Islamic Finance Law Dissertation Example | Topics and Well Written Essays - 1500 words

Islamic Finance Law - Dissertation Example The paper would therefore be analysing the role of Islamic finance in the fast transforming environment of global economy with the view that it has brought in more radical but ethical paradigms within financial system of contemporary times. Historical background The Ottoman Empire in the pre WWI era has perhaps been the most prominent exponent of using tenets of Islamic finance in their trade and business transactions. The close trade relationship with their European counterparts, Islamic finance was closely aligned with that of European financial system. The system worked on the basis of sharing of profit and loss (Chachi, 2005). But post WWI and WWII brought into focus the divergent ideologies of two financial system into sharp focus. While the western economy and financial system was based on interest bearing instruments, Islamic finance was rigidly guided by the religious tenets of Islam which forbids transactions based on interests or gains made through unethical means (Ahmad, 1 972)). In the contemporary times, Islamic finance has seen unprecedented growth primarily because of its fundamental principles based on Shariah guidelines (Anwar, 2008; Sundararajan & Errico, 2002). Principles of Islamic law and financial transactions under it Islamic finance is based on Islamic law that conforms to the Shariah guidelines of ethical practices in personal and business arena. Thus, Shariah can broadly be referred as Islamic law that defines the duties of man and the way they should be carried out (Vogel & Hayes, 1998; Hasanuzzaman, 1997). Shariah is part of Quran, the religious scripture of Muslims and is written in Arabic language. The interpretation of Shariah scholars therefore, may differ but the fundamental principle of ethics remains same. But Hadith, qiyas, idjma and fatwas are also key sources which inspire the ethical and moral considerations within the business transactions in Islamic finance (El-Gamal, 2006; Shahrukh, 1997; Pryor, 1985). Shariah principles are based on equity and prohibit financial transactions and activities that incorporate gharar (uncertainty), maiser (gambling) and riba (interest income) (Thomas, 2005; Nienhaus, 1986; Hasanuzzaman, 1994). The shariah compliance is vital element of Islamic finance products. Interestingly in the current times of highly sensitive global market, Islamic finance offers huge incentives in terms of ethically delivered financial instruments in myriad areas of finance (Venardos, 2005; Cooper, 1997; Ariff, 1988). It has made forays into banking, market risks and credit, insurance, liquidity management etc. and is fast emerging as credible alternative investment forum. Main Sharia compliant transaction structure and how they are used in practice All Islamic financial institutions are distinct in their constitution of board that comprises of financial experts and shariah scholars who evaluate the validity of financial instruments as per shariah principles. It uses various financial structure s that conform to shariah but at the same time, adequately meet the needs of people in the contemporary times (Hasanuzzaman, 1971; Saeed, 1995). Some of those financial methodologies can be defined as under: Zakah: It is vital instrument that promotes social justice by ensuring that people who own more than nisab (basic need) must make donation of 2.5% of their yearly assets. The social funds are used to meet the needs of the poor. Murabaha: