|To what extent the zero sum game influences the issue of gharar in developing islamic banking products.|
|MARKFIELD INSTITUE OF HIGHER EDUCATION, UNIVERSITY OF GLOUCESTERSHIRE
To what extent the zero sum game influences the issue of gharar in developing islamic banking products.
Key word: Islamic Banking, Product Development in Islamic Banking, Gharar and Zero Sum Game.
Bashir Uj Jaman
In this paper gharar and zero sum game have been analyzed with the spirit of maqasis al sharia. Existing Islamic banking products have been justifid in relation to gharar and zero sum game. Some contradictory products have been debated and marketing strategy to avoid gharar and zero sum game has been discussed. Finally conclusion has been drawn with the framework of future product development to avoid gharar and zero sum game.
Table of Contents
1.0 Introduction: 4
1.1 Islamic Banking: 4
1.2 Product Development in Islamic Banking: 5
1.3 Gharar: 5
1.4 Zero Sum Game: 5
2.0 Relationship between Maqsad al Sharia, Gharar and Zero Sum Game: 6
2.1 Relationship between Maqsad al Sharia and Gharar: 6
2.2 Relationship between Maqsad al Sharia and Zero sum game: 6
2.3 Relationship between Gharar and Zero Sum Game: 6
3.0 Existing Islamic products, Gharar and Zero sum Game: 7
3.1 Mudaraba (Passive partnership): 7
3.2: Musharaka (Active Partnership): 7
3.3 Murabaha Bai Muajjal (Cost plus deferred sale): 7
3.6 Istisna (Commssion to manufacture): 8
4.0 Some Contradictory Islamic products and Issues of Gharar and Zero Sum Game: 9
4.1 Bay’ Al Inah (Same item sale repurchase): 9
4.2 Tawarruq: 9
4.3 Insurance VS Takaful: 9
4.4 Bay’ al urboun (Down payment sale): 10
4.5 Ja’alah: 10
4.6 Wa’ad (Promise): 10
4.7 Penalty clause: 11
5.0 Marketing strategy, Gharar and Zero Sum Game: 12
5.1 Attracting customers with offer of chance: 12
5.2 Multi Level Marketing (MLM): 12
6.0 Conclusion: 13
Islam is not only a religion but also a complete code of life. It gives solution to all the problems of humanity from personal, social, political and economic life. Though Islamic economists had written about Islamic banking and finance from the beginning of nineteenth century, it got its framework at the beginning of 1960’s with small mutual saving project in Egypt (Schoon, 2009). It started to take off from 1990’s and it is a trillion dollar business now growing at the rate of 15%-20% annually. But in terms of product development it is facing significant obstacles because of the lack of expert human resources with the combination of both banking and sharia skills. That is why, it is very important to understand prohibition in Islamic banking like gharar and zero sum game, so that it can be avoided at the time of future product development in Islamic banking.
1.1 Islamic Banking:
Islamic banking is an alternative banking system based on principles of sharia. It has been developed with the addition of permissible economic techniques (Halal-to do) from fiqh muwamalat (islamic business laws) like sales, business, profit and loss sharing and eliminating prohibition of sharia (Haram-not to do) like riba (interest), gharar (Ambiguity), zulm (oppression), mysir (Gambling) and investment in haram products like alcohol, tobacco and pork business.
Yahia Abdul Rahman (2010) says ‘’ Islamic banking is socially responsible and community based both in spirit and intent’’. While conventional bank deals with only money which leads to riba, Islamic bank though a financial intermediary like conventional bank deals with trade. As Islam prohibits riba and allows trades. (Al Quran, 2:275)
1.2 Product Development in Islamic Banking:
No industry can survive for long term without continuously developing new products. Change in technology, demand of customers and forces of new competitors lead to new product development (Clark and Wheelwright, 1994). While in secular industry fulfilment of customer demand and winning competitors in order to maximize revenue of the company within the framework of rules and regulation of the state is sufficient, but it needs to stay within the parameter of sharia in terms of sharia compliant product development. Development of products for Islamic banks can be done by either completely developing new product based on quran, sunnah, ijma and qiyas or by purifying existing conventional banking products (Ayub, 2009).
The term Gharar does not have a specific definition like Riba from Quran and Sunnah. It is because what is gharar today may not be gharar tomorrow. It keeps the flexibility and options for arguments among sharia scholars at the time of new product development. Gharar generally refers to uncertainty, ambiguity, high risks, unknown and even ignorance. Because of the gharar prophet (pbuh) forbade pebble sale, sale of things before acquiring ownership, two dependent contracts in one sale, sale of birds in the sky and fish in the sea etc (Vogel & Hayes, 1998).
1.4 Zero Sum Game:
A game is a contest among two or more players where everyone is competing for his own interest. But a zero sum game is a contest among two or more individuals where what others lose (zero) is a win (sum) for only one person (Swailem,2000). It means in order to win one must lose another. While competition among companies brings harmony, zero sum game brings hatred and enmity in the market.
2.0 Relationship between Maqsad al Sharia, Gharar and Zero Sum Game:
Maqsad al sharia explains wisdom behind ruling. In broad sense it means to understand the reasons and objectives of laws laid in quran and sunnah. Mujtahids use their individual analogy in order to find answer for contemporary problems based on maqsad al sharia (Ibn Ashur ,2006). Hence it is very important to understand it in order to develop products for Islamic banking. Sharia intends to bring samaha (ease) between parties in dealing with one another. Samaha is the standing in the midway between strictness and indulgence (Ibn Ashur.2000). It is to create win-win situation for counter parties in exchange so that they do not regret afterwards. Therefore gharar and zero sum game should be understood in light of maqasid al sharia in order to avoid those in future product development for Islamic banking.
2.1 Relationship between Maqsad al Sharia and Gharar:
A purpose (Maqsad) is not valid unless it leads to fulfilment of some goods (maslahah) or the avoidance of some mischief (mafsadah). Therefore the objective, intent, principal, end or goal of the Islamic law is there for the ‘interest of the humanity’(Auda,2008). So, sharia intends to avoid any conflict between counterparty, avoids uncertainty, stops harming oneself or others and regret after transaction. On the other hand, gharar leads to uncertainty, dispute and conflict which may cause harm to the society. So it can be concluded that Maqsad al sharia and gharar are opposing to each other.
2.2 Relationship between Maqsad al Sharia and Zero sum game:
While Maqsad al sharia is to save society harming to one or to others, Zero sum game must compete to lose others for individual gain. Therefore sharia does not allow zero sum game.
2.3 Relationship between Gharar and Zero Sum Game:
Imam Malik in Muwatta states “Included in gharar and risky transactions is the case in which a man whose camel is lost, or his slave has escaped, the price of which is (say) fifty dinar, so he would be told by another man: I will buy it for twenty dinars. Thus if the buyer finds it, the seller loses thirty dinars; if not, the buyer loses twenty dinars” (Swailem,2000). Here both buyer and seller’s interest is completely opposite, which one loses is the gain of others. Hence this is a zero sum game as well. So, all kinds of Zero sum games lead to gharar. Because players in zero sum game does not know beforehand whether he is going to win or not (uncertainty), if he loses then loses everything he puts in the game (excessive risk).
3.0 Existing Islamic products, Gharar and Zero sum Game:
To be able to develop new products for Islamic banking in future it is essential to know existing permissible products in terms of gharar and zero sum game.
3.1 Mudaraba (Passive partnership):
Mudaraba is a partnership where one party supplies capital (Rab ul Mal) and another puts his expertise (Mudarib). Sole management remains with the mudarib without any interference from Rab ul Mal. A profit rate (%) but not a fixed amount is assigned to each party before venture starts. So in case of success, both of the party distribute the profit between them in agreed ratio and in case of failure Rab ul Mal lose his capital and mudarib loses his time and efforts (Saeed,1999). In this business venture both rab ul mal and mudarib co operate with each other unlike zero sum game and they know beforehand the consequences for profit and loss unlike gharar.
3.2: Musharaka (Active Partnership):
Musharaka is partnership like mudaraba but only difference is here both party invest capital and engage in management as well. So overall success of business brings profit to both and failure of business brings loss to both at a time. Hence musharaka is free from zero sum game and gharar.
3.3 Murabaha Bai Muajjal (Cost plus deferred sale):
Most of the trade in Islamic banking are based on the mixture of murabaha and bai muajjal. Murabaha is a contract where both buyer and seller agreed on goods, cost, mark up and payment date. Buyer pays higher price than market rate but get the ownership of the good to be benefitted from it (Thomas et al ,2005). So in this sale contract, seller benefit by higher price and buyer benefit from ownership of the goods, creating a win-win situation for both parties in the contract. Hence it is a non zero sum game and no scope of gharar in the contract as everything about product, price and time is written down in the contract.
Lexically ijara means to give something for rent. It is of two types. Renting usufructs of property or asset (Lease) or hiring/employing service of a person or company for wages, fees or commission (Kettell, 2010). Both the lessor and lessee are being beneficial for lease contract, one is enjoying service while other getting profit as a rent or fee. So, ijara contract develops win-win condition for both parties. Hence ijara contract is free from zero sum game. There is no gharar in the contract as well because property, rent and time of payment is specifically written before executing contract.
3.5 Bai Salam (Prepaid Purchase):
Bai salam is opposite of Bai Muajjal. It is a sale contract specifically for the agricultural products. In this contract full price of the goods (Rice, wheat) is paid in advance and delivery is taken in a pre agreed future date. Though sharia does not allow selling something which is completely not ready to be sold but this exception has been made to facilitate poor farmer who needs money in advance to process agricultural product to make it usable for market (Siddiqi,A & Hrubi,2008). In Bai salam contract determined price is lower than spot price. Buyer is benefited by paying less money and seller is benefited by receiving money in advance. Though it is risky for buyer in case of any natural calamity, but it is sharia permitted risk which is acceptable for any business. At the time of delivery if the price of the goods goes up, seller has the incentive to default or sell goods to someone else. But he will not do that because sale contract has been already done. So, it will be subject to legal consequences. Bai salam contract creates win win situation for both buyer and seller. That is why it is not a zero sum game.
3.6 Istisna (Commssion to manufacture):
Istisna is an exceptional sale contract like salam. At the time of contract, good or item generally not owned or never existed before. Buyer gives order to seller to build some item with specification. Unlike salam, delivery time need not to be fixed and sale price may not be paid full in advance (Siddiqi,A.,2008). In istisna contract both buyer and seller are in win-win position and there interest are not conflicting to each other, hence, it is a non zero sum game.
4.0 Some Contradictory Islamic products and Issues of Gharar and Zero Sum Game:
After analyzing permissible products of Islamic banking in terms of gharar and zero sum game, it is necessary to see some products where fuqaha from different school of thought take different view for sharia rulings.
4.1 Bay’ Al Inah (Same item sale repurchase):
In Bay’ al inah borrower (customer) sells some property to the lender (bank) for cash price and then lender turns back to sell same property to borrower with deferred but higher price (El-Gamal,2006). In this contract, it is a condition of second sale for the execution of first sale. Since it brings two contract within one sale, it leads to gharar. Final result of two contracts is original property is transferred to borrower with a liability of debt. Extra amount for second deferred sale that borrower loses is the gain of lender, hence it leads to zero sum game. So, Bai’al inah is prohibited by major school of thoughts.
To overcome the criticism of bay’al ina, a third party arrangement is introduced. In this contract customer buy a product from Islamic bank on murabaha bai muajjal basis and sell it back with lower price to a third party on spot basis. In practice, bank organize this third party so that customer can easily sell it back to the party whom bank has bought the product from. So in reality product or asset does not move from the original place. Islamic fiqh academy and AAOFI has rejected this kind of organized tawarruq (Swailem, 2006, pp. 103-104). End result of tawarruq is like bay’ al ina. Extra amount paid by customer is the gain of bank leading to zero sum game.
4.3 Insurance VS Takaful:
Islam encourages human being to cooperate with each other and not to harm each other. In insurance one buys nothing but transfer risk with a premium fee to the insurance company. If any damage happen to the property, insurance company is liable to pay the damage cost and if nothing happen, insurer gains premium fee for nothing. In the first case, extra amount after deduction of premium fee spent by insurer is the gain of customer and in later, amount lose by customer is the gain of insurer. So insurance leads to pure zero sum game (swailem,2000). But instead of transfer of risk like insurance, risk is mutually shared among parties in takaful pool. Takaful company works as a wakeel (agent) who is responsible to manage takaful fund. Hence, risk is not transferred to takaful operator (Iqbal,2005,P. 4-5). If any damage happen to the property of a person, all the people in the takaful fund loses and if nothing happen, all the people save their money. Takaful operator will get a fixed management fee as a wakeel in any circumstances. So, interest of any of the parties in takaful fund are mutually cooperative not opposite. Therefore takaful is free from zero sum game.
4.4 Bay’ al urboun (Down payment sale):
Bay’ al urboun is a sale contract where buyer pays some money in advance to buys the goods in future date. If sales take place in future then down payment goes with original price. Otherwise down payment is kept by seller. Majority of scholars consider this contract as gharar (Swailem.2000) because of uncertain outcome. In the later case, seller is getting money for nothing. He receives the amount lose by buyer leading to zero sum game.
Ja’alah is a contract where a person or company hire another person or company to do certain task. Hiring person will pay only when hired person can do the task successfully otherwise no payment will be made. For instance, a bank can hire a credit recovery company to recover credit from defaulting client. If the company is successful then bank will pay them a pre determined fixed fee or percentage of recovered money, otherwise no payment will be made. Most of the scholar accept this contract whereas haanafi school of thought consider it as gharar (Swailem,2000). Even though hired party (Credit recovery) is not successful, it may benefit hiring company (Bank) because of the work done by hired party. Bank will get report from credit recovery for future reference or any other operational efficiency. But credit recovery company has lost its efforts and cost associated with the task given by bank. So what is lost by credit recovery is the gain of bank. If the credit recovery is successful it will get fee from the bank, even though bank is not getting anything extra. Bank is just getting the actual amount from its client. Therefore it is a zero sum game.
4.6 Wa’ad (Promise):
Wa’ad is a financial instrument used for enhancing efficiency of Islamic banking. When customer approach bank to buy a product on murabaha basis, bank takes wa’ad (undertaking) from the customer that he will buy the product in future date. It is also being used for hedging purposes. There is debate among scholars whether wa’ad should be legally binding or not. AAOFI has permitted it to be legally binding for financial transaction with the condition that bank can only recover actual loss but not opportunity cost. So even after knowing binding structure of wa’ad if the customer do not fulfil promise then he must have better offer from somewhere else. Customer will break wa’ad only if he gets more benefit. So, even though wa’ad is legally binding, bank is getting its money back by using binding wa’ad and customer is being benefited by offer from different sources. So, whether wa’ad is being fulfilled or being broken in both of the circumstances, none of the company is a loser and is not conflicting with each other. Hence legally binding wa’ad is not gharar or zero sum game.
4.7 Penalty clause:
Quran (2:280) prohibit penalizing for late payment of debt. Moreover it encourages waiving the sum as charity. But Quran actually refers to debt incurred by personal relation (Hans’2009,p.78). But Islamic bank as financial intermediary working as a trustee of poor depositors cannot donate principle money as a charity. If there is no penalty clause debtor will take advantage of it because of moral hazard problem. If the debtor pays fees as a penalty of late payment (only after debtor could not convince Islamic bank about real cause of late payment), Islamic bank or the client himself donate it to charity. So, amount paid by client is not gain by bank. Hence penalty clause does not lead to zero sum game.
From many element of marketing, promotion to attract new customer is very crucial for the existence of any organization. In conventional system, organization can take many approach like sale, discount, and limited time offer, buy one get one free or even chance of getting very costly items as a gift (iphone,ipad) etc . Another kind of marketing approach is multilevel marketing (MLM), where people get reward for making their relative, friends and family to be customer of that organization. Promotional activities in Islamic banking must follow sharia parameter and it must avoid any sort of gharar, deception and zero sum game.
5.1 Attracting customers with offer of chance:
Most of the company attract new customer with offer of chance of receiving costly and alluring items. For instance, a web based telecom company may advertise customer registering to their website within a specific month, their name will be put into a pool of lottery. Lottery will be drawn after certain time to pick up the name of winner who will receive an iphone. At the time of registration, if it is a condition from the company that they must buy a product to be eligible for entry to pool of lottery, it will lead to zero sum game. Because of customer is actually not only paying for product but also buying the product with the hope of winning lottery. After the draw of the lottery, only some people win while other gets nothing. Hence it is zero sum game. But if the customer needs not to pay for any product and get free entry to pool of lottery, it will not be zero sum game. Because of prize of the lottery will be considered as a gift from company. Islamic bank can practice second approach to attract new depositors and buyers of its products.
5.2 Multi Level Marketing (MLM):
Generally Multi Level Marketing (also known as network marketing) refers to an alternative approach of conducting business that involves selling of goods and services through a network of distributors. It involves multiple levels of distributors known as upline and downline.The growth of MLM network could involve vertical (up-down) expansion, horizontal (right-left) expansion or a combination of both (Abd Rahman, 2007). If there is a sales target for an individual involve in MLM to be eligible to get commission, it will lead to zero sum game. Because, no matter how less is the sale of individual company generate profit from it. So, if an individual puts efforts for meeting target but could not meet at certain month, he will lose all his efforts and time but company will benefit from it. If people interested to join MLM required to pay for membership, and if this membership fee contributes to the commission of agent who has introduced him, it will also lead to zero sum game. Because people who join the MLM at the end will be contributing to the profit of few people at the above in MLM and they will not find any new customer. Hence, loss of their membership fee is the gain of profit of others which leads to zero sum game.
Allah says in the Quran (2:188), ‘And eat up not one another’s property unjustly (in any illegal way e.g. stealing, robbing, deceiving, etc.), nor give bribery to the rulers (judges before presenting your cases) that you may knowingly eat up a part of the property of others sinfully’. Most of the Islamic scholar see zero sum game as eating others property for nothing (Swailem, 2000). Hence, People working for product development department in Islamic banking must make sure new product must create win-win or lose-lose situation for parties in the game. Product should encourage co operation not competition in an unfair way. Because, all kinds of zero sum game is consider as gharar (Swailem,2000) and gharar is strictly prohibited by sharia.
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