Islamic Finance: Fit for Purpose or Mere Replication?

The form versus substance issue is not a new phenomenon in Islamic finance. Beyond question, one of the verses emphasising the superiority of substance over form is surah al-Baqarah: ‘Righteousness is not that you turn your faces toward the east or the west, but righteousness is one who believes in Allah, the last day, the angels, the Book, and the prophets and gives wealth, in spite of love for it, to relatives, orphans, the needy, the traveller, the who ask for help, and freeing slaves…’(2:177) In the verse, it is stated that the true goodness and respect for Allah is not to turn its face towards east or west during the worship. Put differently, the Qur’an idealises an understanding wider than a mere formalism that is not based on the virtues of faith, religion, and morality. In this article, it is discussed whether the understanding of the substance over form, which is adopted in the sources of Islam, is fully implemented or not. In this article, first, prohibitions against riba (as a guiding principle of Islamic finance) in the Quran and its historical roots are examined to understand what the purpose of these restrictions is by looking at Islamic finance philosophy. Second, various contract types which have been used to circumvent the prohibition of riba through hilah and their historical origins are also be criticised. Lastly, some Islamic finance contracts, which are frequently used in Islamic finance, and which are similar to the contracts in conventional finance in terms of economic outcome, are examined. It is also evaluated to what extent the Islamic finance sector, which is structured in line with the classical view on riba, is unique. Also, the criticism of Islamic finance being same as conventional finance both economically and legally is examined. Islamic finance contributes to the expansion of financial inclusion and the growth of the financial industry. Islamic finance may enhance financial access by broadening the scope of available financial products and promoting the inclusion of individuals who lack access to financial services. Islamic banking has a strong emphasis on partnership-style financing, which may be helpful in enhancing access to capital for small businesses. It also contributes to enhancing financial stability due to its relatively uncorrelated financial products operating in line with the risk-sharing and avoidance of leverage principles. However, the Islamic finance industry needs to develop new innovative products to differentiate itself from conventional banking and accommodate the concerns of investors regarding the authenticity of the system.

Keywords:

Islamic Finance, Islamic Banking, Islamic Finance Theory Substance over Form,

PDF

___

Ahmed, H. (2011) Product Developments in Islamic Banks. Edinburgh: Edinburgh University Press
Asutay M. and Yilmaz I. (2021) Constituting an Islamic Social Welfare Function: An Exploration Through Islamic Moral Economy, 14(3), 524-540
Balala, MH. (2010) Islamic Finance and Law: Theory and Practise in a Globalized World. London: I.B. Tauris
Baldwin D. and Wilson, R. (1988) ‘Islamic Finance in Principle and Practise’ in Chibli Mallat (ed) Islamic Law and Finance, London: Graham and Trotman Ltd
Barnett, JE. (2007) Times’s Pendulum, in Ed. Mielants, EH. The Origins of Capitalism and the ‘Rise of the West’, Temple University Press, Philadelphia, 20.
Cakir, S. and Raei F. (2007) Sukuk vs. Eurobonds: Is there a Difference in Value-at-Risk? accessed 9 May 2023
Cizakca, M. (2011) Islamic Capitalism and Finance. Cheltenham, UK; Northampton, MA: Edward Elgar
Eisenberg, DM. (2012) ‘Sources and Principles of Islamic Law in relation to Finance’ in Craig R Nethercott and David M Eisenberg (eds) Islamic Finance: Law and Practise. Oxford: Oxford University Press
El Diwany, T. (2006) Subverting the Islamic Ban on Usury. Financial Times accessed 8 December 2021
El-Gamal, M. (2001) An Economic Explication of the Prohibition of Gharar in Classic Islamic Jurisprudence. Islamic Economic Studies, 8(2), 29-58.
El-Gamal, M. (2006) Islamic Finance: Law, Economics, and Practise. Cambridge: Cambridge University Press.
El-Gamal, M. (2008) Contemporary Islamic Law and Finance: The Tradeoff Between Brand-Name Distinctiveness and Convergence. Berkeley Journal of Middle Eastern and Islamic Law, 1(1), 193-201.
Farooq, MO. (2015) Islamic Finance and Debt Culture: Treading the Conventional Path? 42(12) International Journal of Social Economics, 1183.
Gundogdu, AS. (2016) Islamic Electronic Trading Platform on Organized Exchange accessed 1 August 2019
Haque, Z. (1995) Riba: The Moral Economy of Usury, Interest and Profit. Selangor: Ikraq.
Henning, JJ. (2007) The Medieval Contractum Trinius and The Law of Partnership Fundamina: A Journal of Legal History accessed 8 December 2021
Horii, S. Reconsideration of Legal Devices (Hiyal) in Islamic Jurisprudence: The Hanafis and Their ‘Exits’ (Makharij) 9(3) Islamic Law and Society, 314.
Iqbal Z. and Mirakhor, A. (2011) An Introduction to Islamic Finance: Theory and Practise. Singapore: John Wiley & Sons
Iqbal, M. and Molyneux, P. (2004) Thirty Years of Islamic Banking: History, Performance and Prospects. London: Palgrave MacMillan UK
Jobst, AA. and Sole, J. (2020) The Nature of Islamic Banking and Solvency Stress Testing―Conceptual Considerations accessed 25 March 2023
Kamali, MH. Suzuki, Y. and Miah, MD. (2018) An Inquiry into the Scope of ‘Acceptable’ Gharar in Eds. Suzuki, Y. and Miah, MD. Dilemmas and Challenges in Islamic Finance: Looking at Equity and Microfinance, Oxon: Routledge, Abingdon, 45.
Kay, J. (2019) Ethical Finance accessed 17 November 2020
Kahf, M. (1978) Islamic Economy: Analytical Study of the Functioning of the Islamic Economic System, American Trust: Indianapolis
Khalil, EH. (2006) An Overview of the Sharia’a Prohibition of Riba, in Abdulkader Thomas (ed) Interest in Islamic Economics: Understanding Riba, Routledge Islamic Studies
Khan, F. (2010) How ‘Islamic’ is Islamic Banking. Journal of Economic Behaviour and Organisation, 76(3), 805-820.
Kuran, T. (1995) Islamic Economics and the Islamic Sub-economy. The Journal of Economic Perspectives, 9(4), 155-173.
Lewis MK. and Algaound, LM. (2001) Islamic Banking, in Ed. Aldohni, AK. The Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the United Kingdom and Malaysia, Routledge, Abingdon, 31.
Mills PS. and Presley JR. (1999) Islamic Finance: Theory and Practise. Palgrave MacMillan UK
Morrison, S. (2014) Islamic Banking and Financial Crisis: Reputation, Stability and Risks (Book Review) 103.
Morrison S. (2017) The Law of Sukuk: Shari’a Compliant Securities (London: Sweet & Maxwell, Thomson Reuters 2017) 73.
Participation Banks Association of Turkey, Turkish Participation Banking Strategy Document 2015-2025 (March 2015) accessed 31 July 2019
Rehman, SS. (2008) Globalization of Islamic Finance Law accessed 6 December 2021
Saeed, A. (2011) ‘Adapting Understanding of Riba to Islamic Banking: Some Developments’, in Mohamed Ariff and Munawar Iqbal (eds) The Foundations of Islamic Banking: Theory, Practise and Education, Edward Elgar Publishing
Schacht, J. (1926) Die Arabische Hijal–Literatur. Ein Beitrag zur Erforschung der Islamischen Rechtspraxis, XV Der Islam, 21.
Sencal H. and Asutay M. (2019) The Emergence of New Islamic Economic and Business Moralities 61(5) Thunderbird International Business Review, accessed 28 March 2022
Shepard, WE. (1996) ‘Muhammad Said al-Ashmawi and the Application of the Sharia in Egypt’ 28(1) International Journal of Middle East Studies accessed 30 July 2021
Siddiqi, MN. (2004) Riba, Bank Interest and the Rationale of Its Prohibition. Jeddah, Saudi Arabia: Islamic Research and Training Institute, Islamic Development Bank
Udovitch, AL. (1962) At the Origins of the Western Commenda: Islam, Israel, Byzanteum? 37 Speculum accessed 10 December 2021
Usmani, MT. (2002) An Introduction to Islamic Finance. The Hague; London: Kluwer Law International
Van De Mieroop, M. (2004) King Hammurabi of Babylon: A Biography, Oxford, UK: Blackwell Publishing
Visser, H. (2009) Islamic Finance: Principles and Practise, Cheltenham: E. Elgar
Vogel, FE. & Hayes SL. (2006) Islamic Law and Finance: Religion, Risk, and Return. Leiden-Boston: Brill.
Warde, I. (2009) The Relevance of Contemporary Islamic Finance. Berkeley Journal of Middle Eastern and Islamic Law, 2(1), 159-171.
Warde, I. (2010) Islamic Finance in the Global Economy, Edinburgh University Press
Wilson, R. (2012) Legal, Regulatory, and Governance Issues in Islamic Finance. Edinburgh: Edinburgh University Press
Yousef, TM. (2004) The Murabaha Syndrome in Islamic Finance: Laws, Institutions and Politics, in Ed. Henry, CM. and Wilson, R. The Politics of Islamic Finance, Edinburgh University Press, Edinburgh, 63-80.
Zaman, MR. (2008) Usury (Riba) and the Place of Bank Interest in Islamic Banking and Finance, 6(1) International Journal of Banking and Finance, 1.
Zimmermann, R. (1996) The Law of Obligations: Roman Foundations of the Civilian Tradition. Oxford University Press.