Islamic finance: a Sharia-based form of economy?

After World War II, the new international economic order was set in place. World trade, the flow of international payments and the financing of development were among the priorities of the time, which encouraged the victors of the war to create a series of international organizations that gradually shaped the international economic system as it is known today.

Over the course of time, new problems have emerged to which the hegemonic economic system does not seem to provide solutions, such as international inequality and poverty, which are now at their highest rates in history, as well as other social and environmental concerns. In response to these issues, various currents and proposals have emerged over the last century advocating an economic model that prioritizes the social and moral impact of the economy.

An ethical economic model

Islamic finance is distinguished by the ethical nature of its transactions, which implies a responsibility towards society and the welfare of citizens. It represents an alternative to conventional economic behavior based on ethical and social considerations (Orozco de la Torre, 2011). Despite being an idea based on and arising from Islam, Islamic finance is not exclusive to Muslims, but is applicable to all people and anywhere in the world.

Economics has occupied a central place in Islam since its origins, due to the importance given to trade and other economic activities. However, it was not until the 1970s, with the end of colonization and the beginning of the accumulation of national income, that an Islamic bank appeared for the first time in the Gulf countries. Thus, the idea of Islamic finance as an alternative economic model within the international financial system began to spread, first in the Middle East and Southeast Asia and later throughout the rest of the world.

But, what is Islamic finance and what is its place in non-Muslim-majority contexts, such as Spain? From a practical point of view, it comprises a series of financial instruments, such as banks, insurance companies, investment funds or other institutions that develop economic activities based on the principles of Islam. The weight of Islamic finance is relative to each country, being the main form of finance in some countries such as, for example, Iran or Saudi Arabia. From a global perspective, they represent around 2% of total financial assets.

In Spain, its presence is very limited, despite the potential opportunities it could offer to Spanish banks, as has already been pointed out on some occasions by national financial institutions.

Islamic finance is characterized by five fundamental principles, based on Islam: the prohibition of usury, or riba, which implies a refusal of interest rates; the prohibition of speculation, or gharar, which implies that uncertain transactions cannot be carried out; the materialization of financial transactions; the obligation to assume the risk of projects in proportional parts, sharing both profits and gains with clients; and the prohibition of financing illicit activities, or those considered haram by Islamic tradition (Lofti, 2021).

These principles are related to a model of ethical banking, under the promise of a fairer and more egalitarian economy for all parties (Rodríguez Marín, 2021). The particularity of Islamic finance is that the principles on which they are sustained are Sharia-based and it is forbidden to finance activities considered illicit by Islam. Therefore, in order to understand Islamic finance and the important role it could play in contexts such as Spain, it is essential to first ask about the concept of Sharia, on which its economic model is based.

Sharia: divine law or something else?

The concept of Sharia (which in Arabic means way, path) is interpreted in multiple and diverse ways by each person, group and tendency, making it complex to define. In classical times, Muslim exegetes and scholars of terminological conceptualization understood Sharia as a way of salvation proposed to humans, as well as a source for its followers to seek what can give meaning to existence (Ferjani, 2009).

With the intention of providing a precise definition of the concept, Hallal (2011) makes an analysis of religious beliefs and practices, as well as Islamic legal texts, from which he affirms that Sharia represents a religious ideal or utopia. In this sense, he considers that each believer interacts with the Sharia in a fluid and dynamic way, experiencing it in a particular way in his or her daily life as an individual ethic or a way of being in the world that drives the search for a better future. In the same vein, Ahmed (2018, p.35) indicates that Sharia “is unique to each individual, as it reflects his or her personal worldview and ideas about a perfect future.”

The Sharia “is unique to each individual, as it reflects his or her personal worldview and ideas about a perfect future.”

This definition of the concept contradicts the prevailing understanding in today’s social imaginary, in which Sharia is discussed, most of the time, in political, legalistic and juridical terms. However, as mentioned above, Sharia relates more to the way in which each person experiences his or her religiosity individually. From this original definition of the term, Sharia does not refer to the exercise of jurisprudence by which the norms of society are established, which entails a human labor of codification and legal execution, known as fiqh (Gomez, 2019).

Fiqh: the interpretation of Sharia

Fiqh refers to Islamic jurisprudence, the theoretical explanation and practical application of the Sharia. The normative codifications are the result of rulings made by jurisconsults who are experts in the field based on a process of interpretation, or ijtihad, of the sources of Islamic law. Although the various legal schools of Islam differ as to the foundations of Islamic law, the Quran and the Sunna are the primary sources.

On the one hand, the Quran is considered by Muslims to be the word of God and the authentic reproduction of the divine messages. On the other hand, the Sunna, although no longer considered of divine origin, is the rule par excellence, whose textual fixation was made from the biography of Muhammad and the hadiths, which recount the life of the Prophet (Gomez, 2019).

Even so, jurisprudence does not emanate directly from the sources of Islamic law. For example, of the 6,236 verses in the Quran, only between 200 and 634 are counted as normative verses, so it would be a mistake to consider the Quran as a code or legislation. As for the Hadith, there are about 150,000 of them, but only about 10,000 are reliable. In other words, the Quran and the Hadith, although they are the sources from which the subsequent normative codification emanates, are not in themselves uniform or definitive legal codes, but express “a way of life and a vision of the world, at the same time as a set of beliefs” (Benmahouf, 2017).

The Quran and the Hadith, although they are the sources from which the subsequent normative codification emanates, are not in themselves uniform or definitive legal codes, but express “a way of life and a vision of the world, at the same time as a set of beliefs” (Benmahouf, 2017).

In this sense, the word Sharia, which appears only once in the Quran, refers to “the rules relating to religious obligations, such as fasting, prayer, almsgiving or pilgrimage, and which enhance beneficence (or “good deeds” – al salihat – that are a sign of “justice and beneficence” or “good doing” recommended by the Quran)” (Ferjani, 2009). On the other hand, fiqh deals with the generation of normative codes to govern aspects of social relations based on human interpretation of the sources of Islamic law. Thus, fiqh addresses all human activities and divides them into lawful (halal) or unlawful (haram). The methods for the work of interpretation, or ijtihad, differ in each current of Islam and, depending on this, various juridical schools or madhab have been formed, from which different considerations are derived regarding the categories of halal and haram.

In the process of interpretation, the sources of Islamic law are always the same, but what changes is the interpretation that is made of them, which is adapted to one or another legal school. In this sense, Rumee Ahmed (2018) refers to the term “hacking” and considers that changes in the interpretation of Sharia have occurred since the beginning of Islam, with the intention of gradually adapting the laws to the changing times, while adhering to the Islamic legal tradition. In this sense, the question would be who interprets Sharia and who has the power to generate jurisprudence and to impose, in particular contexts, a particular view of Sharia. To answer this question, a comprehensive analysis of power relations would be necessary, which would not only consider the religious sphere, but also the political, economic and social spheres.

Therefore, it should be considered that Sharia, although it can be interpreted as divine law that regulates the personal relations of each individual with religion, does not represent a finished form of legislation applicable to society, which would relate more to fiqh. Sharia is the content, the raw material, from which the various legal schools establish, for each context, certain legal codifications. Therefore, the social, political and legal organization of each society corresponds to human decision-making, which may be based on the Quran and the Sunna, but is the product of the interpretation, decisions and actions that certain actors exercise in specific contexts.

Why are Sharia and fiqh confused?

Today there is a widespread confusion between the concepts of Sharia and fiqh, and there is a tendency to associate the word Sharia with a monolithic and mandatory set of rules in the countries where it is applied. In this regard, Ahmed (2018) points out that there are five major myths that need to be disproved: (1) there is only one official Sharia; (2) Sharia never changes; (3) only scholars can debate Sharia; (4) Islamic law is found in the Quran and the sayings of Muhammad; and (5) all Muslims live by Islamic law.

There are five major myths that need to be disproved: (1) there is only one official Sharia; (2) Sharia never changes; (3) only scholars can debate Sharia; (4) Islamic law is found in the Quran and the sayings of Muhammad; and (5) all Muslims live by Islamic law.

These myths are what shape the social imaginary, generalizing the confusion surrounding the term Sharia. However, it is important to consider that these myths are created in specific circumstances by particular actors, whose origins can be traced to colonization and the imposition of European jurisprudence. Previously, Islamic societies were characterized by being organized on the basis of multiple and diverse laws, which were in turn based on local practices or on Islamic texts that were theoretical rather than legal works. Moreover, the existing legal texts were not binding and were subject to the discretion of the authorities. However, the Europeans unified a civil code as a single law equated with Sharia, introducing, for the first time, the idea of Sharia as a just and equitable legal entity that does not change (Hallal, 2011).

Therefore, since Islam is diverse, heterogeneous and contradictory from its origin, it would be a mistake to think that the basis of Islam lies in regulatory homogeneity, as well as in the existence of an institution that links its authority to the will of God (Filali-Ansary, 2004). This is a modern and post-colonial idea, which is sometimes resorted to in order to justify the immovability of certain rules and laws. Even so, throughout the 20th century, different voices have been appearing claiming that the generation of norms belongs to the realm of fiqh and that it is the product of human interpretation and elaboration, being subject to a certain historical context. “Fiqh is a law that is Sharia in name only… Sharia is only an ideological slogan that legitimizes the system and the claim of fiqh” (al-Azmeh, 1992, p.63, in Filali-Ansary, 2004).

The interpretation of Sharia in Islamic finance

It has been previously mentioned that the particularity of Islamic finance is that it is based on Sharia principles. However, a reflection on the religious and individual meaning of the concept relegates political and legal issues to other areas. It would be a serious error, therefore, to consider that the rules relating to the conduct of Islamic finance are set by Sharia, since the legal framework of Islamic finance depends on specific financial regulatory bodies.

It would be a serious error, therefore, to consider that the rules relating to the conduct of Islamic finance are set by Sharia, since the legal framework of Islamic finance depends on specific financial regulatory bodies.

In this regard, experience has been “very varied, with minimalist approaches to the regulation of Islamic banking being observed, such as in the United Kingdom, where all depository institutions have to comply with the same set of regulations, except for minimal differences for Islamic banks, to a dual approach, where the authorities establish specific regulations for each type of financial institution, as in Bahrain” (Rodríguez Marín and de Anca, 2016).

Islamic finance is governed by the institutions of the international and national financial system. But, in addition, given its specificity, a series of bodies have been created for this sector, such as the Islamic Development Bank (IDB) or the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), among others. There are also Sharia Supervisory Boards, composed of “recognized experts, both in Islamic jurisprudence and in economics and finance, […] whose fundamental role is to ensure that all products and services offered are fully compatible with the principles of Sharia” (Lofti, 2021, p.127). In addition, there are consultancies, experts in the field or institutions such as the Islamic Fiqh Academy, among others, that offer guidance on the subject.

Therefore, the rules established in the context of Islamic finance, while based on Sharia as a source of inspiration, are formalized through all these institutions and the individuals that comprise them. With this, it should be emphasized that the Sharia is not a normative code that establishes what is permitted and what is not, but that these are categories determined by the specific bodies of interpretation of Sharia, which, in turn, are subject to national and international regulations.

The Sharia, inscribed in the Quran, the Sunna and the Hadith, is the source. But, the texts are as important as the interpretation given to them. The use of the term Sharia as a monolithic and homogeneous source of Islamic law can generate a vision of Islam as an established and immovable normative set. This is reminiscent of Ahmed’s (2018) concept of “hacking”, as a method for instrumentalizing concepts for certain purposes. However, as evidenced in the present text, this use of the term is not only inconsistent with the origins of the definition of the word Sharia, but also ignores the importance of interpretation and the human role in generating the norms that regulate the social world.

As evidenced in the present text, this use of the term is not only inconsistent with the origins of the definition of the word Sharia, but also ignores the importance of interpretation and the human role in generating the norms that regulate the social world.

Reflection on the origins of the word Sharia is important because concepts are not mere passive objects, but have the capacity to infer and create reality. This reflection enables us to break with the legalistic interpretation of the Sharia and reminds us that the rules are the product of human elaboration, which removes their immutable and sacred character. On the contrary, the rules and laws, whether in the economic field of Islamic finance or in any other, are the product of reason and human interpretation that certain actors make in specific circumstances.

Ainara García Sánchez

References

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