Islamic Financial Contracts Essay

1050 words - 4 pages

In the Islamic Law (the Charia), you cannot pay a fix interest rate, named “Riba”, as a remuneration for the capital. Indeed, the money should not “work” alone but nothing in the Charia forbid the remuneration of the assets bought thanks to the capital lent. The inner principle the many interdictions concerning the money lending in the Islamic Law is that money has no inherent value in itself, only the human work should be rewarded.

Islamic financial contracts are conceived to facilitate the financing according to Islamic standards.
The Islamic finance appeared at the beginning of 1960s with the aim of developing alternative financial contracts conform to the Sharia. Before the 60’s Islamic Finance existed but without solid institution it could not expend itself. The creation of the first Islamic social bank, Mit Ghamr Islamic Bank in Egypt in 1963, and the first Islamic commercial bank, Dubai Islamic Bank in 1975 set up this problem. This financing system remained quite unknown until a few years ago, when the risks taken in the classical global finance led into a global crisis.
In a first part we will study why the Islamic finance is really different from classical finance, then why it could be one alternative for the classical finance, and finally we will see that this financing model is not a panacea for all the problems in our current financing system.

I) In what Islamic Finance is so different from the current global finance?

The sociologists agree to say that the process of the modernization of the society is due to the separation of the different spheres (economical, artistic, legal…) from the religion. This process called secularization is the foundation of our society: “saeculum” in Latin means “century” and what is related with the time for the Church is the power into the world (the temporal power). So, with the secularization, the society come back into the world, preoccupied more by the worldly goods than the heavenly ones.
The Islamic Finance, based on a religious ethic, go totally backwards from this separation between the economy (supposed to belong to the world) and the religion.
The second principle that makes a difference between the Islamic Finance and Western Finance is the concept of autonomous rationality. Indeed, A. Smith, in The Wealth of the Nations says that:” It is not from the benevolence of the butcher the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” In other terms, there is an invisible hand guiding the combination of individual selfishness toward collective good, there is an autonomous rationality which made us behave like ‘’homo economicus” .
On the contrary, the Islamic Finance participates to the global aims of the Sharia, i.e:
- The daruriyyât or necessities (the protection of the religion, of the life, of the posterity, of the ownership and of the reason).
- The hajiyyât or utilities, that allow us to go beyond the bare necessity.
- The ta7sîniyyât or...

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