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International Business---Islamic Law 1 BUSINESS LAW INTERNATIONAL BUSINESS---ISLAMIC LAW Submitted by: Aaima Sarwar Arslan Aftab Asim Liaqat Khan Komal Agha Muhammad Waleed Usman Omair Farooq Submitted to: Mr. Shariq.G.Mahmood Lahore School of Economics

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International Business---Islamic Law 1

BUSINESS LAW

INTERNATIONAL BUSINESS---ISLAMIC LAW

Submitted by:

Aaima Sarwar

Arslan Aftab

Asim Liaqat Khan

Komal Agha

Muhammad Waleed Usman

Omair Farooq

Submitted to:

Mr. Shariq.G.Mahmood

Lahore School of Economics

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International Business---Islamic Law 2

ACKNOWLEDGEMENTS

First of all we would like to thank Allah Almighty for giving us the strength to complete this

exigent and challenging task. We would like to thank our instructor, Mr.Shariq Mahmood, for 

his guidance and relaxed, thoughtful insight. We thank him for her hospitality and for his

continuous assistance. The research in this paper would have taken far longer to complete

without the encouragement from many others. It is a delight to acknowledge those who have

supported us.

The days would have passed far more slowly without the support of our friends, whom we thank 

for putting up with our idiosyncrasies and for providing such a rich source of conversation and

learning. Finally, we wish to thank our parents for their love and encouragement, without whom

we would never have enjoyed so many opportunities.

Thank you all.

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International Business---Islamic Law 3

Table of Contents

ACKNOWLEDGEMENTS...............................................................................................2 

Table of Contents.......................................................................................................3 

ABSTRACT...................................................................................................................5 

What Is International Business?..................................................................................6 

When I Export Products Do I Have An International Business?.............................6 

What Is International Business Versus Global Business?......................................7 

What is LAW?..............................................................................................................9 

Is LAW really NEEDED?..........................................................................................10 

What is ISLAMIC LAW?..............................................................................................11 

Ijtihad, Istihsan and Istislah:..................................................................................11 

Capitalism; as a system:...........................................................................................13 

Islamic Views about Capitalism Ideology:..............................................................15 

Islamic Transactions Law as Common Law...............................................................22 

Islamic Finance:........................................................................................................25 

Finance without Interest?.........................................................................................25 

Bounded Rationality and Paternalism....................................................................26 

The Prohibition of Riba.......................................................................................27 

Equity and Efficiency through Marking to Market..................................................28 

Economic Substance of Prohibition........................................................................29 

Prohibition of Ghara...........................................................................................29 

Sale-Based Islamic Finance......................................................................................30 

Leasing, Securitization, and Sukuk...........................................................................31 

General Lease:......................................................................................................31 

General Lease Conditions:.....................................................................................32 

Flexible-Rate Financing.........................................................................................33 

Asset-Backed Leasing Bonds (Sukuk)....................................................................33 

Partnerships Business...............................................................................................34 

Classical Forms Of Partnership..............................................................................34 

Silent Partnership: Theoretical Workhorse of Islamic Finance...............................35 

Profit-Sharing Conditions....................................................................................36 

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International Business---Islamic Law 4

Common-Stock Ownership.......................................................................................36 

“Islamic Screens” and Their Shortcomings...............................................................37 

Line-of-Business Screens..........................................................................................37 

Islamic Financial Institutions.....................................................................................38 

Islamic Banking Business......................................................................................39 

Observing Shariah principles..............................................................................40 

Two Conflicting Fatawa......................................................................................40 

Conventional Bank interest is a form of forbidden riba......................................41 

Insurance and Takaful...........................................................................................44 

Takaful a worldwide perspective........................................................................47 

Toward a New Islamic International Business Identity..............................................48 

Conclusion................................................................................................................49 

References................................................................................................................51 

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International Business---Islamic Law 5

ABSTRACT

In recent years, business and financial activities conducted under the banner of “Islamic finance”

have grown significantly in volume and scope, attracting significant attention worldwide.

Numerous books and articles have been published on the topic over the past few decades. Their 

genres have ranged from highly religious treatises on Islamic law and worldview to highly

practical surveys of the latest Islamic financial products to reach the market.

In every aspect of business – from personal loans to investment banking, and from market

structure to corporate governance of financial institutions – Islamic finance aims to replicate in

Islamic forms the substantive functions of contemporary financial instruments, markets, and

institutions.

This supposed Islamization of contemporary financial practice is accomplished by means of 

modified pre modern financial contracts (such as sales, leases, and simple partnerships). The

contracts are designed by teams of (1) financial professionals who make and cater to the market

for “Islamic” products, (2) lawyers who are skilled in the art of regulatory arbitrage, and (3)

jurists or religious scholars who are familiar with medieval juristic texts (mostly in Arabic) and

provide certification of the Islamicity of various business products and services.

"There are very few who are doing that yet”, Frank E. Vogel said “As a result, truly few Muslims

who are international businesspeople are exposed to the vagaries of currency exchanges." There

are religiously acceptable options for commodities, but they're very cumbersome, he said.

In this paper we aim to find out if International business is practical n wide enough to be

implemented anywhere and everywhere in the world.

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International Business---Islamic Law 6

Defining International Business---Islamic Law

What Is International Business?

Dealing with so many different cultures and with extensive field experience, we tend to apply the

simplest of definitions:

International business =  Business transactions crossing national borders at any stage of the

transaction.

But then very often other questions pop up.

Unlike many subjects for which an acceptable definition exists, international business so far has

not enjoyed a distinct definition that may obtain the consensus of scholars and practitioners. For 

instance some writers like;

Robock and Simmonds define “International business as a field of management training that

deals with the special features of the business activities that cross national boundaries”.

Daniel and Radebaugh define international business as;

“All business transactions that involve two or more countries”

When I Export Products Do I Have An International Business?

There are distinctions to be made between:

A company that sells their domestic products to different countries through export/import

agents, and

A company that knows how to adapt its marketing, sales, products and business strategies

to sell to clients in different countries

A company with in-house international expertise across all business activities has an

international business without a doubt.

Some people would say that a company, where a third party international sales agent takes care

of all aspects of the international sale, is not an international business.

There are of course companies at varying stages between these two scenarios. And companiesoften progress through these different stages as they develop their international business.

There is no real “yes” or “no” answer here. It depends what definition you give to “international

business”. But you do need to know your definition of “international business” and no matter 

which one you use you should also convey this definition to others when speaking about it.

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International Business---Islamic Law 7

What Is International Business Versus Global Business?

To answer this question it really depends which hat I decide to put on.

If we are going to discuss the theory of international business, there are some fine differences.

But this is not a university and my response is based on my many years of field experience in

international business.

In conversations across cultures the terms “international business” and “global business” refer to

the same thing.

Today, if you are in the field, academic definitions of “international business” are not easy to

translate into the cross-cultural reality of business. The boundaries of definitions become fuzzy

and inadequate.

Remember, both “international business” and “global business” mean that you have to

adapt your business to the outside world. Herein lies the true meaning of international business

for me.

You need to learn how to adapt your business to your markets in different cultures

Successful international businesses or global businesses seem to become free of their own

national boundaries. They simply become very competent at navigating through the whole world

market.

However Toyne(1989,1) argues that the lack of consensus concerning the domain of 

international business is due to a misplaced emphasis on the firm as unit of analysis. Whereas, if 

“Exchange were made the unit of analysis,”” it would make it possible to define the field on a

more acceptable basis.

Toyne idea of International business revolves around three characteristics:

International business involves the exchange of goods and/or services across or within

national boundaries between two or more social actions in different countries or 

commercial reasons.

International business is an exchange process involving relationships, inputs and outputs,

between social actions located in different countries.

International business may be influenced by non-commercial (social and political)

considerations.

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International Business---Islamic Law 8

The issues involved in international business are indeed complex as are the variety of national

cultural elements interacting in the process. It’s a multi dimensional process with a host of 

factors including international economic issues, political realities, trade patterns, international

policies and many other activities involved in the process of buying and selling throughout the

community of nations. Figure below tells about some of the complexities.

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International Business---Islamic Law 9

What is LAW?

As such, there is no single or correct answer to this question. In past no one really questioned

lawmakers, law distributors, or the laws themselves. But of late, society has begun to question

most legal activities as to their effectiveness and competence. The cause of these reviews has

emerged by changing times, changing thoughts, understanding, beliefs, as well as the

development of technology and other such new developments within societies.

There are 2 sources of law – parliament (legislation) and court (case) made law. These laws can

be regarded as being purely formal, irrespective of whether they are good or bad.

Law can be ‘positivist’ in nature – meaning no judgement is made in regards to the quality of 

that law - implement it regardless if it is a good or bad. Such a theory does not look at the moral

implications of the laws – it’s a amoral view of law. Natural law on the other hand, is the idea

that ‘God’ makes laws. This theory originates as far back as early Greece and the ‘Gods’. The

most complete account of natural law doctrine can be found by Aquinas St. Thomas. For 

instance – "Nothing else than the rational creature’s participation of the eternal law" , "Every

human law has just so much of the character of the law as it is derived from the law of nature.

But if in any point it differs from the law of nature, it is no longer a law but a corruption of a

law", "…that positive law is a determination of natural law". One natural theorist is Kant

Emmanuel – "No law can be right merely by convention", "Laws, as such, are to be regarded as

necessary a priori – that is as following of themselves from the conceptions of external right

generally – and not as merely established by statues".

Bentham Jeremy

• He accepted Hobber’s identification of law – A law is what a sovereign commands (This

approach can be associated to the case of Hitler and his power).

• Principle of utility – the ability to way up the benefits of a product or situation and make

decisions about it based on its usefulness or cost.

• Suggested that certainty in the law could not be had without codification.

In 1832, Austin John published his theory that sought to clarify the distinction between law and

morality. He stated that 'commands' are expressions of desire that another shall forbear, which is

accompanied by a threat of punishment (the "sanction") for disobedience.

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International Business---Islamic Law 10

Is LAW really NEEDED?

The disputed question is "is law really needed"? As simplistic as it may seem to answer, it is

fundamental that we ask. Personally, laws are guidelines that set out appropriate behavior that

has been developed over time, and are based on moral beliefs, a human condition that sets out a

purpose that society in general is called upon – or required to fulfill. Without the fulfillment of 

these desired tasks, man simply will become equal to animals – or worse still, allow their darker 

sides (or impulses) to emerge and control their lives. Thus, law acts as a guardian against the

inevitable anarchy that would engulf humanity (if you want proof, simply turn to the riots that

take place in America when officers of the law go out on strike).

On the other hand, we have those who believe that mankind is naturally good, and it is the

external forces that surround us that are completely responsible for any wrong doing that takes

place – for instance, the government.

Augustine’s assertion that law was a natural necessity to curb man’s sinful nature held the field

for many centuries. But the belief that man’s nature might be corrupt and sinful has been at times

weighed against the belief that man posses a natural virtue which is capable of development.

Leaning heavily upon Aristotle’s conception of the natural development of the state from man’s

social impulses, Aquinas held that the state was not necessary evil but was a natural foundation

in the development of human welfare.

This continued perception of man with no laws or structures to force certain behaviors creating

the ultimate ‘utopian’ society is legally termed (or coined) as laissez faire .But when we think 

about this supposed utopian society, we can see that it is not possible. The only time it would

have ever been a feasible theory would have been at the time of man’s conception as in Adam

and Eve – and history has already show us that their duration in paradise did not last that long.

Come to think of it, even Adam and Eve had guidelines, no matter how limited, that they had to

follow for their retention in paradise – and they failed - as would any other anarchy based, or 

limited direction society.

The most influential of all people that promoted anarchy of sorts, would undoubtedly be Karl

Marx. He envisaged the overthrow of the capitalist society by a violent revolution of the

oppressed proletariat. Law was nothing but a coercive system devised to maintain a classless

society would be brought into being, and law and the state would ‘whither away’ as being no

longer needed to support an oppressive regime. The Marxist looks forward rather than back to

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International Business---Islamic Law 11

the Golden Age (if it ever really existed) when social harmony will be attuned to the natural

goodness of man unimpeded by such environmental snares as the institution of private property.

But it can be seen that the introduction of Marxist socialism has always been closely followed by

the implementation of more laws and legal repression, rather than having them abolished.

It is fact, that even in the simplest of societies, some form of legal rule and guidance is without

doubt needed to control the anarchist like environment – which ironically counteracts the entire

purpose of a lawless society.

What is ISLAMIC LAW?

Islamic law - the code of law derived from the Koran and from the teachings and example of 

Mohammed; "sharia=islamic law is only applicable to Muslims"; "under Islamic law there is no

separation of church and state"

The Sharia (literally: "the path leading to the watering place") is Islamic law formed by

traditional Islamic scholarship, which most Muslim groups adhere to. In Islam, Sharia is the

expression of the divine will, and "constitutes a system of duties that are incumbent upon a

Muslim by virtue of his religious belief".

Over the years there have been changing views on Islamic law but many such

as Zahiri and Jariri have since died out. Islamic law covers all aspects of life, from matters of 

state, like governance and foreign relations, to issues of daily living. However,

these prescriptions and prohibitions may be broad, so their application in practice varies. Islamic 

scholars(known as ulema) have elaborated systems of law on the basis of these rules and their 

interpretations.

Fiqh, or "jurisprudence", is defined as the knowledge of the practical rules of the religion. The

method Islamic jurists use to derive rulings is known as usul al-fiqh ("legal theory", or 

"principles of jurisprudence"). According to Islamic legal theory, law has four fundamental roots,

which are given precedence in this order: the Qur'an, the Sunnah (actions and sayings of 

Muhammad), the consensus of the Muslim jurists (ijma), and analogical reasoning (qiyas).

Ijtihad, Istihsan and Istislah:

In the absence of legislative canonical texts or canonized consensus, jurists had to resort to some

process of juristic inference. Most Sunni jurists have agreed formally to limit juristic inference to

reasoning by analogy, following Al-Shafi (1939, p. 477). The general term for juristic analysis is

ijtihad , which literally

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International Business---Islamic Law 12

means “doing one’s utmost” (to reach the most appropriate ruling). Earlier juristic methods of 

approbation (istihsan, mainly in the Hanafi school), benefit analysis (istislah, mainly in the

Maliki school), and reliance on local customs (urf  ) were thus denounced by Al-Shafi as

illegitimate forms of human legislation.

Strict adherence to reasoning by analogy has played an important role in the development of an

inefficient Islamic finance industry focused on pre modern nominate contracts. However, careful

examination of classical jurisprudence shows that many of the best classical jurists based their 

rulings mainly on benefit analyses that were guided by their economic understanding.

For Islamic societies to go beyond formalistic adherence to pre modern jurisprudence, they

needed to revive the substance of classical Islamic jurisprudence in an enlightened modern

manner. Some contemporary jurists have made efforts in that direction, such as Al-Qaradawi

(1996). His and similar proposals for renewed juristic inference have centered mainly on the

notion of “collective ijtihad ,” in order to overcome classical taxonomies of jurists and their 

authorities. In the classical hierarchy of jurists, the two top categories of unconstrained-

independent and unconstrained-dependent jurists (the difference being that the former type

develops their own legal methodology) are generally restricted to the great Imams of the golden

age of jurisprudence. Thus, the only recognized categories of jurists today require varying

degrees of dependence on classical jurisprudence. However, proponents of reviving ijtihad 

argued, groups of jurists may attain sufficient modern authoritativeness through collaboration.

Hence the research requires International Business to be seen in the parameters of Islamic

Law. In this regard, it is useful to recall the following statement of Ali ibn Abi Talib, the fourth

Caliph. When asked to let the Quran arbitrate his political dispute with Muawiyah ibn Abi

Sufyan, he said famously: “The Quran does not speak; men [claim to] speak on its behalf.” Legal

content of the Quran thus required explanation through Prophetic Sunna, as well as juristic

analyses in later centuries.

Hence we pose our study on the basis of a hypothesis;

Ho: International business can be conducted in the parameters of Islamic Law

H1: International business cannot be conducted in the parameters of Islamic Law.

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International Business---Islamic Law 13

Capitalism; as a system:

From the very beginning of mankind development, several questions have been raised about the

methods, systems, sciences, techniques and tactics with which the economy ought to be run.

There have been many schools of thoughts and most of the time each school of thought

contradicts or conflicts with the other. Human beings find themselves very confused about which

method to choose and not to choose. They developed many political systems each of them

facilitates the companies and organizations in a very different and unique way. The most

prevalent systems that have been devised are as follows:

o Totalitarianism

o Socialism

o Communism

o Democracy

o Anarchism

o Liberalism

o Capitalism

Over the period of centuries, different political entities pursue different systems to run the

economies and many of them were successful, but in the end all of them turned out be failures.

Socialism, which guarantees the just distribution of wealth and promises that each and every

person would be better off, also proved to be a failure. It turned out that socialism is a system

through which each and every person in the economy is in as much misery as the other persons

and no one is better off. In a Socialist Society, the government takes all the private enterprises

from the people and run it under its control. Only few or, no enterprise, runs under the private

sector. A socialist society doesn’t provide any motive to the people of its nation to work harder 

and bring their best to their economy. This is probably, the reason why the socialist ideology of 

Russia, China and US brought them to a downfall. The opponents of the Socialism, argues that

the ideology itself is of no defect. But the problem lies in the fact that it can never be adopted

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International Business---Islamic Law 15

The GDPs of US, UK and European countries are showing a huge growth and it is all because of 

capitalism.

Islamic Views about Capitalism Ideology:

From the above discussion, we have found out the Capitalism is very beneficial and self-

evolving system. Now let us see what the Islamists think about the Capitalism. After so much

research and work we have found out the Islam does not support the Capitalism system and it

rather recognize it as an inherently wrong and incorrect system. Muslims believe that Capitalism

does not do any good to the society and it rather creates a catastrophe for the people.

Here, the question that comes to our minds is that, Capitalism has proven to be one of the most

successful systems in the history of mankind why would Muslims not approve of it. To find out

what is wrong with the Capitalism ideology, let us break down the above discussion in parts and

let us look at each and every characteristic of a capitalist society more closely.

In the above discussion, we said that after adopting the capitalism system “their GDPs started to

grow at a drastic and surprising rate”

The most important index of economic well being under capitalism is the index that monitors the

growth of the nation’s health as a whole. DOW Jones, NASDAQ, NIKO, NYSE and other 

indices monitor the status of the nation’s most powerful companies.

A steady increase of these indices does not record, reflect or impact the status of the poor in the

nation. In fact, statistics shows that poverty and hunger persist despite the steady increase of 

economic indices over the years. The daily report of the economic indices prove that capitalism

is inherently concerned about the growth of products, about the big companies and enterprises

and it is not concerned about the well-being of the poor of the country. It only shows the success

of the individual companies and its individuals, it does not have anything to do with the welfare

of a particular society, minority, race, groups. People of these countries are turning against

capitalism and protesting everyday to change the system. This is why they are making

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International Business---Islamic Law 16

documentaries which show the adverse impacts of capitalism on different people. “The

Corporation” by Jennifer Abbot & Mark Achbar and “Capitalism: A Love Story” by Michael

Moore are one of the many documentaries which are made against the capitalism. Ultimately, we

can say that under capitalism “a poor is becoming poorer and a rich is getting richer”. However,

in an Islamic State the economic strength and growth will be measured by the actual well being

of the individuals, rather than by the well being of NASDAQ or DOW JONES. What good

would it do to the stomach of a poor person, if the NASDAQ gains or losses points? The Islamic

Economic Index is based on the food that is available to each and every human soul in the

society. One or more companies under Islam for example, will not own the oil. The fact that a

certain company was able to drill and exploit oil fields in Saudi Arabia, does not give those

people the right of the oil. The oil exists in fields that go beneath the houses and lands of 

millions of people. In Islam, the oil belongs to all the people in the state.

We also said in the above discussion that “Under Capitalism an individual works for his own

good and only he will reap out the benefits of his work. All the actions and plans of an

organization are driven with the profit motive”

The former characteristic i.e. an individual works for his own good and only he will reap out the

benefits of his work, could and has been proven dangerous and catastrophic for the economy.

When an individual works for his own well and not for others, he/she becomes so selfish that he

totally ignores or forgets his God’s Pleasure. All his deeds and actions are surrounded with

greed. They would only work on those commodities or services which satisfy some particular 

human needs and bring them most earnings. The Fulfilment of God’s will is disregarded and it is

not given any weight in the study of economies. The drive of profits will separate the state affairs

with the religious affairs. People will become materialistic and any intangible thing like honour,

glory, prosperity disappears from the economy. and if a person, by God’s Will, does invent

something good that could bring a positive change in the life of the people, he would charge

premium on it, he will create a monopoly in the market, he would have copyrights, trademarks,patents for his brand and restrict the positivity of that thing to go to the poor of the world.

In the latter part that says “All the actions and plans of an organization are driven with the profit

motive”

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International Business---Islamic Law 17

When everything is planned for the profit, this plan would stain the sanctity of it. However, if it

was planned for the well-being of society and environment then it would have proven really

beneficial for the people. The drive for profits makes the people of the organisations go crazy.

The entrepreneurs will exploit the labours as much as they could and squeeze out every penny

from them without giving any share from the profits they are providing to the entrepreneur. This

is why, large organisations like Nike, Levi’s, Shell, Honda have production departments in the

third world countries because there, they pay approximately ten times less than what they would

pay in their countries for instance In the US the average value of an hour of labor is around $150

while they pay third world people in cents. The products that they make are sold in hundreds of 

dollars while the labors only get few cents. The organizations come up with new ideas that a

normal person would not believe. For instance, Nike has developed the science of exploitation.

Nike has designed a very special time frame. They do not give wages according to how many

minutes a worker works. They break the time frame into ten thousandth of a second. It takes

around 6.6141 minutes for a worker to make a shirt. At the rate of seventy cents an hour, 6.6

minutes is equal to 8 cents. And these same shirts are sold at 20 times higher prices. This shows

us that how unconcerned these people are for other people progress and development.

We all know that, as the petrochemical era grew and grew, warning signs also started to emerge

that some of the chemicals pose hazards in the areas where they are experimented, produced and

tested. Gradually, a huge body of data started to accumulate and now we all know that synthetic

chemical industries pollutes our air, our water, our work place, our houses. Moreover, when

these chemical industries dispose of their wastes, this waste produces cancer, birth defects and

some other toxic effects in different species. Followings are the pictures of a victim plant, a

victim bird and a human being. 

The demonstration obliged us to believe that these profit-oriented organizations have a reckless

disregard for others safety. An Islamic State would never allow this to happen it rather motivates

the organizations and teach its students that the safety of others comes before any kind of 

personal advantage, earning or profit. And in case of such a disregard it punishes them severely.

In the discussion about the capitalism we also said that “It helps and facilitates a person to stretch

its capabilities beyond his expectations”

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International Business---Islamic Law 18

But it turns out that greed and profit is not the only force that helps a person stretch his

capabilities. There are other motives and incentives which could help a person stretch his

capabilities. It’s only a matter of a person’s concept of happiness. In an Islamic society a person

is grown up in such a way that he not only works and endeavors for worldly satisfactions but he

also works to make his God happy. He works for the benefit, prosperity, welfare and benefit for 

his Muslim brothers and sisters. A true Muslim is never a greedy person and all his actions are

for the Pleasure of God. Not only Muslims there are people in other religions too who have given

away their life time work just for the benefit of mankind. For instance, Dr. Jonas Edward Salk 

(1914-1995), U.S.A. virologist who developed the first successful polio vaccine against polio

(the Salk vaccine). When he invented the vaccine, instead of using it to make a ton of money, he

decided to give it away for free. Dr. Salk could have been rich many times over, had he sold his

vaccine to a pharmaceutical company. But he thought his invention should be used for a greater 

good and the decent salary he makes as a doctor and as a research professor is enough for him to

live a comfortable life. On an interview, he was asked “who owns the patent on this vaccine?” he

replied “well, the people I’d say. There is no patent”.

In the advantages of Capitalism we also said that “organizations devise techniques and plans to

fulfill the growing unlimited demands of the individuals using the limited resources and they find

ways to fulfill all the satisfactions of individuals”

When one deeply takes a look at the world, he comes to know that the resources in the world

aren’t really scarce. Economists have over-rated the scarcity of the resources. We see that the

nature has provided us everything in abundance but it just so happened that some of the people

have taken it all and the remaining are left with only a little. When we look at the wealth

distribution of the total world we see that 7o % of the world’s population is poor, 20 per cent

belongs to middle-class and 10 per cent is rich. If we take all the money from the entire world

and distribute it evenly we’ll see that no one would be poor and everyone would lead a

comfortable life.

And when it comes to the unlimited demands, yes people do have unlimited demands but in an

Islamic State, they are grown up in such a way that they learn how to overcome and suppress the

demands which are extravagant, ethically or morally wrong and for that matter displeasing to

their God. There is another major defect in the capitalism system which is that it provides

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motivation to the organizations to fulfill the satisfactions of the individuals no matter how wrong

or unethical they are. For Instance, many organizations realize that Sex and Alcohol has an

unlimited and ever growing demand in the market so they will go and make innovations in the

areas like pornography, prostitution, beers, wines, cocktails and earn huge profits. If you look at

the financial record of the companies which provides such services you’ll come to know how

financially strong they are. The objective to tell all this is that, the profit motive makes an

organization, so called an “artificial person”, to do such harmful and wrong things that they

wouldn’t do otherwise. But in the Islamic society a person would bring his moral and principle

before the profits and then make his decisions.

We also said that, due to capitalism the trend of globalization started to emerge and people from

the across the world earned huge profits. But there is a catch here. People do not know that why

the people make huge profits due to globalization. People make profits because the globalization

makes it possible for different companies to diverse the risk or to put it another way, to spread

the risk onto more people. This way when the risk is divided, each person gets a little risk on his

part and this makes the organizations to go into deals which are associated with more and more

risk. This is how the mortgages in the US really expanded. Organizations started to take more

and more risk by giving away prime mortgages, subprime mortgages. Millions of dollars had

been given away using easy initial terms (with-out checking the credibility of the loan taker).

This is true that people earned huge profits out of these deals. But, in 2008, when the interest

rates went up and the houses prices went down, those people incurred millions of losses. And

this gave birth to Global Recession. It is reported that this is the worst recession since the Great

Depression of 1930s. And it had its adverse effects not only on USA but also on many other 

countries. So many companies had to do retrenchments, thousands of people had to lose their 

jobs, many successful companies had to go bankrupt and Lehman Brothers is one of them.

So in the light of above discussion we can say that capitalism urges people to accumulate virtual

wealth and go blind for it. The Capitalism, as tempting as it is, it is also proven to be harmful for 

the mankind.

There was another advantage mentioned about the capitalism that it creates “Perfect

Competition” in the market and let the market decide who will survive and who will not and

which direction it may take. Also, the government cannot make any kind of intervention in the

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market. But we all know that the efficient market hypothesis and the perfect competition don’t

really exist. The conditions required for the perfect competition doesn’t exist and could never be

made available. The conditions for perfect competition are as follows:

a) Infinite Buyers/ Infinite Sellers

b) Zero Entry/ Exit Barriers

c) Perfect Information

d) Transactions are costless

e) Firms Aim To Maximize Profits

f) Homogenous Products

By looking at the above conditions, you’d figure out easily that the conditions of perfect

competition do not exist.

Let’s look at the each condition and see how it cannot be made available.

First of all, Infinite Buyers and Sellers but it is very clear that no market has infinite participants.

There is always a limited no. of participants in a market.

Secondly, Zero Entry/ Exit Barriers is also not possible because there is always a cost attached

for the preliminary expenses of starting a business or there is always a loss associated in exiting a

business.

Perfect Information, it is evident that all the participants couldn’t have perfect information and

this is why arbitrage exists in the market.

Transactions are costless, we all know that each and every transaction, we make, has a cost

attached to it which could be sales commission, fee, service charge etc

Firms Aim to Maximize Profits; we all know that there are organizations which do not work for 

profits e.g. Non-profit Organizations.

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Islamic Transactions Law as Common Law

English and American lawyers have found business and financial engineering within the context

of Islamic jurisprudence to be a natural exercise. Indeed, many Islamic finance lawyers have

found Islamic and English common law sufficiently similar that they decided to make most

Islamic transaction an financial structures subject to the latter. A student of Islamic law

expressed his realization of similarities between the two legal systems as follows:

In the course of studying Islamic law in its everyday practice I have been increasingly struck 

with its similarities to the common law form in which I have also been trained in the United 

States.

This inherent familiarity with the modes of analysis in Islamic jurisprudence stems from its close

relationship with Anglo-American common law. Although most historical studies trace the

origins of common law during the reign of Henry II to Roman and canon laws, some recent

historical scholarship has traced the roots of some parts of the common law of financial

transactions to Islamic origins.

One of the earliest studies in this area traced the British system of trusts to the Islamic institution

of waqf . More recently, John Makdisi traced the origins of many innovations in British contract

law to Islamic origins. Indeed, similarities extend to the very methodology of legal inference

based on case studies of legal precedents and reasoning by analogy.

This explains the relative success of Islamic finance in the Anglo-American world and in Islamic

countries that have had a history of British rule (e.g., Gulf Cooperation Council (GCC) countries

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or Malaysia). In the meantime, divergence between the common-law nature of Islamic

jurisprudence, on the one hand, and

the rhetoric of interpreting the Islamic canon, on the other, has led to fundamental failures of 

Islamic finance in countries that attempted to “Islamize” their entire financial systems (Iran,

Pakistan, and Sudan). Rosen (2000, p. 64) correctly explained those failures of contemporary

attempts at de jure implementation of Islamic Law as follows: in Pakistan and Sudan the simple

use of Islamic law as an arm of the state has slipped through the fingers of those at the center.

The reason, I believe, is that these regimes have been trying to apply a common law variant as if 

it were a civil law system. This confusion is even more acute in countries that have not been

officially Islamized. Many of those countries’ official legal systems were derived from European

civil codes: Swiss in the case of the Turkish republic (1926), French in the cases of Egypt

(1949), Syria (1949), and Iraq (1953). The architect of those codes, Abdal-Razzaq Al-Sanhuri,

argued successfully before the Egyptian parliament in 1948 that they contain all the aspects of 

Islamic jurisprudence that agreed with widely accepted principles of modern legal theory.Yet, we

continue to hear calls for “application of the Islamic Sharia” in Egypt, post-Baathist Iraq, and

other countries.

The legal environment for Islamic finance is made more complicated by statements about the

supremacy of Islamic law, even in countries that are relatively secular. For instance, Egyptian

Constitution Article 2, amended in May 1980, stated that all subsequent laws and legislations

must be derived from Islamic Law.

This constitutional requirement was further strengthened through a later Egyptian Constitutional

Court’s ruling: It is therefore not permitted that a legislative text contradict those rules of Sharia

whose origin and interpretation are definitive, since these rules are the only ones regarding which

new interpretive effort (ijtihad ) is impossible, as they represent, in Islamic Sharia, the supreme

principles and fixed foundations that admit neither allegorical interpretation, nor modification. In

addition, we should not contemplate that their meaning would change with changes in time and

place, from which it follows that they are impermeable to any amendment, and that it is not

permitted to go beyond them or change their meaning. The authority of the High Constitutional

Court in this regard is limited to safeguarding their implementation and overruling any other 

legal rule that contradicts them.

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Islamic finance thrives mainly in Islamic countries with officially adopted civil laws, but it is

driven primarily by a canon-law-like interpretation of Islamic scriptures. However, one can

readily see that the canon-like nature of Islamic jurisprudence is mostly rhetorical. The true

nature of Islamic jurisprudence of financial transactions is very similar to Western-style

common law. In particular, contemporary developments in Islamic finance owe more to juristic

understandings of the canonical texts and previous juristic analyses than they owe to the canon

itself.

According to one of the most prominent jurists working in this field:

It must be understood that when we claim that Islam has a satisfactory solution for every

problem emerging in any situation in all times to come, we do not mean that the Holy Quran and 

Sunna of the Holy Prophet or the rulings of Islamic scholars provide a specific answer to each

and every minute detail of our socioeconomic life. What we mean is that the Holy Quran and the

Holy Sunna of the Prophet have laid down the broad principles in the light of which the scholars

of every time have deduced specific answers to the new situations arising in their age. Therefore,

in order to reach a definite answer about a new situation the scholars of Shariah have to play a

very important role. They have to analyze every question in light of the principles laid down by

the Holy Quran and Sunna as well as in the light of the standards set by earlier jurists

enumerated in the books of Islamic jurisprudence. This exercise is called Istinbat or Ijtihad.

[T]he ongoing process of Istinbat keeps injecting new ideas, concepts and rulings into the

heritage of Islamic jurisprudence.

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Islamic Finance:

Finance without Interest?

Most readers encounter Islamic finance first through grossly simplistic statements such as “Islam

(or the Qur ̆ an) forbids interest.” This has given rise to countless jokes about “how one can get

an Islamic interest-free mortgage loan.” Even relatively sophisticated journalists follow this

process of false reductionism, followed by tongue-in-cheek qualifications. For instance, in an

article in Fortune magazine, Useem (2002) reported on typical Islamic financing through credit

sales, known by the Arabic name murabaha.

The result looked a lot like interest, and some argue that murabaha is simply a thinly veiled

version of it; the markup charges is very close to the prevailing interest rate.

But bank officials argue that God is in the details. This tongue-in-cheek quotation of the

statement that “God is in the details” may otherwise be viewed as offensive and condescending.

However, it is surprisingly tolerated, and sometimes nurtured, within Islamic finance circles. It

reflects the prevailing form-above-substance approach of that industry. Islamic financial forms

are derived, albeit loosely, from classical sources of Islamic jurisprudence, which process of 

derivation gives the industry its “Islamic” label.

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In fact, there are numerous instances wherein reporters begin by stating that the distinguishing

feature of Islamic finance is the prohibition of interest and then proceed to report the interest rate

that Islamic instruments pay (sakuk).

Such discrepancies between rhetoric and practice are not only problematic from an intellectual

standpoint. They also lead to disillusionment with the industry for many educated Muslims, who

may otherwise be its primary customers.

Two Major Prohibitions: Riba and Gharar 

Islamic finance and business is a prohibition-driven industry. In this regard, the instigating factor 

for prohibition-based contract invalidation can almost always be attributed to the two factors

labeled riba and gharar . Participants in the industry, especially ones who are not themselves

devout Muslims, operationally respect Muslims’ religious observance and devise financial

solutions that avoid various prohibitions according to juristic opinion.

Bounded Rationality and Paternalism

In the case of wine and gambling, the Quranic solution was complete avoidance thereof, since

those activities are not essential. In contrast, transfers of credit and risk are at the heart of 

finance, without which an economic system cannot function. The Islamic legal solution in this

case was to impose restrictions on the means of transferring credit and risk, through prohibitions

of riba and gharar .

We shall argue that – in finance – the forbidden riba is essentially “trading in credit,” and the

forbidden gharar is “trading in risk,” as unbundled commodities.

In other words, Islamic jurisprudence uses those two prohibitions to allow only for the

appropriate measure of permissibility of transferring credit and risk to achieve economic ends.

As many observers and practitioners in financial markets will testify, trading in credit and risk 

(perfected through derivative securities) is as dangerous as twirling a two-edged sword.

Although those vehicles can be used judiciously to reduce risk and enhance welfare, they can

easily entice otherwise cautious individuals to engage in ruinous gambling behavior. While

financial regulators seek to limit the scope of credit and risk trading to prevent systemic failures,

Islamic jurisprudence introduces injunctions that aim also to protect individuals from their own

greed and myopia.

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The Prohibition of Riba

The term riba is the Arabic verb raba, meaning to increase.Therefore, jurists defined the

forbidden riba generally as “trading two goods of the same kind in different quantities, where the

increase is not a proper compensation.” In this regard, the distinction between legitimate

compensations and forbidden riba is the most fundamental distinguishing feature of Islamic

finance, as a prohibition-driven industry. However, the distinction – as defined by contemporary

jurists – is exploited mostly by adopting premodern forms rather than mechanisms that ensure

fairness of contract pricing. In this regard, understanding the canonical prohibition of  riba, and

contemporary interpretations thereof, is central to understanding the industry as it exists today, as

well as any likely alternative “Islamic” structure.

There are two main types of  riba recognized by all scholars, with Shafi scholars providing a

further refinement of the second type. The first type is called riba al-nasia. The worst form of this riba, known as riba al-jahiliyya (practiced in pre-Islamic Arabia), was strictly forbidden in

the Quran, to the point that Imam Malik is reported to have described its prohibition as the

severest one in Islam.

The first mention of  riba in the Quran was in Makka, and it discouraged collection thereof,

without explicitly prohibiting it:

“That which you lend to increase in the property of others will not increase with God; but that 

which you give out in charity, seeking God’s pleasure, it will surely multiply” [30:39].

The first verses regarding riba that were revealed in Madina only forbade pre- Islamic riba of 

Arabia, whereby interest was charged at the maturity of debts from interest-free loans or credit

sales, and compounded at later maturity dates. Thus, the principal due on the debtor was

described in the Quran as “riba doubled and multiplied” [3:130]. Among the very last Quranic

verses to be revealed, the verses [2:275–9] ordered Muslims to abandon all remaining riba

(presumably of the same form defined in [3:130]), otherwise to expect a war from God and His

Messenger.

Most jurists have expanded the strict Quranic prohibition of pre-Islamic riba to cover all forms

of interest-bearing loans, subsumed under the term riba al-nasia.

They provided three explanations of the rationale for this prohibition:

(1) one might potentially exploit poor debtors who need to borrow money or commodities.

(2) trading money may lead to fluctuations in currency values and monetary Uncertainty.

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(3) trading foodstuffs for larger amounts of future foodstuffs would lead to shortages in spot

markets for those foodstuffs (presumably because many traders would withhold the goods in the

hope of getting more in the future!).

But even the most conservative contemporary jurists do not consider all forms of what

economists and regulators call interest to be forbidden riba. A simple examination of riba-free

Islamic financial methods such as mark-up credit sales (murabaha) and lease (ijara) financing

shows that those modes of financing are not “interest-free.” Indeed, truth-in-lending regulations

in the United States force Islamic and conventional financiers to report the implicit interest rates

they charge their customers in such financing arrangements. Thus, the practice of Islamic finance

itself illustrates the fact that some forms of interest (e.g., in credit sales and leases) should not be

considered forbidden riba.

Equity and Efficiency through Marking to Market

Selling the first type of dates (at the highest available market price), and buying the other type

(for the lowest available market price), ensures that exchange takes place at the ratio dictated by

market prices. Naturally, traders would trade only at that ratio if they valued the marginal units

differently. Allowing for diminishing marginal utilities, whereby the buyer of each type of dates

will value successive marginal units less, trading eventually halts by equating the ratio of 

marginal utilities to the ratio of market prices. Hence (Pareto) efficiency in exchange is attained,

as dictated by contemporary neoclassical economic theory. Thus, the injunction against this type

of  riba al-fadl  can be readily seen as a mechanism that precommits those who observe the

prohibition to collection of information about market conditions, and marking terms of trade to

market prices. This protects individuals against engaging in disadvantageous trades and enhances

overall exchange efficiency. In this regard, notice that trading at any ratio that deviates from that

of market prices will – by necessity – be disadvantageous to one party.

Hence, justice and efficiency both dictate following this mark-to-market approach to establishing

trading ratios. Extending this logic to exchange over time (through credit sales, leases, or other 

transactions) is not difficult. In the context of credit sales and lease-to-purchase financing, the

substantive prohibition of riba – aiming to ensure equity in exchange– dictates that credit in such

transactions must be extended at the appropriate interest rate. In this regard, conventional finance

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has played a very important role for contemporary Islamic finance, by determining the market

interest rates for various borrowers, based on creditworthiness and security of the posted

collateral.

Here, benchmarking the implicit interest rate in Islamic credit sales and leaseto- purchase

transactions to conventional interest rates is quite appropriate. Indeed, if, for instance, the market

interest rate for a particular borrower and particular collateral was 6 percent, but customer and

financier agreed on a credit sale at 10 percent implied interest, one would object that this clearly

violates the spirit

of Islamic prohibition of  riba, even if it uses a sale-based ruse to stay clear of the ancient

forbidden form. In this regard, Al-Misri (2004) has argued that Islamic banks are well advised to

abandon characterizing their mark-up in credit sales as “profit,” and list it instead as “interest,”

since the former is potentially unlimited whereas the latter is capped by various contemporary

anti-usury laws that protect those in need of credit against predatory lenders.

Economic Substance of Prohibition

The most significant developments in finance over the past three decades have been in the area

of separating various financial credit and risk components for accurate pricing. This was

accomplished through advances in securitization and development of financial derivatives. We

admitted earlier that finance (Islamic or otherwise) is about allocation of credit or risk.

Moreover, we have argued that the two main prohibitions in Islamic jurisprudence, those of riba

and gharar , are best characterized as trading in unbundled credit and trading in unbundled risk,

respectively. For the case of riba, disallowing unbundled trading of credit can protect individuals

who are vulnerable to excessive borrowing from falling into debt cycles and ensured marking

interest rates to market.

Prohibition of Ghara

The best literal and juristic translation for “bay-al-gharar ” is “trading in risk.” In this regard, the

Encyclopedia of Islamic Jurisprudence also lists cheating  (tadlis) and fraud (ghubn) as specialcases of gharar . Thus, gharar  incorporate uncertainty regarding future events and qualities of 

goods, and it may be the result of one-sided or two-sided and intentional or unintentional

incompleteness of information.

We have argued that the prohibition of riba may very well be based on the potentially addictive

nature of borrowing and living beyond one’s means. In this section we deal with the prohibition

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of gharar , which was characterized by prominent jurists in light of its similarity to gambling. In

this regard, the late Professor Mustafa Al-Zarqa defined the forbidden bay-al-gharar as “the sale

of probable items whose existence or characteristics are not certain, the risky nature of which

makes the transaction akin to gambling.

  [The Prophet’s] prohibition of gharar sales (bay-al-gharar) render such sales defective. The

meaning of “gharar sale,” and God knows best, is any sale in which gharar is the major 

component. This is the type of sale justifiably characterized as a gharar sale, and it is

unanimously forbidden. However, minor gharar would not render a sales contract defective,

since no contract can be entirely free of gharar. Consequently, scholars differ in opinion

regarding which contracts are thus rendered defective, based on their assessment of the extent of 

gharar in the contract. Thus, each scholar would invalidate a contract if he deems its gharar 

component substantial, and would otherwise declare the contract valid if the gharar is deemed 

minor.

Sale-Based Islamic Finance

Sale is the ultimate permissible contract, as indicated by the Qur ̆ anic verse asserting that God

has permitted trade and forbidden riba [2:275]. Sales generally are characterized by classical

jurists as exchanges of owned properties, including services and some property rights for non-

Hanafi jurists. A sales contract requires offer and acceptance, with a meeting of minds for buyer 

and seller. For Hanafis and Malikis, a sale is concluded and binding on both parties on the

expression of offer and acceptance. On the other hand, Shafis and Hanbalis ruled that buyer and

seller retain the option to rescind the sales contract as long as they have not parted from the

contract session. This is called the “contract session option” (khiyar al-majlis), which is based

on an authentic Prophetic tradition: “The two parties to a sale have the option [to rescind it]

as long as they have not parted, and one of them may give the other the option for a longer

period.”2

A number of restrictions on objects of sale were put in place, in part to ensure that sales contractsare not used as ruses for riba, and in part to protect the interests of contracting parties. With the

exception of prepaid forward sales (salam) and commissions to manufacture (istisna), to be

discussed separately in later chapters, objects of sale must exist at the time of the contract.

Moreover, for a sale to be executed, objects of sale must be owned by the seller, in his

possession, and deliverable to the buyer. This set of conditions is central to the practice of 

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Islamic financial institutions, wherein the financial institution must own a property in order later 

to sell or lease it to its customer. As noted above, this requirement results in additional legal

costs for the extra sale and establishment of SPVs, as well as potential additional sales taxes,

licensing fees, and the like. Interestingly, although the Shafis and Hanbalis listed the seller’s

ownership of an object of sale as a condition of conclusion of the sale contract, Hanafis and

Malikis deemed it only a condition of execution of the sale. Thus, the latter two groups of 

scholars deemed sales by an “un-commissioned agent” (known in Arabic as bay ˘ al-fuduli)

concluded but suspended pending the [ultimate] seller’s approval.

Leasing, Securitization, and Sukuk 

In recent years leasing has become increasingly popular as a vehicle for financing the purchase

of various assets, as well as issuance of various financial instruments, from mortgage-backed

securities to bond structures known as sukuk . The increased popularity of lease-based financing

and securitization stems from the existence of underlying physical assets, the usufruct of which

is being transferred under various leases or subleases. Those underlying assets ostensibly allow

secondary markets for lease-based debt instruments to emerge, without violating the general

prohibition of trading in debts to which most schools of jurisprudence adhere (with the notable

exception of Malaysian jurists following a particular opinion within the Shafi school).

General Lease:

Retired Justice M. Taqi Usmani – one of the foremost leaders in Islamic finance, chairing

multiple Sharia boards – argued that the sale of a lease-backed security transfers material

ownership rights and obligations from one lessor to another, and hence the purchaser of such a

security is entitled to collect rent thereof. Needless to say, conventional asset-backed securities,

whether lease or sale based, are often merely financial claims, with little material distinction

between the two. Thus, commenting on common legal structures of lease-backed securities,

Justice Usmani wrote:

It should be remembered, however, that the certificate must represent ownership of an undivided 

part of the asset with all its rights and obligations. Misunderstanding this basic concept, some

quarters tried to issue ijara certificates representing the holder’s right to claim certain amount 

of the rental only without assigning to him any kind of ownership in the asset. It means that the

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holder of such a certificate has no relation with the leased asset at all. His only right is to share

the rentals received from the lessee. This type of securitization is not allowed in Shariah.

General Lease Conditions:Interesting application of binding promises in leasing allows jurists to justify lease-to-purchase

arrangements. As we have seen in the introduction, most sukuk  structures involve selling a

property to an SPV and then buying it back or receiving it as a gift at lease end. Moreover, many

retail Islamic banking customers who wish to finance the purchase of real estate, automobiles,

equipment, and the like aim to purchase the property at lease end. Contemporary as well as

classical jurists disallowed stipulating in the lease contract that the lessor must sell the property

to the lessee at lease end, since that condition negates ownership rights of the lessor and violates

the prohibition of “two contracts in one” or “two sales in one contract.” However, contemporary

jurists allowed lease-to-purchase contracts by arguing that the lessor may make a unilaterally

binding promise (which is not part of the lease contract itself ) to sell the property, or to give it as

a gift at contract end. Moreover, those contemporary jurists have argued that once the promise is

made, it becomes binding upon the lessor, in each case using a majority or minority opinion as

the need arises.

The only two conditions imposed by those jurists are that the binding promise to sell the property

at lease end, if the lessee wishes to do so, must be unilateral, and that it must not be made a

condition of the lease (it must be recorded in a separate document). Naturally, if the lessee pays

not only the return on capital, but also the return of capital used to purchase the property, as part

of lease payments, his own interest will drive him to exercise that option. Similarly, since Islamic

banking lessors are primarily financial intermediaries, who are not in the business of owning and

leasing properties, exercising the option is in their best interest as well. Moreover, although the

option may not be made a condition for the contract, it appears that the separate document

obliging the lessor to sell or give the property as a gift at the end of the lease can be signed prior 

to signing the lease itself. Needless to say, that promise becomes nugatory if the lease is not

concluded, but it is binding upon the lessor if the lease is in fact concluded and executed for its

full term.

Another note on the issue of binding promises is in order at this stage. Justice Usmani’s analysis,

as referenced above, implies that a unilateral promise to give the property as a gift at lease end is

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equally binding to a promise to sell the property at lease end. However, this position seems

potentially controversial in light of classical juristic analysis of uncompensated gifts (hiba) and

offers (jiala) .

Classical rules in this regard seem to agree with common-law provisions, which lean toward

making uncompensated transactions nonbinding.9 It would thus be more appripriate to use a

unilateral promise to sell the property at lease end for some financial consideration, even if 

minimal or symbolic, and despite concerns regarding same-item sale-repurchase (bay-al-ina).

Flexible-Rate Financing

Contemporary jurists have also found lease contracts to be particularly useful for flexible-rate

financing. In this regard, murabaha financing requires that the amount of debt established upon

the buyer is fixed at contract inception, hence restricting the contract to financing at fixed or 

predetermined interest-rate schedules.

In contrast, with the exception of Shafi jurists, most jurists allowed longterm leasing on month-

to-month or other periodic bases. In this regard, Shafi jurists based their ruling on the conditions

of sale, which would require that the entire lease period (during which usufruct, the object of 

sale, may be consumed) must be specified at contract inception. However, jurists of other 

schools argued that lessor and lessee can agree to a longer-term periodically renewable lease,

whereby the lease is binding on both parties for each period that it is extended with mutual

consent.The mutual consent provision, however, could have been problematic for juristic

arguments in the long term, since lessor and lessee have conflicting interests as interest rates rise

or fall. To avoid such problems, contemporary jurists took the additional (somewhat heroic) step

to link the rent to a flexible-rate benchmark (e.g., LIBOR + spread), ignoring the fact that

classical jurists who allowed automatic renewal of lease, possibly at different mutually

acceptable rents, did not make the lease binding on any one party. In contrast, Justice Usmani

seemed to argue that – in contemporary financial terms – both parties are exposed to interest-raterisk, and hence the demarcation criterion for permissibility may be ex ante acceptance of the

benchmark, rather than ex post agreement at each renewal period.

Asset-Backed Leasing Bonds (Sukuk )

We now turn to the basic mechanics of a typical lease-backed bond (sukuk ) issuance.

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As an example, we shall consider the largest issuance in 2003: that of the seven-year, $700

million Qatar global sukuk . The basic structure of that transaction was illustrated in December 

2003 by Mr. Robert Gray, chairman of HSBC’s (co-lead manager for the issuance) Debt

Financing Advisory.

The steps of this transaction are essentially the same as those of the Tabreed structure discussed

in the introduction, with the exception that the underlying asset (in this case a parcel of land) is

not sold back at lease end, but given back as a gift. In general, the SPV, in this case a trust,

utilized for issuing lease-backed securities needs to obtain short-term funding in one of two basic

ways: (1) by obtaining a bank loan or some substitute thereof, including the possible deferment

of price payment until proceeds are collected from sukuk buyers, or (2) by selling the sukuk prior 

to purchasing the property to be leased back. The rest of the transaction is straightforward, with

lease payments (in this case covering both principal and interest) passed through to sukuk 

investors. The other potentially thorny issue is the bindingness of a unilateral promise to give the

property (land parcel) back as a gift at lease end.

Partnerships Business

Simple partnership forms existed in Arabia prior to the advent of Islam and were recognized and

legalized both in the Quran and in Prophetic traditions.In this regard, a number of simple

partnership types were recognized by classical jurists.

Classical Forms Of Partnership

“sharikat al-inan.” Limited (inan) partners need not contribute equal amounts of capital to the

partnership and consequently may have different degrees of control over partnership assets, even

to the extent of giving only one partner exclusive control over capital and assets. Because of 

those varying degrees of control, each partner is responsible only for dealings that he himself 

makes.

Unlimited partnerships were generally known as “sharikat al-mufawada” (literally delegated

partnerships), wherein each partner allowed the other to deal in his property.

A third type of recognized partnerships were so-called credit partnerships, generally known as

“sharikat al-wujuh” (literally reputation partnerships), wherein a number of partners joined in

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credit purchases, followed by spot-market sales of the same properties. Profits and losses are

distributed among the partners according to their ownership shares in the objects of the initial

credit purchases.

A fourth recognized classical partnership form was called labor partnerships (known variously as

sharikat al-amal , sharikat al-abdan, and sharikat al-sani), wherein a group of workers

collaborated on projects (e.g., building some structure) by contributing labor of various types.

Classical partnership forms are then later declared unreliable and unstable – instability increasing

montonically with the number of partners. Hence classical partnership forms were ill-equipped to

take advantage of economies of scale in the preindustrial and industrial ages. Even if heirs to one

partner wished to continue the business, the first partnership – in which the deceased took part – 

was dissolved, and a new partnership needed to be formed. In part building on the seminal

historical work of Abraham Udovitch (1970), contemporary economists such as Avner Greif and

Timur Kuran have argued that this fundamental characteristic of Islamic partnerships limited

them severely, in terms of both size and longevity, in comparison to Western-style limited-

liability corporations that retain their own legal personality.

Silent Partnership: Theoretical Workhorse of Islamic Finance

The classical partnership form that contemporary Islamic practice has adopted most extensively,

albeit in modified form, is the classical silent partnership form known in Iraq as mudaraba and in

Hijaz (western Arabia) as qirad . The model of silent partnership was originally envisioned in

Islamic economics and finance as the cornerstone of the prospective Islamic financial industry.

In this type of partnership, one party (the silent partner, investor, or rabb al-mal ) contributes his

property as partnership capital, while the other party (entrepreneur or mudarib) contributes his

labor, expertise, and so on.

One reason that this contract was viewed favorably by Islamic economists and early architects of 

Islamic finance as a potential building block for the latter is its prominence in medieval

Mediterranean trade, in part under the Italian name commenda.

First, however, we need to summarize the classical conditions of silent partnerships, especially

since the contract has significant similarities to labor hiring (ijara, wherein the entrepreneur 

would be characterized as a hired worker) as well as agency (wakala, wherein the entrepreneur 

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as agent is paid a flat fee rather than a profit share). Of course, the ruling based on analogy to

either of those contracts would have been problematic based on the prohibition of gharar (since

the profit share characterized as wage or agency fee is uncertain).

Thus, classical jurists had to rely on prophetic tradition to legitimize the contract under a separate

name (as they had done, for instance, for salam) despite that gharar .

Profit-Sharing Conditions

Most jurists, classical and contemporary, insisted that returns to the investor and entrepreneur 

must be specified as unidentified shares in profits. Some leniency was allowed if the shares were

not known explicitly, in which case most jurists reverted to a default rule of equal sharing in

realized profits (recall that all financial losses are borne by the investor). We have also noted that

if profit shares were specified, but at extreme values, the contract is deemed a loan if the entire

profit was assigned to the entrepreneur, and a voluntary agency if it was all assigned to the

investor. On the other hand, the vast majority of classical and contemporary jurists unequivocally

rejected silent partnerships wherein one party is promised a fixed amount of money, including as

a percentage of provided capital (interest).

The vast majority of classical and contemporary jurists claimed that the rules for profit sharing

must be strictly followed in silent partnership. Thus, debtlike instruments such as corporate

bonds, which promise a fixed amount of money equal to the invested capital plus interest, were

forbidden. Moreover, hybrid equity instruments such as preferred shares were deemed

impermissible. However, as we shall see in Chapter 8, some contemporary jurists have argued

that classical consensus over the rules of silent partnership may not be very relevant for 

contemporary practice. They alluded to rules of defective silent partnerships, which entail

recharacterization of the contract in terms of other permissible ones. They also argued that

contemporary practices need not be limited to classical contract forms, and classical conditions

thereof.

Common-Stock Ownership

Equity investments in Islamic finance started with simple mutual funds that applied standard

portfolio management techniques to a limited universe of stocks, which excluded, for example,

companies with Islamically illegitimate lines of business. In recent years managers have begun to

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may not. The issue in all cases is whether an activity is forbidden and the extent to which it is a

primary activity of the company under consideration. This approach allows for a number of 

Sharia-arbitrage opportunities. For instance, instead of purchasing a restaurant chain, one can

create an SPV that buys all the assets of the chain, excluding their wine cellars, wine bottles and

glasses for serving wine, and the like. Then shares in the newly created company would be

permissible, since the primary usage of its capital (e.g., real estate, tables, chairs, kitchens) is

serving food rather than alcoholic beverages. With sufficient accounting acumen, one can thus

separate ownership of the impermissible part from ownership of the permissible part and sell the

latter as “Sharia-compliant” securities.

Islamic Financial Institutions

Financial institutions, Islamic or otherwise, play two indispensable roles in financial systems.

The first role is providing support for various financial markets. For instance, exchanges of 

various types are institutions that facilitate the functioning of markets, by setting rules of trading

and providing clearinghouse and margin logistical support. Those services alleviate many of the

information asymmetries between buyers and sellers that might lead to market failures. The

second role that

financial institutions perform is providing financial solutions where market failures exist despite

the existence of market-supporting institutions. For instance, although any company should – in

theory – be able to access debt markets by issuing bonds, commercial paper, and the like,

transactions costs may be disproportionately high, and investor information may be extremely

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lacking. In such cases, the terms at which a small investor can borrow from the market may be

prohibitive.

Islamic Banking Business

Shari'a-compliant banking is fast moving from niche to mainstream, says Christopher Watts. But while continuing growth seems certain, challenges remain.

Islamic finance was conceived in the 1970s as a practical implementation of contemporary

thought in “Islamic economics.” The latter field had begun to take shape in the 1950s, based

primarily on the writings ofMuhammad Iqbal and Abu Al-Ala Al-Maududi in the subcontinent,

and Baqir Al-Sadr and Sayyid Qutb in the Arab world.Timur Kuran (2004a) noted the

importance for that field of the concurrent emergence of a political independence movement,

with accompanying emphasis on national and religious identities. He argued convincingly that

the ideology that gave rise to Islamic economics, and sustains it to this day, is socio-politically

(and not scientifically or ethically) based on religion. Over the course of three decades, Islamic

economics morphed into a subfield of economics as suggested by contemporary leaders of the

field: Islamic economics . . . has the advantage of benefiting from the tools of analysis developed

by conventional economics. These tools along with a consistent world-view for both

microeconomics and macroeconomics, and empirical data about the extent of deviation from

[normative] goal realization may help.

[Islamic economics] is the Muslim thinkers’ response to the economic challenges of their times.

In this endeavor they were aided by the Qur’an and the Sunna as well as by reason and

experience.

Islamic banking Act 1983 defines “Islamic Bank” as “any company which carries on Islamic

banking business and holds a valid licence and “Islamic banking business" as “banking business

whose aims and operations do not involve any element which is not approved by the Religion of 

Islam”.

However, the term “banking business” itself is not defined and the Islamic Banking Act 1983

does not stipulate how that term is to be understood in the context of Islamic banking.

The definition of “Islamic banking business” in the Act also appears to be confusing. The

expression “any element which is not approved by the Religion of Islam” is blurred. Is the phrase

of the “Religion of Islam” similar to the word Syariah? Syariah could carry a wider concept of 

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the practice of Islam and it is quite misleading to equate the religion of Islam with the word

Syariah.

Islamic banking is banking based on Islamic law (Shariah). It follows the Shariah, called fiqh

muamalat (Islamic rules on transactions). The rules and practices of  fiqh muamalat came from

the Quran and the Sunnah, and other secondary sources of Islamic law such as opinions

collectively agreed among Shariah scholars (ijma’), analogy (qiyas) and personal reasoning

(ijtihad).

Observing Shariah principles

All Islamic banks and IBS banks have set up Shariah Committees to guide them on Shariah

matters and to make sure that they function in a manner that is in line with the Shariah. In

addition, the advice of the Shariah Advisory Council which is the highest Shariah body set up at

Bank Negara Malaysia, can be sought to ensure uniformity in views and practices. The members

of the Shariah Committees and the Shariah Advisory Council are academicians and Shariah

experts in Islamic banking and finance.

Two Conflicting Fatawa

Over the past two centuries, there have been two conflicting juristic views of the banking

industry: one unfavorable and one favorable. The unfavorable view characterized traditional

banking as usury or  riba-based, both bank deposits and financing being viewed as forbidden

interest-based loans. The other view, which originated with the Ottoman Mufti Ebussoud Efendi

and continues to this day in various juristic circles, views contemporary banking practice as a

new financial technology, which is not intrinsically forbidden, although certain corrections of 

specific banking behavior may be required to ensure adherence to the percepts of Shari

Recently the debate erupted once more with a high-profile fatwa from the prestigious Azhar 

Islamic Research Institute, which deemed the collection of interest on conventional bank deposits permissible (by characterizing it as a fixed profit rate in investment agency). This fatwa

reiterated an earlier issued fatwa in the late 1980s by the current rector of Al-Azhar, Tantawi,

who was then the Grand Mufti of Egypt.

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Conventional Bank interest is a form of forbidden riba

Banks’ interest on deposits is a form of riba that is forbidden in Quran and Sunna, as previous

decisions and fatawa have concurred since the second meeting of the Islamic Research Institute

in Cairo, Muharram 1385 A.H., May 1965 A.D., attended by eighty-five of the greatest Muslim

scholars and representatives of thirty-five Islamic countries. The

first decision of that conference stated: “Interest on any type of loan is forbidden riba.”

Shariah concepts in Islamic banking

The common Shariah concepts are as follows:

Wadiah (Safekeeping  )

Wadiah means custody or safekeeping. In a Wadiah arrangement, you will deposit cash or other 

assets in a bank for safekeeping. The bank guarantees the safety of the items kept by it.

Know the Shariah concept used and be clear of  your rights and Responsibilities.

1) You place money in a bank and the bank guarantees to return the money to you.

2) You are allowed to withdraw the money anytime.

3) Bank may charge you a fee for looking after your money and may pay hibah (gift) to you if it

deems fit.

4) This concept is normally used in deposit-taking activities custodial services and safe deposit

boxes.

Mudharabah (Profit sharing  )

Mudharabah is a profit sharing arrangement between two parties, that is, an investor and the

entrepreneur. The investor will supply the entrepreneur with funds for his business venture and

gets a return on the funds he puts into the business based on a profit sharing ratio that has been

agreed earlier. The principle of Mudharabah can be applied to Islamic banking operations in 2

ways: between a bank (as the entrepreneur) and the capital provider, and between a bank (as

capital provider) and the entrepreneur. Losses suffered shall be borne by the capital provider.

Here is how it works:

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1) You supply funds to the bank after agreeing on the terms of the Mudharabah arrangement.

2) Bank invests funds in assets or in projects.

3) Business may make profit or incur loss.

4) Profit is shared between you and your bank based on a pre agreed ratio.

5) Any loss will be borne by you. This will reduce the value of the assets/ investments and hence,

the amount of funds you have supplied to the bank.

Bai’ Bithaman Ajil – BBA (Deferred payment sale  )

This refers to the sale of goods where the buyer pays the seller after the sale together with an

agreed profit margin, either in one lump sum or by installment.

Here is how it works:

1) You pick an asset you would like to buy.

2) You then ask the bank for BBA and promise to buy the asset from the bank through a resale at

a mark-up price.

3) Bank buys the asset from the owner on cash basis.

4) Ownership of the goods passes to the bank.

5) Bank sells the goods, passes ownership to you at the mark-up price.

6) You pay the bank the mark-up price in installments over a period of time.

Murabahah (Cost plus  )

As in BBA, a Murabahah transaction involves the sale of goods at a price which

includes a profit margin agreed by both parties. However, in Murabahah, the seller 

must let the buyer know the actual cost for the asset and the profit margin at the

time of the sale agreement.

Musyarakah (Joint venture  )

In the context of business and trade, Musyarakah refers to a partnership or a joint

business venture to make profit. Profits made will be shared by the partners based on

an agreed ratio which may not be in the same proportion as the amount of investment

made by the partners. However, losses incurred will be shared based on the ratio of 

funds invested by each partner.

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Ijarah Thumma Bai’ (Hire purchase  )

Ijarah Thumma Bai’ is normally used in financing consumer goods especially motor 

vehicles. There are two separate contracts involved: Ijarah contract (leasing/renting) and

Bai’ contract (purchase). The contracts are made one after the other.

Here is how it works:

1) You pick a car you would like to have.

2) You ask the bank for Ijarah of the car, pay the deposit for the car and promise to lease the car 

from the bank after the bank has bought the car.

3) Bank pays the seller for the car.

4) Seller passes ownership of the car to the bank.

5) Bank leases the car to you.

6) You pay Ijarah rentals over a period.

7) At end of the leasing period, the bank sells the car to you at the agreed sale price.

Wakalah (Agency  )

This is a contract whereby a person (principal) asks another party to act on his behalf 

(as his agent) for a specific task. The person who takes on the task is an agent who will

be paid a fee for his services.

Example

A customer asks a bank to pay someone under certain terms. The bank is therefore the agent for 

carrying out the financial transaction and the bank will be paid a fee for its services.

Qard (Interest-free loan  )

Under this arrangement, a loan is given for a fixed period on a goodwill basis and the

borrower is only required to repay the amount borrowed. However, the borrower 

may, if he so wishes, pay an extra amount (without promising it) as a way to thank the

lender.

Example

A lender who lent RM5,000 to a borrower on Qard will expect the borrower to return exactly

RM5,000 to him at a later date.

Hibah (Gift  )

This refers to a payment made willingly in return for a benefit received.

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Example: In savings operated under Wadiah, banks will normally pay their Wadiah depositors

hibah although the accountholders only intend to put their savings in the banks for safekeeping.

Insurance and Takaful

Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in

exchange for payment. An insurer is a company selling the insurance; an insured or 

policyholder is the person or entity buying the insurance policy. The insurer charges a price

which is called premium which is used to compensate the insured at the time of loss.

The most common type of insurances are:

Life insurance

Property insurance Casualty insurance

Health insurance

Business insurance

Auto insurance

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Home insurance

Liability insurance

Credit insurance

Accident, sickness and unemployment insurance

Apart from these types of insurances, many different companies offer many different types of 

insurance plans.

All these types of insurances are used worldwide under a specific law. The insurance law has

two types; one is under which insurance business is held and second is the law how claim

handling is done.

Islamic finance has developed mainly in two directions namely Islamic banking and Islamic

insurance (Takaful). Under Islamic law this concept of insurance that is worldwide used is

slightly different. Under Islamic law insurance is said to be “Takaful”. Takaful is Arabic word

meaning guaranteeing each other or joint guarantee. The Tabarru system is the main core of the

Takaful system making it free from uncertainty and gambling. Tabarru means donation; gift;

contribution. Each participant that needs protection must be present with the sincere intention to

donate to other participants faced with difficulties. Therefore, Islamic insurance exists where

each participant contributes into a fund that is used to support one another with each participant

contributing sufficient amounts to cover expected claims. The objective of Takaful is to pay a

defined loss from a defined fund.  Muslim jurists conclude that insurance in Islam should be

based on principles of mutuality and cooperation; having the elements of shared responsibility,

joint indemnity, common interest and solidarity.

The principles of Takaful insurance are as follows:

Policyholders cooperate among themselves for their common good.

Every policyholder pays his subscription to help those that need assistance.

Losses are divided and liabilities spread according to the community pooling system.

Uncertainty is eliminated in respect of subscription and compensation.

It does not derive advantage at the cost of others.

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain

sum of money to a common pool. The purpose of this system is not profits but to uphold the

principle of “bear one another’s burden.”

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The contract of Takaful provides solidarity in respect of any tragedy in human life and loss to the

business or property. The policyholders (Takaful  partners) pay subscription to assist and

indemnify each other and share the profits earned from business conducted by the Company with

the subscribed funds. Takaful companies normally divide the contributions into two parts, i.e.,

donations for meeting mortality liability or losses of the fellow policyholders and the other part

for investment. Accordingly, the clause of Tabarru´ is incorporated in the contract. How much of 

the contribution is meant for mortality liability and how much for investment account is based on

a sound technical basis of mortality tables and other actuarial requirements. Both the accounts

are invested and returns thereof distributed on Mudarabah principle between the participants and

the Takaful operators. The profit attributable to the participants is credited into the two accounts

separately. To describe from another angle, a Takaful contract may comprise clauses for either 

protection or savings/investments or both the benefits of protection as well as savings and

investment. The protection part of Takaful works on the donation principle according to which

individual rights are given up to indemnify the losses reciprocally. In the Savings part, individual

rights remain intact under Mudarabah principle and the contributions along with profit are paid

to the policyholders at the end of policy term or before, if required by them.

The types of Takaful are:

Family Takaful

Investment linked Takaful Child Education Takaful

Medical and health Takaful

Home Takaful

Car Takaful

And Personal accident Takaful

The Islamic law prohibits from a contract with a commercial insurance company. The distinctionbetween the conventional insurance and Takaful  business is more visible with respect to

investment of funds. While insurance companies invest their funds in interest-based avenues and

without any regard for the concept of  Halal-o-Haram, Takaful  companies undertake only

Shariah compliant business and the profits are distributed in accordance with the pre-agreed

ratios in the Takaful  Agreement. Likewise they share in any surplus or loss from the pool

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collectively. Takaful system has a built-in mechanism to counter any over-pricing policies of the

insurance companies because whatever may be the premium charged, the surplus would

normally go back to the participants in proportion to their contributions.

“Commercial insurance is originally Haram as agreed upon by most contemporary scholars. It is

well known that in most non-Islamic countries there are cooperative and mutual insurance

companies. There is no harm from the Shariah point of view to participate in these services. So,

it is unlawful for a Muslim living in a country where there is such a cooperative insurance

company to make an agreement with a commercial insurance company. But, if a cooperative

insurance company is not found one may enter into a contract with a commercial insurance

company only by way of necessity. If a person is forced by law to insurance or by way of need, it

is obligatory for him to be content with the minimum proportion of insurance that covers his

need or to the minimum of such transaction he’s being forced to carry out.” - European Council 

for Fatwa and Research.

Takaful a worldwide perspective

The development of Takaful in modern times was initially undertaken in Sudan in 1979 and

Malaysia in 1984. The culmination of this initial development was encapsulated within the 1985

Fiqh Academy ruling declaring that conventional commercial insurance was Haram (forbidden)

and insurance based on the application of cooperative principles, Sharia compliance and

charitable donations was Halal (acceptable). During the past two decades we have seen Takaful

operations opening up in many countries throughout the world, primarily in Islamic countries

and countries with a large Muslim community. In the Far East, Malaysia has been at the forefront

of Takaful development with Bank Negara taking the lead with the introduction of separate

Takaful regulations allowing the Takaful business to flourish in that country. Singapore,

Indonesia, Brunei has all followed with the development of Takaful operations. In the Middle

East, Takaful operations have developed in Saudi Arabia, Bahrain, Iran, Qatar and Iran with new

operations opening up in Egypt, UAE and Kuwait in recent years. Tough Takaful has widely

spread in the Middle East countries but it has started moving towards countries like Srilanka and

Bangladesh. Outside these two primary regions, Takaful has also been introduced into Europe

and the USA but, as yet, development of Takaful in the western world has not met with any

major degree of success. But it can be hoped that in some years Takaful operations would also be

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needed in these regions because of its growing popularity and because of the growing Muslim

population.

Hence this was the concept of insurance under Islamic law which is called Islamic Insurance or 

Takaful which is growing very rapidly worldwide especially in the Middle East countries.

Toward a New Islamic International Business Identity

A brilliant recent study on ethical, developmental, and environmental considerations in business

and finance was endorsed by a number of financial institutions. Those institutions were initially

invited by United Nations Secretary General Kofi Annan in January 2004 to participate in his

initiative on implementing universal principles in business (originally launched in 2000). The

study was labeled “Who Cares Wins: Connecting Financial Markets to a Changing World.” It

provided “recommendations by the financial industry to better integrate environmental, social,

and governance issues in analysis, asset management and securities brokerage.”

The participating institutions provided the following insights that can provide a general

framework for a new “Islamic finance” identity: The institutions endorsing this report are

convinced that in a more globalised, interconnected and competitive world the way that

environmental, social, and corporate governance issues are managed is part of companies’

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overall management quality needed to compete successfully. Companies that perform better with

regard to these issues can increase shareholder value by, for example, properly managing risks,

anticipating regulatory action or accessing new markets, while at the same time contributing to

the sustainable development of the societies in which they operate. Moreover, these issues can

have strong impact on reputation and brands, an increasingly important part of company value.

Elaborating on this idea of brand-name value based on social and environmental agendas, the

report’s authors argued that ESG [environmental, social, and corporate governance] issues can

have a strong impact on reputation and brands, an increasingly important part of company value.

It is not uncommon that intangible assets, including reputation and brands, represent over two

thirds of total market value of a listed company. It is likely that ESG issues will have an even

greater impact on companies’ competitiveness and financial performance in the future.

Conclusion

Once the people of the world examine Islam system with serious and sincere considerations, they

will realise that it’s the only viable system. Although Islamic financing system is most viable

and has everything but its true representation is still needed.

In all areas be it business, finance, social and corporate governance, Islamic finance has golden

opportunities to redefine the brand name in a manner that enhances its providers’ profitability

and market value; increases access to the fast-growing potential market segment of middle-class

Muslims, and enhances its ability to recruit top-drawer talent from that same market segment for 

its products.

However, multinational as well as large indigenous Islamic finance institutions are not directly

capable of engaging in the poverty alleviation, microfinance, and other socially beneficial

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activities that are necessary for establishing this new identity and brand name. A network of 

mutual financial institutions with close ties to religious establishments can perform the necessary

intermediation between those institutions’ world of high finance and those required social

functions.

Hence, it is clear that once Islamic finance outgrows its formulaic current mode of operation, and

assumes a new identity based on substantive and ethical religious tenets, it will no longer need to

hide behind the “Islamic” brand name, just as Luther’s cobbler needed only to make a good shoe,

and to sell it at a fair price, without the need to make or market a “Christian shoe”.

I though accept Ho on the basis of my research but since we know that practice is different from

theory. And Islamic law for International business has a long challenging way to go.

To be sure, while the world's first Islamic bank was founded back in 1975, it is only in the lastfive years or so that Islamic finance has surged. Sniffing opportunity, conventional banks are

now scrambling to set up Shari'a-compliant operations; and there has been a flurry of all-Islamic

start-ups, from full-service investment banks to specialist advisory firms. Products have moved

beyond lending, insurance and investment funds to include sukuk, hedge funds, currency swaps,

and more.

Despite this boom – largely concentrated in the Middle East and South-East Asia – it's plain the

Islamic finance industry still lacks global scale. Professor Rodney Wilson of the Institute for 

Middle Eastern and Islamic studies at Durham University in the UK estimates Islamic banking

assets speak for less than 0.5% of the world's total. And worldwide sukuk debt outstanding

amounts to perhaps USD 100 billion – just 0.1% of the global bond market.

For certain, industry practitioners are making progress. Earlier this year the International Capital

Market Association and the IIFM agreed to develop standard contracts and common best practice

for secondary trading of sukuk and other Islamic instruments. And it may help, too, that global

banking giants are putting their weight behind Islamic finance. (Deutsche Bank, Barclays Capital

and BNP Paribas are already among the world's top five issuers of sukuk.)

The Islamic business and finance industry needs to work on innovation, too. Shari's-compliant

products can be more complex than conventional ones because every transaction is backed a

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non-financial trade. Many instruments are still lacking, including corporate treasury and

derivatives products. As UIB's Pace points out: "We [in the industry] need to change our 

perception of R&D, and view it as a core ingredient of success." But at the same time, innovation

is hampered by the limited number of Islamic scholars able to vet financial products for Shari'a

compliance.

The question whether Islamic finance has reached critical mass or shall ever will remains open,

of course. But Johnson of Calyx Financial is optimistic: "The tipping point may already have

arrived," he ventures. Even if Johnson is wrong in his optimism, it seems unlikely history will

prove him to have been very far wide of the mark.

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