Ethics: Inherent In Islamic Finance Through Shari'a law; Resisted In American Business Despite Sarbanes-Oxley

I. INTRODUCTION Ethics are inherent in Islamic finance and are accepted by those wishing to enter the marketplace of Islamic finance; however, in America where ethics have only recently been integrated through Sarbanes-Oxley into our existing system of business, ethical compliance is met with resistance. Islamic financing is based on a system of ethics derived from the principles of the Quran. ' These ethical principles are applied to the financial industry through Shari'a law.2 Shari'a law governs all business transactions of devout Muslims who must be in compliance with Shari'a law in order to observe the principles of Islam articulated in the Quran.3 As wealth has increased in the hands of Shari'a compliant Muslims, so has the opportunity and demand to create Shari'a compliant investments.4 Regulatory standards have been created by the Accounting and Auditing Organization for Islamic Financial Institutions ("AAOIFI") to standardize the governance of every Islamic business product and service.5 Any institution offering a Shari'a investment product must conform to the ethical principles of Shari'a law set forth in the Accounting, Auditing, and Governance Standards for Islamic Financial Institutions created by the AAOIFI.6 The principles of Shari'a are enforced and monitored by Shari'a scholars through the issuance of a "fatwa," a religious blessing, certifying Shari'a compliance, at which point the investment product is deemed a Shari'a product.7 In response to corporate governance failures such as Enron, the United States took the first stride towards adopting a similar, ethical business model.8 The Sarbanes-Oxley Act of 2002 heightened disclosure requirements and raised the level of accountability.9 Sarbanes-Oxley introduces ethical principles to the United States corporate environment through the application of many rules.10 Currently, however, there is a backlash against Sarbanes-Oxley as it is perceived as being too costly,11 demonstrating the continued chasm between ethics and corporate law in America. II. Ethics in Islamic Finance Islamic finance flows from the principle that religion cannot be divorced from any aspect of life, including business.12 Shari'a law governing Islamic finance is derived from the guidance from God found in the Quran and the Sunnah (teachings) of the Prophet Muhammad.13 This necessitates tailoring conventional financial practices to fit within religious rules stemming from as far back as the time of Muhammad in 632 AD.14 Therefore, the industry of Islamic banking is quite distinct from the modern and secular investing practices of the West. This distinction creates an opportunity for Western financial institutions to create Shari'a compliant products and expand into this burgeoning marketplace.15 A. Growins Demand There is an increasing population of people looking for financial products consistent with their religious beliefs.16 The increase of money in the Middle East reflecting the growth of the oil industry has had a positive impact on the Islamic banking industry.17 The wealth in the Middle East has created a demand on the Islamic banking industry and an incentive for American companies to provide different investment options to meet this demand.18 In order to capitalize on this demand and serve the market, American investment firms must create AAOIFI compliant products. Recently, the Middle East, itself, has served the Islamic market by offering many new investment products.19 The Islamic financial movement began in 1973 with the creation of the Islamic Development Bank.20 The 1970's oil boom put money in the hands of many Muslim nations that wanted to adhere to their Islamic values.21 Since then, the Islamic banking industry has grown about 10% to 15% per year.22 In the past year or two, the high price of oil has shifted an enormous amount of wealth to the Middle East.23 Current estimates show that the oil exporters' current-account surplus could reach $400 billion. …