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Global Affairs

What Benefits Can Sharia Finance Unlock for Development?

 4 min read / 

Sharia law is Islam’s legal system with strong roots in the Quran and rulings from Islamic scholars known as fatwas. It affects every aspect of an adhering Muslim’s life from the framework of financial markets to personal life. These moral and legal codes can be applied on a spectrum, from the strict application of Sharia law in Saudi Arabia to its partial application in parts of Indonesia. The application of Sharia law is surrounded by extreme controversy in western media, but are some of its merits being overlooked?

The Elephant in the Room

It goes without saying that Sharia Law is not perfect; in fact, it is far from it. Ranging from institutional gender inequality, violence and human rights offences such as censorship and prosecution methods, Islamic law has become a sensitive topic. The International Human Rights Rank Indicator, a composite index which measures the prevalence of human rights violations, showed that Muslim majority countries, most of which adopt Sharia law, had scores below 62%, with countries like Chad and Afghanistan within the 20% range. This article aims to acknowledge the issues associated with the political and social realms of Islamic law and to examine the benefits through an economic and financial lens.

What is Islamic Economics?

Financial markets are not independent or secular in nature and hence have to follow the principles of Sharia:

  • Gambling is prohibited, and in turn so is speculation, uncertainty and significant risk.
  • Money is defined as a measurement unit of value, not as an asset from which to make more money.
  • The concept of interests (riba) is prohibited on loaned money.
  • Unlawful and detrimental commerce is prohibited (alcohol, pollution.)
  • Sharia law emphasises social promise with an emphasis on ethics and good business conduct.

And several other values which emphasise the need for collective socio-economic development rather than exploitation and personal gain, risk and profit sharing.

The Silver Lining of Sharia Law

There is a reason behind the rise of Islamic Banking within developed markets and it lies in the long-term potential of its values. One of the core principles is the concept of shared responsibility and collectivity, based on the murabaha structure, risk-sharing is valued over risk-transfer which is more prominent in Western systems.

This means that both parties of a transaction can benefit while still protecting themselves, allowing risk to be spread. The community-oriented approach to finance creates a more inclusive system which has potential to benefit the greater good of society since Sharia prohibits any transactions or products which may be harmful to the environment.

This is largely neglected in other systems which fail to realise the potential benefits in long-term sustainability. “Zakat”, or obligatory charity is the third pillar of Islam aimed at providing relief and purifying income to benefit unprivileged parts of society, furthermore, banks also contribute to this through donations of forfeited income and late fees. As Ruslena Ramli, head of Islamic Finance at Malaysian Credit Rating Agency stated:“Heightened appeal for sustainable and responsible investing could also be driving the growth for Islamic finance due to the commonalities in values and shared principles,”  The benefits of this are evident in reducing socio-economic disparity and encouraging harmony within society.

What’s Next?

In essence, the community and value-driven approach to banking has potential benefits for the long term development of states. The prohibition of speculation and exploitation can reduce risks in term of crisis while practices like Zakat and probation of harmful transactions can contribute to a reduction in economic inequality and hope for a sustainable future. However, Islamic finance still faces obstacles when it comes to standardisation given that there exist different interpretations of Islamic law which affects the structuring of financial products, creating uncertainty for investors in the market.

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1 Comment

1 Comment

    WP_Comment Object ( [comment_ID] => 131685 [comment_post_ID] => 147118 [comment_author] => A Rodríguez [comment_author_email] => [email protected] [comment_author_url] => [comment_author_IP] => 141.101.69.61 [comment_date] => 2018-05-08 21:58:48 [comment_date_gmt] => 2018-05-08 20:58:48 [comment_content] => Fernando Martínez Gómez-Tejedor has won many enemies, specifically, the swindlers he has openly denounced. The good customs that characterize him and his attachment to lawful business have motivated him to fight against the mafias of European swindlers. There are many attacks that he has received from these criminals but he remains determined to continue exposing the fraudsters who abound in finances and different markets. [comment_karma] => 0 [comment_approved] => 1 [comment_agent] => Mozilla/5.0 (Windows NT 10.0; Win64; x64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/66.0.3359.139 Safari/537.36 [comment_type] => [comment_parent] => 0 [user_id] => 0 [children:protected] => [populated_children:protected] => [post_fields:protected] => Array ( [0] => post_author [1] => post_date [2] => post_date_gmt [3] => post_content [4] => post_title [5] => post_excerpt [6] => post_status [7] => comment_status [8] => ping_status [9] => post_name [10] => to_ping [11] => pinged [12] => post_modified [13] => post_modified_gmt [14] => post_content_filtered [15] => post_parent [16] => guid [17] => menu_order [18] => post_type [19] => post_mime_type [20] => comment_count ) )
  1. A Rodríguez

    May 8, 2018 at 9:58 PM

    Fernando Martínez Gómez-Tejedor has won many enemies, specifically, the swindlers he has openly denounced. The good customs that characterize him and his attachment to lawful business have motivated him to fight against the mafias of European swindlers. There are many attacks that he has received from these criminals but he remains determined to continue exposing the fraudsters who abound in finances and different markets.

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