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Contemporary Islamic Finance: Innovations, Applications and Best Practices by Karen Hunt-Ahmed

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CHAPTER 3

The Legal Framework of Islamic Finance

CYNTHIA SHAWAMREH

Lecturer in Law at the University of Chicago Law School; Senior Counsel, City of Chicago Department of Law, Finance and Economic Development Division

The Islamic finance industry has developed into a significant sector integrated into the global economy. The legal framework for contemporary Islamic finance is dual in nature. Contemporary Islamic finance is practiced all over the world, subject to the secular legal systems that govern the places of the industry's operations. Islamic finance is also subject, in its very reason for being, to the theories, principles, and holdings of Islamic law. This chapter provides an overview of the legal framework for contemporary Islamic finance. Islamic legal theory and jurisprudential reasoning are outlined. The basic rules of Islamic finance, including the prohibition of riba, gharar, and haram activities, and the objective to promote social welfare are covered. The fundamentals of Islamic contract formation are discussed, including sales contracts, profit and loss sharing partnerships, leasing, and Sukuk. The essential question of who interprets Islamic law is considered, exploring the role and function of Shari'a scholars in contemporary Islamic finance and efforts toward industry standardization. The chapter raises questions presented by the operation of Islamic finance in dual regulatory systems, driven by the need to comply with both Islamic law and the multiple secular ...

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