Fiqh al-Mu'amalat

Fiqh al-mu'amalat (Arabic for "the jurisprudence of transactions") is the branch of Islamic jurisprudence that governs dealings between people, as distinct from acts of worship. It covers sales, leases, partnerships, loans, agency, guarantees, pledges, transfers of debt, gifts and the law of property, and it supplies the contracts and rules on which modern Islamic finance and Islamic banking are built. In Islamic legal writing, the field is usually contrasted with fiqh al-'ibadat, the jurisprudence of worship, such as prayer and fasting.

Fiqh is the human understanding and elaboration of Sharia, derived by scholars from the Quran, the Sunnah of the Prophet, consensus (ijma') and analogy (qiyas). Fiqh al-mu'amalat is therefore the working legal code that a Sharia supervisory board applies when it reviews a financial product.

A frequently cited maxim holds that in transactions the default position is permissibility: any contract or arrangement is allowed unless a specific prohibition applies. This contrasts with worship, where only what is prescribed is permitted, and it gives the law of transactions considerable flexibility. The main prohibitions that limit that freedom are:

• Riba, a predetermined increase in a loan or an unequal exchange of certain goods, divided into riba al-nasi'ah (increase for deferment) and riba al-fadl (unequal exchange of like goods).
• Gharar, excessive uncertainty or ambiguity in the subject matter, price or terms of a contract.
• Maysir, gambling and speculation in which gain depends on chance.
• Dealing in prohibited goods and activities, such as alcohol or pork.

Positive principles include mutual consent, the requirement that the seller own and, for many contracts, take possession (qabd) of goods before selling them, the linkage of profit to risk, and the fulfilment of contractual obligations. Scholars also interpret the law in light of its objectives, the maqasid al-Sharia, such as the protection of wealth.

Classical jurists developed a set of named contracts with defined elements, which modern institutions use as building blocks:

• Exchange contracts: sale (bay'), including cost-plus sale or murabaha; forward sale or salam; manufacturing contracts or istisna'; and leasing or ijarah.
• Partnership contracts: musharakah, in which partners contribute capital and share profit and loss, and mudarabah, in which one party provides capital and the other labor.
• Supporting contracts: agency or wakalah, guarantee (kafalah), pledge (rahn), transfer of debt or hawalah, and safekeeping (wadi'ah).
• Gratuitous contracts: the benevolent loan or qard, gifts, and donations such as tabarru', which underpins takaful.

Modern products often combine several of these contracts. A home financing product may use diminishing partnership with a lease, and a sukuk issue may combine a sale, a lease and a purchase undertaking. Jurists debate how far contracts can be combined before the combination is treated as a device to circumvent a prohibition, as in criticisms of bay' al-'inah and organized tawarruq.

The rules of transactions were elaborated by the founders of the major schools of law from the eighth and ninth centuries onward, and the four Sunni schools (Hanafi, Maliki, Shafi'i and Hanbali) and Shia jurisprudence differ on many details. A landmark codification was the Ottoman Mecelle (Majalla), compiled between 1869 and 1876, which set out the Hanafi law of obligations and transactions in numbered articles and served as a civil code in parts of the former Ottoman lands well into the twentieth century.

The growth of Islamic banking from the 1970s created demand for applying classical rules to deposits, trade finance, capital markets and insurance. Standard-setting bodies now restate the relevant law in modern form. AAOIFI publishes Shari'ah Standards that many regulators make mandatory, the IFSB issues prudential standards that take these contracts into account, and bodies such as the International Islamic Fiqh Academy issue collective resolutions. Individual product approvals take the form of a fatwa.

A long-running debate concerns whether Islamic finance follows the form of fiqh al-mu'amalat while reproducing the economic substance of conventional finance, for instance where profit rates track conventional benchmarks. Critics favor a greater role for partnership contracts; others argue that sale- and lease-based contracts are legitimate in their own right. There is also comparative interest in parallels with Jewish law on interest and partnership, such as the heter iska.