Exploitative Profit Sharing: On the incoherence of all contract-based approaches to "Islamic finance"
I am writing a paper for a conference, and after my usual criticism of the modus operandi of Islamic finance (using degrees of separation such as trading partners and assets to separate lender from borrower to disguise interest on debt), which is shared by many, I wanted to make sure also to criticize the misplaced drive for finding an "Islamic finance" in other contract forms. Toward that end, I wrote the following example:
The message is clear: to call a transaction "Islamic," it must be fair in some clear sense. The paper will include a section on a "unified theory of riba and gharar" to which I have hinted in earlier writings, including on this blog.
My point has been, and continues to be, that there is no amount of juristic (fiqhi) analysis of contract forms that will help you determine whether or not there is injustice in the exchange, and that is the crux of the matter for calling something "Islamic," because the first requirement is Justice (عدل):
Some supporters of “Islamic finance” have long suggested that profit sharing (in silent partnership, or mudaraba) or profit-and-loss sharing (in full partnership, or musharaka) is the ideal Islamic alternative to riba. However, the reason for the prohibition, which Ibn Rushd imputed to be the potential for extreme injustice, can be just as present there.
Consider, for example, a silent partnership whereby a capitalist approaches a worker with no capital. Instead of hiring the worker at the market wage, let’s say it is $100 per day, he tells the worker that he wants to engage him as a mudarib (entrepreneur), while he himself will serve as rabb al-mal (capitalist). Let’s say that the capital invested for one day is $1,000 and it is expected to produce a profit of $200 plus or minus $10, depending on market conditions. The mudarib will do the same work for which he could have earned a guaranteed $100 market wage, but the capitalist insisted on “risk sharing.” That may be argued to be somewhat fair if he is offered a 50% share of the profit, in which case, he would earn $100 plus or minus $5.
(Note: This is not an entirely novel idea: many classical jurists had classified mudaraba as ijara bi-l-gharar; hire with (forbidden if excessive) uncertain wage. My example suggests that it may also include an element of riba, in the sense that the profit share is not commensurate with the work done, fairness being determined by the market wage, as many classical jurists would also have determined.)Putting aside the relative risk tolerances of the capitalist and the worker/entrepreneur for the moment, which presents problems of its own, there is nothing in the Islamic rules of mudaraba that prevents the capitalist from offering the worker a 25% share of profits, which is grossly unfair relative to his market wage. If the worker has no access to other work, severe exploitation is thus allowed by this ostensibly “Islamic” partnership model, whereby the worker is forced to earn half his market wage on average, with unwanted risk to boot! That is the very same extreme injustice (ghubn fahish) for which riba is but one vehicle.
The message is clear: to call a transaction "Islamic," it must be fair in some clear sense. The paper will include a section on a "unified theory of riba and gharar" to which I have hinted in earlier writings, including on this blog.
My point has been, and continues to be, that there is no amount of juristic (fiqhi) analysis of contract forms that will help you determine whether or not there is injustice in the exchange, and that is the crux of the matter for calling something "Islamic," because the first requirement is Justice (عدل):
(Al-Nahl 16:90 [Asad translation];
Behold: God enjoins justice, and the doing of good, and generosity towards one's fellow men,
and he forbids all that is shameful and all that runs counter to reason, as well as all envy,
and He exhorts you repeatedly so that you might bear all this in mind.)
I love, in particular, how Muhammad Asad translated al-munkar (المنكر) as "all that runs counter to reason." I often translate it as "blameworthy activity." But, of course, these are one and the same, and explains my attitude towards so-called "Islamic finance," it runs counter to reason, and is, therefore, blameworthy!