The Relationship between Traditional as well as Modern Modes of Financial Instruments for International Market through Islamic Finance

Headnote

Abstract

Islamic financial system compared to western conventional system is related to the religion of Islam. The principles of Islamic finance are based on three main factors which are mentioned in the Quran and are an important part of Islamic jurisprudence, such as Riba, Gharar and Maysir. Islamic commercial law is based on three modes which serve as the basic blocks for complex financial products. These three modes are partnership based, trade based and rental based modes of financing. These three traditional modes of financing are dependent upon the size and limitations of entire market and desires of their target customers. The modern modes of financing consist upon Islamic Insurance (Takaful), Islamic financial derivatives, Islamic bonds (Sukuk) and Istisna. Furthermore, there should not be pure economical interest in transactions; it must contribute to the social harmony. It shows balanced between equity and debt and the trade of debt must be avoided which is explicitly expressed in the pillars of Islamic banking.

Keywords: Islamic jurisprudence; Social harmony; Traditional; Modern financial instruments

© Shabbir MS, 2016

INTRODUCTION

The principles of Islamic finance are based on three main factors which are mentioned in the Quran and are an important part of Shariah1 and Islamic jurisprudence, such as Riba, Gharar and Maysir. The concept of Islamic finance has existed since the emergence of Islam. However, it was not as developed and systematic as today before late 1970s. The main idea of Islamic finance is perhaps best described by Iqbal et al. [1]. They state that under Islamic jurisprudence there are two kinds of rulings, the worship ruling which governs the relationship between man and Allah, and the second being mutual dealing rulings which governs the relationship among mankind. The general principle of mutual dealing rulings is that, everything is permitted unless clearly prohibited, which includes the principle of Halal and Haram discussed earlier [2]. They call it the "Doctrine of Universal permissibility". Iqbal et al. [1] further state that; "In addition to the Doctrine of Universal Permissibility, Islam permits the contracting parties to agree on any conditions as long as they do not violate any Sharijah ruling. ...We call this the 'Golden Principle of Free Choice'. As may be seen, this principle gives a very wide scope for...