Islamic Finance in the Global Economy

By Ibrahim Warde | Go to book overview

2
ISLAM, ECONOMICS AND FINANCE

Any successful belief system, whether religious or secular, has seemingly contradictory characteristics: it is malleable enough to adapt to a variety of geographical settings and to survive the test of time, but it must also be able to maintain its specificity, or it would disappear or become fused with competing belief systems; it is idealistic, sometimes even utopian, yet capable of adjusting to human imperfection and making the kind of compromises that are endemic to political and economic life. With this in mind we can better understand how a system rooted in the Middle Ages could survive, and thrive, in the global economy.

Following a broad overview of the parallel evolution of religion and history, this chapter explores the mechanisms by which Islam adapted to changing circumstances, and explains how Islam came to accommodate itself with modern economics and finance.


I Historical and Religious Background

The tenets of the Islamic religion can be conceived as a pyramid. At the top stands the Koran, considered by Muslims to be God’s word as conveyed to the Prophet Mohammed. Below it are the Hadith and the Sunna. Often used interchangeably: the first, commonly translated as the Traditions of the Prophet, actually refers to his words and deeds, as reported by a chain of transmission going all the way back to the Prophet’s companions; the second refers to the righteous path established by those words and deeds. In other words, the Hadith, in the form of a large and ill-defined number of short texts, relates stories about and sayings (specific pronouncements, deeds, or approvals of other people’s actions) of the Prophet, whereas the Sunna consists of the practices and rulings deduced from such narratives.

As for issues and questions not addressed by those primary sources, the proper Islamic view can be obtained through ijmaa and qiyas. Ijmaa means consensus, and is based on the notion that the communal mind of Muslim scholars of a particular age provides an assurance of freedom from error. Qiyas refers to reasoning by analogy or by logical inference based on primary sources. Jurists, through devout and careful reflection and effort (ijtihad) can derive appropriate rulings, by ascertaining how the Prophet and his four immediate successors – the

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