Contemporary Islamic Finance: From Socioeconomic Idealism to Pure Legalism

Ever since the first wave of European armies reached the Mediterranean shores of the last Islamic empire in the late eighteenth century,1 Western influence has dominated many important aspects of Muslim life, most notably in the areas of trade and finance. Traditional Islamic contracts and financial instruments that once prevailed in Muslim commercial markets have been replaced by Western financial instruments and institutions. The wholesale adoption of the French civil code (or the Napoleonic Code) by most Middle Eastern countries is unambiguous evidence of the magnitude of such European influence. By the beginning of the twentieth century, many pro-independence political movements began to form strong resistance to Western influence and colonial insensitivity to Islamic culture and social values. Some movements, such as the Egyptian Muslim Brothers Movement (Harakat al-lkhwan al-Muslimin), joined their demands for political independence with demands for adopting homegrown and Islamic-inspired social and economic reforms. One of these demands called for the abolishment of the Western banking system on the ground that it violated Islamic principles, most notably the prohibition of usury. The allegations that Western banking involved usurious practices stimulated important discussions and debates among Muslim jurists and economists over the legitimacy of Western financial institutions and the viability of Islamic financial alternatives. These discussions and debates constitute the underlying theoretical foundation for contemporary Islamic finance practices. Two main approaches to such discussions can be distinguished. While some writers focused on highlighting the social and economic benefits of an Islamic system ("socio-economic approach"), others adopted a more pragmatic approach aimed at finding the optimal structure of Islamic financial institutions ("IFIs") that could efficiently function as lawful or permissible (halal) platforms for offering conventional banking and financial services ("legalistic approach"). The socio-economic approach was inspired by the writings of the Islamic thinker Abu al-A'la al-Mawdudi2 and the Egyptian Islamists and leaders of the influential Muslim Brothers Movement, Hassan al-Banna and Sayyid Qutb. The work of these three Islamic activists focused on the overall reform of Muslim societies, covering the political, social, and economic aspects of life.3 More recently, Muslim economists, such as the Egyptian economists Ahmad alNajjar,4 Khurshid Ahmad,5 and Muhammad Umar Chapra,6 have reiterated the Islamic economic reform ideas and, in some cases, attempted to implement them. The legalistic approach, on the other hand, benefited significantly from the influential writings of the renowned Iraqi and Shiite scholar Muhammad Baqir as-Sadr7 and the Islamic finance scholar and banker Sami Homoud. These two academic approaches define the practice of contemporary Islamic finance. Although most of today's IFIs fall under the legalistic approach, the Mit Ghamr Local Savings Bank, founded by Ahmad al-Najjar and considered by many to be the first modern Islamic bank, is one of the few examples of the socio-economic approach. I. SOCIO-ECONOMIC APPROACH As mentioned earlier, this approach presents Islamic economic and financial ideas as a response to demands for social justice and economic opportunity, while at the same time complying with Islamic legal and moral principles. The proponents of this reform-driven approach claim that Islamic alternatives offer superior social and economic benefits to Muslim society. The two main contributors to this approach are the Muslim Brothers Movement ("Movement") and the Islamic finance pioneer, Ahmad al-Najjar. A. MUSLIM BROTHERS MOVEMENT'S REFORM INITIATIVES The Movement was founded by Hassan al-Banna in 1928 and is considered to be the original ideological fountain from which most contemporary Islamic activism sprang. …