Introduction
15.01 Islamic finance was conceptualised as a post-colonial assertion of cultural and religious diversity in the increasingly integrated and harmonised market practices of the global economy.
Interest-free (riba)1 banking would help pious Muslims through everyday acts to develop an Islamic communitarian ethos in which everybody gained and in which transparency, honesty, and fairness prevailed. The amalgamation of individual Islamic acts would contribute to restoring Islamic civilisation to its rightful place amongst the community of nations.15.02 Despite the industry’s postcolonial origins, many of the contracts which the industry uses as a conceptual basis derive from Islamic jurisprudence or the body of Islamic law known as sharia. The sharia comprises the holy sources of Islam including the Qur’an which Muslims believe originated from the Prophet Muhammad’s revelation of the word of God in the early seventh century CE. However, Islamic jurisprudence (fiqh) was developed over the course of nearly two centuries and eventually was applied as a governing legal system throughout the Near and Middle East from around the ninth century CE.2 This status persisted until the Ottomans undertook a series of reforms known as the tanzimat, which preceded the dissolution of the Ottoman Empire as well as the abandonment of the sharia throughout the empire’s former territories. Whereas Islamic family law continues to play a role in many Muslim majority jurisdictions, with the possible exception of Saudi Arabia, the commercial rules of the sharia, were almost entirely discarded in favour of secular commercial law.3 The
reasons for this diminished role are complex and numerous but must include the impact of the West and its modernising project, which began with ‘legal colonialism’.[1576]
15.03
The first modern Islamic finance project began in the Nile Delta region of Egypt, where, in 1963, it was implemented to include under-banked and often poor farmers in an equitable and religiously compatible way.[1577] Since these modest beginnings, it has become one of the fastest growing financial sectors, comprising over US$2 trillion in assets, and is now facilitated in over sixty countries worldwide.
The IMF considers the Islamic finance industry systemically important in more than fourteen jurisdictions.[1578] The industry’s success, however, has come at the cost of Islamic finance’s traditional emphasis on financial inclusion, equitable outcomes, and the avoidance of interest and excessive risk. The invisible hand of the global economy has co-opted Islamic finance in its stream of increasingly harmonised financial practices.[1579] The legal and economic substance of Islamic financial products which emerges in global financial markets reflects the neoliberal economic paradigm in which the global economy operates.[1580]15.04
Paradoxically, the technological revolution may allow Islamic finance to rediscover aspects of its trade-finance roots, helping it to develop trade practices that are cheaper, financially inclusive, transparent, less risky, more efficient and which transfer a greater share of the risk to sellers. Fintech may help the industry to realise Islamic commercial principles to a greater extent. Technologies such as blockchain or distributed ledger technology (‘DLT’)—a decentralised database infrastructure for storing data and managing software applications—may increase the transparency of supply chains, accelerate the digitalisation of trade processes, and automate trade finance contracts. Other technologies such as the internet of things— everyday devices which communicate with other devices by means of sensors and other processes—enable the tracking of products along the supply chain and help to prevent equipment breakdowns. Artificial intelligence enables machines and computers to perform cognitive functions normally associated with humans. Robots direct warehouse storage, machines package products, and corporations mine big data to determine consumer preferences and behaviour for customised selling. These and other technologies are bringing the world closer together in a ‘New Digital Revolution’ which promises to enact technology- driven structural change in the trade-based global economy.[1581]
15.05
The general principles of Islamic trade finance have been discussed broadly in the voluminous literature.
Most accounts deal with the different modes of facilitating finance including the murabaha (cost mark-up sale), mudaraba, musharaka (both profit- and loss-sharing partnerships), wakala (agency), and kafala (guarantee) contracts. Surprisingly, there are very few accounts of the effects of blockchain and smart contracts on Islamic trade finance and its underlying Islamic principles. One pioneering work does not grapple with the transformation of Islamic trade law, nor does it delve into the legal and sharia-related issues that these technologies bring forth.[1582] There are several works that deal broadly with the innovative capacity that fintech can provide to Islamic finance in more or less a general sense. This chapter explores the commercial origins and contemporary practice of Islamic trade finance, highlighting its conceptual and practical transformation, and its blockchain- and smart contract-based future. The chapter examines the principles of Islamic trade finance, charting their transformation from the classical past to the present digital era. The chapter argues that the industry’s ethical and social mission may be realised to a greater extent by looking to future-oriented technologies such as blockchain for trade finance.15.06 Using comparative law methodology, which calls for the examination of multiple systems of law and is geared towards the development of new and divergent legal trends, this chapter is organised in the following way: First, a short history of trade and commerce in the Islamic tradition is examined; second, the chapter investigates the development of modern Islamic finance; third, the principles of Islamic commercial law are introduced, followed by fourth, a discussion of the murabaha for trade finance; fifth, the way in which English courts have dealt with Islamic financial transactions are considered; and, finally, blockchain and smart contracts for Islamic trade finance are introduced, highlighting its mechanisms, legal, and sharia-related considerations, and their potential to help Islamic trade finance realise its ethical aspirations and efficiency concerns. The conclusion follows.
II.