Samuel L. Hayes

Capital and the Crescent: A Primer on Islamic Economic Jurisprudence
In an article on Islamic finance (“‘Interest’ and the Paradox of Contemporary Islamic Law and Finance”), Professor Mahmoud A. El-Gamal of Rice University recounted the edict of Ebusuud Efendi, the Mufti of Istanbul (1545-1574), which reportedly upheld the charging of interest. Such atypical attempts to clarify the role of interest in Islamic finance remain invariably in the minority in the Islamic socioeconomic milieu, although, as Professor El-Gamal points out, financial institutions in the Islamic world have begun embracing many features of the mainstream banking establishment. But earning or charging interest remains a near-inviolable proscription in Islamic economics. In “Islamic Law and Finance”, one learns that, despite the permissibility under Islamic law of the application of the time value of money in commercial transactions, bank clients in Saudi Arabia as of the time of writing commonly opt not to earn interest on their bank deposits. This practice is apparently based on a particularly somber interpretation of the “hadith” or religious edict that stresses that every loan that attracts a benefit is “riba” or usurious and is thus unsanctioned and unlawful.

Jointly written by a legal specialist and a professor from the Harvard Business School, “Islamic Law and Finance” provides an in-depth account of Islamic economic doctrine from both theoretical and practical perspectives. The book, while endeavoring to remove Islamic banking’s apparent penumbra of impenetrability, does not profess to present a complete review of the development of Islamic financial doctrine and its impact on the global economic environment; rather, the volume concentrates on exploring the intricacies of the range of financial instruments and transactions deemed permissible under Islamic principles. Recognizing that Islamic financial doctrine does not rule out the introduction of innovative means to channel or mobilize funds if conducted through “halal” means, the authors explicitly attempt to reconcile Islamic financial practices with conventional procedures. The key to the continuing evolution of Islamic financial jurisprudence, as emphasized in the volume, is to “preserve what is essential about the Islamic heritage in law and economics, while also vastly improving on past commercial techniques, and enabling Muslims to join in, and effectively compete in, world economic and commercial advances”.

Divided into three parts, the book opens with an overview of Islamic law and how the idiosyncrasies of such jurisprudence influence banking and financial practices in the Arab world. By highlighting the delineation between “shari‘a”, or divine law as revealed in the holy texts, and “fiqh” – man’s understanding and interpretation of the divine law – which is the corpus juris of classical Islamic law, the volume draws attention to the possibility that modern interpretations of the divine law can help bridge the gulf between the sanctity of conforming to orthodox Islamic economic practices and the utility of certain forms of contemporary transactions. Following this preamble, Part I moves on to a discussion of what the holy texts mention about contract and commerce in general, explores tenets pertaining to usury, risk, and property, and examines the legal framework of Islamic financial institutions and various permutations of Islamic contracts and financial instruments. Exploring the logic behind many commercially-related “hadith” and “fiqh”, “Islamic Law and Finance” also draws attention to divergences of opinion amongst various Islamic schools of thought (the Hanafi, Maliki, Shafi’i and Hanbali), which in certain circumstances can be utilized to yield economic outcomes that closely resemble results obtainable from non-Islamic transactions. It is also shown that there is an inherent tension between the positions taken by religious scholars from the different schools of thought and the overarching influence of various governments on Islamic commercial doctrine.

Part II, “A Financial Analysis of Islamic Banking and Finance”, delves into minutiae of the various instruments and arrangements used to mobilize funds and finance working capital requirements in an Islamic commercial context. Also presented is a method of calculating the opportunity cost of capital. By employing probability tree analysis to compute a venture’s cost of equity, the need to rely on a directly observable risk-free rate and to use the expected return on a diversified market portfolio under the capital asset pricing model is obviated. The cost of debt, meanwhile, can be calculated using the internal rate of return on various shari‘a-compliant credit instruments. There is also a somewhat desultory discussion of how financial risk can be addressed in an Islamic commercial setting. The relatively brief discussion about risk coverage is due to the lack of depth of Islamic financial markets at the time; the most optimal way to hedge against credit risk in an Islamic setting as of the time of writing is via a third-party guarantee, because of the lack of shari‘a -compliant instruments capable of addressing such risks.

The third part covers case studies involving Islamically-acceptable financial innovations. Essentially advocating that legal and financial innovation is a conditio sine qua non in addressing the myriad changes in the global financial landscape, the authors sought to demonstrate that the economic and moral precepts that underpin classical Islamic law should not be construed as completely restrictive of financial innovation, and that conservatism in the application of Islamic economic doctrine is not in the interest of present-day Islamic investors and companies.

Recent innovations in Islamic finance, such as the growing prominence of “sukuk” or shari‘a-compliant asset-based securities in sovereign finance and the capital structure of Arabic ventures, as well as the need to develop acceptable risk management mechanisms acceptable in the Islamic context, have significantly accelerated the pace of change of the Islamic financial sector. In view of the present developmental trajectory of Islamic financial markets, “Islamic Law and Finance”, although dated, can serve as an invaluable starting point for anyone contemplating of conducting business within an Islamic framework.… (plus d'informations)