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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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