Islamic Banking in Indonesia: New Perspectives on Monetary and Financial Issues by Rifki Ismal

Chapter 1
Classic Arab Financial Contracts in
Modern Financial Institutions
∗
INTRODUCTION
As a way of life, Islam provides not only religious values related to
worshipping God and kindness to humankind but also an economic system
through special religious contracts (Sharia jurisprudence). Historically,
these contracts began in the Prophet Muhammad’s (pbuh) era, when he first
introduced Islamic values and concepts of economics and trade to Arab
people. Later, such Islamic economic concepts become the basis for modern
financial contracts in Islamic financial institutions.
Actually, Sharia financial contracts are composed of some traditional
(classic) Arabic economic contracts approved by the Prophet (pbuh) and
some other contracts (new contracts) introduced and applied by the Prophet
(pbuh) and his companions. By transforming positive aspects of classical
Arab contracts and new Islamic contracts, the Prophet (pbuh) had
successfully developed fair economic transactions and ensured a stronger
economic condition for Arabic society.
ECONOMIC CONDITIONS IN
THE PROPHET MUHAMMAD’S
(pbuh) ERA
In the Prophet’s (pbuh) era, the Arab economy was trade-based, with no
natural resources business. Trading activities were conducted internally and
externally with other regions. As such, there were typically several trade
links in the Middle East regions such as from Rome into India (southern
trade link), Rome into Persia (northern trade link), and Syria into Yemen
(northern and southern trade links) (Muhammad 2002, 142). Through these
links, Arabic traders gained regional economic advantages by becoming
intermediaries for goods delivered from and passing through their regions.
The economic transactions in that time used dinar and dirham as legal
currencies, which had stable values for a long period.
In addition, the
position of Ka’bah as a central, sacred place for all Moslems guaranteed the
safety of economic activities of Arabic traders.
In addition, the Hilf ul
Fudul agreement among Arab tribes to set up a peaceful business
environment (wars among tribes commonly occurred) created the necessary
social conditions for trading (Ayati, as cited in Muhammad 2002, 144).
Nonetheless, despite such favorable conditions, some unfair trading
contracts existed among traders before the Islamic period. Particularly,
unfair and disputable transactions such as Talaqqi Rukban, Kali bi kali, and
Riba al Jahiliah3 were common trading activities. Talaqqi Rukban was a
practice of stopping foreign traders before they came into the Arabic region,
buying their goods, and reselling them with a higher price margin. It was
such a traditional practice of price distortion at that time.
Kali bi kali was a transaction in which the buyer ordered a good from the
seller to be delivered later with an installment payment basis. Usually, both
of the parties (buyer and seller) used borrowed money to fulfill these
contracts. Even before the good was delivered by the seller, the buyer had
contracted with a third party to be the next buyer of the ordered good.
Selling an invisible (not existing) good is prohibited in Islam and the
problem is exacerbated if the parties involved use borrowed moneys.
The last practice mentioned is Riba al Jahiliah. In fact, the most dominant
mode of financing during the pre-Islamic era was Riba-based borrowing.
Riba al Jahiliah was practiced among members of Quraish and Thaqif
tribes and in Jewish communities (Kahf and Khan 1992, 11). In this case, a
lender made money available to others for a certain period of time with or
without any agreement to ask for any profit/remuneration from the
borrower. However, when the borrower failed to return the loan in an
agreed date, he would be charged interest (for example, 12 percent per

Islamic Banking in Indonesia: New Perspectives on Monetary and Financial Issues by Rifki Ismal