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Home > Operations Management Checklists > Islamic Commercial Law

Operations Management Checklists

Islamic Commercial Law


Checklist Description

This checklist provides an overview of how Islam-inspired law covers commercial transactions and highlights some of the main differences relative to Western laws.

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Definition

Given that Islam-derived laws encompass all aspects of how Muslims should live their lives and instill a strong sense of the highest moral values, it should be no surprise that Muslims are expected to conduct commercial transactions according to the same principles of equality, justice, and general sense of fair play. Exploitation of any kind is expressly forbidden, including any attempt to capitalize on a counterparty’s poor negotiating position due to unforeseen circumstances. Speculative activity of any kind is banned, as are transactions or investments of any kind involving products or services prohibited by Islam, such as alcoholic drink, pork-derived foods, gambling, or pornography. Laws are also structured in such a way to prohibit the charging of interest of any kind, given that Islam expressly forbids any usage of money to make money. Instead, Islamic commercial law supports a partnership-based approach to business with, for example, finance providers treated as stakeholders with an interest in the success of a business rather than external lenders charging interest for the use of their money. Inspired by the Prophet Mohammed’s experience as a merchant in Mecca, laws strictly govern agreements such as leasing deals, partnerships, and currency exchanges.

Although aspects of Islam-derived commercial laws bear close comparison with their Western counterparts, other features intended to defend the interest of the counterparties stand in marked contrast to the basic principles of Western commercial laws. For example, while under mainstream Western jurisdictions signed commercial agreements would be binding on both parties unless specific exit clauses are triggered, when applied in modern finance, many basic Islamic contracts can be nonbinding in nature.

Given the trend of increasing commercialism in many Muslim countries as their economies have developed, developments in Islam-inspired commercial law have sought to cater for the needs of Muslims to engage in transactions such as buying their homes, or investing for their future, yet without in any way compromising the principles and moral values enshrined by Islam. Some relatively liberal countries such as Qatar and Bahrain have sought to strike a balance between these potentially conflicting objectives, introducing commercial legal frameworks to enable transactions involving, for example, acceptably low levels of interest or permitting forms of insurance contracts to cover certain types of risk. However, these reforms are not reflected in other countries such as Iran, which retain a strict interpretation of Islamic-led commercial law.

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Advantages

  • Islamic commercial law provides a framework for commercial transactions while upholding the high moral values and principles of Islam.

  • Laws are structured to support a longer term stakeholder approach, rather than a short-term, “quick return” attitude to business.

  • Some countries have chosen to adopt a more business-friendly, progressive attitude to their interpretation of Islamic-inspired law.

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Disadvantages

  • Some elements of Islam-derived commercial law can be confusing to non-Muslims, notably the nonbinding nature of contracts under certain circumstances.

  • While reflecting Islam’s rejection of involvement in speculative activities, it could be argued that laws potentially expose businesses to risk, given restrictions on products such as conventional insurance.

  • Adherence to traditional ways of overseeing business could mean that Muslim businesses are hampered by legal restrictions.

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Action Checklist

  • Recognize how faith and business practices are intertwined in Muslim countries.

  • Accept that the interpretation of some aspects of shariah-inspired laws may be subject to slightly different interpretations in different countries.

  • Acknowledge the importance of equality, fairness, and compassion in commercial activities in Muslim jurisdictions. Businesses do not simply pay lip service to these concepts; rather, they are fundamental principles on which all transactions are based.

  • Recognize that individual attitudes to financial products may differ between national jurisdictions. Products such as futures and options may be classed as speculative instruments and, therefore, prohibited in some countries, while others may permit their use as tools to hedge risk.

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Dos and Don’ts

Do

  • Acknowledge that law in Muslim countries has a broader role in governing how people live their lives than in the West.

  • Take qualified legal advice as to the applicable Islam-inspired law in any particular jurisdiction.

Don’t

  • Don’t think of Islam-inspired law as a relict of the past. In reality, the influence of shariah-inspired law is growing as the prosperity of the followers of Islam across the world grows.

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Further reading

Books:

  • Ballantyne, William M., and Howard L. Stovall. Arab Commercial Law: Principles and Perspectives. Chicago, IL: American Bar Association Publishing, 2002.
  • Coulson, Noel J. Commercial Law in the Gulf States: The Islamic Legal Tradition. London: Graham & Trotman, 1984.
  • Hashim Kamali, Mohammad. Islamic Commercial Law: An Analysis of Futures and Options. London: Islamic Texts Society, 2000.

Article:

  • Hegazy, Walid S. “Contemporary Islamic finance: From socioeconomic idealism to pure legalism.” Chicago Journal of International Law 7:2 (Winter 2007): 581–603.

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