Islamic Financial Contracts

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 i...

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... finance won’t overcome the current model but only be a part of it. Indeed, the classical finance has a big propensity to consider alternatives model like a niche market. The Islamic finance I still young, and lot of experimentations and researches will be necessary before it can play an important part in the worldwide finance. The risk is that the Islamic Finance loses a part of its ethics principles as developing itself. Indeed, even if the gambling is theorically forbidden by the Sharia, one can always build a system avoiding the rule, like it is actually the case with the Salam contract: a short term contract allowed by the Sharia, where the seller realizes a profit from a decline in value of the asset.

Works Cited

:” 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.