Islamic Finance: The New Regulatory Challenge, 2nd Edition

Chapter 9

Law and Islamic Finance: An Interactive Analysis

Yusuf Talal DeLorenzo and Michael J. T. McMillen

1. INTRODUCTION AND OVERVIEW

One of the most prominent features regarding the development of the Islamic economy in its “modern era” (which begins approximately 1390 AH, or 1971 CE) is the interactive influence of law and Islamic finance. Islamic finance is fertilising the development of law, particularly in its jurisprudential sense. And law, in both its jurisprudential and practical applications, is stimulating and shaping the growth of Islamic finance. This is the theme of this chapter. There is no pretense at comprehensive coverage of these interactive influences; the approach is to discuss only a handful of examples taken from both Islamic Shari’ah and secular law.

We begin with an historical analysis of how Islamic finance has influenced the development of Islamic jurisprudence. From little more than a concept in the first decades after most Muslim countries regained their independence following World War II, modern Islamic finance took the form of Islamic banks and investment houses in the 1970s and 1980s, and a growing body of scholarship was generated by the practical needs of those institutions as they began to proliferate, particularly as they accumulated more deposits and the demands for product diversity grew more insistent.

No legal system can remain viable without a subject, and without an object, for its application. In recent centuries, and until the 1970s ...