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Title: Islamic Finance Ethics and Shari'ah Law in the Aftermath of the Crisis
Subtitle: Concept and Practice of Shari'ah Compliant Finance
Author(s): NIENHAUS, Volker
Journal: Ethical Perspectives
Volume: 18    Issue: 4   Date: 2011   
Pages: 591-623
DOI: 10.2143/EP.18.4.2141849

Abstract :
As its name suggests, Islamic finance is based on a religious worldview and is thus often considered to be ‘ethical finance’ per se. It is expected to observe the prohibition against interest (riba), uncertainty (gharar) and gambling (maysir), and it is supposed to tie financial transactions to activities in the real economy and share entrepreneurial risks. Proponents of Islamic banking claim that it is therefore superior to conventional finance regarding efficiency, justice and stability. The practice of Islamic banking, however, has reduced potentially substantial differences to actually subtle distinctions in the contractual basis of financial transactions. The replication of conventional products – including functional equivalents for complex structured products similar to those that contributed to the recent financial crisis – took place with the approval of prominent scholars on the Shari’ah boards of Islamic financial institutions. The said Shari’ah scholars see themselves more as legal advisors than as guardians of business ethics. Their micro-legalistic approach (‘Shari’ah compliance’) is very different from the macro-systemic perspective of Islamic economists who have been developing models of interest-free and profit and loss-sharing economies since the second half of the last century. But with ‘form over substance’ in practice, Islamic finance has become a profitable segment of the global finance industry. In its present form, it is neither more ethical nor more efficient or stable than ‘prudent’ conventional banking. This could change in the future. The Islamic finance industry might respond to a growing demand from the public for more ethical banking and socially responsible investment and to the increasing concerns of some regulators in relation to more genuine Shari’ah based financial innovations with an explicit ethical profile and a consistent link to the real economy.

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