The Customary Practice of Gerawee in Afghanistan: A Case for Transitioning to Real Equity-Based Finance

Indonesian Journal of International & Comparative Law, 2015

32 Pages Posted: 6 Dec 2015

See all articles by Haroun Rahimi

Haroun Rahimi

American University of Afghanistan; Bocconi University School of Law

Date Written: October 4, 2015

Abstract

The customary practice of Gerawee, in principle, refers to a specific form of synthetic loan. It is a pledge-lease transaction that enables owners of immovable properties to obtain financing based on the market value of those properties in exchange for either paying regular payments in form of rent or transferring the right to lease those properties to a financer. The practice has been developed to help debtors and creditors avoid the prohibition of interest bearing loans under Shari’ah. Despite the efforts of some Muslim jurists to justify the practice under Shari’ah, it is widely criticized. In particular, Afghan muftis generally consider the practice of Gerawee “un-Islamic,” and under Afghan civil code, the practice has no formal standing. Nonetheless, it has been used, and unfortunately, has created problems such as fraud, and ineffective legal protection for financiers.

This article recommends that Afghans adopt a modified Islamic finance product known as the “Musharakah Mutanaqisah Partnership (MMP).” The MMP is a joint-ownership arrangement created by a sales contract, which was developed in Muslim countries to solve the housing problem. The modified MMP (MMMP), as prescribed in this paper, can deliver the expectations of the parties, and address the legal and Shari’ah-related objections by transforming the practice from debt-based finance to equity-based finance under which the parties share the risk. This solution eliminates the main causes of criticism of an MMP, which are the lack of a bona fide sale contract and risk sharing.

Keywords: Islamic Finance, Shari'ah, Afghanistan Law, Gerawee, Musharakah Mutanaqisah Partnership, Islamic Mortgage

Suggested Citation

Rahimi, Haroun, The Customary Practice of Gerawee in Afghanistan: A Case for Transitioning to Real Equity-Based Finance (October 4, 2015). Indonesian Journal of International & Comparative Law, 2015, Available at SSRN: https://ssrn.com/abstract=2699248

Haroun Rahimi (Contact Author)

American University of Afghanistan ( email )

Darul Aman Road
Kabul, Kabul
Afghanistan

Bocconi University School of Law ( email )

Italy

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