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Economics of Liability: An Islamic View

As we delve deeper into the various aspects of Islamic finance, it is worth emphasizing the legal implications of applying Shariah guidelines to various financial contracts. While Islamic finance is often distinguished from the conventional financial system, in practice they both co-exist and in more than one ocassion need to be considered side-by-side. In particular, there are significant differences (i.e. treatment of liability, bankruptcy, foreclosure, etc.) that practitioners should be aware of. These go well beyond the usual introductory aspects of Islamic finance (i.e. prohibition of riba, negative screens, etc.) but are of vital importance for fund managers and product manufacturers.

The below paper provides an introduction to Islamic liability, as we aim for more ellaborate and detailed discussions on Islamic tort law and Islamic liablity law (check the upcoming discussion on Islamic bankruptcy). This paper provides a novel comparison between the American system of liability and the Islamic system of liability (and worth checking for other papers of interest available from the International Islamic University Malaysia).

Economics of Liability: An Islamic View
Monzer Kahf
Former research economist at the Islamic Research and Training Institute (IRTI)
IIUM Journal of Economics and Management

Some excerpts: "The Islamic system of liability centers on the materiality of the injury, both in its causality and in its outcome, and it provides a list of compensations. Accordingly, recognizable emotional harm is only the one that can actually be materially checked, and recognizable loss of income covers only that actually forgone income during the off work period caused by the injury."

"Predictability is one of the main characteristics of the Islamic system of civil liability. This provides the producer with better chance of planning and pricing, and while it compensates the injured it deters consumers from exaggerating their demand for compensation."


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