The Revolution in Islamic Finance

Abstract

The development of Islamic banking simultaneously represents an expansion of the global financial system, a revival and re-adaptation of Shari'ah principles along a spectrum of cultures and polities, and a potential bridge across gaps that increasingly divide Muslims from one another and from other great civilizations. Islamic finance is a natural magnet for interdisciplinary and cross-cultural researchers. It stands at the intersections of law and economics and of religion and politics, both globally and nationally. In the fields of international and comparative law, it provides a particularly exciting laboratory for students of international regimes, legal and religious pluralism, and the cross-fertilization of Western and non-Western legal traditions. Students of international law and politics will recognize the new regulatory architecture of Islamic finance as an international regime-in-the-making that is accepting direction from a more established yet still evolving global regime of banking regulators dominated by the industrialized nations of Europe and North America.1 As these two regulatory systems interact, it will be intriguing to see how they influence one another. Islamic bankers are keen to win greater recognition and legitimacy in global financial circles, and they seem resigned to complying with the prevailing movements toward standardization, disclosure, and corporate governance. However, they also want to preserve distinctive religious values and identities, sparking constant debate over when convergence and harmonization might go too far. Non-Muslim bankers and regulators are increasingly attentive to such concerns, especially as "Shari'ah-compliant" arms of Western banks become powerful and innovative players in Islamic financial markets around the world. Both the global and the Islamic regulatory regimes have strong reasons to accommodate the other's sensitivities; compliance is becoming a two-way street, and each side has a vital stake in the other's rule-making processes. If the crux of successful international regimes is institutionalizing trust and learning, then hopefully global finance and Islamic finance can strengthen their mutual regard and use it as an ongoing basis for solving common problems. Because many of those problems are ethical and human rather than merely technical and professional, the shared values of monotheism might help to support a productive dialogue. Western bankers are well aware that their industry leaders have shifted strategies from deregulation to re-regulation due to a wave of ethical and leadership failures that threatened the stability and integrity of the global financial system. Some leaders of the financial services industry are calling for broad reforms that would promote a more just and humane variety of world capitalism.2 Similarly, Islamic banking is still recovering from its own crisis, stemming from past scandals and from new fears of manipulation by terrorist groups. Its quest for transparency and uniform standards is also an effort to reset the moral compass that was supposed to guide Islamic finance all along.3 For students of legal and religious pluralism, Islamic finance exemplifies the Muslim world's continuing talent for mixing disparate traditions in an eclectic and dynamic synthesis. The theory and practice of Islamic economics supports more ambitious efforts to turn the Sharfah into a living law that can help to shape social change for many generations. Today, as in the past, the Shari'ah blends holy scripture and oral traditions with multiple styles of human interpretation. It constantly interacts with non-religious law from several sources, particularly local custom, state legislation, and a wide array of Western imports.4 The rise of modern international law adds yet another factor to the equation, creating opportunities for a reinvigorated Shari'ah to influence developments far beyond Islam's historical heartlands. Continued openness and flexibility in Islamic law are especially important as scholarly interest focuses on the problems of globalization and legal transplants. …