Introduction
For decades, Islamic finance has progressed in different parts of the world. After its creation in the early 1970s, Islamic banking has grown significantly not only in Muslim-populated countries but also in nations with Christian majority faithful. In Islamic banking, various transactions such as the imposition of interest (riba) are not allowed following some set sharia rules that regard such moves as unjustified. Prohibited deals are viewed as differing from the financial and economic principles of Islam. Islam is not only a religion but also a way of life for the Muslim faithful. Thus, all kinds of transactions, whether banking or non-banking, have to adhere to the laid-down sharia principles. In other words, contemporary Islamic financial transactions are prohibition-driven since they are restricted to follow the Maqasid Al-Shariah, which is the key pillar that governs Islamic finance.
Strict Adherence to Maqasid Al-Shariah
Islamic finance is underpinned by four main objectives that revolve around Islamic, social, economic, and ethical guidelines. The four broad objectives otherwise referred to as Maqasid Al-Shariah, are essential for Islamic financial institutions to serve their clients efficiently (Worthington 32). From a sharia-based economic perspective, in case any Islamic financial institution fails to adhere to the outlined objectives, it is bound not to survive in the market. According to Aribi and Arun, Maqasid Al-Shariah influences the development of the structure of “Islamic Finance Institutions (IFIs)” (785). Therefore, it is important for banks to adhere to the laid objectives while offering various services to customers. However, conventional financial institutions do not follow all the objectives since their core mandate is to maximize profits for the banks’ owners. Furthermore, Islamic finance functions under strict moral and ethical standards, which prohibit business transactions that are associated with unjustified returns (Housby 12; Saifuddeen et al. 318). The moral aspect of Maqasid Al-Shariah protects Islamic banking against fluctuations such as the global recession experienced in 2007 and 2008.
The Prohibition of Riba
In the Arabic context, riba implies an unwarranted increase in the value of business deals. On the grounds of riba’s definition, jurists in the Arabic world believe that there is no need for increasing the value of two similar goods as a way of preventing unfair compensation. In this regard, Islamic finance underlines the need for the realization of fair compensation since it goes a long way in fostering equality among the adherents of Islam.
As such, the difference between legal compensations and the forbidden riba is the most basic differentiating factor of Islamic finance as a prohibition–driven sector. In other words, Islamic finance advocates for the embracement of mechanisms that uphold the essence of the fairness of contract pricing (Abdul-Rahman 71). Canonical texts on riba also underline the need for upholding justice in the corporate world. The Quran denotes some of the prohibitions of riba, owing to its implications to all Muslim faithful.
Riba al-Nasĭa is one of the strictly forbidden forms of Islamic finance as underpinned in the Quran. Particularly, the riba al-Jahiliyya is a notable aspect of Riba al-Nasĭa that denotes a significant restriction that characterizes Islamic finance (Aribi and Arun 789). Riba emphasizes the need for believers to uphold the essence of charity as a multiplier of wealth, as opposed to the unjustified increase of proper over others. Riba Al-Fadl is another form of the prohibition under Islamic finance, which discourages the trade of similar goods in varying quantities. It underlines the need for trading gold for gold and nothing more since any increase would denote the prohibited riba (Aribi and Arun 790). In this light, riba Al-Fadl encourages Muslims to adhere strictly to the set laws and regulations.
The Economic Substance of Prohibition
Over the past few decades, Islamic finance has applied prohibitions to facilitate the separation of numerous financial credit facilities and risk elements with the view of realizing accurate pricing. Strategies, including the development and securitization of financial derivatives in the Islamic context, denote some of the notable advancements made in accounting to guarantee accurate pricing (Abdul-Rahman 67). Consequently, Islamic finance facilitates the equitable distribution of credit among individuals who have accounts with various Islamic financial institutions. As such, Islamic finance protects individuals from the adverse effects of excessive borrowing. Therefore, the observance of Maqasid Al-Sharia and riba plays a considerable role in fostering the realization of equitable growth and development in Arabic society (Abedifar et al. 642). In this light, the nature of Islamic finance seeks to prevent stakeholders from engaging in considerable financial risks to the extent of undermining the wellness of the entire society.
Conclusion
The provisions of sharia law have a substantial influence on contemporary Islamic finance. Financial institutions in the Islamic world observe the provisions of sharia such as Maqasid Al-Shariah and riba, among others, which are prohibitive in nature. Nonetheless, in contemporary settings, financial institutions uphold the essence of maximizing profits, thereby undermining the welfare of the wider public, as required in the contemporary Islamic finance. The paper has argued that the prohibitive nature of today’s Islamic finance is contrary to other institutions whose agenda is to maximize profits through means such as interests at the expense of account holders.
Works Cited
Abdul-Rahman, Yahia. The Art of RF (Riba-Free) Islamic Banking and Finance: Tools and Techniques for Community-Based Banking. 2nd ed., John Wiley & Sons, 2014.
Abedifar, Pejman, et al. “Islamic Banking and Finance: Recent Empirical Literature and Directions for Future Research.” Journal of Economic Surveys, vol. 29, no. 4, 2015, pp. 637-670.
Aribi, Zakaria, and Thankom Arun. “Corporate Social Responsibility and Islamic Financial Institutions (IFIs): Management Perceptions from IFIs in Bahrain.” Journal of Business Ethics, vol. 129, no. 4, 2015, pp. 785-794.
Housby, Elaine. Islamic and Ethical Finance in the United Kingdom. Edinburgh University Press, 2013.
Saifuddeen, Shaikh, et al. “Maqasid al-Shariah as a Complementary Framework to Conventional Bioethics.” Science & Engineering Ethics, vol. 20, no. 2, 2014, pp. 317-327.
Worthington, Andrew. Contemporary Issues in Islamic Finance: Principles, Progress and Prospects. Nova Science Publishers, Inc. 2014.