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2008 Financial Crisis and Islamic Finance: An Unrealized Opportunity

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The Islamic finance industry is relatively new and vibrant. It is becoming a mainstream industry in the MENA (Middle East and North Africa). The industry is based on a number of Sharia’a maxims and in particular the prohibition of Riba. Islamic law scholars’ emphasis on the ethical dimension of this industry and how it can be seen as a solution to existing capitalism. The current financial crisis presented this industry with an unprecedented test and an opportunity to influence and merge into main stream finance. This paper presents an evaluation of Islamic finance industry in the current financial crisis and whether the governance and ethical foundation of Islamic finance institutions distinguished itself from conventional finance. Thus, this paper begins with an overview of Islamic finance, then it discusses the governance framework structure of Islamic finance institutions and the role of its organs. In addition, this paper will compare between the ethical framework of the Islamic finance institutions and the conventional institutions. Finally, this paper will discover the ethical failure of the current global financial system and its relation with the current financial crisis.

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    This evolution in the meaning of usury can also be traced to the definition of the word in the Oxford Shorter Dictionary on Historical Principles where the “old meaning of the word usury was defined as “the fact or practice of lending money at interest” but also observes ‘in later use, the practice of charging excessive or illegal rates of interest for money on loan.”

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    Deposits usually are in the form of a loan from the client to the financial institutions. In some legal systems, such as in the United Kingdom, it is a regulatory requirement that all deposits have to be capital certain, i.e. the financial institutions are legally obliged to return the deposited amounts.

  3. 3.

    In a Mudaraba Rab Al-Mal (capital owner/depositor) provides the entire capital needed to finance a project while the entrepreneur (the IFI) offers his labour and expertise. Profits are shared between them at a certain fixed ratio, whereas financial losses are exclusively borne by Rab Al-Mal (Depositor). The liability of the entrepreneur (the IFI) is limited only to his time and effort.

  4. 4.

    In a Wakala the IFI acts as an agent and the depositor is considered to the be the principle. It is very similar to the relationship between asset management clients and the managers in that industry.

  5. 5.

    I use the word borrower to illustrate the relationship, since, in Islamic finance, the word borrower is not acceptable, as clients never borrow funds directly (it always has to be via a Sharia’a compliant product, e.g. Ijara or a Murabaha).

  6. 6.

    "A Murabaha is a sale on profit. Technically a contract of sale in which the seller declares his cost and benefit. This has been adopted as a mode of financing by a number of Islamic banks. As a financing technique, it involves a request by the client to the bank to purchase a certain item for him. The bank does that for a definite profit over the cost which is settled in advance.” See visited on 5 January 2008.

  7. 7.

    These characteristics will be discussed in more detail below.

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    These countries include Indonesia, Lebanon, Malaysia, Pakistan, Saudi Arabia, Bahrain, Sudan, Qatar, Syria, South Africa and UAE. See AAOIFI presentation on the Middle East Financial Services Summit, May 2008 Kingdom of Bahrain.

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    For example, Kuwait, UAE, Bahrain, UK, Qatar and Kingdom of Saudi Arabia.

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    Gulf Cooperation Council which consist of Kuwait, Bahrain, Saudi Arabia, UAE, Qatar and Oman.

  11. 11.

    Zakat is a religious tax to be deducted from wealth to be paid to the needy.

  12. 12.

    The maqasid approach can be traced to the writings of Choudhury and Hoque quoted in.


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Correspondence to Fahad Al-Zumai.

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Al-Zumai, F., Al-Wasmi, M. 2008 Financial Crisis and Islamic Finance: An Unrealized Opportunity. Int J Semiot Law 29, 455–472 (2016).

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  • Islamic finance
  • Business ethics
  • Financial crisis
  • Sharia’a board
  • Governance