Islamic Commercial Law in Saudi Arabia

Subject: Law
Pages: 17
Words: 4531
Reading time:
16 min
Study level: College

Introduction to Shariah Law

The Shariah Law is the legislative system which is provided for by Islam. The legal framework under the Shariah law is aimed at regulating the public as well as the private behavior of the people in a justifiable manner according to the teachings of Islam. The Shariah Law is derived form the teachings of Islam as depicting in the Koran, the sayings and the life teachings/ conduct of the Prophet Muhammad along with the combination of fatwa’s that are passed through Islamic Jurisprudence. The Shariah law allows that as the changes take place according to the passage of time it be required for additional legislature to be implemented under the Shariah. As a result some aspects of the legal framework are considered by a group of Islamic scholars and clerics who form the Islamic jurisprudence through which fatwa’s or declarations can be made fro inclusion in the Shariah law. The main concept that drives Shariah are humanity, equality and peace. “In the Islamic tradition Sharia is seen as something that nurtures humanity. They see the Sharia not in the light of something primitive but as something divinely revealed. In a society where social problems are endemic, Sharia frees humanity to realize its individual potential.” (Sharia, BBC Religion and Ethics – Islam, 2009).

Shariah is applicable on the lives of all Muslims, while regions where the majority of the population is Muslim are governed by the Shariah laws. The aspects of the legislative framework that are governed under the Shariah law include Islamic banking, Islamic Commercial Law, inheritance, politics, economics, contracts, business, as well as social issues. Aside from this where other alternative legislative systems are present, the Shariah can be used a source of Islamic legislature for Muslims from which the regional legislature can be derived through Islamic jurisprudence of prominent scholars and clerics of the religion. There exists only one country in the world, Saudi Arabia, where Shariah is employed in its essence as the law of the state.

Features of Islamic Commercial Law

The Islamic Commercial Law was officially provided recognition in the 21st century in 1975 when the Islamic development Bank was established by mutual agreement between various financial institutions participating in the Organizations of Islamic Conference. Similarly the use of Islamic indices was also initiated in 1999 when the application of Islamic Commercial Law for portfolios was made in the capital and financial markets

The Islamic Commercial law highlights laws, legislature and guideless for trade, commerce and business transactions “based on values of justice, equality, and fairness. In the world of commerce, these values take the form of prohibitions against usury (ribā), transactions involving excessive uncertainty, insurance contracts, and businesses involving gambling, alcohol, and the consumption of pork, pornography, prostitution, and weapons.” (Warren, 2009). The main objective behind the Islamic Law for commerce and business transactions is to provide fairness for all and certainty when it comes to the fulfillment of contractual obligation. The roles of the different parties involved in trade are harmonized while the points and basis for transactions are clearly documented through contracts for record keeping proof of the transaction.

The Islamic Law for commerce gives more freedom and rights to people involved in business by providing them with interest free capital provision and equal hare in profit and loss on investment returns. The contract law in the west renders the parties involved in a contract to be bound until the termination of the contract or the expiry of its fixed period. However the Islamic Law of contracts in commerce allows either party to dissolve the contract on the basis of dissatisfaction. Similarly business can be terminated by partner, where more than one are present, under the Islamic Commercial Law even if the agreement of the business according to western law states that the contract is fixed and cannot be terminated until it expires after period of time. “Financial transactions may be structured to reallocate risk-sharing and profits by using the Islamic doctrines of murābahah (the sale of commodities at prices that include stated profits foreseen by seller and buyer); mudārabah (a form of trust whereby an owner entrusts funds to a trustee, who returns the principal and an agreed-to share of profits after using the funds for a specified purpose); mushārakah (a partnership of limited duration for the purpose of completing a specific project, and which allows partners to share losses based on the proportion of their capital contributions); ījārah (a type of lease allowing a bank to purchase equipment or machinery and lease it to clients, who may ultimately take absolute ownership); muqaradah (which allows banks to issue bonds to finance specific projects); bai῾mu῾ajjal (the practice of purchasing and reselling property on a deferred payment basis) and bāi῾salam (whereby a price is paid at the time the contract is formulated, but delivery takes place at a future date).” (Warren, 2009).

The functions of the Islamic Commercial Law compose of the main elements of commerce pertaining to trading, leasing, partnership and the support and management of contracts. Under the function of contracts management, the theory of Islamic lawful contacts is presented featuring the aspects and attributes that make a contract valid. The theory of riba and gharar is clearly pointed out in the contracts pertaining to banking and finance. The aspect of trade that is covered by the Islamic commercial law pertains to making the sale, the essential elements that complete a sale, the classification of the sale according to its attributes and the distinction of the different types of sales. The concept of deferred payment and differed delivery are elaborated upon along with the sale of asset or sale of different currency/ foreign exchange to furnish a debt. The leasing aspect of Islamic banking is explicitly stated in the Islamic Commercial Law which provides the rules that govern the establishment and management of the ijara, as well as those which pertain to the rental leases. The different forms of ijara are highlight in the Islamic Commercial Law along with the various reasons for its termination that are present and how the lease can be renewed again. The distinction between the operational lease and the financial lease is provided along with the ownership of the lease. Shirkah or partnership is covered by Islamic Commercial Law through the Mudarabah and the Musharakah that highlight the concepts of Islamic partnerships.

Significance of Islamic Commercial Law

After the development of the Islamic Commercial Law from the teachings pointed out in the Shariah, the Islamic Commercial Law all but disappeared due to its impracticability and inapplicability in the real world where multiple factors influence operations against the teachings of Shariah. However in the recent decades the orientation towards the study and exploration of Islam has grown which has caused extensive debate on Shariah and its guidelines. These have contributed towards the revival of the Islamic Commercial Law.

The growth and development in the Islamic world along with the growth of the Islam as a religion in countries around the world has led to increase in business transactions, and investments by Muslims, who also require access to Islamic banking. The combination of the above mentioned factors have considerably contributed to making Islamic Commercial Law significant in the recent years.

The orientation towards the adoption of the Shariah law by Muslim countries as their state based law has encouraged development and exploration in the field of Islamic Commercial Law in specific sectors of operation. “In UAE, which has a split system, the fundamental law is the Civil Code, which is based on the Shari’a. The Commercial Code is asset of variations from, and additions to the civil code. So the Commercial Code is subject to shari’a influence. Significant provisions include Art 1(means of filling gaps in legislation), Art 2 (interpretation), Art 3 (public policy), Art 200(1)(legality of contractual object and Art 96 (certainty). In addition, the Civil Code includes bodies of rules relevant to commercial matters but drawn from Shari’a. Examples include the general law of contract, the law of property, the law of traditional (nonblank) guarantees, the law of security over movables and the law relating to the transfer of rights. The commercial aspects of Sharia therefore cannot be ignored.” (Foster, 2006).

However it needs to be highlighted that there do exist some issues when the Sharia based Islamic Commercial Law is considered as the basic commercial law of the state. This is because the rules and regulations of Shariah that impacts the Islamic Commercial Law are not compatible with the general code of commercial legislature as popular in the west. Issues regarding irregular profit sharing and presence of interest would still be predominant. Therefore issues can occur when a country joins an economic forum or a legislative body that goes against the principles of Shariah.

Most countries in the world that have implemented Shariah have done so on a selective basis. This indicates that if the Islamic Commercial Law is employed it would still be able to operate in the presence of other commercial codes. The main reason for this is because the main principles of the Islamic Commercial Law derived from Islamic Jurisprudence and Shariah are very general in nature and coincides with the key guidelines of the commercial codes. The England common law and its associated legislature is very much akin to the Islamic Commercial Law thus depicting how its possible for countries to operate on a Civil Code basis as well as Islamic commercial based legislature.

Islamic Banking

Islamic Banking is akin to the normal commercial banking; however it is difference in few aspects according to the Shariah Law. In Islamic Banking there is no concept of interests the law prohibits the investors and lenders to earn guaranteed fixed profits on their investments and supplied credit lines. As a result the concept of interest is abolished in Islamic banking. Aside from this it is also forbidden under the Shariah and the Islamic Commercial law to invest in businesses that deal with pork, alcohol, gambling and other questionable business. Islamic banking has been described in the teachings of the religion however the modern Islamic banking was initiated by Egypt in 1963 with the establishment of a profit sharing savings bank in a small town.

The main principles of Islamic banking pertain to the fact that Mudharabah also known as profit sharing whereby the profits and losses on the investment are shared by the customer and the bank in the ratio of their respective investments. An Islamic bank goes into a joint venture agreement with the customer under the Musharakha which enables the bank provide capital investment in businesses for in association with its customers though a documented process where the profit and loss sharing done on the basis to the customer at of pro rata. The Wadiha or safekeeping is the Islamic banking concepts which provides that the bank is responsible for keeping the funds of the customer as an ‘Amanat’ and is responsible for its safekeeping. Murhaba is another principle of Islamic Banking which is provides that the sale is documented with the cost of the product sold is explicitly mentioned along with the mark up put on the sale. This information is provided to the buyer in order to educate them whether the sale is made at profit, or at cost. Even a sale made at loss also has to be documented and shared with the buyer. Islamic banks make use of Murabaha for dealing with micro financing products, property, the import and export related services as well as when providing asset financing to customers. “The prohibition of charging interest forces Islamic Banks to either ‘sell’ tangible goods or take equity positions in the businesses they finance. Hence they assume more risk than do conventional banks. Venardos emphasizes, to a fault, how Islamic banks provide conventional banking services, yet he does not delve into some of the services they provide that are similar to those provided by conventional mutual funds. A substantial part of Islamic banking involves partnerships formed in the course of financing that are more reminiscent of developing a portfolio of equity positions like those of mutual funds”. (‘Islamic banking in Southeast Asia’, 2008)

Traditionally however the concept of Islamic banking was rather simple where the products and services were trade based along with the businesses where investments were being made. The profits and losses form the investments made in business were shared by the investors with profits coming in the form of dividends and losses being shared by both the customers and the bank The concept of interest free financial services is present in Islamic banking where by insurance and leasing of assets are provided to the customers without the any interest. In leasing the Islamic bank buys the car or an asset for the customer and allows the customer to make use of the asset. The customer is liable to pay the total cost of the asset over a period of years with no additional payables in the form of interests. “When it comes to mortgages or car loans, typically the bank buys the home or car for the customer, who in turn leases the items back from the bank. ‘We buy property on behalf of the customer and they pay us back in monthly installments over a maximum of 25 years,’ said Emile Abu-Shakra, a spokesman for Lloyds TSB in London. ‘The bank and buyer enjoy a kind of partnership.’” (Emling, 2005).

The concept of Islamic banking has rapidly become popular due to the performance and the growth potential depicted by the industry. When faced with the current financial crisis, the industry has been able to survive unscathed which is making it more attractive for businesses worldwide. “Islamic indices historically have also been outperforming the other indices with the Dow Jones Islamic Developed World Index outperforming the MSCI World Index consistently over the past few years. Growth in Islamic banking has also been stellar and it has been growing at a healthy rate of 15-20% per year according to estimates.” (Muahmmad, 2009).

Use of Islamic Commercial Law in Muslim Countries

There is only one country in the whole world that has adopted the Shariah in the true sense of the world for both its state legislature and its commercial legislature. Saudi Arabia is the country which has its law system entirely based on Shariah with the commercial code of the country also entirely made of the Islamic Commercial Law. Aside from Saudi Arabia no other country has implemented Islamic Commercial Law in this manner. Instead small sectors of parallel Islamized businesses and commercial sectors have developed in various countries which are run on the Islamic Commercial Code. In such instances the sector or only a few industries make use of guidelines of Shariah and the Islamic Commercial Law. An example of such industry is the Islamic banking industry which largely based on the guidelines of Islamic Commercial Law and is run parallel to the regular commercial banking industry. The Muslim countries that have developed Islamic banking or are using the Islamic Commercial Law in some sectors of operations include Malaysia, Pakistan, Iran, Turkey, Syria, Lebanon, Indonesia and UAE. In these countries Islamic banking is developed while Shariah based Leasing, Insurance and capital/ asset management products and services are also provided.

The war torn region of Afghanistan has also seen significant popularity of Islamic banking and Islamic Commercial Law. Men and women looking to rebuild there lives after the wars in Afghanistan have taken to taking out microfinance loans for small scale industries and entrepreneurial businesses. The products and services that are developed under the Islamic Commercial code are better received by the public in Afghanistan as compares to the traditional products for lending as they do not include the concept of an additional interest payment. Moreover the Murbaha practice is also advantageous for the business as it minimized costs of capital by apportioning it over a period of time. “Paul Robinson, FINCA’s country director in Afghanistan, says not only are the products better received than conventional forms of lending, the Murabaha practice is also better for business. ‘The advantage of Murabaha loans is that 100 per cent of the money goes into the business. When you do small business lending at Bank of America for instance and you are a small business, as a banker, I would give you a cheque with the name of the store, rather than giving the borrower cash to make sure all the money goes into the business,’ Robinson says” (Zafar, 2009). As a result the popularity of the Islamic banking products and Islamic Commercial code is lending a helping hand to the redevelopment of Afghanistan without putting strain on the people for recovering from the devastations of war and the Taliban.

Use of Islamic Commercial Law in the Non-Muslim Countries

Britain has significantly seen arguments for the implementation of Islamic Commercial Law which is based on the Shariah. While there are strong arguments against the application of the Shariah laws pertaining to human rights, crime and punishment as well as to inheritance, the application of the Shariah law to banking and business is increasingly being observed in the positive light. “In his book Islam in Britain, Patrick Sookhdeo, director of the Institute for the Study of Islam and Christianity, says there is an ‘alternative parallel unofficial legal system’ that operates in the Muslim community on a voluntary basis. ‘Sharia courts now operate in most larger cities, with different sectarian and ethnic groups operating their own courts that cater to their specific needs according to their traditions,’ he says. These are based on sharia councils, set up in Britain to help Muslims solve family and personal problems.” (Rozenberg, 2006).

Islamic commercial law is increasingly becoming popular in the western and south eastern countries that are predominantly non-Muslim in nature. The main reason for the attractiveness of the Islamic commercial law and business that are based on such law is the promising future that it provides along with the benefits that are reaped by the users. The growth potential of the Islamic Commercial Law is huge as depicted by the Malaysian economy which employs the Islamic Commercial Law. “Islamic commercial law has been a part of Malaysian law through an uncommon source – the English common law. Very different from personal law such as marriage and divorce, the Islamic law of transaction (fiqh muamalat), which in essence is the commercial transaction, is of general application for the Muslims and non-Muslims alike and is basically fair and essential by any standard” (Osman, 2007). The law structure is very similar to the legislature regarding business and finance in the non-Muslim countries particularly that provided by the England common legislature however the main difference is that it operates without the use of interest. This characteristic of the Islamic commercial has enabled the capital markets of the world that are based on the Islamic Commercial Law to be protected from the recent failure of the global capital and financial market, allowing them to thrive in these recessionary times.

The concept of Islamic banking has also taken up considerable demand in the non-Muslim countries. The main concept in Islamic banking is that all transactions, and services provided by the bank are free from interest and guaranteed profit which is banned by Shariah. As result the customers are provided a much better resource for their money while an effective and efficient lease relationship. “Islamic banking has also recently done rather well in non-Muslim countries with the reported size of UK Islamic banking overtaking that of majority Muslim countries like Pakistan. Islamic banking assets are thought to be anywhere from 700 billion dollars to 900 billion dollars as of 2009. The credit crunch that has affected much of the western world has not taken its toll on the Islamic Banks, mainly because of the nature of the underlying transactions which admonish Riba and encourage instead a partnership based approach.” (Muhammad, 2009) Aside from this Islamic bonds also termed Sukuk have been launched by many corporations globally which have a total worth of $100 billion. The concept of Islamic leasing also termed as Ijara which is combined with the Islamic form of insurance also termed Takafuul is also becoming increasingly popular in the western countries. Firms in UK and US alike are offering these services to their customers in the region due to increased demand fro them presented by Muslims and non Muslims alike.

The ban on interest and the more ethical management of fund is attracting non Muslims to open accounts with Islamic banks as the customers of the banks know that their depocisted funds are invested in healthy business that do not contribute to war, weapon manufacturing businesses or those involved in the trade of alchohol. “Banks such as HSBC have hailed Islamic banking as finally coming into the mainstream as they prepare to target not only the estimated 6 million Muslims in America — with a wealthy middle class that’s growing in size — but members of other faiths as well” (Emling, 2005) The strong demand of the Islamic banking amongst the non Muslims can be depicted by the fact that over 25 percent of the account holders of Islamic Banks in the nation of Malaysia are those who are not Muslims (Osman, 2007). World over the operations based on Islamic Banking have been established in over 100 countries that have a worth of $300 billion.

Perception of Shariah- Islamic Commercial Law in the West

There are mixed perceptions of the western world regarding the Shariah and the Islamic Commercial Law. On one hand the use of Shariah law and Islamic banking structures in countries outside of Muslim nations is increasing, while on the other hand the implementation of Shariah is being strongly opposed against by non Muslims as well as Muslims alike. The main reasons for the opposition of the Islamic Commercial Law and the Shariah law is due to the propaganda that is present in the media and the amount of devote that has been conducted against it.

As has been discussed earlier Islamic Commercial Law and Shariah are being increasingly sought after by the public in Britain. There are many Muslims that reside in the UK and their significant presence in the region has created a need for Shariah based courts and Islamic commercial law which can be applied to them. In this regard, the Archbishop of Canterbury mad an address in which he mentioned that it would soon become unavoidable for Britain not to integrate Shariah law and Islamic commercial law into its legal system. This however has been met by strong arguments by the media as well as the public in the west by Muslim and non Muslim alike. Those who protest the implementation off Shariah base their argument saying that “it would be ‘simply impossible’ to bring Shariah law into British law ‘without fundamentally affecting its integrity’. Shariah ‘would be in tension with the English legal tradition on questions like monogamy, provisions for divorce, the rights of women, custody of children, laws of inheritance and of evidence. ‘This is not to mention the relation of freedom of belief and of expression to provisions for blasphemy and apostasy.’ The church’s second most senior leader, Archbishop of York Dr John Sentamu, refused to discuss the matter. But he has said Shariah law ‘would never happen’ in Britain. Politicians joined the chorus of condemnation, with Downing Street saying British law should be based on British values.” (‘Sharia law row: Archbishop is in shock as he faces demands to quit and criticism from Lord Carey’, 2008).

Especially since the war on terror has been initiated by the US against Iraq and Afghanistan, the harsh rule of Taliban has come to light. Following the revelations of the Taliban rule, People are against the implementation of Shariah laws as they equate it with the kind of rule implemented by the Taliban. They state that “even in civil matters, Sharia law is discriminatory, unfair and unjust, particularly against women and children. Moreover, its voluntary nature is a sham; many women will be pressured into going to these courts and abiding by their decisions. These courts are a quick and cheap route to injustice and do nothing to promote minority rights and social cohesion. Public interest, particularly with regard to women and children, requires an end to Sharia and all other faith-based courts and tribunals.’” (Namazie, 2008).

Some Muslim communities and activation groups are also against the implementation of Shariah and the Islamic Commercial Law as it is based on the principles of Islam which incite anger and aggression in the Western world against the Muslim. This is a different approach which has been taken by the Muslim community on changing the principles of Islam and the Shariah to make it more acceptable to the Western world. They hold the primary argument that Shariah and all its related forms of legislative law should be either reformed or should be abolished, as in its current state it is not possible to merge the legislature with the norms of the modern sociality.


The Shariah law is a completely different system of law and legislature regarding economics, politics, banking, social issues as well as the rights of the people which are entirely based on the teachings of Islam, the teachings of the Prophet Muhammad through his life and the derivations and interpretation made by the Islamic Scholars and clerics. The Islamic Commercial Law is also entirely based on the Shariah and follows the rules and guidelines provided by that, however the Islamic Commercial Law is also compatible with the commercial law of the rest of the world particularly the England Common Law. The main reason for this is that the products, services, laws, and procedures that are outlines for business transactions and the management of the economy are based on simple rational rules of human rights and behavior. Moreover the Shariah allows room for interpretation from which the Islamic scholars have interpreted the teachings of Islam to develop a very similar form of Islamic Commercial Law that takes into account the needs of the people while still not indulging in the Haram elements of Riba/ interest, gambling, alcohol trade, and pork trade.

Currently there is only limited application of Islamic Commercial Law in selective sectors only in the Muslim world. The Islamic Commercial Law has attained significant importance, especially in the last couple of years as while the world has been reeling from the failure of the mortgage and housing markets and the financial/ capital markets, the sectors that run under the Islamic Commercial Law have not been affected by the crisis. This is making Islamic Commercial Law increasingly attractive for non Muslim as well as Muslim countries alike. Therefore the non Muslim countries are also adopting the Islamic Commercial Law for attaining strategic advantage. However as with everything else, some of the communities and public is against the adoption of the Islamic Commercial Law as it requires adoption of the Shariah code which is perceived as being restrictive, and not kind to the rights of humans specially the women and children according to popular opinion in the west.


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