The Principles of Islamic Banking

By Cheikh A. Soumare

This book is about the principles of Islamic banking. It explains the prohibition of Riba, and how the prohibition of usury was common to all monotheist religions. The use of Islamic laws in banking can bring together investors and managers; and also to explain mudarabah which is an arrangement where an investor entrusts his capital or merchandise to an agent.

The book explains the belief of economic progress; that development does not imply Westernization. The encouragement of private sector activity is not, however, accompanied by any deliberate policy of fostering competition. The authority in an Islamic state is an interest that extends not only to criminal law, but also to the commercial law which affects both local and foreign companies. Although the law is usually applied consistently within individual countries, there is less consistency among Islamic states. The Koran and the sunnah, of course, provide the basis of the law in all Islamic states, but interpretation varies considerably.

It finally explains the greatest challenge to the world of Islamic commerce in the 20thcentury is, to transform the classical mudarabah into an equally smooth functioning and efficient modern Islamic bank with the potential of almost unlimited growth.

• Language: English
• Publisher: Xlibris US
• Release date: Jul 29, 2008
• ISBN: 9781469101491

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Copyright © 2008 by Cheikh A. Soumare.

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Contents

GLOSSARY

CHAPTER 1

CHAPTER 2

CHAPTER 3

CHAPTER 4

CHAPTER 5

CHAPTER 6

CHAPTER 7

BIBLIOGRAPHY

GLOSSARY

The aim of this study is to give the reader an understanding of Islamic business philosophy and methods. The Western businessman will find both contrasts and similarities with his own business environment in the examination of the Islamic legal system and comparison between Muslim and Christian business ethics. In what follows, methods of business finance which adhere to Islamic principle are considered, in particular the implications of the prohibition on usury, riba, which is enforced in varying degrees in the Muslim world. The study goes on to examine the role of the new Islamic banks in the financial system of Islamic countries and their position vis-à-vis normal commercial banks.

Islamic policies towards borrowing on a fixed or variable interest basis have been much discussed in the West, but less well known in Western business circles are the Islamic policies on insurance, industrial relations and the management of the economy. This report also covers these issues and goes on to discuss the reasons for the Islamic prohibition on endowment insurance and the permissible Islamic forms of insurance. This leads to an outline of insurance legislation of particular Islamic countries, including that of Saudi Arabia where insurance companies are not allowed to register locally. In addition, the growing body of labour legislation which conforms to Islamic principles is described, as are the differences between employment practices in the West and those of Islamic states. Employers’ responsibilities are defined much more widely in the Muslim world than elsewhere, and lifetime security of tenure is usual, with little occupational mobility or even mobility between companies. A critical area of concern is made up by the limitations on government intervention in the economic sphere, and the extent to which fiscal and monetary policy can be used to control economic activity, and this naturally implies that the degree of consistency in government policy will clearly affect business confidence. Policy consistency has all too often been notably lacking in the Islamic world in recent years, but this has little to do with Muslim ideology.

Throughout the study, Islamic business theory is illustrated with respect to the practice in particular Muslim countries. From this it is evident just how varied practices are. The reasons for the differing interpretations of Islamic principles are explained in terms that the non-Muslim can readily understand, and, although this study is written by a professional economist, it is designed to be read by those with only a slight knowledge of the subject. Businessmen already involved in the Muslim world may, as a result, more fully grasp the reasons for any cultural misunderstandings they have experienced in the past, while those about to get involved for the first time in the infinite complexities of Islamic society will more readily appreciate the cultural adjustment which it is often necessary to make.

Before examining Islamic business theory and practice in detail it seems appropriate to look at the significance of Islam in broader terms—whether, for instance, the Islamic world should be treated as a business entity, how far Muslim beliefs help or hinder economic development, and the underlying reasons for the current Islamic revival. Considerations of these fundamental issues should help place the rest of this work in perspective.

The Islamic World: Basic Indicators by Country

Source: World Bank Data, 1983.

CHAPTER 1

THE SIGNIFICANCE OF ISLAM

In recent years the Islamic revival has received considerable attention from Western observers, especially since the Iranian revolution of 1979. The increasing impact of Islam has been viewed with concern by many in Europe and the USA, not least by exporters in the business community. Iran under the shah was the largest single export market, not only in the Middle East, but in the whole of Asia for the countries of the EC, including the UK. Yet following the revolution, trade was seriously disrupted, partly as a result of the dramatic fall in Iranian oil production, but also because of payments difficulties for export consignments, and a loss of confidence in the Iranian economy. These problems were, however, short term, although they were compounded by the financial crisis surrounding the US embassy hostage affair and, later, by the Iran-Iraq war.

However, statements from Iran’s rulers that they rejected materialism in all its forms, and did not want the sort of consumer merchandise which the West had to offer, should be seen as of longer term concern, and of more fundamental significance. At the same time, they also expressed a wish to restructure their economic system along Islamic lines, and to eliminate all traces of both capitalist and socialist modes of production and exchange—even though this task might take decades rather than years.

The question that worries many Western businessmen is whether the Iranian experience could be repeated elsewhere in the Islamic world, and what the long term implications for commercial relations may be. Certainly, the consequences of Islamic revolution seem certain to be far reaching, given that Islamic culture spans such a large section of the globe, from the Atlantic shores of Mauritania and Morocco in the west to the China Sea coastlines of Malaysia and Indonesia in the Far East. From the point of view of the EC, the Islamic world represents its largest export market, more significant even than the North American market or that of the Far East, including Japan. There are over 650 mn consumers in this vast area, living in 40 predominantly Muslim countries.

THE ISLAMIC WORLD AS AN ENTITY

Although the 40 countries that make up the Muslim world are racially ethnically and linguistically diverse, there are many common cultural and behavioural characteristics resulting from their Islamic inheritance. Certainly these common factors are sufficient to make it worthwhile to consider the Islamic world as a market entity in a broad sense. Indeed, many Western companies engaged in business worldwide would find it better sense to see the Islamic world as a unit rather than to deal with separate regional divisions covering the Middle East, North Africa, South and South East Asia. Clearly the Muslim countries in the Middle East would rather be bracketed with their co-religionists in South Asia or North Africa than with a non-Islamic country such as Israel. Most companies with geographical organisations have to omit Israel from their Middle Eastern divisions, in any case, because of the Arab boycott.

Communications create unity—

Modern communications links have helped unite the Islamic world, and there is a greater amount of movement of goods, finance and people between Muslim countries today then ever before. In the very recent past trading convoys moved across the deserts using camels as the major means of transport, but now Islamic cities have well equipped modern airports for handling both people and freight, as well as some of the most up to date container ports in the world. Road links have also been constructed and improved between contiguous Islamic countries, the most important of which is undoubtedly the inter-Arab road network linking Jordan and Saudi Arabia with the Arab sheikhdoms and emirates along the Gulf.

—but the commercial consequences are still limited

Despite these links and attempts at promoting trade between Islamic states by economic groupings such as the Arab Common Market—Egypt, Syria, Jordan and Iraq—and the Gulf Cooperation Council—Saudi Arabia, Kuwait, Qatar, Bahrain, the UAE and Oman—the volume of intra-regional commerce remains limited. Islamic countries mainly trade with the non-Islamic West rather than amongst themselves. This is largely because most Islamic states export primary products such as petroleum, minerals or agricultural commodities rather than manufactured goods. Hence there can be no possibility of self-sufficiency for the Islamic world as a whole, or economic independence from the world economic system which remains dominated by non-believers.

Although the Islamic world cannot yet be viewed as an entity as far as trade is concerned, there is a degree of integration of the market for factors of production, particularly the labour and capital markets. In recent years people have migrated to the oil rich states of the Gulf and Saudi Arabia from many parts of the Islamic world, particularly from Arab countries such as Egypt, Lebanon and Jordan, but also from non-Arab Muslim states such as Pakistan and Bangladesh. There are now more than 2 mn non-citizen Muslims resident in the Gulf region. This migration has not only involved skilled and semi-skilled labour engaged in construction and service activities, but also professional people such as teachers, doctors, lawyers and other well educated groups. All this has contributed not only to greater mutual understanding amongst different Muslim groups, but also to a considerable ferment of ideas, as Islamic practices and philosophy differ considerably amongst the faithful despite the common core of beliefs.

In the past the major meeting of Muslims was at the time of the annual pilgrimage to Mecca, where the prophet Mohammed is buried. Although most Muslims wish to take part in this pilgrimage at least once in their lifetime, until recent years the annual influx of visitors numbered only tens of thousands rather than the million and a half who now participate annually. Travel to the prophet’s tomb used to be difficult, involving either a hazardous overland journey along unsurfaced tracks, or a long sea passage to Jeddah before the final trek to Mecca.

Now most pilgrims arrive at Jeddah’s showpiece international airport in hours, stay in four and five star