An Islamic Approach to Contract Management and Financing Title in Infrastructure Projects( Dissertation_全文 ) Author(s) Majid Rahmanian Koshkaki Citation Kyoto University (京都大学) Issue Date 2012-09-24 URL http://dx.doi.org/10.14989/doctor.k17143 Right Type Thesis or Dissertation Textversion author Kyoto University An Islamic Approach to Contract Management and Financing in Infrastructure Projects By Majid Rahmanian Koshkaki A dissertation submitted in partial satisfaction of the requirement for the degree of Doctor of Philosophy in Engineering Department of Urban Management Graduate School of Engineering Kyoto University Acknowledgments To reach this point to finalize my doctoral research I have received a huge amount of support, advice, patience, kindness, attention, respect from lots of people. Here I have a limited space to mention a few names. It was impossible to initiate this process without financial support from Japan Government and Japanese Ministry of Education, Culture, Sports, Science and Technology. I am deeply indebted to my supervisor Professor Kiyoshi Kobayashi. It was a great honor for me to work under the supervision of a man who has dedicated his life to promote knowledge in the society. It was a prominent opportunity for me to be a member of vivid and active laboratory of Professor Kobayashi. He always conducted me in a correct way with his brilliant and thoughtful advice and comments. I would like to express my deepest appreciation to the members of my defense committee Professors Kazushige Taniguchi for his constructive criticism and valuable comments and also Associate Professor Kakuya Matsushima. I had the chance to work with Associate Professor Kakuya Matsushima who has always been nice and patient to all students and also as a defense committee member he contributed to my project positively. It was impossible for me to progress in my research without great contributions from Assistant Professor Masamitsu Onishi who always inspired me with valuable comments and points. I should say: thank you very much. My gratitude goes as well to the Kyoto University which facilitated my research, activity and life in Japan. Unfortunately it is impossible to mention all the people who helped me in this way, from professors who I passed courses with them to all the staffs who helped me patiently regarding my poor Japanese. I am grateful to Professor Khairuddin Abdulrashid from Islamic International University of Malaysia who has always been supportive in my project. He also arranged my internship in Malaysia which helped me a lot during my research and also Ms Siti Nora Haryati from IIUM whose valuable advice was a starting point for my research. I would like also to thank all members of Kobayashi laboratory and I hope not to forget any name; the lab‟s kind and supportive secretary Ms. Aya Fujimoto, the Assistant Professor Mamuro Yoshida, Dr. ii Hayeong Jeong who has always been nice and helpful, and a lot of colleagues and friends who facilitated my research and my life in Japan. Hidetoshi Nakano, Christakis Mina, Daeseok Han, Suharman Hamzah, Ismu Rini Dwi Ari, Apul Nababan, Wang Zhiyuan, Alena Vasilyeva-Lyulina, Maiko Abe, Kenshiro Ogi, Hiroshi Fukui, Wang Chong, Hisashi Mori, Teranishi, Parisa Aghamohammadi and … it is impossible to mention all friends in this limited space. I would like to appreciate my friends in IDRO Company in Iran Mr. Mohammad Reza Rafat and Mr. Masoud Shokri who kindly supported my research by providing precious information from Iran. My special thanks go to my beloved Host Family: Kobayashi. Who have really been as my real family in Japan and with them I rarely felt lonely and helpless. And my deepest appreciation and love to my family specially my mom. Undoubtedly I could not exist and survive without her deep and pure love and support which is beyond of words to be described. iii Executive Summary Islamic economics is based on a paradigm which has socio-economic justice as its primary objective. The Islamic economic system is defined by a network of constitutive and regulative rules called shari‟ah; the shari'ah is the guide for human action which encompasses every aspect of life - social, political, cultural, and economic. To describe the significance of research subject namely An Islamic Approach to Contract Management and Financing of Infrastructure Projects; it is necessary to describe the advent, development and impact of Islamic Finance and how it is related to the infrastructure development also how the infrastructure and construction plays a crucial role in development of Muslim countries. Islamic Finance is a relatively new term which denotes engaging in financial and business transactions according to the principles of shari‟ah. However, the Islamic financial system has a centuries-old history. In modern history, interest in conducting shari‟ah compliant business rose with the first sign of expansion of conventional “interest based” commercial banking into the Muslim world. By 1953, Islamic jurists and economists had developed the first description of an interest-free bank. Nowadays Islamic assets represent about 1% of the global financial market and 10-15% annual growth and number of Muslims in the world; it is expected this ratio increase drastically in the future. Based on this very brief introduction, the main objective of research is to provide a comprehensive reference of significant topics related to the shari‟ah and shari‟ah compliance in contract management and financing of projects generally and in infrastructure projects particularly and furthermore, to find a framework to measure shari‟ah compliance objectively based on an Islamic approach. In Chapter 2 and to find out the notion of Shari‟ah Compliance; the main challenge to be discovered is: what are the relevant prescriptions in shari‟ah? This leads us to the study of Islamic jurisprudence, i.e. the investigation of Islamic texts which are the sources of shari‟ah. These texts include the Quran, the traditions, and the fiqh books of authoritative scholars filled with casuistry and reasoning by analogy or other type of reasoning. The main challenge in this concern is not “what is laid down in the shari‟ah and Islamic legal system and its resources” but “How shari‟ah is understood and applied?”. The concept of shari‟ah as used in religious, legal, political and economic discourse conveys different meanings. In this regard four types of shari‟ah could be distinguished: the abstract shari‟ah, the classical shari‟ah, the historical shari‟ah(s), and the contemporary shari‟ah(s). The Divine, Abstract shari‟ah is God‟s plan for mankind consisting of his prescriptions for human behavior. The Classical Shari‟ah is the body of Islamic rules, principles and cases compiled by religious scholars in search of God‟s will during the first two centuries after the Messenger. The historical shari‟ah(s) include(s) the entire body of all principles, rules, iv cases and interpretations developed and transmitted throughout a history of more than one thousand years across the entire Muslim world. The contemporary shari‟ah(s) contain the full spectrum of principles, rules, cases and interpretations that are developed and applied at present, throughout the Muslim world. The main concern is to clarify the contemporary shari‟ah; however, it is inevitable to briefly introduce the other types. Later in the Chapter 2 the relation between shari‟ah and national law of Muslim countries is considered. To find answer to the questions: how national legal systems of Muslim countries have dealt with the shari‟ah? And what are the contents of national shari‟ah-based law?; the constitutions, national and sub-national laws; such as civil law and commercial law, of 12 main Muslim countries have been investigated. As a result the legal system of Muslim countries is classified into three groups, the main group with a mixed system and two small groups with classical shari‟ah system and secular system. Moreover; the Islamic Financial Institution regulatory and supervisory system of Muslim countries could be classified into four shari‟ah governance models as; passive approach, minimalist approach, pro-active approach and passive-interventionist approach. A shari‟ah compliant construction contract is defined as a construction contract with its subject matter, agreement, terms and the conditions that embrace the Islamic belief, practice and value system. The main objective of a shari‟ah compliant contract is not only to fulfill the demand of the industry but most importantly it is to fulfill obligations of Muslims towards Allah which requires us to identify the halal (lawful) and haram (prohibited) in our everyday dealings. It has been agreed by many scholars that istisna is considered as the appropriate shari‟ah compliant contract agreement to be used for construction but it does not mean that any contract which is not mentioned in nussus is not shari‟ah compliant. In Chapter 3 the main topic is risk and risk management. It is impossible to understand the Islamic approach to risk without understanding the notion of gharar. Gharar is one of the controversial topics in Islamic transactions. It is translated as uncertainty and risk but the precise meaning of Gharar is itself uncertain. There are several hadiths related to the prohibition of gharar and those could be categorized in 3 groups; (1) Non or incomplete ownership (2) Nonexistence of the object (3) Extra stipulation. Every type of risk or uncertainty is not prohibited in Islam. Risk associated with normal economic transactions, i.e. value-adding and wealth-creating activities is inevitable for the society well-being and acceptable. Only when risk is a tool or mediator to make one party profits at the expense of the other or risk associated with “eating wealth for nothing”, where no net additional wealth is created; it becomes gharar and so it is prohibited.