Shariah Partnership and Islamic Banking in the Light of Shariah Injunctions - A Research Study

Abstract

The modern day institutionalization of Islamic Banking is viewed as the manifestation of the political will of independent Muslim nation states that emerged after the Second World War. The Muslim population of these newly formed nation states pleaded for a financial system that is aligned with their religious value system. Over five decades ago the earliest conceptualization of an Islamic banks was pegged on the ideals of participatory forms of financial intermediation. The profit/risk-sharing and equity based contracts of Musharaka and Mudaraba have always been idealized in the Islamic finance literature. However, the contemporary Islamic banks are predominantly engaged in debt-based asset and liability structures based on Murabaha, Salam, and Istisna contracts. This divergence is often attributed to lack of knowledge development around participatory modes, and also Islamization of knowledge to co-opt the existing financial structures. This paper seeks to address this gap, by conducting a thorough review of the historical, intellectual, and religious foundations of participatory business and finance, with a special focus on the institutionalization of Musharaka and Mudaraba contracts. This paper presents a comprehensive review of religious injunction drawn on Quran, Hadith, Sunnah and Fiqhi sources around participatory modes. Finally, this paper also presents the international standards, implications and applications of participatory modes in the contemporary settings e.g. (AAOIFI Standards, joint stock companies, and depositor’s profit pool management in Islamic banks). Findings of this paper shall potentially elucidate the practitioners, regulators, investors, and borrowers in fostering participatory/risk-sharing/equity based modes of financial intermediation.