Analysis of the new Iraqi Constitution and its potential effects on the finance community

1. Will Article 2 of the Iraqi Constitution Establishing Islamic Law be an Impediment to Iraq’s Economic Development? <br />Presented to:<br />Marshall Taheri<br />Submitted by:<br />Keith Adams <br />Contents TOC quot;
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Introduction PAGEREF _Toc249701701 3Background Information About Iraq PAGEREF _Toc249701702 5Development of Iraqi Law and Shari’ah Law PAGEREF _Toc249701703 8Islamic Banking PAGEREF _Toc249701704 10Transactions Forbidden Under Shari’ah Law PAGEREF _Toc249701705 11Shari’ah Compliant Transactions PAGEREF _Toc249701706 13Influences Impacting the Development of Iraqi Law PAGEREF _Toc249701707 16Grand Ayatollah Ali al-Sistani Islamic Law Code PAGEREF _Toc249701708 17Constraints on Shari’ah Law on Commercial Activity in Other Middle Eastern Countries PAGEREF _Toc249701709 20Conclusion PAGEREF _Toc249701710 21Bibliography PAGEREF _Toc249701711 23<br />Introduction <br />Today, Iraq is a nation in transition, culturally and legally. Iraq has recently taking steps to assert control over its borders, as the United States limits its role in the country. Iraq has successfully held democratic elections and has written a new constitution, guaranteeing the rule of law within the nation. The Constitution of Iraq has one feature that may alarm Westerners seeking to do business in Iraq, namely Article 2 which declares Islam to be the religion of Iraq and that all law derives from Islam. Further, the constitution declares that it is the supreme law of the land and that any law that contradicts it is invalid. <br />Islamic law, also known as Shari’ah law, is controversial and misunderstood in the West. One of the most well known laws of the Shari’ah, and the most widely debated, is the prohibition of riba, or interest. For most in Islam, riba and interest are terms that are interchangeable, whereas in the West, it can be split into interest and usury, with only the latter being banned. This general prohibition of interest in Islamic law has resulted in financial products that skirt the interest prohibition, collectively known as Islamic financing.<br />Islamic finance is the dominate form of finance in Islamic lands, and it has been growing in the West as well. However, despite interest being prohibited by Shari’ah law, many Islamic nations in the Middle East permit its use. Some outright declare that interest is permissible, like Egypt, while others have been more discreet, like Saudi Arabia, which allows the payments of various fees on financial instruments based on percentages. Others have found the use of rent being paid on money financed to be an acceptable way to pay the costs of financing.<br />This has resulted in scholars complaining that countries professing to adhere to Islamic law to be doing so in form and not in substance. Further complicating matters are the internal debates about riba in Islam. Some scholars have argued that interest should be permitted, with only usury prohibited, as it more properly tracks the intent of the ban. Others have said that all interest has to be banned because the Qur’an says so. In the middle, voices have said that interest has to be prohibited due to scripture, but money has a value in itself and so a rent may be paid on loans to compensate for the opportunity costs of not being able to use the money loaned for other endeavors. <br />Iraq has been a nation that has allowed the payment of interest in financial products. Its original business law authorized it. Further, during its occupation, the United States modernized the banking laws, continuing the practice of allowing interest to be paid. Today, though, there is concern that the new Iraqi Constitution may ban the practice of interest payments, upsetting the traditional practice of interest bearing finance being used in the country. <br />This report will explore if the Iraqi Constitution will find the paying of interest to be in violation of its laws. This paper will start will a general introduction to Iraq, discussing its culture and factors that influence it. Next, the development of Iraqi law and Shari’ah law will be discussed, leading to the development and practice of Islamic banking and various financial transactions. Lastly, the Shari’ah code of Grand Ayatollah Ali al-Sistani will be discussed and compared to various financial products.<br />This report will conclude by finding that Iraq will likely maintain the practice of interest. First, interest will be found to be in compliance when practiced with a non-Muslim, as the current Iraqi law and Shari’ah Code of Sistani permits it. Specifically, the Sistani Code is a form of Shari’ah law, and given his influence, it will carry enough weight to continue the practice. In terms of interest bearing products between Muslims, the issuer becomes a bit muddier. It is allowed under the current code, but categorically forbidden by the Sistani Code, creating a conflict. While this conflict can be fatal to interest bearing products for Muslim-to-Muslim transactions, most nations in the Middle East have sought to limit the reach of Shari’ah law, either directly by permitting interest or through the use of colorful terms, which adhere to interest bans but allow payments under other names. In either of these two forms, Iraq is likely to continue the practice. Lastly, even if interest is banned outright, various financial vehicles allows for transactions to be conducted to allow and compensate for financing and risk. These various products allow the same ends to be accomplished, but by modified means so as to meet the requirements of Shari’ah law.<br />Background Information About Iraq<br />Iraq is a nation-state located in Middle East Asia, which borders Iran, Kuwait, Saudi Arabia, Jordan, Syria and Turkey. Iraq also has coastal access to the Persian Gulf between Kuwait and Iran. Its geographic coordinates are 33 00 N, 44 00 E. <br />Iraq has a unique culture that blends traditional Arab and Muslim culture. Several factors influence the individual’s behavior, which include gender, family, tribe, ethnicity, religion, and politics. <br />Iraqis hold the family at the central pillar of society. Loyalty to the family unit and maintaining its honor are very important in Iraqi culture. An Iraqi’s tribal affiliation, or ashira, is another very important aspect in Iraqi society. As one American study put it, “Loyalty and association with a tribe serves as the basis before all else; family first, tribe second and government last.” In the tribal system, the fathers and tribe elders are revered and they are the ones who dictate the clan’s loyalties. The leader of the tribe is the sheik, who provides protection, and guarantees basic economic well being. They also act as a form of judiciary, mediating disputes, resolving property disputes and suggesting marriage arrangements. The role of the tribal leader has also been described as a “ward boss” in reference to the corrupt patronage that existed in U.S. politics. In many areas, the sheiks also act as intermediaries between the coalition forces and Iraqi government in their respective areas, controlling the issuance of contracts, thereby increasing their wealth and increasing their power.<br />The power of the tribes can also been seen in the reduction in violence against U.S. troops. The U.S. “Surge” strategy focused, in part, on bringing the Sunni tribes into the arms of the coalition and Iraqi government, through the Sons of Iraq initiative and through direct aid and contracts administration.<br />Iraq is a country made up of several ethnic groups, Arab 75%-80%, Kurdish 15%-20%, Turkoman, Assyrian, or other 5%. The various ethnicities carry with them age old bias and animosities. One such animosity is the Arab disdain for Kurds, who they believe are inferior. Further, these attitudes, along with Saddam Hussein’s chemical attacks and war on the Kurdish people have created a distrust and has fueled desires for independence and creation of a Kurdish state, which would include Iranian and Turkish lands. Iraqi Kurds have supported Turkish Kurds, resulting in Turkish military raids into Iraqi territory. Hussein also sought to de-Kurdify areas of strategic value, namely Kirkuk, with its massive oil reserves. <br />Iraq’s Turkoman population shares an ethnic link to Turks. This has prompted the nation of Turkey to declare its desire to protect them. Turkoman populations live mainly in northern Iraq, notably in Kirkuk, Mosul, and Tal Afar. They represent the third largest ethnic group in Iraq, after the Arabs and Kurds, respectively.<br />The majority of Iraq is Arab. Iraq, under Saddam Hussein, subscribed to a pan-Arab ideology. Since the removal of Saddam Hussein, there have been calls to abandon the pan-Arab ideology in favor of a national one. One author states, “[M]ost Iraqis claim that [they] are Iraqis. [They] go back to the [ancient Mesopotamians].quot;
<br />Like many nations in the Middle East, religion plays an important role. Iraq’s religious groups break down as Muslim 97% (Shia 60%-65%, Sunni 32%-37%), Christian or other 3%. Iraq’s religious differences and disputes tend to dominate media coverage. The Shia sect of Muslims further divide between Grand Ayatollah Ali al-Sistani of Najf and Muqtada al Sadr. Officially, al-Sistani has held the view and practice that the religious leaders should refrain and remain above politics. Al-Sadr, on the other hand, has fully embraced politics and controls a militia and is based in a Baghdad slum dubbed Sadr City, formally known as Saddam City. <br />The Sunni branch of the Muslim religion is a minority, but until the US intervention in Iraq, was the dominate and controlling group, although true control came from the al-Tikriti tribes outside of Baghdad, homeland of Saddam Hussein. Since Hussein’s fall, a near equilibrium had to develop between the two religious sects. Hard feelings and atrocities committed by the former regime, criminal actions by Sunni and Shia militias, including torture of civilians and neighborhood cleansing, and outside influences have made the process harder. <br />Iraq has a small Christian population, located in Northern Iraq and Baghdad. The Christians also form separate ethnic groups, the Assyrians and Chaldeans. Since 2003, Assyrians have fled to Syria, although exact numbers are unknown.<br />Lastly, politics is a major factor in the culture of Iraq. Politics does not refer to the current political happenings in Iraq, but rather politics under the Hussein regime and its continued affect on the Iraqi psyche. Hussein used his intelligence apparatus to monitor and control his internal population. As such, many citizens have a great distrust for the intelligence services in Iraq. Hussein sought to closely monitor those below him, to prevent any kind of overthrow of his government. Hussein was also known for his immense cruelty to opposition figures. These factors combined to result in “a severe atmosphere of suspicion, paranoia, and distrust.” While this quote deals specifically with the building and training of the new military, it can be easily applied to the general population, as well, as they were subject to the same level of monitoring and abuses as those in the military. <br />This has resulted in a culture that is used to micromanagement from the top, with little input or control from the lower echelons of an organization. Further, employment, promotions and other advancements were not based on merit or ability, but rather on family or tribal bounds, as trust and fear dictated whom one surrounded himself with. Further, due to financial mismanagement of the previous regime, Iraq is a cashed based society that is distrustful of banks.<br />The main language in Iraq is Arabic. Other languages are used in the nation as well, such as Kurdish, which is the official language in Kurdish regions. Turkoman and Assyrian languages are also used.<br />Development of Iraqi Law and Shari’ah Law<br />In the Middle East, most countries follow the continental European system that distinguish issues that arise from civil related matters to commercial related matters. It has been suggested that this legal differentiation may be more difficult for the common law lawyer to understand than with dealing with Shari’ah influenced law. The countries’ laws can be generally grouped in three different categories, Western laws, Shari’ah Laws, and a hybrid mix of the two. Countries that followed the Western system include Egypt, Syria and Lebanon. Saudi Arabia, Oman and Yemen have based their legal system on Shari’ah, while Iraq, Jordan and Libya have combined the two legal theories.<br />“[S]ince its original transition from Ottoman Rule to British at the end of World War I” and to this day, Iraq has always had a “bureaucratic, complex system of laws, regulations and orders.” In 1951, Iraq attempted to modernize its business laws under Law No. 40, which remains in force today, unless its specific regulations have been overruled or amended. This law is heavily influenced by Abd al-Razzaq Ahmad al-Sanhuri, who wrote the Egyptian civil code. The Egyptian code is influenced by the Western civil law and Islamic law. Iraqi commercial law was still considered to be a labyrinth, but it proved to be predictable and enjoyed a “relatively prosperous period from 1955-1975.”<br />Since the U.S. led war in Iraq and the toppling of the Hussein regime, Iraq has gone through substantial changes. Among these has been the liberalization of Iraqi law by the Coalition Provisional Authority (CPA) and the Iraqi government that adopted a new Constitution. The present legal system is based on Sanhuri’s 1955 law, which includes modifications made by subsequent laws, notably the CPA decrees. The Iraqi Constitution is the supreme law of the land, which any conflicts to be construed in favor of the Constitution. Any gaps in the law are to be filled by the principals of Shari’ah law.<br />Under Sanhuri’s Codes, interest is permissible, even though the majority of Islamic movement rejects the argument. This allowance of interest, also known as riba under Shari’ah law, is permitted by Article 692 of the Iraqi code and by the Commercial Banking Law that was signed into effect by the CPA. These authorizations for the charging of interest might conflict with Article 2 of the Iraqi Constitution, which states:<br />First: Islam is the official religion of the State and is a foundation source of<br />legislation:<br />A. No law may be enacted that contradicts the established provisions of Islam<br />B. No law may be enacted that contradicts the principles of democracy.<br />C. No law may be enacted that contradicts the rights and basic freedoms stipulated in this Constitution.<br />Sanhuri, in writing his codes, was able to reconcile the charging of interest with classical Sunni thought. This represents a more Sunni centric model of Shari’ah law. The basis of Sunni centric Shari’ah stems from the philosophy of medieval Sunni authorities and dominates the Middle East’s laws. In the Shia branch of Islam, “the interpretation of the shari’a belongs to a select group of high scholars, each termed a mujtahid, with the entire group collectively referred to as the marja’iyya.” The current lone example of this school of thought is Iran, which forbids the charging and paying of riba. <br />However, it is very important to realize that Islamic law is not defined by the context of religion alone, or even from a single religious source, and these competing forces will also affect how Islamic law develops. “Islamic law is an academic construction, a brooding omnipresence whose relationship to the social order in Muslim societies is very much the matter of debate.” National Islamic law has been partially influenced by other factors, such as Soviet domination over Central Asian Muslim nations before its collapse, and the regional influence of the Thais and Singaporeans over Indonesian development.<br />Islamic Banking<br />In Muslim nations, a dominant form of finance is Islamic banking. Islamic banking/finance differs from conventional/Western banking in that it is in compliance with Islamic law. The legal principles:<br />The principles and precepts of Islamic Shari’ah are revealed in (i) the Qur’an, which is the holy book of Islam, (ii) the sunna, or binding authority of the dicta and decisions of the Prophet Mohammed (PBUH), (iii) ijma, or “consensus” of the community of Islamic scholars, and (iv) the qiyas, or analogical deductions and reasoning of the Islamic scholars with respect to the foregoing, as interpreted from time to time by the Islamic scholars<br />(emphasis in the original). The Qur’an and the sunnah provides the basis for the development of Islamic law. The ijma and the qiyas “provide the methodology and procedural guidelines to ensure correct utilization of the source evidence.”<br />In order for a financial product to comply with Islamic law, it must not fall into any of the four prohibitions, riba- the most controversial, is the prohibition against the use of interest, ghara- prohibition against dealing in uncertainty, maysir- prohibition of excessive risk and gambling, and haram- investment in forbidden products, i.e. pork, alcohol, gambling/casinos, etc. As long as the transaction is not specifically forbidden by Shari’ah, the parties are free to contract as they wish. If a party wishes to assert unlawfulness as to the Shari’ah, that party carries the burden of proof.<br />Islamic banking institutions employ Shari’ah Advisory Committees to show compliance with Islamic law. The boards base their advice and guidance on their interpretations of the primary and secondary sources of Islamic law. The Board’s determinations are fiqh, the “human comprehension of Shari’ah.” Determinations of one board are not binding on another, so there is a lack of consistency from board to board on similar financial products. These variances can carry a potential for council shopping or pressuring of councils to authorize a product for fear that another board will approve it, and thereby lose business and/or influence. Islamic investors depend heavily on the boards and they may require a fatwa in order to invest in a particular financial product. <br />Transactions Forbidden Under Shari’ah Law<br />Consensus holds that riba is a prohibition against interest on loans and accounts. “The Qur’an mentions riba and prohibits it but does not provide context for its application in modern transactions … [I]n Arabic language, riba literally means excess or increase over and above the principal sum loaned.” Further, certain passages in the Qur’an are ambiguous as to what types of interest are banned, all or just usurious. The reasoning on banning riba has fallen on scholars to debate. Their reasoning for its prohibition include that earning interest is not a legitimate form of work, to prevent usury, to prevent unjust enrichment, “riba could result in laziness,” it could lead to “strained relationships” between people who cannot repay the interest and loan, and it can lead to duress on the borrower who may be taken advantage of by the lender. <br />The debate of what the prohibition of riba means has evolved into three schools of thought, the liberal, moderate and conservative views. The liberals believe that riba should only be banned when they are “exorbitantly high interest rates, which is exploitive and forbidden by the Qur’an.” They contend that the prohibition was established in the last days of the Prophet, and he was not able to provide a “proper interpretation” regarding its prohibition. Further, they assert that these prohibitions should be strictly limited to the sunnah and not to the modern banking industry, which was not present during the Prophet’s time.<br />The moderate interpretation of riba contend that the prohibition applies to both usury and modern interest payments. However, they also distinguish that the Shari’ah recognizes the value of money, and so rent can be charged on money loaned. This allows a merchant to sell one item at a lower price for immediate payment, yet charge a higher price for the identical item if bought on credit. This appears to be the more dominant view.<br />The conservative school of thought is the most restrictive and encompasses the more radical social justice schools of thought. “Proponents of the conservative view contend that in addition to usury and fixed interest, riba also includes all forms of economic exploitation of the poor by the rich like profiteering and paying of subsistence wages to laborers.” They argue that money has no intrinsic value except for a medium of exchange. Further, loans were not meant for commercial or business activity, but for charity. They also view the current Islamic banking models of financial transactions as riba, because they achieve the same results, but just avoid the word riba. <br />The next prohibition under Shari’ah law is gharar, the prohibition against dealing with uncertainty. “The classical prohibition of gharar rests largely on the basis of Prophetic statements forbidding the sale of unripe fruit on a tree, the sperm of a stallion, the fetus of a camel, grapes until they are black, or grain until it is strong,” because the commodity’s maturity is not certain. This prohibition is not blanket prohibition against uncertainty, otherwise no contract would be valid because “complete contract language is impossible.” Islamists jurists have distinguished between excessive risk and permissible risk. <br />In determining whether gharar will invalidate a particular contract … [the] four conditions [are helpful]: (1) gharar must be excessive -- minor uncertainty will not affect the contract; (2) the potentially affected contract must be a sale and not a gift; (3) the gharar must affect the principal components of the transaction; and (4) if the contract containing gharar meets a need that cannot otherwise be met, the contract will not be deemed invalid based on that gharar.<br />Maysir prohibits gambling and haram are forbidden things in Islam, but neither are significant regarding Islamic finance. These only impact the ability to engage in transactions pertaining to gambling, alcohol, pork products and the like.<br />Shari’ah Compliant Transactions<br />Islamic banking is the dominant financing vehicle in the Middle East and North Africa. Growth has been increasing as the range of products continues to expand with vehicles such as suhuk (Islamic bonds), securitization, as well as more traditional Islamic banking features. It is also worthy to note that non-Muslims have also been choosing to use Shari’ah compliant products, despite the availability of Western-style financial products. It has also been found that Islamic banking is the “[f]astest-growing and most dynamic areas in global financial market[s].”<br />As Shari’ah banking has expanded, several types of transactions have surface that tend to be compliant with the needs of Shari’ah law. The following products may be Shari’ah compliant:<br />Musharaka (partnership): Financing that typically involves a business undertaking in which both the customer and the financial institution provide capital with the understanding that the financial institution and customer will share profits and losses in accordance with a formula agreed upon before the transaction is consummated<br />Mudaraba (venture capital financing): Financing in which the financial institution typically provides all of the capital for a transaction. The customer acts as the financial institution’s agent in utilizing the funds and also provides sweat equity (including know-how). The financial institution and customer share profits in accordance with a contractually stated percentage formula<br />Murabaha (cost-plus financing): Financing by a financial institution on a “cost-plus” basis. The financial institution obtains title to a good on behalf of its customer and then sells the good to the customer via installment payments at a contractually pre-arranged cost (set at the original cost of the good plus a reasonable profit for the financial institution)<br />Ba’i Bithaman Ajil (deferred payment financing): A sale of goods on a deferred payment basis. At the request of its customer, the financial institution purchases an existing contract to buy certain assets on a deferred payment schedule and then sells the goods back to the customer at an agreed upon price, including a profit<br />Istisna (commissioned manufacturing): Financing in which the financial institution makes payments to a developer or contractor as a job (typically involving construction or manufacturing) is completed<br />Ijara (lease financing): A leasing arrangement whereby a financial institution purchases an asset and leases it to its customer<br />Ju’ala (loans with a service charge): Financing through the use of a service charge <br />Qarde Hasan (benevolent financing): Financing that occurs when the financial institution provides a loan free of charge, typically with the intent to provide financial assistance to ailing institutions or to provide humanitarian assistance to individuals<br />(emphasis added). It is important to remember that each product must be individually scrutinized to ensure that its particulars are properly within the confines of Islamic law. <br />There is criticism that many of these products put form over substance, by merely eliminating the word “interest” from the product. While the product is interest free, the product is designed to achieve the same ends of interest, namely a guaranteed fix rate of return and shifting all risk to the borrower. One method is to charge a “rent” on the money used, as in the case of ijarah leasing. Quite often, the value of the lease is tied to the London Inter-Bank Offer Rate (LIBOR), an interest rate. In such a circumstance, the rent paid on the money financed bears a striking resemblance to an interest paid on the amount financed.<br />A fundamental aspect of Islamic banking is the sharing of risk. If “a transaction is structured in such a way that it secures a guaranteed profit without taking any risks” it can be deemed riba, despite the lack of that specific word being uttered by the parties or written in the contract. Critics contend that modern Shari’ah banking products are created to “replicate conventional financial products” and tweaking them in order to avoid the dreaded “riba,” replacing it with some type of fee. Some products even engage in “multiple sales and/or leases to mimic the amortization schedule of a conventional mortgage,” i.e. selling x% of property with y% of profit to the customer until the entire parcel is sold, mimicking the paying off of a mortgage in traditional banking.<br /> A particular product that is borderline prohibited is the murabaha (cost-plus contract). The Office of Comptroller of the Currency (OCC) in the United States decided that a “murabaha transaction is … a permissible … financing method because the economic substance is functionally equivalent to a real estate mortgage transaction.” Another area of concern has been the securitization of loans, which some believe is a way “to pay disguised interest” by way of “lease certificates.” <br />In Canada, the Muslim Canadian Congress has criticized Islamic compliant products because they have been found to be .60 percentage points higher than traditional products. However, this might be needed to compensate for additional risks the Islamic banks are required to take in order to be in compliance with Shari’ah law, which can include taking an ownership interest or entering into a partnership with the customer.<br />Influences Impacting the Development of Iraqi Law<br />The current banking laws in effect in Iraq were written by the Coalitional Provisional Authority (CPA), a ruling body headed by a U.S. diplomat. Since then, Iraq wrote and passed its Constitution which requires all laws to be in accordance with Islamic law. Theoretically, the Iraq can change the law to make in inline with general Shari’ah laws ban on riba. However, the World Bank notes that there is considerable pressure to maintain the economic regulations passed by the CPA. These pressures stem from the business community’s need to see stable and consistent economic policies being maintained by the government to foster investment and development.<br />Internal forces will also shape the law in Iraq. Commercial development in Iraq is built upon two legs:<br />[C]ommercial order in Iraq, and in particular among specific categories of Shi’i Iraqi merchants … has been organized through two central sets of rules and principals. The first of these influences is the national law, the civil code, drafted by Abdul Razzaq al-Sanhuri, reflecting modern conceptions similar to those prevailing in civil law countries in the West. The second set of rules and principals, which is administered and enforced on a more informal and localized basis, is the shari’a as developed by the Najaf-based clerical authorities.<br />These authorities are the marja’iyya, which are “extremely powerful Shi’i religious institution[s].” The marja’iyya are important because they can essentially overrule any act that the Iraqi commercial code permits, such as the payment of interests. If the Code allows it, but the religious authorities deem it a sinful act, the likely result is that the Iraqi people will adhere to the religious interpretations, whether due to piety or social pressures.<br />This results in needing to not only look to the Iraqi code in order to determine whether or not interest can be used in financial transactions, but also requires looking to the religious authorities and their interpretations of Islam. On one hand, “[l]eaders such as Shi’i Muhammad Baqir al-Sadr and the Sunni Sayyid Qutb, tapping into a theme of anti-colonial, regional liberation fervor that lasts to this day, castigated Muslim societies for acceding to Western notions of finance in permitting interest.” However, the current most powerful force in Islam in Iraq is the Grand Ayatollah Ali al-Sistani. He has been influential in stopping and preventing the sectarian violence that occurred in Iraq, getting Iraqis to vote and in pushing the Iraqi legislature to adopt shari’ah principals into the Constitution. Sistani posts his rulings on Shari’ah online and is an invaluable tool in determining where the Iraqi law will go. <br />One word of caution is warranted, though. Iraq is a complex and dynamic society going through changes. Under Saddam Hussein, Iraq was ruled as a secular nation. After the fall of Hussein, there was a surge of religious fervor, especially with the Shia who for the first time could worship without fear of persecution. However, as the religious authorities became stricter and saw it as a vehicle for power, people have started to become disillusioned with it. Some young Iraqis blame the religious fervor for restricting their freedoms and for the violence. This disillusionment has also spread to the older voters, who believe the religious parties are ineffective and corrupt. Some polling suggests that these voters prefer secular candidates over religious ones, even in southern Iraq, which is dominated by Shia religious parties. This rift can also be observed through Prime Minister Nouri al-Maliki splitting away from the Shiite block to run on “a secularist [and] nationalist platform.” While these historical patterns and present trends are not determinative alone, they have the potential to greatly affect the development of the law.<br />Grand Ayatollah Ali al-Sistani Islamic Law Code<br />The Grand Ayatollah Ali al-Sistani is the most influential cleric in Iraq and has written his own Shari’ah law code. He takes a relatively moderate/liberal view in terms of commerce and finance. Under Law 200, §2063 Part 4 of his code, he decrees that any transaction involving interest is haram (forbidden). However, under §2088 of Law 200, “a Muslim can take interest from a non-Muslim who is not under protection of Islam.” It also says, “if payment of interest is permissible in the religion of that non-Muslim, a Muslim can receive interest from him.” This quite clearly states that under the Shari’ah law espoused by the most powerful Najaf cleric, interest bearing financial products can be permitted under Shari’ah, and therefore fall within the confines of Article 2 of the Iraqi Constitution. Further, this also removes social stigma from the interest transaction being a sinful act. However, without this exception, Sistani’s code is quite clear throughout that interest is forbidden.<br />If the participants in a transaction cannot meet the aforementioned requirement, the Sistani codes offers many other options to achieve a desired result. Under Law 200, §2083, currency speculation is permitted. This law essentially allows a person to receive one type of currency, and repay that debt in another currency for a greater amount. However, if he repays in the same currency received for a greater amount, it is forbidden.<br />Law 202, §2098 provides a five part test that must be fulfilled in order to engage in a sales transaction, which essentially require (1) known quantity; (2) transferable or tangible object; (3) description of the item and intent of the parties to be known; (4) unconditional ownership; and (5) the item itself is to be sold, not the anticipated profit. This test in important because of Shari’ah compliant products that require a transfer of property, from seller, to bank to the ultimate buyer. There is no timing requirement, allowing the parties to determine that themselves. Part (5) of the test specifically addresses issues related to gharar (uncertainty) and limits speculation by forbidding sales based on anticipated profits.<br />Law 202, §2104 permits the sale of leases, making a ijara (lease finance agreements) a liquid investment. The Sistani code also recognizes the time value of money. Law 205, §2116 allows a vendor to sell a product at an increased price if that sale is based on credit, as opposed to a lower price for an immediate payment. This rule falls squarely within the moderate philosophy of riba, where money has its own value and so a rental fee can be charged for the opportunity cost of the transaction. <br />Law 211 deals with the laws of partnership. §2150 allows partners to form a partnership and divide profits between themselves in any way they desire. § 2154 further clarifies and allows the parties to outline duties between managing partners and potentially limited partners, allowing them to contract how they will divide profits. §2159 permits the partner with “the right of discretion over the capital” to act in a way that he deems fit for the benefit of the partnership. These sections are important for the development of musharaka (partnership) financial products. This type of product requires the financier to become a partner. Law 211 permits this type of relationship and permits the parties to contract duties and payments in a manner that properly compensates both while still being able to compete cost wise against Western-style loans.<br />Law 221 deals with agency, important for mudaraba (venture capital financing) where the customer acts as an agent for the financier providing the capital. §2265 states that no formal agreement needs to be put in place to effect an agency relationship; it also allows for the development of apparent agency relationships, similar to American common law principals. The only substantial deviation from traditional Amercian agency law is found in §2268, which forbids the Muslims from during anything that is haram (forbidden) in Islam. Aside from that, Law 221 essentially allows the parties to develop their own agency relationships, as they see fit. This benefits the mudaraba agreement as it gives all parties the ability to create a contract that is flexible enough to be tailored to the needs of various venture capitalists. <br />Law 223 speaks specifically to hawala. However, §2298 has provisions for the assignment of loans provided the parties agree. This permission extends to all financiers, not only hawala practitioners. Law 225 and Law 226 and their subsequent sections authorize the use of surety agreements that generally track the guaranty rules in the Uniform Commercial Code (UCC).<br />Constraints on Shari’ah Law on Commercial Activity in Other Middle Eastern Countries<br />In determining the path Iraq will take regarding merging its Constitutional requirement to impose Shari’ah law with the needs of a flexible business environment, it is important to look at the other nations in the region. “Every one of the States in the Gulf region now has a set of codified corporate laws. These laws are based on the civil, or French/Egyptian, model. The judges who were installed to handle company law disputes in the Gulf were, if not Egyptians, graduates from Egypt’s law schools,” which makes the Egyptian/Sanhuri philosophies very influential. Many Middle Eastern nations have found that when religion and commerce falls into conflict, the most expedient course of action has been to limit the reach of Shari’ah. <br />In Kuwait, the government determined that while Shari’ah may be appropriate for civil matters, it should not be extended to matters involving commercial law. Kuwait maintains a duel banking system, one Shari’ah compliant one and another Western style one. “In fact, during the period between 1985 and 1986, when the leading Islamic bank in Kuwait (Kuwait Finance House) could not pay a profit to its investors and depositors, many depositors took their funds back to the traditional commercial banking sector, notably to the National Bank of Kuwait, voting with their feet for profit over piety.” <br />In Qatar, the Constitution states that Shari’ah is the main source of law. However, “the Civil and Commercial Code states that Sharia law will apply in the absence of express legislation, provision or custom,” making it a gap filler rather than a source of law. Shari’ah in Qatar has essentially been regulated to traditional and private matters.<br />Saudi Arabia never fell under the jurisdiction of a European power, and so its law developed separately, with a very Shari’ah based system. In doing this, interest is forbidden in Saudi Arabia. However, they do allow fees to be paid through a “commission of services” scheme which is calculated as a percentage of the loans which “never exceeds 8.5%.” “Deposits and savings are also entitled to a commission, which is again based on a percentage that fluctuates between 3.5% and 5%.” So while the Saudis have “banned” the payments of interest, they have developed financial schemes that closely relate to a fixed percentage return on capital which is essentially interest.<br />After the Revolution in Iran, changes were made to the financial and banking sectors, which resulted in “interest-free financing.” As stated earlier, the Sanhuri code of Egypt permits the use of interest based products in Egypt. This same philosophy is found in the Iraqi Commercial Code and in the CPA Banking Law. Bahrain codiefied its commercial code in 1987, “akin to the Egyptian Law of Commerce and derived from the Fench commercial code … which effectively subordinates the Sharia in Bahraini law to filling the gaps left by the Law of Commerce.”<br />Another example of the limits of the power of Shari’ah is the presence of the insurance contract. Insurance represents “riba and ghara (risk, uncertainty, and speculation).” Several Middle Eastern countries allow insurance, including Egypt, Iraq, Libya, Syria and ultraconservative Saudi Arabia, which boasts a $2.5 billion insurance industry. This paints a picture that in terms of business, piety will generally take a back seat by way of officially allowing interest or by just calling it by another name.<br />Conclusion<br />Iraq is a nation in transition. It is a new democracy emerging from the pangs of war and from a recent history of brutal suppression stemming from its prior government under Saddam Hussein. During the time of repression, Iraqis, especially the majority Shia were preventing to openly practicing their faith. After the overthrow of Hussein by U.S. led forces, a wave of religious fervor swept the nation and can be seem in its Constitution, which declares that Shari’ah law to be the basis of law in Iraq. <br />This constitutional declaration brings about questions regarding the use of interest in financial products. Iraq had been traditionally a secular nation, and its laws reflected that and allowed the use on interest in various financial products. The current swing towards religion, though, and the general ban of interest by Islamic law, threatens to throw the current financial scheme into uncertainty, with the potential conflict between the current interest permissive banking laws and the Constitution basing its laws on Shari’ah principals.<br />While there is cause for concern regarding this development, the likely result is to be of minimal effect. Islamic finance has developed to allow for many various financial vehicles to achieve the same ends as traditional interest bearing products. Further, the leading religious authority, Grand Ayatollah Ali al-Sistani permits interest bearing products in transactions with non-Muslims, banning only Muslim-to-Muslim interest products. While this ban might be seen as a hurdle, many Middle Eastern governments have been adept at limiting the reach of Shari’ah, even when mandated by a national Constitution. Some outright permit the use of interest while others coin colorful terms, such as rents or fees that are tied to traditional interest rates. When that fails, financiers have also proven adept at developing products that mimic an interest based transaction while remaining complaint to Shari’ah law. The end result is that even if interest in any form is banned, creative legislatures and financiers will be able to achieve the same ends through a modified means, limiting any impact on business and Iraqi economic development.<br />Bibliography<br />Articles<br />Anthony Shadid, In Southern Iraq, Testing Democracy’s Limits, Washington Post, January 19, 2009, cited at 2009 WLNR 1051683<br />APS Diplomat Redrawing the Islamic Map, Najaf Hawsa Against Shi’ite Repreisals Despite Neo-Salafi & Ba’thist Bombins, August 17, 2009, 2009 WLNR 16562473<br />Irish Times, Iraqi Cleric Advises on Constitution, August 6, 2005, 2005 WLNR 12374210<br />Liz Sly, Iraq’s Maliki Splits with Shiite Bloc, Los Angeles Times, August 25, 2009, cited at 2009 WLNR 16547399<br />Ned Parker, Iraq's provincial elections show the power of the tribe, Los Angeles Times, February 3, 2009, available at http://articles.latimes.com/2009/feb/03/world/fg-iraq-sheik3 <br />Philip Kennicott, Shiite Leader Al-Sistani’s Edicts Illuminate the Gap with West, Washington Post, February 18, 2005, cited at 2005 WLNR 234943<br />Sabrina Tavernise, Extremists Shake Faith of Young Iraqis, International Herald Tribune, March 5, 2008, cited at 2008 WLNR 4376764<br />Sam Dagher, Tribal Rivalries Persist as Iraqis Seek Local Posts, New York Times, January 19, 2009, available at http://www.nytimes.com/2009/01/20/world/middleeast/20anbar.html?_r=3&ref=world <br />San Jose Mercury News, Poll Says Iraqi Voters will Support Secular Candidates, January 20, 2009, cited at 2009 WLNR 1191821<br />Books<br />Ronald Mann, Payment Systems and Other Financial Transactions. 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