called li-tijari. Every party in the contract is aware that they or their cosigners enter into the contract for the purpose of acquiring personal gain for themselves through the contract. Usually there is a bargaining and negotiating process, either bilaterally or multilaterally, on the specifications of the contract, such as the terms for price, quality, and quantity of the object; the ratio; the timeframe of settlement; the time of delivery; the time of payment; and the like. With this awareness, all sides have willingly accepted the risk inherent in the contract and have no regrets if the realization of the contract is different from their expectation. In mu'amalah, there are many examples of this sort of contract, like sale (bay'), rent or lease (ijarah), partnering in business (syirkah), the cultivation of agriculture (musaqat), and so forth. Islam allows anyone to enter a transaction with the intention of gaining profit as in the various contracts mentioned, as long as the contracts are made properly and are also executed properly. The profits gained from these contracts are incomes that are lawful and good, for they are gained by the efforts of one's own hand.
Second is the contract that is made with the purpose of giving reward, aid, or assistance to other people; this is called the li-tabarru' contract. This type of contract is usually entered by those who are in need, have lived through a catastrophe, or are under problems that cause them to need the assistance of others. In this contract, negotiation or bargaining is rarely found except in payment terms and due date, where both are related to the ease preferred by the party in need. Because of this, Islam loathes anyone who exploits the opportunities that arise from other people's needs for personal gain or profit, material or immaterial, through any assistance rendered. Among the examples are loan or debt (qardh), entrustment (wadhiah), representation (wakalah), borrowing or lending (dayn), transfer of debts between debtors (hawalah), etc. In qaidah fiqhiyah, it is said, “every loan receivable that generates benefit/gain, then it is usury” (Asy-Syairazi, Al-Muhadzdzab: 1/304). Included in this group of contracts is a contract of guarantee over debts or loans, like third-party guarantees (kafalah) and asset-backed guarantees (rahn).
It is hoped that by knowing the division of financial contracts and by executing them consistently, one can avoid various forms of usurious transaction. For example, when one is interested in helping others who need capital for business, but is still at the same time interested in turning a profit, then the li-tijari contract can be used, like murabahah or ijarah. In both of these contracts, the capital owner can receive profit in the form of sales margin or rental fee, and the entrepreneur receive working capital in the form of fixed assets without having to expend money at the beginning. Other than that, by understanding the purpose for financial contracts, the parties involved can realize their position within the contract and their rights and responsibilities.
Principles of Islamic Finance
Risk sharing as a principle of justice is embodied in Islamic economy. Every economic agent involved in financial transactions, consciously or unconsciously, directly or indirectly, should complement each other and the system. All parties, without exception, can access money and other resources in the economy. The result is a “multiplier effect” that appears to drive the economy and improve the welfare of the community, not just the individual. All of these are summarized into three Islamic finance principles: universal complementarity, justice and equity in al-hisba, and abolition of riba.
Universal Complementarity
Both conventional and Islamic financial institutions function with the purpose of creating a system to enhance the efficiency of resource allocation and distribution in society by providing financial services to bridge the gap between the parties with excess funds on hand and those needing funds, thus setting in motion continuous economic growth. The basic difference between the two is that an Islamic financial institution must be free from all forms of usury, gambling (maysir), uncertain or doubtful elements (gharar), swindling (tadlis), injustice and coercion (ikhraha). Islamic financial institutions divide risk and profit fairly between different economic actors, both when there is a surplus of funds as well as when there is a deficit of them. This division of risk is a manifestation of the principle of economic fairness and implemented among the participants in the profit–loss sharing scheme. Every economic agent involved in a financial transaction, aware or not, directly or indirectly, should complement each other's absence of skill or function. Thus, everyone, without exception, can access the money in circulation and the available resource. Of course the multiplier effect that can be generated will mobilize the economy and improve the society's prosperity, not just the individual ones. When every element in the society is considered as an economic agent (producers and consumers, government, households, and industry) with complementary functions needed to achieve societal prosperity, the loss of individual business opportunity is a loss to society.
Justice and Equity in Al-Hisba
Among Islamic financial contract schemes, the profit-sharing instrument is considered to be most representative of Islamic finance's character. This scheme is dependent on the proportion (nisbah) agreed upon, based on the comparison between the opportunity cost of capital and the expectations of profit or loss of business. In Islamic finance, pricing is not determined by conventional standards (e.g., the capital asset pricing model [CAPM], market interest rate, etc.), but from the comparison of the function of satisfaction of capital to individual satisfaction and, on an aggregate level, a comparison to the economic surplus of every economic agent.
Abolition of Riba
Other than the two principles, there is at least another that must hold in the implementation of Islamic finance; the principle of removal of usury (riba). It must be understood that the marginal rates of substitution will be different among economic agents. This difference should be reflected in the lack of a “unified interest rate” as a reference for opportunity cost. In the allocation of return, it should be based on the division of investment roles along with the risk distributed among them. With that, every business opportunity will have a unique rate of return. In the end, this practice will consistently move in the direction of the removal of usury, which is the removal of a predetermined rate of interest between economic agents. In other words, economic agents will share risks and returns based on the actual performance of an investment. Aside from the way that usury is a form of injustice and is as such unlawful in Islam, the removal of usury is an implementation of the principle of fairness in measurement or scales. Every economic agent receives a different return according to their own measure, dependent on the investment role and risk that they've taken.
Interest-Based Return versus Profit–Loss Sharing
In Islamic finance, money is only considered as a medium of exchange and does not have intrinsic value on its own; because of that, if the money is idle (left in the bank or lent to other people) and not used in business, then money should not increase. On the other hand, Islamic finance considers that the human endeavor, initiative, innovation, creativity, and risk inherent in productive business are more important than the money used to fund the project itself. Money is considered capital only if it is invested in business and the investors accept the possibility of loss or failure in business; thus, investment also opens the possibility of growing. If the money is given to a business in the form of a loan, instead of equity, then because it is debt instead of capital, the money has no right to any return generated by the business (like interest). This is because money only has a time value when it is invested as capital, not when it is idling as “potential capital.” Besides, Islam does not consider loan (or debt) as an income-generating transaction.
Money, Time Value of Money, and the Discounted Model in Islam
Islam forbids the practice of usury in all its forms, such as a discounted debt (borrowing $1,000 for a period of 3 months, but the money received at the beginning is only $950, and the borrower is required to return exactly $1,000 at the due date), an interest-bearing debt (borrowing $1,000
