LEGAL FICTION (HIYAL) AND PARTICIPATION FINANCE

From time to time, transactions carried out by participation banks are associated with the concept of legal fictions (hila). According to this, participation banks and participation finance institutions carry out interest transactions discursively (legal fictions), and for this reason, it is stated that this is the only difference from conventional banks. Another discourse argues that participation banks do not carry out transactions with interest through legal fictions; on the contrary, interest is avoided in some transactions using Sharia remedies available in Islamic law (fiqh).

At this point, it is important to note that participation banking and Islamic finance aim to have a stance with their principles and be an alternative in the capitalist economic system. Therefore, one of their most fundamental principles is the interest-free system against interest, which is a terror for humanity, an economic exploitation instrument, and unfair profit. Thus, not only Muslims, but also non-Muslims seek alternative methods to

the adverse effects of interest in the world economy. While Judaism and Christianity initially opposed interest, they broke their resilience over time and legitimised interest under various reasons. However, despite their abdication and submission to the “interest-free economy is impossible” slogan, Islam refused to compromise its anti-interest rhetoric. For this reason, the best alternative against interest is the Islamic economic system. At present, it is participation banks and Islamic financial institutions that try to represent this system. Therefore, it is crucial that the transactions carried out by these institutions must indeed not cast doubt. If there are issues in the current practices, they should be swiftly addressed.

To analyse the claim that participation banks are using legal fictions, we should discuss the nature of legal fictions, the circumstances of resorting to legal fictions during economic transactions and the relevance of participation finance within this context. It should be noted that there are significant differences between the meaning of the word hila (legal fiction) in the Turkish language and the definition of a legal fiction in Islamic law in terms of its aims and results. In the Turkish language, the word hila (hile) refers to the unfair act, deception, pretence, and cause of harm to the other party for personal benefit. Considering the fact that Islam prohibits actions of this kind of hila, it is clear that it refuses such acts when it comes to interest as well. There are concepts of hila and legal fiction practised for certain transaction logic in exceptional context in Islamic law.

This essentially means identifying a solution in line with the law and religion for a person in a difficult situation rather than deceiving the other party. In other words, legal fictions can be understood as providing a solution and advice with the aim to save a person in distress through actions within the legitimate circle while protecting her/him from sin. In order to do so, the concepts of mahlas and makharij are used. While the former is used to define the path of redemption through religion, the latter refers to the way out compatible with religion. Through these methods, it is possible to reach legitimate results by using legitimate means, illegitimate results by using illegitimate means, legitimate results by using illegitimate means and illegitimate results by using legitimate means.

In Islamic law, legal fictions have sometimes been referred to as an agreed method by parties of a contract to protect their true intention from third parties. These procedures are termed fictitious transaction, and their legal consequences are evaluated accordingly. For example, bai al-inah, “hulla” are examples of a legal fiction that uses legitimate means to reach illegitimate results. The treatment of legal fictions in form must be flawless and legally compliant. As such, it would be incorrect to assume that this type of legal fiction is always a fraud against the law. According to Ibn Nujeym, a Hanafi scholar, it may also have been aimed as a method of salvation/escape in accordance with the religion and the law for the person going through a religious struggle. However, for the device to be deemed unacceptable, it must cause a result contrary to the essence and purpose of the norm preached by the legislator and should also carry a false (deceiving) intent. If there is no such intention in such transactions, then it will not be considered fraud.

Legal fictions in a negative sense, there is a law abiding transaction in terms of form and shape. However, this method does not aim to elude a result prohibited by law and religion but rather to reach a result prohibited by law. This disposition can be legal and valid in form, but if the purpose is taken as the basis, in substance, it goes against the law. According to Islamic law, there is a difference between the legal (incidental) validity of a transaction and the religious (conscience) validity. According to this, conscious contentment is just as important as the conditions of the outer appearance and form for legitimate transactions. This approach is supported by the prophet Muhammed (pbuh), who states, “Consult your heart even if muftis give you a religious ruling.”

At this point, the question arises as to whether the person who performs the transaction through a legal fiction can benefit legally from the result or not. Islamic scholars have suggested different opinions on the judgement of the treatment to achieve illegitimate results using legitimate means. While the Hanafi and Shafii school of thought took on a more general approach that allowed legal fiction for not getting into haram or go against the law, Hanbali and Maliki schools of thought take on a more narrow approach that refuses legal fiction entirely on the grounds that it can lead to haram and violation of prohibitions. However, it is essential to point out the understanding that the imams of the

Hanafi school of thought, do not permit transactions that are carried out with the intention of reaching illegitimate results through legitimate means. On the other hand, Imam Shafii declares that it is necessary to apply objective and formal rules to ensure the stability and legal security of legal transactions and relationships. According to him, fiction transactions in the narrow sense are legally valid. However, the conscientious part is referred to Allah. This is because, in Islamic law, unlike modern law, both the moral and religious consequences of the device are discussed along with the legal sanctions. The defining point here is the intention.

While a legal fiction is permissible, this does not imply permission to use reasons that do not comply with Islamic provisions. On the contrary, the provisions that may arise from such rea sons become mutually agreed upon. At this point, camouflaging the received or receivable interest is not the same as seeking methods or alternatives to avoid using interest or protecting a transaction from interest. Interest, which was also forbidden in Christianity until the Middle Ages, was first acquired through interest fiction. The method was paved after the Christian clergy and especially Catholics, who resisted in implementing the ban rather than finding alternative solutions to an economic system that did not coincide with the prohibition. Over time, enforcement of the law against usury in investment areas became increasingly costly, and people went around the ban and resorted to various interest fictions. Thus, the form of the transaction was the primary concern rather than the substance. As a result, the prohibition was no longer applicable, and the provision itself was discredited. Even clergymen such as Calvin have revealed that the prohibitions regarding interest in the sacred texts are historical, circumstances have changed, and interest is the profit of capital. For this reason, establishing acceptable interest fictions as a general rule in Islam can jeopardise the precision regarding interest sensitivity.

Today, there are interest-free banks, Islamic financial institutions and participation banks representing Islamic finance on a global scale. There are some opinions that the transactions carried out in these institutions are occasionally interest device. However, instead of a general criticism regarding this issue, evaluating interest fiction on a transaction basis can be a more objective approach. Lastly, while there are Islamic scholars who permit the transactions that Islamic finance institutions try to implement, there are also scholars that perform transaction-based evaluations and prohibit it based on the justification that they are interest fictions. However, one should bear in mind that these institutions, which are at the elementary stage, are trying to establish an interest-free alternative, albeit small, in an interest-based global market. In order to establish a real alternative, these institutions require a solid financial resource, alternative product development and special law. This is because issues such as interest-free debt (qard hassan) or granting an extension for borrowers who cannot pay, can only be achieved through a solid financial resource. To achieve this, the institutions in question must continue their research for an alternative without compromising the fundamental Islamic principles and the values that make them interest-free alternatives.

While doing so, as long as they do not have the purpose of reaching interest through devices, changing the form and direction of the transaction to prevent interest is not considered a fraud. For this reason, Muslims who are precise about interest should not only support and protect these institutions but also check the transactions that take place. Institutions must also change their malpractices and identify halal alternatives. While it is clear that Muslims should not yield towards interest, they are just as responsible for finding an alternative method. Simultaneously, just as interest is haram, so are the legal fictions that aim for interest.

Member of TKBB Advisory Board Prof. Dr. Abdullah Kahraman

You can view the content in the 25th issue of Katılım Finans. (LEGAL FICTION (HIYAL) AND PARTICIPATION FINANCE)