Integrating the social maslaha into Islamic finance

Description
The purpose of this paper is to analyse the extent of the contribution of the current Islamic
financial system to society in terms of social responsibility (SR) required by the concept of social
maslahah.

Accounting Research Journal
Integrating the social maslaha into Islamic finance
Ismail Cebeci
Article information:
To cite this document:
Ismail Cebeci, (2012),"Integrating the social maslaha into Islamic finance", Accounting Research J ournal,
Vol. 25 Iss 3 pp. 166 - 184
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Integrating the social maslaha
into Islamic ?nance
Ismail Cebeci
Oxford Centre for Islamic Studies, Oxford, UK
Abstract
Purpose – The purpose of this paper is to analyse the extent of the contribution of the current Islamic
?nancial system to society in terms of social responsibility (SR) required by the concept of social
maslahah.
Design/methodology/approach – The paper adopts a critical analytic approach in considering the
reasons of the failure of the social dimension of Islamic ?nancial intermediation based on real ?gures
of selected Islamic banks.
Findings – Concepts of SR and corporate social responsibility (CSR) are not enough to describe
Islamic Banks’ responsibilities. Also, this failure cannot be understood only with reference to the
“external environment”, i.e. competition-driven, capitalistic market conditions; but it is also closely
related to the transformation of Islamic ?nance into an almost exclusively murabaha-based Islamic
banking, which promotes more individual maslahah than social maslahah. Compared to the murabaha,
other product structures such as mudaraba and musharaka seem to be better instruments for
expanding welfare and alleviating poverty.
Practical implications – There is a close relationship between Islamic banking contracts and social
contribution of Islamic banks. This paper provides some practical solutions in this context. Also,
empirical evidence derived from several conventional and Islamic banks supports these arguments.
Originality/value – This paper is the ?rst to analyse the reasons for the social failure of Islamic
Banks and to recommend substantial solutions in this scope and also offers practical help to
practitioners of Islamic banking on the issue of social contribution of the Islamic banking business.
Keywords Islam, Banking, Social responsibility, Society, Ethics, Islamic ?nance, Islamic banking,
Contracts, Murabaha, Maslahah
Paper type Research paper
1. Introduction
Islamic ?nance has grown considerably over the past three decades in terms of its capital
volume and organizational structure. Its potential contribution to social development is
an equally crucial question. Despite (or rather, because of) its initially idealistic social
objectives such as helping reduce underdevelopment and economic inequalities, and
despite the existence of exemplary institutions of Islamic civilization, such as the
mudaraba and the waqf, which historically performed certain welfare and
developmental functions, it is still debated if Islamic ?nance has created a structure
that systematically contributes to social development in the Muslim world.
This paper presents a critical examination of Islamic ?nance in terms of its
contributions to social development and what might be called “social maslahah (SM)”,
a concept that requires corporations to go beyond social responsibility (SR). In this
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
The author thanks Oxford Centre for Islamic Studies and Harvard Law School ILSP – Islamic
Finance Project for creating an intellectually stimulating environment for his studies on Islamic
?nance, as well as the writing of this particular article. He also thanks Nurullah Ardic of
Istanbul Sehir University for his helpful comments on the earlier versions of the paper.
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Accounting Research Journal
Vol. 25 No. 3, 2012
pp. 166-184
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611211290158
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context, it ?rst introduces the concept of SM and seeks to answer the question of to
what extent “SR” and “corporate social responsibility” (CSR) correspond to the former.
The paper then discusses various reasons for the failure of Islamic banks in providing
SM adequately. In this context, it focuses on both external (e.g. interest-based,
capitalistic market conditions) and internal factors, particularly on the advantages of
the mudaraba and musharaka over the murabaha with respect to SM. Finally,
it presents a set of measures to be taken by Islamic ?nancial institutions to enhance
their functions in terms of the SM. The paper supports its analyses and arguments
with empirical evidence as much as possible.
2. SM and Islamic ?nance
Today, not only Islamic banks operate in many countries, but also of?ces of a number of
major banks inWesterncapitalist societies operate inaccordance withIslamic principles.
The total capacity of Islamic banks is estimated to be approximately 1.3 trillion dollars
(IF, 2012). Despite its initially idealistic social objectives, such as helping reduce
economic inequalities, alleviate poverty, and despite the existence of exemplary
institutions of certainwelfare functions, andof the social bankingexperience particularly
in Egypt in the early years of this business (Najjar, 1972), Islamic ?nance is yet to create a
structure that systematically contributes to the enhancement of welfare in the society.
This paper argues that such a contribution can be made through realizing what I call
“SM” which can be de?ned as providing permanent values and enduring bene?ts for the
general public via a set of sustainable and measurable activities/projects focusing – at
an individual or institutional level – on the development of society, including a
controllable, manageable and clearly determined process. More speci?cally, social or
collective maslahah refers to an institution’s direct and enduring contributions to social
development through its own structure and mechanisms (in this case, the constitution of,
and the transactions made by, an Islamic bank), rather than simply contingent and
“charity-like” activities sponsored by an institution, which are often conducted for
public relations and marketing reasons. This concept requires Islamic banks to pursue
much more serious social objectives through longer-term and larger projects than they
presently do; however, it does not suggest to create a ?nancial system that acts like a
large-scale, state-like political-economic structure that seems to entail the entire legal,
political and economic life, which is what Elmelki and Arab (2009, p. 126) seem to
suggest when they compare Islamic banks with conventional ones:
What distinguishes an Islamic bank from a conventional one is that the Islamic bank keeps
in view certain social objectives intended for the bene?t of society. The Islamic banks aim to
establish distributive justice free from all sorts of exploitation. Fromthe Islamic point of view,
business transactions can never be dissociated fromthe moral objectives of the society. Islamic
banking aims [to expand] the social justice through forbidding all forms of economic activities
which are morally or socially injurious, ensuring ownership of wealth legitimately acquired,
allowing an individual to retain any surplus wealth and seeking to prevent the accumulation of
wealth in a few hands to the detriment of society as a whole through its laws of inheritance.
Islamic banks are mainly concerned about justice and fairness and prohibit the extracting of a
surplus value in an unfair way through the practice of paying and receiving interest regardless
of the purpose for which loans are made and the rates at which interests are charged.
Although I agree on their emphasis on social objectives as a distinguishing feature of Islamic
banking, the rest of the argument exeggerated, for such requirements as “establishing
distributive justice” go beyond the scope of Islamic ?nance.
Integrating
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In this connection Haniffa and Hudaib (2007, p. 99) present a more re?ned and
reasonable list:
[. . .] there are ?ve distinctive features that differentiate Islamic Banks (IBs) from their
competitors (conventional banks): (a) underlying philosophy and values; (b) provision of
interest-free products and services; (c) restriction to Islamically acceptable deals; (d) focus on
developmental and social goals; and (e) subjection to additional reviews by the Shari’ah
Supervisory Board (SSB). Hence, Islamic banks, as economic and social institutions, must
portray aspects of those ?ve traits, drawn from both Shari’ah and business ethics.
Many Islamic banks themselves declare in their mission statements that one of their
primarygoals is tocontribute to the well beingof the society. For example, Al Rajhi Bank,
which is one of the ?rst Islamic banks in the world, says: “Our responsibility to our
community has always been at the forefront of our obligations and is one of the main
objectives of the Bank (Al Rajihi, 2011).” Likewise, HSBCAmanah (2011), which is one of
the important Islamic ?nancial institutions in the west, declares that:
[. . .] In exercising all its banking or developmental activities, the Islamic bank takes into
prime consideration the social implications that may be brought about by any decision or
action taken by the bank. Pro?tability – despite its importance and priority is not therefore
the sole criterion or the prime element in evaluating the performance of Islamic banks,
since they have to match both between the material and the social objectives that would serve
the interests of the community as a whole and help achieve their role in the sphere of social
mutual guarantee. Social goals are understood to form an inseparable element of the Islamic
banking system that cannot be dispensed with or neglected.
In justifying their claim for contribution to the well-being of society, Islamic banks
often emphasize the concepts of “SR” and “CSR” presenting them as an integral part of
their mission. For instance, Al Baraka (2011), which has several branches in different
countries, states that:
We consider the role of CSR in our organization to be essential to the application of the
principles derived from divine power and on which our business activities in all the countries
in which we operate are based.
Now I do not deny the importance of SR and CSR and their potential contributions to
Islamic ?nance; however, I contend that Islamic banks should go beyond these
concepts and objectives in order to be able to ful?ll their SM functions and help, on a
broader level, Islamic economics materialize its social objectives and the maslahah.
There are three principal arguments behind my contention.
First, SR entails responsible investment, good customer service, employee welfare
policies, environmental policies and charitable activities. I contend that Islamic banks
remain satisfactory in this sense. In fact, recent research has shown that the majority of
Islamic banks are doing well in terms of their SR functions at this basic level
(DinarStandard and DarAlIstithmar, 2010). However, I believe that SR and CSR in their
modern sense do not suf?ce for contributing to the welfare of society in the Muslim
world in a meaningful, enduring and sustainable manner.
This is because, second, the social and historical contexts signi?cantly affect the
structure and functions of ?nancial institutions; therefore, one should not ignore the
fact that such institutions in the Muslim world might substantially differ from the ones
in the Western world in these respects. Compared to Muslim countries,
institutionalization in general has gone much further in Western societies as
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a response to various challenges posed by complex structures of the modernity, which
also has implications for ?nancial institutions. For example, governments and various
non-governmental organizations serve different functions that directly contribute to
the economy, including, among others, allocating resources to and providing guidance
for entrepreneurs and young people who would act as “human resources” of the
capitalist economy. Most Muslim societies, however, lack such an institutional
structure, which results in the decline of productivity and inef?cient use of human and
material resources. Therefore, I ?nd it insuf?cient when Islamic banks follow
“Western” banks in the ?eld of CSR by publishing books and giving charity (Table I).
It is in this sense that I argue that though SR and CSR are positive notions in general,
they do not open up a social space large enough for realizing the social objectives
embraced by Islamic economics in general, and Islamic ?nance in particular.
At this point, let us take a look at a sample of SR and CSR projects developed by
several Islamic and conventional banks from Turkey, UAE, Saudi Arabia, Malaysia,
the UK and the USA.
Third, my analysis of SR and CSR is based on an examination of the extent to which
two of the goals attributed to Islamic ?nance by Elmelki and Arab, are materialized:
the bene?t of society and preventing the accumulation of wealth in a few hands.
Clearly, these are among the basic Islamic principles, which are also required to
be followed in order for Islamic banks to realize SM. However, we see that these
principles, which also lead to the realization of the SM, cannot be put into practice
through SR or CSR only. For such large-scale and broad objectives as preventing
the accumulation of wealth in a few hands are too big to materialize by publishing
cultural books and periodicals, and granting scholarships to a few students and
SR projects Bank
Sample SR and CSR
projects of Islamic
banks
Organizing cultural activities through “cultural clubs”
and sponsoring competitions (e.g. Islamic calligraphy
competition)
Albarakaturk (TR)
Renovating historic buildings and artifacts, recruiting
interns from among college graduates
Kuveytturk (TR)
Charity Kuveytturk (TR)/
ADIB (UAE)
Sponsoring a football league, sponsoring periodicals,
cultural publications, conferences and short ?lms
Bank Asya (TR)
Sponsoring sport activities, traf?c week and Umrah ADIB (UAE)
Patronage and sponsorship of educational and social
projects
Al Baraka (KSA)
Supporting musical and sports activities, scholarship CIMB Islamic
(Malaysia)
Sample SR and CSR
projects by
conventional banks
Providing scholarships to students, distributing free
books, cultural publications, and sponsoring the chess
association, a forest, and a museum
I
?
s¸ Bankas? (TR)
Environmental targets, ?nancial education, customer
relations, employee care, charity
LLoyds TSB (UK)
Nonpro?t grant funding, (sports, art, etc.)
sponsorships, volunteer grants
Bank of America
(USA)
Notes: Information on these projects is compiled from the banks’ web sites
Table I.
A comparison between
the SR projects by IB’s
and conventional banks
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researchers, etc. Moreover, given the fact that few other institutions in Muslim
countries match the ?nancial power and international networking that the Islamic
banks enjoy today, which further increases these banks’ reponsibilities, any serious
attempt to realize the above-mentioned broad principles must consider the essential
link between these principles and the structural elements of Islamic ?nance, such as the
types of contracts that Islamic banks rely on (see also below for further discussion).
It should also be emphasized that I am aware of the fact that Islamic banks are not
charity institutions and that they have activities with SR functions, as already
mentioned above. However, these functions are far from creating SM by failing to
produce permanent values and continuing bene?ts for the wider society through
sustainable, measurable projects focusing on a particular social problem. The main
problem with Islamic banks in this context is that these institutions, which have
considerable information, experience, capital and international organization, have failed
to satisfactorily mobilize their ?nancial resources and customers in social improvement,
fair distribution of income and leading in investment, and thus remained largely
incapable of contributing to the society with lasting mechanisms in an enduring manner.
3. Why has Islamic banking failed in SM and what is the solution?
Below I discuss in detail the main factors that are accountable for this failure. I focus on
both external ones such as the institutional and cultural contexts and legal and political
constraints, and internal ones such as dominance of the murabaha as a basic
transaction mechanism and lack of academic support as guide for Islamic banks.
I argue that the majority of the staff of Islamic banks and their clients have largely
adopted the capitalistic mindset that emphasizes pro?t maximization, which hinders
their social functions. I also argue that many of the scholars and practitioners of
Islamic ?nance see the structural problems of the system; especially those related to
SM, as merely technical, managerial problems and thus offer little help to solve them.
The following section includes, therefore, a number of suggestions for the social
functions of Islamic banks. Here I emphasize the need for a comprehensive and holistic
but also multi-dimensional and diversi?ed outlook for the current crisis.
A number of factors may have played a role in this failure, which can be grouped as
“external” and “internal” factors. Let us look at some of them in more detail.
3.1 External factors
The “external” factors principally include what might be called the “institutional
context” and the “cultural context,” both of which are closely related to the fact that
contemporary Islamic ?nancial institutions have to operate in the capitalistic world
economy. The “institutional context” refers to national and international institutions
that are largely shaped by the capitalist mindset. For instance, Islamic banks, just like
conventional ones consider competition and pro?t maximization as their most
important priorities. Likewise, they have to operate in an interest-based system,
national or international, thereby making transactions that are often dif?cult to
differentiate from those involving interest. (For instance, ?nancial penalties accrued in
case of late payment are not easy to separate from interest.) To operate independently
of this framework does not seem possible for Islamic banks in the short run, because
they lack suf?cient economic and political power to shape the public opinion and create
an institutional context compatible with Islamic ?nance.
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Naturally, then, it is extremely dif?cult for Islamic banks to develop and execute
important social projects in such an environment where they encounter certain
structural problems. Moreover, they do not have a sound customer base that is ready to
abandon certain practices entrenched in the current capitalist system. Therefore, it
would not be fair to blame solely Islamic banks for failing to ful?ll their promises. By the
same token, it is a dif?cult task for Islamic banks to achieve SM goals in the short run.
As a part of institutional context, administrative and bureaucratic constraints also
negatively affect Islamic banks’ SM functions. In many countries, Muslim and
non-Muslim ones alike, Islamic banks have to face negative attitudes of political
authorities and the constraining effects of existing laws (Attiyah, 1990). Since these
laws are made to facilitate the operation of capitalistic market relations, and state
authorities usually have a negative view on the requirements of the Islamic ?nancial
system, Islamic banks often ?nd it dif?cult to survive in such a hostile environment,
let alone ful?ll their social functions. For instance, the fact that Islamic banks have
legal problems in some countries forces them to operate as a conventional bank.
Otherwise, they would have to worry about their very survival under such
circumstances, which are heavily conditioned by the interests of the global ?nancial
capital. For instance, in Turkey Islamic banks experience great dif?culty in this respect
because the ?nancial laws under which they have to operate have been designed solely
for interest-based ?nancial institutions. For example, Turkish Law (no. 5411, article 48)
considers funding the “Islamic” banks provide for procurement of commodities as
“credit” (TMSF, 2005). Similar legal problems are also encountered in the west, even in
the UK where Islamic ?nance has developed the most. For example, one of the most
important issues for the Financial Services Authority (FSA) in the UK is that of Islamic
deposits. The British legal de?nition of a deposit is: “a sum of money paid on terms
under which it will be repaid either on demand or in circumstances agreed by the
parties” (FSA, 2006). In other words, money placed on deposit must be capital certain.
For a simple non-interest bearing account there is no problem, for the bank safeguards
the customer’s money and returns it when the terms of the account require it to do so.
However, with a savings account there is a potential con?ict between UK law, which
requires capital certainty, and Sharia law, which requires the customer to accept the
risk of a loss in order to have the possibility of a return.
Second, the cultural, or ideological, context refers to the fact that the majority of
Muslims, the main clientele for Islamic banks, have already been heavily in?uenced by
capitalistic market relations on a global scale. This implies that most Muslims are not
much different from the regular, one-dimensional homo economicus of the capitalist
system in terms of their expectations (such as not accepting the possibility of economic
loss as well as pro?t in a joint venture transaction)[1] and ethical priorities in economic
life. This is a signi?cant obstacle for Islamic banks in terms of creating a mechanism
that reserves room for SM in a competition-driven environment.
Third, SM is closely related with social and institutional structures. On the one
hand, today’s Muslims have a considerably different life styles than in pre-capitalist
period; on the other hand, ?nance and economy in the modern world are intricately
connected to the governments and the international system. This implies that the
?nancial sector is an integral part of the policies (including the social welfare ones)
pursued by states and international organizations, which is indicated by the workings
of the conventional capitalist banking in the global economy. Islamic ?nance, however,
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does not operate in such a broad, integrative ?nancial and political system – a fact
which is closely related to the abscence of a viable ulama class, as well as that of
political bodies and international organization that could provide such broad policies.
Thus, the lack of a comprehensive, integrative system of social policies negatively
affects Islamic banks’ performances in the ?eld of SR.
Finally, in terms of its operationality, Islamic banking – due to ban on interest
(Qur’an, 2: 275, 276, 278, 279; 3: 130; 4: 161; 30: 39; Bukhari, Muslim, Abu Dawud) –
is based on the principle of exchanging money with labour, goods and services,
thereby producing a surplus value and pro?t. Accordingly, money cannot produce
such value so long as it remains in a static position. Due to this principle, unlike
classical banks, Islamic banks do not grant money in exchange for money; rather,
they produce surplus value by managing the money they receive through various
legal contract models, such as trading, partnerships, and renting. This, in turn,
creates an opportunity for the application of different contract models in Islamic
?nance. This situation brings to Islamic banking certain advantages over the modern
capitalist banking system in terms of its social dimension due to the dynamism that
the former necessarily contains. Despite this structural advantage, however, Islamic
banking has so far largely failed in terms of ful?lling its social functions, as
discussed above.
3.2 Internal factors
As for the “internal” factors they are essentially related to the fact that Islamic banking
has usually followed the capitalist banking system as a model for its own
institutionalization. That is to say, they have been forming their institutional build-up
increasingly on the basis of this model, which in turn produces a quasi-capitalist
mindset as well as concrete mechanisms. Moreover, their personnel consists mostly of
those who had standard, Western-style higher education, many of whom probably had
also worked for conventional banks previously. A signi?cant indicator of this tendency
toward more capitalistic institutional frameworks is the fact that the murabaha, which
has been modi?ed to adapt to modern conditions and market relations, has
increasingly been dominating the Islamic ?nancial system at the expense of other
transaction types.
A signi?cant factor leading to the neglect of SM is what might be termed as an
“minimalist” or “micro” understanding of the fatwa institution. Although it is clear that
the fatwas used to justify policies and decisions of the Islamic banks are produced
carefully and that they conform to the speci?c rulings of the Sharia, these individual
fatwas do not usually produce a comprehensive and meaningful whole, because they
are mostly produced by the ulama with a myopic and minimalist view of the individual
cases brought to them.
An important point that should not be missed here is that Islamic economics and
Islamic ?nance are not ?qh al-mu’amalat (Islamic juris prudence of transactions)[2].
Though the ?qh forms the basis of their activities, these activities are usually built
upon the permissions ( jaizs) obtained from researchers and purely technical rules
concerned only with legal validity, which do not exactly correspond to the needs of the
individuals and their normative world. As Kilian Ba¨lz (2008, pp. 12-13) remarks,
modern Islamic ?nance has been stuck with technical rules and legal frameworks,
leading to the ignorance of ethical considerations:
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Pre-modern Islamic law, in broad terms, employed two categories to rate human acts. One
concerned its legal validity (ranging from sahih “valid” to batil “null and void”) and the other
its ethical or religious assessment (ranging from wajib “obligatory” to haram “forbidden”.
Where Islamic legal rules have been enacted as state law, as is the case with Islamic codes, the
rating normally is reduced to questions of legal validity.
In fact, as is well known, Islam does not just consist of a set of rules and regulations,
but the Qur’an and the prophetic hadiths contain many provisions regarding moral
values. However, we observe that many Islamic banks do not refer to Islamic moral
principles in their statements[3]. The fact that the practitioners of Islamic banking have
usually been treating the ?qh questions as technical, legal problems, thereby largely
ignoring their social-welfare related aspects, can also be demonstrated through a
glance at the resolutions of the International Islamic Fiqh Academy (IFA). The IFA
(2007) of?cially issued a total of 174 resolutions between 1985 and 2007; about half (82)
of them were on either Islamic economics or Islamic ?nance. However, only two of
these resolutions were directly related to the social functions of Islamic banks (i.e. the
resolutions on the development of human resources [R #164] and on the role of the
zakat in alleviating poverty [R #165]. This indicates that though Islamic economics
and Islamic ?nance are deemed very important in the lives of contemporary Muslims,
their SM-related aspects are not treated equally.
Another signi?cant factor in?uencing the dif?culty in realizing its social objectives
has been the ineffectiveness experienced in the transition from Islamic economics to
Islamic ?nance;[4], i.e. failure to create an ef?cient and mature process of
institutionalization. In other words, although the theory of Islamic economics had
many social objectives (Siddiqi, 2007, pp. 99-100) at macro and micro levels in its initial
period during the 1950s and 1960s, institutionalization necessary to realize these ends
has been achieved only by Islamic banks at the micro level. Other, accompanying
public and private institutions that could share the functions of Islamic ?nance have
not been established in the Muslim world. For this reason, the burden of responsibility
to materialize the broad ideals of Islamic economics (and expectations from it) has been
shouldered solely by Islamic banks.
Furthermore, the fact that Islamic ?nance was born out of a rather rapid ?nancial
growth provided by “petrodollars” produced by oil exports, rather than as a result of a
“natural” process of economic expansion, also seems to have negatively affected its SM
functions. In other words, because most Islamic banks were almost suddenly created as
a result of the circulation of oil-based ?nance capital, rather than emerging gradually
as a product of the industrialization process (as was the case with Western banks), in
many cases they were not supported enough by necessary economic, legal and social
infrastructure. Thus, for instance, had the Mit Ghamr model of Islamic banking been
successful before Dubai took over Islamic ?nance, these banks could have been much
more successful in terms of providing SM.
Moreover, an important element of the “internal” factors that have hindered the
improvement of the SM-based Islamic banking is the lack of academic and/or scholarly
support for such an improvement. Studies on Islamic ?nance from the perspective of
both modern economics and Islamic law have so far largely ignored the domain of
social functions, which has in turn resulted in the fact that we have very little, if any,
discussion on, let alone solutions for, the fundamental structural problems
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of Islamic banking. There are three speci?c reasons for the lack of scholarly
competence on SM-based Islamic ?nance.
First, Islamic ?nance is an interdisciplinary ?eld of study, pertaining to modern law,
economics and management, as well as Islamic ?qh. As such, most academic
institutions do not treat it as a compact, bounded disciplinary sub-?eld in its own right.
This results in scarcity of experts on contemporary Islamic ?nance, who are educated
in both Islamic studies (the ?qh in particular) and economics as well as in management
and ?nance law.
Second, althoughthe discussions oneconomic provisions inthe classical ?qhliterature
are mostly about relatively simple and monophasic transactions among actual persons
within a Muslimsociety, these provisions are directly applied today to large, impersonal
institutions in predominantly non-Islamic (even “un-Islamic” in many respects)
institutional contexts. We often observe the deployment of a contract recognized by
Islamic ?qh as part of a modern transaction with no attention to its legal and social
context. For example, the contract of representation (or power of attorney) (wakalah),
which is recognized by the ?qh, is frequently used in modern ?nancial transactions in
order for one of the parties to avoid the risk brought by the transaction. The logic behind
this application of traditional transaction mechanisms to modern, capitalist markets is a
super?cial one, which ignores the intellectual and historical backgrounds of both Islamic
and modern-capitalist structures. Such an endeavor has produced both in theory and
practice a synthetic amalgam of very different parts, rather than a compact whole. This
mixture of pre-capitalist and capitalist elements thus lacks cohesion and a social
perspective because the elements of the ?qh are sought mostly as a potential source of
Islamic justi?cation ( jawaz) for modern ?nancial mechanisms. Moreover, this Islamic
justi?cation is considered only in strictly legal terms, thereby largely ignoring the social
aspects of Islamic ?qh. In other words, the academic/scholarly endeavours that focus on
Islamic ?nance invoke Islamic lawonly in so far as it provides modern mechanisms with
strictly legal provisions by abstracting them from their social contexts.
Third, we observe that many of the policy recommendations the scholars put
forward for Islamic banks remain restricted to the domain of purely charity-based
mechanisms, such as the zakat (alms), sadaqa (voluntary charity) and the qard hasan
(gratuitous loan) (Elmelki and Arab, 2009, p. 129; Farook, 2007, pp. 39-40). The problem
with this picture is that these charity mechanisms are realized usually by the personal
initiatives of bank staff and customers, rather than establishing a structural
mechanism for social projects. Thus, it might be more useful to focus on the types and
workings of speci?c transactions, such as the mudaraba (partnership between investor
and entrepreneur), the musharaka ( joint venture), the murabaha (cost-plus ?nancing),
the ijara (renting/leasing), the salam (“prepay”; agreement to pay now for goods
delivered later), the istisna’ (“work contract”; product manufacturing contract with
agreed delivery and price), etc. rather than being preoccupied with charity-based
mechanisms only.
As a result of these economic and socio-cultural factors, therefore, the Islamic
banking system has abondoned most of its social goals and idealistic discourse that
were initially quite widespread as part of an optimistic outlook. This way Islamic
banks have largely failed to create an original system, parallel to the failure of Muslims
to present an alternative life style to the capitalistic West. Consequently, different types
of economic transactions derived from the Islamic tradition have been adapted to the
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capitalist market relations. This process has in turn created great obstacles for a
SM-based banking practice because the capitalist system is based on ?erce competition
and a mindset conditioned by pure credit and pro?t maximization. I argue, therefore,
that an Islamic ?nancial system based on the imitation of contemporary capitalistic
mechanisms cannot fully realize its initial goals of creating a SM-based ?nancial
environment. Moreover, since Islamic banks are supposedly based on religious
premises, the process of transforming into capitalist banks might lead to an
image-maintenance problem for them in Muslim countries.
I further argue that both the practicioners of, and the researchers on, Islamic banking
usually see – perhaps as a result of pressures of the capitalist work environement – the
structural problems of this system merely as management problems, which prevents
them from seeing the big picture. For this reason, the functions and even the very
existence of Islamic banks will remain problematic until the essential issues relating to
Islamic economics, including its assumptions and main principles on human nature,
politics, technology, etc. have been discussed and clari?ed. Because these fundamental
issues are still vague for many, the signi?cant problems the Islamic banks encounter are
continued to be reduced to those of the managerial problems of a regular ?nancial
institution trying to survive in a capitalistic enviroment.
4. Dominance of the Murabaha
The dominance of the murabaha constitutes the “speci?c factor” in?uencing the failure
of Islamic banks in terms of improving their SM-based institutionalization, because it
has been used as the basic instrument in the process of transforming into capitalistic
?nancial institutions. As a form of ?nancial transaction, legally recognized in Islamic
economics and law, the murabaha refers to a process in which the client requests from
an Islamic bank (usually due to lack of cash) to buy a commodity and sell it to him/her
(the client) on credit terms; then, if the bank approves the request, it buys the commodity
and sells it to the client, who in turn pays it back in instalments. The modernized
murabaha as a model to be used by Islamic banks was ?rst theorized by Sami Hasan
Hammoud (1976) under the title “Murabaha li al-amir bi al-shira” (mark-up sale upon the
instructions of the potential purchaser) in Egypt in 1976 – a development that roughly
corresponded to the emergence of the “Islamic banks.” In his analysis, Hasan Hammoud
derived the modernized form of the murabaha from a case discussed by Imam al-Sha?
in his Kitab al-Umm, and presented it as a practical solution to the requirements of the
new economy. For him the murabaha was more ef?cient and more comprehensive than
both the musharaka and the mudaraba – and a better alternative to the exchange types
of capitalistic, interest-based banks. In time, the murabaha has become an established
and commonly used practice due to its several advantages. For example, in murabaha
contracts, transactions could be done faster, certain provisions of the ?qh were adapted
through it, and certain measures were taken to ensure that all the risk was shouldered
by the client – rather than shared between the bank and the client.
Therefore, the murabaha, which has important implications for SM (or lack thereof),
has dominated the practice of Islamic banking particularly in terms of the intensity of
its use and of the mindset it has nurtured. Although Islamic banking was initially
thought to be based more on the musharaka and the mudaraba (Siddiqi, 2007,
pp. 102-3), rather than on the murabaha[5], today it has become almost entirely
a murabaha-based ?nancial system. For example, in the case of the Islamic banks
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operating in Turkey, between 70 and 80 percent of their funds are offered for
murabaha-based production support, and 5-10 percent of them are offered on the basis
of mudaraba. Moreover, they state that they use much of the funds that they have
collected in either trade or productive services, by providing corporations with
production support (Turkiye Finans, 2011; Bank Asya, 2011). Furthermore, the fact
that these banks do not provide detailed information on the distribution of the contract
types that they utilize in their annual reports invigorates this image.
An important factor that has negatively affected the feasibility of both the
musharaka and the mudaraba has been the attitudes of the customers: Islamic banks
have suffered a lot of losses, particularly in their initial decades, due to backing out of
their clients, many of whom reported ?nancial losses only. As a result, while the
murabaha has become the most commonly used mechanism, other transactions such
as the mudaraba and the musharaka have almost disappeared today.
Second, in terms of forging a particular mindset, the murabaha has been deeply
affecting the way the practicioners of Islamic banks, managers and employees, think
about their profession. For, as mentioned, compared to other mechanisms, the
murabaha is more short-term, less risky, and more practical in terms of crediting; it
also provides liquidity more ef?ciently than others (Zayd, 2004, p. 27). Because of such
economic advantages, it has gained the status of the most preferred transaction type,
which then created a ready soil for a kind of capitalistic mentality to ?ourish.
Therefore, the spread of the murabaha as the most preferable banking method and the
conversion of Islamic ?nance into a quasi-capitalistic banking are the two processes
that have gone hand in hand mutually feeding and nourishing each other.
On the other hand, although the murabaha has turned into a mechanism that
constraints the domain of social functions, it does not in itself contradict the principle of
SM. For it is suitable for application in different spheres of life, including such SM-based
areas as health, education and environment (Rabia, 2000, p. 134). However, the
murabaha has become an obstacle for such an application due to three main reasons.
First, the murabaha has largely been cut off from the real trade and market
conditions by minimizing the ?nancial institutions’ risk- and labour-sharing
responsibilities, which in turn has made the murabaha merely a kind of paper work.
Yet many of those who favor the murabaha in the literature discuss risk-taking and
labour-sharing by the ?nancial institution as advantages of this mechanism. When the
modern murabaha was presented as an alternative ?nancial mechanism, the bank was
supposed to be actively involved in the entire transaction process, by taking part in
searching for the commodity and providing it to the customer, in communicating with
the seller and purchasing the commodity, in the transportation phase, and in the
sharing of the potential risk. However, the bank’s role has been minimized in the
process of applying this theoretical model in practice as well as with different
modi?cations in the model itself throughout several decades since the 1970s. For this
reason, Islamic banks’ involvement in the murabaha-based transactions in terms of
research, effort and risk-taking is at a minimum level, which also constitutes one of the
most frequently discussed – and criticized – aspects of Islamic ?nance today.
Moreover, this lack of involvement in real-life transactions leads to a lack of
specialization by Islamic banks in different investment areas, which greatly reduces
their potential contribution to economic development in their host countries as well as
to develop different SM-based projects that might serve their societies.
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Second, the murabaha has become an obstacle in terms of SM-based banking also
because of the fact that pro?t maximization is thought to be the only goal of this
mechanism (Rabia, 2000, p. 151), which excludes its potential contribution to social
development (Sairally, 2011). The principal factors that help the murabaha to be a
method based solely on pro?t maximization seem to include severe competition,
market conditions, and the pro?t-based expectations of the clientele, all of which imply
a primarily capitalistic mindset and institutional context. For both the ?nancial
institutions and their clients have been considering their transactions as a
pro?t-generating mechanisms, almost completely ignoring their (potential) social uses.
Third, once the murabaha has turned into such an institution, it has dominated the
market by causing the exclusion of other transaction mechanisms, including the
mudaraba, the musharaka, the salam, the istisna’, the ijara, etc. This domination has
disturbed the balance between these mechanisms, which has in turn shaped the basic
structures of Islamic banks. For each mechanism entails different kinds of functions –
including social and welfare functions. The musharaka, for example, helps to
accomplish large-scale projects by making it possible to combine various kinds of
small-scale capital accumulation; the mudaraba helps to bring together capital and
management skills. These mechanisms entail various social contributions to the
well-being of different groups within a society. Thus, once the entire ?eld of ?nancial
activities is dominated by the murabaha, different social functions carried out by other
transaction mechanisms disappear.
5. The advantages of the mudaraba and the musharaka in terms of SM
I propose that the domination of the murabaha is ended in Islamic ?nance by
diversifying the sector through including and improving other transaction
mechanisms (the mudaraba, the musharaka, the salam, the istisna’, the ijara, etc.)
from a more comprehensive perspective. This is because these other mechanisms,
which were in fact initially planned to be major elements of Islamic banking, especially
the two more prominent ones, the mudaraba and the musharaka, seem to be more
effective in terms of realizing social functions (see also below). Islamic banking may
thus be balanced (vis-a-vis the murabaha’s domination) by expanding its operations so
as to include other transaction methods, particularly the two prominent ones
mentioned above[6].
There are at least seven different potential advantages of the mudaraba and the
musharaka over the murabaha in terms of SM:
(1) In the musharaka and the mudaraba the Islamic bank has more power and
authority in determining the conditions of the project or transaction, unlike in
the murabaha where the institution plays a passive role and its impact is quite
limited because the client possesses the sole authority to choose the commodity
and the seller to buy from. For this reason, in the musharaka and the mudaraba
Islamic banks might be more active with more power in terms of more
effectively marketing to their customers the SM-based projects that they
themselves propose.
(2) The musharaka andthe mudaraba encourage, evenforce, the institution to have a
close contact with the real market conditions, unlike the murabaha, which
con?nes their operation to money transactions and paper work. The former two
mechanisms, if properly applied, will require Islamic banks to actually deal with
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trade, real sector, and different commodity types as well as to get involved with
their customers’ projects and to propose their own projects to them. All these
requirements will most likely help themenhance their skills in different ?nancial
areas, improve their social perspective, and increase their social effects. It will be
very common, for example, to see Islamic banks looking for pro?table projects as
well as proposing their own projects. With the murabaha dominating the sector,
on the other hand, the operations of many of the Islamic banks have become
merely an armchair profession with little contact with real economic life and
little concern for social and welfare functions. Thus, by focusing predominantly
on the murabaha, Islamic banks have largely lost their investment skills
(Zayd, 2004, p. 31). This development in turn has a negative impact on ?nancing
production and long-terminvestments. Unlike the murabaha, the musharaka and
the mudaraba have a certain advantages in the long run that prevents such
problems for both the ?nancial institution and its customers. For, unlike the
murabaha, these two by default make it impossible for the institution to remain
passive, as the bank cannot just take measures to reduce the risk for itself but is
forced to get involved during the entire process in order not to suffer ?nancial
losses. This, in turn, may provide Islamic banks with more impetus and
experience for the projects that contributes to social development.
(3) The mudaraba and the musharaka are more suitable in terms of sharing
responsibility among the partners of an investment project and thereby
reducing risk for them. For these mechanisms inherently make it impossible to
be risk-free for either side of the transaction because in the mudaraba the
investor bears the whole loss and in the musharaka the partners share the loss.
In the murabaha, on the other hand, this is not the case: Islamic banks in many
countries have by now taken certain measures (such as the institution of the
guarantor and collateral security, giving all the responsibility to the costumer
for the problems associated with the commodity) to guarantee the repayment of
their credits, thereby making their transactions almost completely risk-free.
Therefore, in the current practice, all the risk is shouldered by one side (the
client) whereas in the mudaraba and the musharaka the risk is diversi?ed and
shared by all parties of the contract.
(4) The murabaha as an exchange contract is by de?nition a single transaction,
unlike the other types, which are based on partnerships and projects. Thus, the
latter are more suitable to include various mechanisms such as buying and
selling, renting, and contract of representation, which implies that they have
more potential for producing social effects. By the same token, the mudaraba
and the musharaka are more suitable for SM-based projects that require large
investments and long-term commitments, such as the construction of hospitals,
schools, and factories, which will create new employment opportunities and
environmental projects. Obviously, such projects include a lot of social
functions, which are more dif?cult to realize with a murabaha-based
mechanism because of its inherent constraints, e.g. it only allows for the
purchase of commodity. The murabaha by itself, then, is not suitable for such
multi-faceted and complex projects, which most SM-based projects are.
Similarly, the mudaraba and the musharaka have the inherent ability to
accommodate multiple partners while the murabaha generally remains limited
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to two partners/sides only. This difference implies signi?cant consequences in
terms of the size of transactions and their social effects. For example, large-scale
social projects like schools and hospitals require the cooperation of multiple
companies and sometimes contributions by hundreds of people, which is not
possible in the murabaha-based system.
(5) Since the murabaha requires the customer to either have money or guarantee to
pay their debt, it tends to limit the potential that could be realized by allowing
different talents to ?ourish in the society. Others, especially the mudaraba, on the
other hand, helps realize this potential by supporting those who have knowledge
and skills but insuf?cient ?nancial resources, thereby contributing to the social
development of the society as a whole. Similarly, the salam and the istisna’ help
the producers who do not have enough accumulated capital to undertake their
own projects; and the ijara makes it possible to use a commodity without buying
it for those who wish to do so. By facilitating the investments and trade for
businessmen and farmers, therefore, these contract models increase productivity
and indirectly contribute to the welfare of the society in general.
(6) A signi?cant element of the Islamic ?nancial system, which has important
implications for social cooperation and solidarity is an Islamic insurance type
called the “takaful.” Parallel to the insurance agreement, this mechanism
consists of three principal elements, including partnership, mobilizing ?nancial
resources, and sharing risk or monetary loss. It therefore ful?lls certain social
functions, as such, is also based on the mudaraba and the musharaka.
(7) Finally, because most of the Islamic ?nancial institutions that exclusively focus
on the murabaha-based mechanisms have become rather like capitalistic banks,
they suffer some problems in terms of maintaining their “Islamic” image for
certain (more religiously-oriented) groups inthe Muslimworld (Zayd, 2004, p. 32).
An increase in their mudaraba- and musharaka-based operations might also help
with this image problem, which stands as a great obstacle in the way of ?nding
necessary support from the society at large for their SM-based projects.
Due to these advantages of the mudaraba- and musharaka-based mechanisms, I propose
that both the practitioners of, and the specialists on, Islamic banking make an effort to
increase the proportion of such mechanisms in the theory and practice of Islamic ?nance.
To achieve this goal, they must develop ways to make these alternative mechanisms
more attractive for both banks and their clients. Moreover, a quote might be imposed to
include these mechanisms in their transactions. However, it is clear that the practitioners
of Islamic ?nance might be reluctant to apply these measures, which requires the Sharia
Boards and the ulema to encourage them in this direction.
As for the general SM conditions of Islamic banking, I have three concrete
recommendations to improve them.
First, the Islamic legal tradition contains some institutions such as the different
forms of the waqf created to meet emergent needs (e.g. cash waqfs found in the
Ottoman practice) and novel forms of contracts (e.g. bay’ al-wafa (debt guarantee sale)),
which emphasize collective maslahah and could serve as models for modern day
transactions. In this context, some of the provisions found in the classical ?qh that are
changeable on the basis of dynamic customs could be updated and revived in light of
new needs and modern developments, such as the widespread use of information and
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communication technologies in commercial transactions. It is always preferable to hold
a long-term SM in this regard than a narrow, overly legalistic approach.
By the same token, second, the increasingly global scale of the existing ?nancial
system should be considered as an essential element of understanding Islamic ?nance
from a SM perspective. Scholars and specialists working on providing solutions to the
problems faced by Islamic banks from the perspective of Islamic ?qh must consider the
social implications of fatwas as well as their legal aspects. For instance, they should
always keep in mind that these institutions are corporate bodies; that is to say, they are
very different than actual persons working with small amounts of ?nancial capital.
Although there is not much difference between the two types of agents from a strictly
legal perspective (as both of them enter into similar types of contracts and are
encountered by similar laws), they are extremely different in terms of their capacity to
carry out social and welfare functions. A number of provisions in the Islamic law could
also be updated from this perspective, as the Islamic ?qh is quite ?exible in terms of
producing new legal mechanisms or contracts and classi?cations. The essential
principle here is that unless there is a clear violation of a basic principle of Islamic law,
new contract or transaction types, and new partnership mechanisms are allowed – and
maybe even necessary under new circumstances.
Finally, it might be useful to create and institutionalize an international social
platform, which might be called the “SM Forum for Islamic Banking,” whose task
would be to produce various projects for Islamic banks. It would bring together
specialists (academics and professionals) from diverse ?elds, including sociology,
psychology, and law as well as economics, ?qh, and the Islamic ?nance itself. This
forum must be an inclusive one in terms of both professions/?elds and nationalities of
its members because SM is a concept that touches upon many different aspects of
social and psychological life, and thus requires a comprehensive perspective and a
mindset that emphasizes “the social” as well as market conditions and economic
relations. The forum might also contain various national and international committees
(and sub-committees) organized around different themes and/or sectors (e.g. education,
health, irrigation, etc.) that will produce and oversee a number of SM projects suitable
for different institutional and cultural contexts.
6. Conclusion
These recommendations and various problems discussed above clearly indicate that
Islamic ?nancial institutions still have a long way to go in terms of ful?lling their SM
functions in a sustainable (as opposed to contingent or transitory) manner because they
lack certain structural mechanisms for this task. I have discussed several important
factors that are accountable for this failure; the most pressing one among them is the
domination of the banks’ ?nancial activities by the murabaha-based mechanisms.
I have argued that a possible increase of the share of other, more ?exible mechanisms,
particularly the mudaraba- and musharaka-based operations, would help Islamic
banks both to escape from the trap of transforming into capitalist banks and to better
ful?ll their social and welfare functions.
I have also discussed other factors that have led to this failure, including the
unfovarable conditions and institutional and cultural contexts in which Islamic banks
have to operate, various administrative and legal constraints they encounter, and a
lack of academic or intellectual competence producing a holistic perspective that could
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guide them in a hostile environment. Improving SM through structural mechanisms
requires Islamic banks to diversify their transaction types, rather than focus solely on
the murabaha by emulating contemporary capitalist ?nancial institutions. They also
need to be able to operate in a more ?exible and broader legal and economic
frameworks in order to undertake meaningful SM-based projects. I have thus discussed
a number of more or less concrete recommendations that might help overcome the
current crisis of Islamic banking in this respect.
However, I have also argued that the ideal situation for SMfunctions of Islamic banks
requires the existence of a healthy social, cultural and legal infrastructure. For this reason,
SMis too large a task to be achievedbyIslamic banks themselves only. Moreover, a lookat
the situation froma broader perspective shows that these social problems associated with
Islamic banks re?ect the general conditions of the Muslim world writ large. In fact, many
Muslim countries and institutions suffer a lack of well-established connections and
continuities between various economic activities and social policies pursued by political
and corporate bodies. Likewise, we do not see many social projects to combat poverty,
violence and other structural problems in Muslim regions designed from a holistic
perspective in a way that is integrated with the activities of larger economic and political
institutions. In this context, Muslim societies need to create other socio-economic
institutions, which can produce projects and organise their planning in line with the broad
objectives of Islamic ?nance (and economics) in the middle and long run in order to
increase the productivityof Islamic banks inrealizingtheir social functions andalleviating
poverty, thereby contributing to social development in their societies. A?rst step required
to reach such a goal must include a revision of the internal structures of Islamic banks
themselves, and a balancing of the distribution of their transaction mechanisms.
An important factor that lies at the root of such chronic and structural problems is
the prevelance of a mindset that conceives these problems in a strictly mechanical and
legal manner, thereby largely ignoring the social and human side of economic relations.
This is very much a product of the impact of modern, capitalist relations that tend to
nurture one-dimensional relations among one-dimensional institutions and individuals,
which challenges and disturbs their natural state, which involves complexity and
multi-dimensionality. Only a comprehensive, relational, and holistic outlook that
emphasizes the connections between the economic and social spheres of life could help
to signi?cantly improve SM functions by offering structural and sustainable solutions
to Islamic banks as well as other Muslim institutions.
Notes
1. For instance, this was the case when a bank called the “Ihlas Finans” collapsed in Turkey in
2001. Many of its shareholders who lost their money did not accept their loss and sued the
company instead.
2. In this context, Siddiqi states (2004): “There is also a need to distinguish between the
objectives of Islam as a way of life and the objectives of Islamic Law. The former involves
aspects of personality and society the latter does not cover. Also, the former has a larger box
of tools than available to the latter. Envisioning Islamic economy in twenty-?rst century is
better done with reference to goals of Islam as a way of life rather than being done with
reference to the goals of Islamic law. This will enable us to handle issues like poverty and
inequality that a law-based approach has failed to handle.” Siddiqi (2007, p. 101) “also notes
that in the current mechanism Shari‘a scholars’ role is rather technical, whereas the main
project from which Islamic ?nance branched out was civilizational.”
Integrating
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3. This is particularly true for the so-called “participation banks” in Turkey. However, one
should note that this lack of Islamic references is also related with the fact that these banks
are bounded by secular laws, particularly the “?nance law” in Turkey.
4. Asutay (2007, p. 168) states that despite the fact that Islamic economics provides
foundational axioms that proposes an ethical system of economics and ?nance based on the
ontological and epistemological sources of Islam, Islamic ?nance does not support, nor is it
supported by, the normative assumptions of Islamic economics.
5. In a parallel argument Warde (2009, p. 168) says: “Because murabaha-type transactions do
not bring signi?cant social and economic bene?ts to the community, have a short-term
orientation and tend to mirror conventional ?nance, Islamic scholars have accepted them
grudgingly.”
6. Mudaraba is a contract, with one party providing 100 percent of the capital and the other party
providing its specialist knowledge to invest the capital and manage the investment project.
Musharaka is the Islamic contract for establishing a joint venture partnership. In musharaka,
two or more parties contribute capital to a business andparticipate with the related pro?ts and
losses. Ijarah contract is basically the transfer of a valuable use (usufruct) while the ownership
remains with the lessor with all its liabilities involved. Salam is a sale whereby the seller
undertakes to supply some speci?c goods to the buyer at a future date in exchange of an
advanced price fully paid at spot. Istisna means to order a manufacturer to manufacture a
speci?c commodity for the purchaser. Takaful refers to participants mutually contributing to
a common fund with the purpose of having mutual indemnity in the case of peril or loss.
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About the author
Ismail Cebeci graduated from the Islamic Law department at Marmara University, Istanbul, in
1998. He completed his MAinthe same department in2001 withhis paper onthe “Sheikh al-Islams’
Fatwas in the Late Ottoman Period.” After studying Arabic literature in the graduate school at
Marmara University for two years, he switched to the graduate program in Islamic Law at the
same university in 2004, where he was awarded a PhD degree in 2010 with his dissertation, titled
“A Critical Analysis of Murabaha Debates in Modern Islamic Economics.” During his graduate
study, he spent one year at Syracuse University in New York, and two years at Jordan University
in Amman, during which he took graduate-level classes on Islamic economics and
?qh al-muamalat. He also visited the Islamic Development Bank, the Albaraka main library,
and the Majma’ al-Fiqh al-Islami in Jeddah, Saudi Arabia. He has recently taught Islamic Lawand
Islamic Economics in Istanbul, Turkey. He also worked as a Lecturer in Arabic at Marmara
University. Between September 2010 and January 2012 he was a Visiting Fellowat Oxford Centre
for Islamic Studies where he also taught Islamic Finance to graduate students. In the spring term
(2012) he was a Visiting Scholar at ILSP, Harvard Law School. Currently he is a Researcher at
Oxford Centre for Islamic Studies. Ismail Cebeci can be contacted at: [email protected]
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