenarios which may be addressed by Islamic Finance.

Posted by Abdulaziz Ismail (Watershed)

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