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Modes of Financing

The ways and means of Islamic finance have been investigated within various disciplines, including philosophy and ethics. However, a more profound investigation may show that commercial and financial contracts between people permitted by Islamic law mirror the 'commercial' contract Allah makes with humanity. Indeed, according to Qur’an 2:282, human souls are loaned from Allah for a fixed period of time and He buys them back from the believers in return for heaven. A thorough semantic and epistemological investigation is therefore required to show, inter alia, what usury (ribà) really means and why only the Lord (rabb) is allowed to deal with it. Similarly, why the words for debt (dayn), religion (dīn), and Judgment Day (yawm al-dīn), all come from the same root. Indeed, the understanding of the deeper and spiritual meanings of the rules is necessary for a proper understanding of the commercial and financial contracts between people. ASSAIF has launched an initiative with the view of delving into these issues and, besides, creating an ontology of Islamic finance. In its endeavour, it is partnering with universities, research and capacity-building centers, news agencies and professional bodies.

In the Islamic law, modes of financing, and the resulting financial contracts, are governed by those general principles of contracting that are common between all legal systems and societies, although with some variations in their minute details, such as civil aptitude, consent and legal permissibility. Furthermore, they are governed by principles that cover a specific Islamic view point; they are:

Moral commitment : an Islamic financing institution cannot finance activities harmful to society or that do not have a humanly acceptable ethical foundation aiming at equity, justice and environmental stability;

Shariah permissibility : it refers to matters that the Islamic law requires, such as the ban on pork and other swine products, the prohibition of interest and the ban on speculation;

Balance : it requires that the obligations of one party be equivalent to the obligations of the other, so that there is no excessive loading on either ones;

Realism or validity : it means that all financing contracts must be founded on real, not presumed or deemed, transactions or exchanges;

Most of these principles have crossed the entire history of mankind with some of them already enunciated by Aristotle. After being endorsed by Hebraism and Christianity, they have been taken up by Islam which is upholding them without claiming authorship.

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Piero della Francesca, ‘La città ideale’, Italy XVI century