Diversity of Islamic ruling in the Practice of Islamic Finance Industry - Essay Example

? Diversity of Islamic ruling in the Practice of Islamic Finance Industry Outline I. Introduction (Balz 2008) II. Comparative Analysis on the Sources of Islamic Sharia ( Letha 2011; Johnson & Vriens 2011; Schoon 2008; Safieddine 2009; Mohammad 2008; Balz 2008) III. Major Areas of Debate among Islamic Scholars on the Islamic Finance Issues (Zaher & Hassan 2001) IV. Methods/principles used by Islamic Scholars to decide on Issues (Kern 2011; Iqbal & Mirakhor 2009; Newell et al. 2009; Venardos 2005; Julio 2011; Dar & Moghul 2006) V. The Implication of Ruling Diversity on the Islamic Finance Industry Development in the Past, Present, and Future (Balz 2008; Zaid et al. 2011) VI. Challenges in Islamic Finance (Zaid et al. 2011) VII. Conclusion Introduction The Islamic law is the main body of the legal rules of the Muslims, which is in Quran and Sunna. The Islamic finance involves the transactions that follow the set Islamic laws and principles. The Islamic finance is also termed as the sharia finance. Their finance has been in existence for the last 50 years in the Muslim community. There is a gradual development of the Islamic finance into the most influential international banking practice. The finance is the most vital sector in the application of the sharia contract law (Balz 2008). The paper will thus describe the main sources of the sharia concerned with finance. It will further tackle the areas of the main debate among the Islamic scholars community, which is the Islamic finance issues. The paper will further evaluate the main methods and principles that the Islamic scholars apply when tackling on any issues affecting the Muslim community. Finally, the paper will critically evaluate the implication the ruling diversity has on the development of the industry of the Islamic finance during the past, the present, and the future. Comparative Analysis on the Sources of Islamic Sharia The Islamic law governs the religious sector, the social aspects, and also the financial as well as economic aspects of the Muslim society. The Sharia is wide and was made on the basis of the life of Prophet Mohammed by the Muslim scholars. The Islamic law influences the legal code in the Muslim communities. This is a set of laws and also regulations that are put to rule the Islamic countries. The sharia law applies in the areas like custody, the personal status including marriages and divorces, inheritances, and the economy of the Islamic society (Letha 2011). The word sharia further means ‘path’ in the Islamic community. It means the set guidelines that rule all the areas of a Muslim individual. This includes the daily routine of an individual, the religious sector, and also the financial aspects of the Muslim society. The laws are from the life experiences and lessons, teachings, and practices of the prophet Mohammed. The past and the current Muslim community apply these precedents and the analogy from the book to address issues that affect the Islamic society (Johnson & Vriens 2011). The law developed from the prophet who acted as a role model for the Muslim community. The Muslim scholars developed also the ‘hadith.’ This sharia law is currently used by the population in the north and west parts of Africa and also on the eastern parts of china (Johnson & Vriens 2011). The Quran contains a compilation of the life and the practices of prophet Mohammed. Islamic law is also referred to as the Sharia in the Arabic and in the Muslim community. It is regarded as a deep and also a rich form of intellectual tradition. The Islamic law is replete with well-developing schools of thought. The tradition encompasses scholarly tomes and detail analysis with principles, texts, and other proofs. The Islamic jurisprudence in Arabic is fiqh, from understanding. It signifies the efforts of legal specialists to interpret the Sharia and apply it to particular human circumstances. A train expiry in jurisprudence is referred to as a faqih and is often when addressing the faqih it goes with the honorific title of “shaykh.” Subsequently, there is a distinction between jurisprudence, fiqh that expresses the guidelines, and also opinions that refers to fatawa.’ This is the plural form of fatwa and legal judgments of the state. Fatwa represents the expert opinion of a jurist, but it lacks the status of law and thus it is not backed by the power of the state. Therefore, a variety of expert opinions regarding the same matter can be freely circulating in a society. This happens in matters that are contemporary in nature, for instance the modern financial services that are prone to a diversity of opinions. A legal judgment is referred to as qada’ and is in support of the infrastructure of the state. However, the jurisdiction cannot stretch beyond that state. Traditional Islamic finance is local and therefore structured under different fatawa’ and qada’ – a major bone of contention in international Islamic Finance deals (Schoon 2008). Within the Islamic jurisprudence, one major category of specialization is the jurisprudence of transactions fiqh al-mu’amalat, area encompassing business transactions, financial arrangements, and so on. Although many people are exposed only to the aspects of fiqh al-mu’amalat, Islamic financial services; it should be the field that has deep roots in the classical Islamic tradition and refers to more than just finance. For example, the Quran lays out guidelines for paying employees on time and disclosing shortcomings in goods that are being sold are all part of the same body of jurisprudence that governs lending and investments. This should be borne in mind by practitioners and observers of Islamic finance alike, lest the focus be solely on the technical aspects of financial structuring, neglecting the broader ethical spirit of the tradition. This is an understanding by Muslim and non-Muslim participants only to varying degrees, which cause inherent differences in opinion when underlying assumptions, do not match up (Safieddine 2009). The Islamic finance shows a great impact on the international trade. This leads to the improvement of the Islamic contract law that controls the Islamic finance both locally and internationally. This is because the Islamic finance contract law has been used in the current modern financial transactions. Over the past years, the Islamic finance sector has been improving with time. The Islamic finance development has spread to other countries like the Bahrain, the Dubai, and also in the Kuala Lumpur country (Balz 2008). The sharia dictates that the financial systems should concentrate on sharing profits as well as losses and completely reject fixed returns. To state it otherwise, the sharia does not permit any payment that goes beyond the principal amount. The Sharia does not support activities like prediction, risk, and uncertainty. The law holds that individuals should not engage in businesses like selling drugs, alcohol, or participating in gambling. The financial system is based solely on Muslims values and believes. The Islamic finance should portray the norms and values upheld by their law (Mohammad 2008). Major Areas of Debate among Islamic Scholars on the Islamic Finance Issues The Islamic community has been debating regarding the effectiveness of banking system operating on interest basis. Banks are widely known to perform a pivotal function in the growth of a nation through acting as financial intermediaries. However, the Muslims have been wondering about the efficient of interest-based banking. They also doubt if the system will influence cyclic fluctuations. The prohibition of riba has also contributed to the debate about the interest-based system. This is because the riba as stated in the holy Quran is against interest rates and thus prefer the Profit-Loss-Sharing system. The Sharia is against any kind of riba and thus any banking system charging interests on their loans is contrary to their financial expectations. The Muslims have rebutted the interests being a saving reward and hold that it could only be justified if it resulted in reinvestment. They contend the interest because it has to be issued regardless of whether the investment brought any productivity or not and thus is unjustified. Last, the Muslims believe that the interest is inevitable but not righteous because it enhances the adjustments between the current values of capital good with tomorrows (Zaher & Hassan 2001). Methods/principles used by Islamic Scholars to decide on Issues The work of the scholars is to ensure that the finance is in compliance with sharia. Their work is to advice the financial institutions on how to conduct business under the guidance of the sharia. Although some complain about the competence of these scholars, their work cannot be overlooked. This is because they ensure sharia principles are adhered to in finance. One of the principles is to have products with fixed income (Kern 2011). This is to ensure the investor receives an amount that is already determined as per the law. The scholars ensure that the venture on capital investment is controlled to a particular amount. The other method is to ensure the securities are traded in accordance with sharia. The scholars also scrutinize the financial firms to ensure they conduct business with regard to sharia. They also ensure transparency and the scholars ensure that the institutions are not corrupt in any manner although sometimes the law is in disagreement (Iqbal & Mirakhor 2009). The scholars also ensure there no moral dents in the financial institutions. They achieve this by restructuring the financial firms in order to fix the dents. The other method is ensuring that the financial systems use the linking methods. The scholars also see to it that the investors comply with the sharia to avoid problems (Newell, Sieracki, Parsa & Ali 2009). The scholars also ensure the use of contracts when getting into any kind of financial dealings. This is to ensure the rights of all the parties are protected from any form of exploitation and ensure the project is real. The scholars helps the financial sector because individuals cannot get conned or enter in fake dealings. They ensure the parties establish and come to some form of agreement (Venardos 2005). The scholars have also helped to streamline the issues that conflict with sharia such as riba, which applies in most financial dealings. The sharia holds that equitability of losses would help solve a crisis because the problem will be shared. However, the scholars may differ because without interests, the economy is bound to suffer (Julio 2011). The scholars would support the closure of the gap between nominal and real. This follows from the idea that the gap results in unhealthy consumerism (Dar & Moghul 2006). The Implication of Ruling Diversity on the Islamic Finance Industry Development in the Past, Present, and Future The Islamic finance was initially used by the Islamic communities in the continent. Presently, the Islamic finance has spread to other countries like the Kuala Lumpur, London, the Dubai, New York, and Bahrain. This shows a significant impact on the Islamic finance practice across the globe. The Islamic finance controls the economic transaction occurring in the Islamic community both locally and internationally. The Islamic finances are used by their banking sectors as well as the international banks. The international banks are able to apply the Islamic finance if they have the banking subsidiaries like the Noriba of UBS or the bank is proficient in offering the Islamic products through an Islamic bank for instance the deutsche bank (Balz 2008). The Islamic finance has lately become a global law. This is because for the Muslims to amend the Islamic finance contract law, they must incorporate the international participants. Thus the analysis of the Islamic finance process is like that of the international finance law. Therefore, during the analysis of the Islamic finance contract laws, the analyzers ought to pay keen interest to the world practices in the international finance on the service firms that are utilizing the Islamic finance. For instance the investment banks and the multination law institutions (Balz 2008). The development of a broader market globally; in the past three decades, their financial systems have proven to be the most outstanding and a very competitive financial sector in the global market. The Islamic finance achieves this through the consistence improvement of the law together with the conventional financial system. This progress has helped in the development of the economy of the participating countries (Zaid et al. 2011). The Islamic finance has currently become more comprehensive as well as more competitive in serving the masses. The worth of the industry is beyond $1 trillion in addition to improving at an alarming rate of 15-20% per annum, with anticipated growth to total $2 trillion in the coming 3 to 5 years, because more nations across the globe will be interested in their financial systems. The system has diversified because the Muslims have been able to develop conventional parties, which have attracted individuals. Further, the industry has been able to offer a range of products in the financial sector. The positive expansion has spread all over the globe and is not confined to Muslim nations only (Zaid et al. 2011). Challenges in Islamic Finance The principles that guide the operation of the Islamic finance are a foundation for validating the entire financial operations. However, some problems come up to differ in the interpretations of the sharia. This has resulted into unnecessary debates while agreeing to an issue. The Islamic finance is faced with the issue of supplying advisory services to all interested parties. When entering into new countries, the Islamic finance finds different laws that demand amendments prior to integrating their operations. The issue of taxation also comes in when venturing into a new market. Thus, the concerned Muslim parties should come up with necessary laws to integrate properly with the ones they find in new countries. The interested countries ought to form a common sharia advisory group. The adoption of the common group may be problematic to apply but if it succeeds, the operations can be smooth sailing. There is also the challenge of product innovation because it is difficult to penetrate in new markets plus that the knowledge is limited there, and maintaining the identity of the brand is also hard. The global market has so far been the major challenge since each decision should be evaluated to ensure it complies with the market requirements (Zaid et al. 2011). Thus, the Islamic financial systems should strategize ways for overcoming these challenges. Conclusion From the discussion, it is clear that the sharia is the main governing law in the Islamic financial sector. The sharia although contentious in some ways has transformed the Islamic financial systems. The principles of sharia are upheld in all matters and consulted when making business decisions thereby protecting individuals from illegal practices. The sharia has been centrally applied in contracts to ensure individuals the legal businesses and thus also ensuring transparency. The application of the Islamic finance contract law toward the local and international transaction has greatly led to the development and growth of the international transactions globally. This leads to the expansion of their market worldwide and thus improvement in their economy. Thus the application of the Islamic finance during international transaction has a positive impact on the Islamic economy and the community. For instance, the Islamic nations have developed more Islamic financial institutions with the participation of shareholders from other parts of the globe. The Islamic finance according to the discussion has become global to an extent of transforming their contractual laws. However, some observers feel that the globalization may affect the ethical principles governing the international business. The observers fear that the international practices may hijack the Islamic contractual laws. Another notable change is that the Muslims have adopted the language of international commercial law as a result of their diversification. The change is resulting from adoption of international practices. Evidently, the Islamic finance is market driven, which contributes to the growth of their systems. The Islamic finance has been growing despite the contentious debates concerning riba. Their riba holds that investors should not participate in business dealings with requirements of interest during the repayment. The Muslims find the riba as unethical practice, which exploits the individuals because the investors do not consider whether or not the investment brought any profits. Additionally, there is the challenge of venturing into new global markets. This is because of the different contractual laws in these countries that cause interpretation problems. However, as seen earlier, the Islamic finance has become global and international participants are accepting and investing in their system. The only flaw that requires to be addressed is the issue of riba and its interpretation to ensure the Islamic nations do not lag behind in terms of economic development. References Balz, K 2008, Sharia risk? How Islamic finance has transformed Islamic contract law, Massachusetts, MA, Cambridge Press Dar, H & Moghul, U 2006, The chancellor guide to the legal and shari’a aspects of Islamic finance, USA, Chancellor Publications. Hassan, K & Mahlknecht, M 2010, Islamic capital markets: product and strategies, New York, NY, Wiley Publications Iqbal, Z & Mirakhor, A 2009, An introduction to Islamic finance: theory and practice, New York, NY, Wiley Publications Kern, S 2011, Islamic sharia – compliant banking takes root in Europe, New York, Hudson. 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