25 Wis. Int'l L.J. 605 (2007-2008)
Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering

handle is hein.journals/wisint25 and id is 615 raw text is: INCOHERENCE OF CONTRACT-BASED ISLAMIC
FINANCIAL JURISPRUDENCE IN THE AGE OF
FINANCIAL ENGINEERING
MAHMOUD A. EL-GAMAL*
I. CONTRACT FORM AND ECONOMIC SUBSTANCE IN
ISLAMIC FINANCE
Over the past three decades, an industry has emerged under the
name Islamic Finance, purporting to provide financial products and
services in accordance with Islamic law or Shari'a. The focus of this
industry has been on contract forms used in various financial
transactions.   For instance, instead of extending a mortgage loan to
finance the purchase of real estate, an Islamic financial provider would
buy the property first and then sell it on credit to the customer, often
benchmarking the implicit rate of return on capital to prevailing
mortgage rates.
Prohibition of certain types of financial transactions is not
unique to Islam. The Jewish Halakhah plays the same legal role as the
Islamic Shari'a. Of course, in financial affairs, the Hebrew Bible (Old
Testament) contains one of the prohibitions commonly shared between
Halakhah and Shari 'a, namely the prohibition of interest-based lending.'
Many Rabbinic solutions were provided as permissible alternatives for
interest-based lending;2 however, the Rabbinic prohibition was stricter
than the Islamic, considering the increment in the price of a credit sale
(above the cash price) to be forbidden interest.' This is in stark contrast
Professor of Economics and Statistics at Rice University.
Hebrew Biblical prohibitions of interest-based lending can be found in several places. See
Exodus 22:25; Leviticus 25:35-37; and Deuteronomy 23:19-20, with additional elaborations in
Baba Metzia, Chapter 5, Mishna 2. Qur'anic prohibitions can be found in 30:30, 3:130, and
especially in 2:275-79. Additionally, many elaborations are provided in the Prophetic tradition
and that of the earliest Muslim community.
For a comprehensive survey, see generally RABBI YISROEL REISMAN, THE LAW OF RIBBIS: THE
LAWS OF INTEREST AND THEIR APPLICATION TO EVERYDAY LIFE AND BUSINESS (1995).
The prohibition of Ribbis is not limited to situations where cash changes hands. It also applies
to purchases made on credit. In this case the customer has the status of a borrower and is
prohibited from paying interest on the credit that he owes the seller. Id. at 112. Rabbi Reisman
proceeds to distinguish between the Canonical prohibition of interest on cash loans, directly

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