On the topics – Ijara for mortgage; fatwa.

Dear readers,

Assalamu-alaiykum-wa-rahmatullah.

On two recent occasions I have conveyed to you the central role of Tawhidi epistemology (Unity of Knowledge) in the construction of socio-scientific thought. Included in this is the domain of Islamic economic problems taken in interactive, integrative and learning dynamics (IIE) with the rest of the socio-scientific order. My caption for such an approach to economic inquiry is Islamic political economy.

I have now read two notes being floated in the IEF network. One is on ijara (rental) vis a vis mortgage (murtahin) (loan outstanding to be paid off on an asset). I would like to address these issues to show how the Tawhidi approach to socio-scientific problems and issues can be applied to these problems. In the attempt I also intend to show that the sheer economic or financial approach to such problems is an unreal one and devoid of Islamic essence.

Capitalizing mortgage by ijara: method

Let P denote the asset price that is paid out by rents in the amount R_t at time period,

t = 1 ® N. Let d_t denote the payout ratio on the mortgage outstanding by means of payments of rents. That is, d_t = (P - R_t)/P = 1- r_t.

The amortization of the mortgage by means of ijara (R_t) is given by the formula:

(P- R₁)(1+r₁)^N + (P- R₁- R₂)(1+r₂)^N-1 … + (P - S_t=1^N R_t)

= PS_t=0^N(1+ r_t+1) ^N-t – R₁ S_t=0^N(1+ r_t+1) ^N-t – R₂ S_t=1^N(1+ r_t+1) ^N-t + … + (P - S_t=1^N R_t).

You may check out the correctness of this formula and further simply the resulting one. The formula can be easily computerized. The above gives a method for an independent asset subject to capitalization on its own.

Combining method with Tawhidi methodology

In the context of Tawhidi epistemology (methodology) the prevalence of unity of knowledge calls for the real world elements that determine (P, R_t, r_t) in the midst of participation. Various aspects of these can ensue from equity participation, linking the quantity of money with the valuation of real assets, profit-sharing, trade financing, joint ventures and other forms of participatory enterprises. Each of these outlets calls forth extensive linkages between agents and sectors, variables and relations. Thus there is a continuous generation of knowledge in such a participatory process. We denote this knowledge by the ordinal (planning parameter), q. This in turn is a limit value of a vast range of discourse values. q-value is thus formed by interactions, consensus (integration) and is further evolved by changes in contracts and relationships, e.g. state of the economy (evolutionary process).

Because of such interlinkages aming agents, variables and their relations we denote,

P = P(P^,X, R)[q], where, P^ denotes a vector of other participatory assets in the economy at large. X denotes a selected socio-economic vector of variables. R denotes a vector of rents from other assets. Each of these variables is premised on limit q-values, which are of the nature of interactions leading to integration and these two leading to evolutionary processes of the same type. These altogether emanate from the essence of participation in a paired worldview subject to dynamic change.

Thus the unity of knowledge (pairedness = zaujun karim in Qur'an) is generated through the medium of shuratic interactions (biologically extensive in the Qur'an) and creative evolution (khalq in-jadid) to more of the same (continuity of purpose and balance = mizan and maqasid) creating fecundity of felicity by the permission of Allah (taiyyabah) and certainty in this world and the hereafter (Ibrahim, 14:27).

We now note that, r_t = r_t(P^,X, R)[q], and just like P, so also, P^(q),X(q), R(q) and r_t(q) are circularly interrelated among themselves in the sense of interactions, integration and creative evolution (IIE-process). One can thus note the simulation and process-oriented problem of valuation of assets that now emerges in such an extensively participatory system. I will not elaborate on this here.

Methodological meaning for asset valuation in the enterprise (ijara and mortgage)

The unrealism of neoclassical and mainstream economic valuation that takes r to be either given or probabilistically expected is rejected in favour of simulation of such values through recursive relations within a milieu of market-institution and technological interrelationships. Thus there can never exist discount rates or predetermined rates, even in a set mudarabah contract, for mudarabah empowers participants and mudarabah contracts must continuously change and diversify across society, economy and agents.

A discount rate is the result of allocation of intertemporal resources between savings and consumption. The rate on savings is interest, whereas the rate of return on Islamic resource mobilization is a return on investments that are necessarily codetermined. Consequently, predetermination is out of the question. On the other hand, knowledge formation, pairedness (complementarity) with creative evolution cause opportunity cost to be unnatural. Now there is no price-relative between today's and tomorrow's resource holding.

Money has not appeared in intertemporal goods, for such goods do not exist. Thus there exists no money to value them. Consequently, there is no expected rate of return, even if an investor was evaluating the asset for his individual choices.

In the case of ijara and mortgage, the rate is ideally that which is generated through the interactive, integrative and evolutionary system as mentioned above among participants and possibilities. For instance, consider the following problem:

r(q) = r(P,R,X,q) = 1 – [D((P,R,X,q) / P^(P,R,X,q)],

with say, R = ^MÖP_i=1^MR_i,

as a geometric mean of R for a given project on ijara based mortgage payment that is subject to the participatory project as explained. More complicated elasticity based forms can be thought of

Risk

Risk though not eliminated is diversified through inter-project mobilization of resources and the holding of shares by participatory agents. Besides, the economy-money linkages causes product diversification to occur. We thereby have complementarity between risk-diversification and product-diversification. Variance of R and r are thus correlation functions of interrelating variables in the sense of complementarity.

dVar(R)/dq < 0; dVar(r)/dq < 0 mean that limit q-values must increase in density. This conveys the creative learning process in IIE. Consequently, through the correlation function, the vector (P(q),R(q),X(q)) must also increase as a cause and effect with economic diversification. For the enterprise such a change would mean an intensification of ijara fund through mortgage financing.

I have outlined a Tawhidi perspectuve of the ijara problem vis a vis mortgage as against a sheer Islamic economic approach to valuation of such ijara. The latter depends upon secondary rates, as mentioned by some to be LIBOR inter-bank rate or the murabaha rate as set by IDB. These bear no Islamic context and may even be detrimental to Islamic concepts. Contrarily, the former is based on a participatory process that necessitates shura of an extensive type in the socio-scientific order at all levels. It calls for Islamic transformation.

Yet if you were to apply this idea now to ijara-based financing by mortgage, the participation can proceed from small scale to larger scale according to planning by contract among Islamically motivated enterprises nationally and internationally (interlinked market with Islamic segmentation).

THE SECOND QUESTION BRIEFLY: FATWA

I am utterly appalled by the dependence on fatwa as the basis of decision-making and thinking among present-days Muslims. Were there fatwas during the time of the Prophet and the Pious Caliphs? Are we to emulate the life and times of the Prophet and the Pious Caliphs or the man-made fatwas that came about within the carcass of the Muslim world? Following the whims of fatwas is a debility of utter magnitude. Muslims must avoid it completely and instead look towards shuratic discourse to develop ahkam on organizing life, thought and experience according to deen al-Akhira and din al-muamalat. Muslims must thus learn to think and do things with a great breadth of thought and vision premised in the Qur'an and Sunnah. All other matters are relative and fatwas fall in this category even though with great questions for their rejection. Contrary to those who indulge in fatwas, the Ullul-Umri are leaders who ensue from shuratic discourse and are accepted by the general ummah out of such sweet freedom of discourse based on Qur'an and Sunnah.

Besides, whose fatwas are we to follow? There are the Sunni and Shiite fatwas and the fatwas formed by persons (sheiks) in the most oppressive and unrepresentative of societies where freedom of Muslims does not exist. This kind of debilitating environment grossly and adversely affects the genuineness of fatwas. Fatwa is a sickness and self-seeking fabrications by sheikhs and certain so-called ulemas that entered the Muslim ranks when freedom was denied to them and the chained Muslims perpetuated the loss of freedom in their servile conditions.

Professor Dr. Masudul Alam Choudhury

Professor of Finance and Economics

King Fahd University of Petroleum & Minerals

& The University College of Cape Breton. August 3, 1999.