Wednesday, June 21, 2006

A Simple Mutualization Argument Based on Al-Qarafi's analysis

I have posted a short note supporting my previous arguments for mutualization in Islamic financial intermediation. The central inspiration for this note is Al-Qarafi's difference #201 in Al-Furuq, in which he explains why interest-free loans are permitted despite containing both riba and gharar.

The abstract of the note follows (follow this link to the paper):

Islamic finance is a prohibition-driven industry, aiming to avoid the prohibitions of riba and gharar. It is well accepted in Islamic jurisprudence that riba and gharar do not affect the legal validity of non-commutative financial contracts (e.g. gifts). Jurists have long viewed this as a potential solution to the problem of gharar in commercial insurance, proposing mutual insurance as a non-commutative alternative. Likewise, Al-Qarafi had shown that loans are exempted from the rules of riba and gharar because of their non-commutative (in this case charitable) nature. It is thus argued that a substantial portion of Islamic financial intermediation can and should be conducted through mutual financial institutions.


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