The Development of the Modern Islamic Finance Industry
15.11
To understand Islamic trade finance, it is necessary to briefly examine the history of Islamic finance as a concept.
In the classical period, as mentioned above, trade and its finance were conducted through informal partnerships, but the concept of modern finance was introduced to the Muslim world alongside colonialism.[1603] From the middle of the nineteenth century colonialism caused almost all Muslim countries to adopt Western laws and legal systems, and this was particularly apparent in the commercial sphere.[1604] Furthermore, the concept of the nation state, previously alien to Muslims, was introduced and took control from the jurists who had always served as a counterbalance to rulers.[1605] The sharia's inherent pluralism and its base in unchanging texts meant that codification of its principles further distorted it and gradually removed it from the lives of Muslims.[1606] By the end of the nineteenth century, these developments had combined to ensure that the financial systems of most Muslim countries were Westernised and secularised,[1607] as can be seen in the fact that interest was permitted in the Egyptian Civil Code.[1608]15.12
Such developments caused inevitable discontent amongst some Muslims, with the influential Iraqi Shia mufti, Muhammad Baqir Al-Sadr, denouncing the ‘long, bitter history of exploitation and struggle' that the Muslim world had faced under colonialism.[1609] Similarly, the activist and founder of the Muslim Brotherhood, Hassan Al-Banna, claimed that Western social principles had failed as they had not helped man reach ‘rest and tranquillity’.[1610] Thinkers such as Al-Banna and Al-Sadr advocated a return to Islam,[1611] seeing it as a third way that would aid the development of the Muslim world more than either capitalism or communism.[1612] This would be done through ‘Islamic economics': the creation of
the idealised Homo Islamicus, whose pious actions would build an alternative system to the capitalist one built on the greed of Homo Economicus.[1613] And what better to represent the inherent greed of capitalist economics than the charging of interest? Interest is prohibited in classical Islamic law, and yet in the modern era jurists had allowed interest to be paid.[1614] Islamic economists saw the charging of interest as an injustice as it kept money in the hands of the moneyed classes and disincentivised the assumption of risk in equity-based investments as interest on a loan is payable regardless of the success of the venture in question.[1615] Moreover, some opponents of interest denounced as a ‘fraud’ the ability to make money out of nothing by demanding interest be paid alongside the principal.[1616]
15.13 In resisting interest in the modern world, Islamic finance now had a purpose, a ‘desire to articulate a form of political, economic and social order that resists the dominant global paradigms and creates a separate, self-defined Islamic identity resting on unique ethical and moral bases’.[1617] Yet, without the quadrupling of oil prices between 1973 and 1974, and the attendant talk of a new international economic order that this generated, perhaps Islamic finance would not have come into existence.[1618]
15.14 In the 1970s, the first commercial Islamic banks were formed, with the purpose of creating a more socially valuable banking system. In practice, this meant a two-tier partnership, where individuals invested in the bank, and the bank invested in ventures, and profits and losses were shared in proportion to the amount invested.[1619] Unfortunately, this proved unpopular with clients who had become used to the minimal risk of loss present in conventional deposits, and the cost of monitoring all the bank’s investments proved too high to be practicable.[1620] Thus, the idealism of the early Islamic finance industry began to fade, and instead the industry had to adapt to survive.[1621] Meanwhile, the dreams of a new economic order began to fade as oil prices fell sharply in 19 8 6.[1622] This, combined with the end of the Cold War, the rise of neoliberalism, and the growing importance of technology, meant that a new type of Islamic finance was born out of necessity.[1623] Islamic financial institutions have gradually moved away from profit and loss sharing structures towards structures more akin to conventional products.[1624] One of those products, the murabaha agreement, is of particular importance to Islamic trade finance and will be examined shortly.
First, the principles of classical Islamic commercial law—which modern Islamic finance still relies on for legitimacy—will be introduced.IV.