In Search of Legitimacy: The Dilemma of Islamic Finance

Abstract

Introduction As highlighted in Chapters 1 and 3, Islamic law in its colonial and post-colonial variants is a modern phenomenon – at best a hybrid of its classical form and substance. The inevitable outcome of historical, socio-economic and political processes, Islamic law as generally experienced today exemplifies continuities, discontinuities and ruptures. Modernity, globalization and the nation state increasingly interact with religion, diverse cultures and official and unofficial legal orders, resulting in synthetic phenomena such as modern Islamic finance and banking. Islamic finance law consists of rules (and institutions) that base their objectives and operations on Islamic law and sharia . A variant of Islamic commercial law, Islamic finance law ‘is based on certain parts of classical Islamic law concerning commercial transactions.’ In popular Muslim consciousness, though, Islamic finance is equated with ‘interest-free’ banking the prohibition of (i) riba (exorbitant or excessive interest, or usury), (ii) gharar (uncertainty, risk or speculation), and (iii) maysir (gambling and games of chance). In theory, engaging in religiously permissible, non-exploitative, equitable and ethical financial activities forms the cornerstone of Islamic finance; in practice, for many centuries the reality has been otherwise, and the vast majority of the Muslim world has engaged with conventional (interest-based) financial regimes in one form or another. Classical Islamic finance has two arms: first, there is the ‘profit-and-loss-sharing’ paradigm, where lender and borrower share the risk of making or losing money, rather than the lender alone being guaranteed a fixed, predetermined return. Islamic finance, being equity-based, treats the financier and the entrepreneur as joint partners, co-joined in risk-taking and profit-sharing. Capital is unsecured, unguaranteed, and not entitled to predetermined or fixed interest, and may appreciate or depreciate depending on the market. Second, there is the entrenched requirement of promoting social justice through mandatory almsgiving ( zakat ), voluntary almsgiving ( sadaqa ), and ‘benevolent loans’ ( qard hasan ). Modern Islamic finance has prioritized the profitable over the charitable arm, largely ignoring the moral economy that was an integral component of its classical antecedent. Furthermore, contemporary Islamic finance law is a law operating without a fully supporting legal system, and the emergent picture is one that combines Islamic form with conventional (Western) substance , leading some commentators to observe that, in practice, Islamic finance appears to mimic the conventional financial regime.