Overview of Sharia law elements relevant to the crowdfunding phenomenon
There are several general principles, some of which are negative (prohibitions) and others positive (mandatory), that must be taken into account in any Sharia-compliant transaction. These prohibitions and mandatory rules are the following:
Prohibition of‘riba’ (riba = financial interest in the Western understanding)
One of the best-known rules of Islamic Finance is the riba ban. The term means ‘excess’. This prohibition is absolute and unconditional. It is mentioned many times in the Quran, but the exact meaning of riba does not require specification in the verses since its meaning was known to most people.
Riba's concept can be divided into two categories:
Riba al-naseeyah, also known as riba al-Quran and riba al-jahiliyyah
This type of riba is the equivalent of interest paid on loans. It consists of the addition to the principal amount of a predetermined premium, which is paid to the lender in exchange for the loan or in exchange for extending the loan repayment time. It is linked to the amount paid and the duration of the loan. The prohibition of the riba al-naseeyah has been established in the Quran, the Sunna of the Prophet and by the consensus of Muslim scholars of all schools of Koranic legal thought (sura 275-9 Quran).
Riba al-fad or riba al-hadith and riba al-byuoo
This concept of riba takes place when the value of the assets offered by one of the parties is superior, ostensible and without justification, to the value of those offered by the other. The prohibition of this type of riba means that any exchange of money (or commodities that are considered money) should only be treated at the same value. Therefore, al-fadl riba arises when the parties exchange products of a similar type at a different value. Riba al-fadl, for example, would be applicable when two people exchange blocks of gold of the same weight but where one block is nine carats and the other 18, and therefore of different values, or when the exchange is not at the same time (Schacht 1913-1936; Watt 1956).
We would be facing a case of riba al-fadl when we exchange a car for money (by buying and selling it) when we deliver the car to the buyer on the spot, but the buyer pays within six months, because there is no fairness in the deal since while the buyer can enjoy the car from its delivery, the seller cannot enjoy the money for another six months.
The meaning of gharar is cheat, trick, attract as bait, tempt, seduce and uncertainty in the transaction or contract. Under Spanish law and other civil law systems, gharar can be assimilated to the sale of a good with hidden defects, or to a sale in which the parties do not know perfectly all the characteristics of the good subject to the transaction or the conditions of the transaction (price, term and amount of each term, for example). The lack of transparency and clarity in business is also a type of gharar (Schacht 1982).
Protection against the gharar is similar to the protection established under European laws in favour of consumers and users in terms of guarantee of the good offered and transparency in the transaction. In Spanish law, we can see this protection in Royal Legislative Decree 1/2007, of 16 November, approving the revised text of the General Law for the Defense of Consumers and Users and other complementary laws ( article 114 ‘The seller is obliged to deliver to the consumer and user products that are in accordance with the contract, responding to him for any lack of conformity that exists at the time of delivery of the product’).
Ban on gambling (qimar) and speculation (maysir)
Qimar (gambling) and maysir (speculation) are prohibited in Islam. In a transaction involving qimar or maysir, one of the parties may either suffer a total loss based on chance or make a substantial gain without any effort. Qimar has an element of gharar but not everything that is gharar is qimar. An example of qimar in modern finance would be the purchase and sale of any type of financial derivative products for speculative purposes (Quran 2:219, al-Baqara). May sir's ban is very relevant, since it means that instruments such as options and futures contracts cannot be used under the rales of Sharia due to their speculative nature.
Obligation to share losses and profits
As a consequence of the prohibition of the riba, understood as financial interest in Islamic law, the figure of the financial creditor is not allowed, which is the person who lends money and intends to participate in the benefits of the project, but without being affected by losses.
Under Sharia rules there is an obligation to share losses and gains, that is, both parties in a transaction participate in the profits or benefits proportionally and therefore they may eventually suffer a loss due to business risk.