Islamic Law and Finance

Abstract

This book is a collection of essays presented at a conference held in April 1988 and organized by the Center of Near and Middle Eastern Studies and the Law Department, School of Oriental and African Studies, University of London. Since the mid-I970s, there has been a significant revival of fundamental Islamic values in several Muslim countries throughout the world. Indeed, a number of Muslim (or perhaps, Islamic) countries like Iran, Pakistan, and the Sudan have recently taken practical steps towards the total Islamization of their economic and financial structures. Among the basic characteristics of an Islamic financial (banking) system is the prohibition of the payment or receipt of a predetermined (fixed) interest rate which is viewed as usury and thus prohibited. As an alternative, the Islamic financial system operates under the general principle of profit-loss sharing, which effectively transforms banks into equity-based (investment) firms. As Mallat correctly points out in his preface, the Western notion of profit maximization does not control the Islamic system. Rather, it is the Shari'ah which primarily governs Islamic finance. However, some contributors to the book, notably William Ballantyne in his introductory chapter, appear to doubt the feasibility of the Islamic system and its ability to operate in contemporary economies. He argues that "what is required in today's climate, is [among other things] a restructuring of the Shari'a to fit Western economic concepts" (p. 9-emphasis added). Nevertheless it is my belief, and perhaps the belief of many Muslim scholars in the field, that such a view is unacceptable, for it seems to be in direct conflict with the core of Islam. A basic tenant of Islam is that the Shari'ah cannot be changed or restructured to satisfy other lines of thought. Indeed, voluminous contemporary research now exists that demonstrates the viability and relevance of pure Islamic teachings to today's complex economic environment. Examples of such research include Chapra (1985, 1991); Khan (1986); Habibi (1987); Darrat (1988); Darrat and Suliman (1990); and Darrat, Suliman, and Bashir (1991). The view that the Islamic economic system is superior to the contemporary Western interest-based economic system is not totally unique with Muslim scholars. Western economic thinkers have also shared a similar view. For example, prominent American economists like Henry Simon (1948) and ...