Islamic business or Business according to Sharia law

Doing business in the Islamic world can be quite challenging, especially if one does not understand Sharia law and its implications. The key to smooth business transactions in the Middle East and the Muslim world as a whole is a common understanding of the purpose of Sharia law, where and how Sharia law is applied, and how it affects the transaction system.

Uncertainty arising from lack of knowledge of Islamic law is critical to doing business in Muslim and Arab countries, which compounds the problem of language and customs.

Sharia law can be difficult to understand. As a legal system they are very extensive. While other legal codes regulate public behavior, Sharia law regulates not only this, but also private behavior and even private beliefs.

History of Sharia

Starting from a basic religious foundation, Islam was first revealed to the Prophet Muhammad in 610 AD in Mecca, Saudi Arabia, and developed several hundred years after the death of the Prophet Muhammad in 632 AD, when the Islamic Empire expanded to the borders of the Northern Africa in the West and to China in the East.

«Sharia» — the Arabic word meaning "right path" refers to traditional Islamic law. Sharia law comes from the Qur'an, the Muslim holy book, which Muslims consider to be the real word of God, containing a set of rules of conduct and rules for people to follow, covering all aspects of Muslim life, including daily life, family and religious obligations, and business relationships.

Shariah is also based on the teachings and interpretations of the Prophet Muhammad, studied and explained by some Muslim legal scholars, these teachings are called hadith. Thus, Islamic law or Sharia — it is an arsenal of rules and jurisprudence that has grown with the interpretation, development and study of the Qur'an and hadith.

There are five central Islamic schools of interpretation and case law: the Sunni Hanafi, Maliki, Shaffi and Hanbali schools and the Jafari school of Shia, which find their basis in the Shia community mainly based in Iraq, Iran and Bahrain. These schools differ in the weight each of them gives to the sources from which Sharia law is derived, the Qur'an, Hadith and Islamic scholars.

Islamic law is extensive and varies from country to country. For example, in Saudi Arabia there is no law other than Islamic law, but in other countries the influence of Islamic law is less noticeable.

In most Arab countries, the position and role of sharia has influenced law and governance in various ways over many centuries. Many Arab and North African countries have adopted a mixed legal system, which is largely based on the French civil law system, with some influence from Islamic law in the areas of personal status and property.

In general, Sharia law is often used in whole or in part, at the national or regional level, in many other Islamic and Arab countries through the application of statutory law based in whole or in part on Islamic law, or to fill legislative gaps when Specific legislation lacks the necessary provisions.

Consequently, one of the common features of the laws of Arab countries is the similarity of the provisions of the Civil Codes. Another important common feature is the application of Islamic law in all Arab countries, especially in matters of family law, which has always formed an important part of Sharia.

This explains why there is no standard and uniform pattern that can be followed in determining the scope and conditions of the use of Sharia. Its application varies from country to country and generally depends on the religious, political and social structure of a society and the characteristics of its legal system.

Countries can apply Sharia law in one of several ways:

• Classical (whole country): Under this system, classical Sharia law is formally considered the equivalent of national law and regulates its content throughout the country.
• Classical (some areas): Classic Sharia is practiced in some areas, but not throughout the country.
• Muslims only: Sharia law applies only to Muslims.
• Mixed: There is a separate secular legal system, but it is influenced to some extent by Sharia law.

Islamic law in Saudi Arabia

Regarding the application of Islamic law, the Sharia state that Muslims aspire to is Saudi Arabia, which has no legal code other than Sharia, which is strictly enforced through its legislature in the absence of a developed codified legal system. In fact, in Saudi Arabia the basic system uses the term "regulatory authority" to refer to the legislative body of a country which has the power to make statutory laws and regulations. It also has the power to approve international treaties, agreements, regulations and concessions.

According to Islamic rules, only God can make laws. No other law is applicable if it is contrary to Shariah. In fact, in Saudi Arabia, the Basic Law of 1992 stipulates that the Qur'an and Hadith are the sole and exclusive sources of law and that all laws and regulations must be in accordance with divine law.

Besides Sharia law, there is a wide range of statutory laws enacted in the criminal, administrative and commercial fields that are in line with the development of the country. These government regulations, which cover many areas of law including the Companies Act, the Commercial Code and the Tenders Act, are legal and enforceable as long as they do not conflict with divine law.

In addition, all official legal materials in Saudi Arabia are written in Arabic, the official language of the country. Legal materials take many forms, but they can be divided into three main sources: Islamic law, statutory law and royal decrees.

The application of Islamic law in the courts of Saudi Arabia is mainly based on the norms of Islamic Sharia as interpreted by the Hanbali school — the fourth orthodox school of law in Sunni Islam.

Practical questions

From a practical point of view, there are basic aspects of prohibited elements in business transactions according to Islamic law, namely: riba, gharar and maysir.

• Riba or interest is strictly and expressly prohibited by Islamic law. While the traditional banking system is based on paying interest at a predetermined rate on cash deposits, riba is prohibited by Shariah. This is a source of unjustified benefit, and the prohibition of interest is seen as a way to establish fairness between the financier and the entrepreneur.
• Gharar or doubtfulness in a contract is also considered by Shariah as unjust enrichment arising from the uncertainty of the essential elements of the contract, therefore it is prohibited.
• Maisir or gambling is also prohibited based on the fact that the apparent agreement between the parties is actually the result of an immoral inducement caused by the false hopes of the parties that they will receive undue benefit from the contract.

Islamic law also placed some restrictions on business practices. For example, the terms of a joint venture agreement should be drafted in such a way as to avoid any possibility of dispute during the conduct of business or during the sharing of profits or losses.

In addition, business capital must be in the form of money. If any of the partners joins his existing business, goods or property, the value of his business should be determined in monetary terms and this amount should be considered as the contribution of the partners.

Plus, in joint stock companies, shareholders are only co-owners and do not have agency rights. The rights and obligations of partners depend on the nature of the joint business and are mainly governed by customs and conventions.

Additionally, in a joint business, productivity and profits are measured on the basis of invested capital, and the proportion of partners' shares in themselves may not be a factor in determining the partners' respective shares of the profits of the business.

Advantages of doing business according to Sharia law

• Savings. The conventional global banking system is based on paying interest at a predetermined rate on cash deposits. Since both payment and receipt of interest are prohibited in Islamic finance, Muslims have a specific banking system. Many foreign companies, private equity firms and venture capitalists can benefit from the financial inclusion of Islamic banking, which can lead to increased savings.
• Risk Avoidance. Sharia law prohibits any investment that could support industries or activities that are considered harmful to people and society as a whole. This means that businesses using Shariah finance must pay attention to reducing the harm caused by their products. These activities include, but are not limited to, speculation and gambling. Companies interested in sustainability and environmental protection may find that their values align with those in the Middle East.
• Stability. According to Sharia law, Islamic banking institutions will not deal with companies whose financial position is precarious, since Islamic trading is aimed at reducing risks and investing safely.
• Accelerating economic progress. Islamic banking focuses on investing only in promising businesses to attract more depositors' funds. As a result, this provides high returns on investment not only for the bank, but also for depositors. This concept differs from that of a conventional bank, in which depositors redeem returns on their deposits based on predetermined interest rates.
• The Fatwa Council will review each transaction. To ensure that a product of any kind — for example, a financial transaction or a real estate transaction — Shariah-compliant, it must be approved by a fatwa council or committee, which is essentially a Shariah supervisory board. Each fatwa council or committee may be different; everyone may have their own interpretation and tolerance for different aspects of the transaction.

Sharia law requires compliance with certain principles before making any transaction. Each type of transaction has its own unique set of rules and principles.

Shariah compliant businesses operate in accordance with Islamic law. To be considered compliant, businesses must comply with basic Sharia principles regarding contracts, property rights and other aspects of trade.

Generally speaking, the following two principles are fundamental to Shariah-compliant business:

• Material finality of the transaction. According to Sharia law, every transaction must be related to the real and real economic transaction underlying it.
• Profit/Loss Sharing. Each party to the contract shares the profits, losses, and any risks associated with the transaction. All parties should benefit equally from the transaction.

Shariah-compliant businesses are subject to special taxes and regulations and are often considered more trustworthy and ethical than businesses that do not necessarily comply with Shariah law.

Financial structures in financial and real estate transactions

Financing mechanisms have been developed to help those involved in business to comply with the restrictions and principles of Shariah. As discussed above, the concept of profit sharing is prevalent in Sharia law. Here are three popular structures:

• Mudaraba — profit and loss sharing partnership. Mudaraba — It is a profit-and-loss-sharing partnership agreement in which the parties share profits according to a pre-agreed ratio. Typically, the financing investor here is an Islamic bank.
• Musharaka — joint venture with profit and loss sharing: Musharaka — It is a type of joint venture in which all participating parties contribute capital and likewise share profits and losses on a proportionate basis.
• Ijarah The Ijarah lease structure establishes a landlord-tenant relationship rather than a creditor-debtor relationship in order to comply with Shariah principles. It is similar to a regular lease, but with some important differences. For example, Sharia law requires the owner of an asset to have certain responsibilities. These responsibilities include:

1. Perform major or structural repairs
2. Obtaining property insurance
3. Payment of property taxes

Sharia rental structures include other types such as murabaha (sale using a markup structure) and bai al-salaam (sale through a markup structure with delivery to a pre-agreed structure at a future date). However, the Ijarah structure is the most common for real estate investments.