Specific traits of Islamic law in relation to economic and financial systems

Abstract

Islamic law is a legal system with a number of specific traits, which determine the path to the Islamic economic system. The Islamic banking system has been overlooked as an alternative to our financial system for years. The lack of interest to which it was exposed in the past clearly left a trace of misconceptions, with which we are accustomed to view it. It does not just concern the concept of our Western world banking in an Islamic environment. It is a system based on pillars, which are based on a very different historical context. The goal of the paper is to describe and explain the principles of the Islamic laws and the actual behaviour of the economy, as well as the economic entities formally operating under Islamic principles (mainly banks). Based on an understanding of the principles of Islamic law and the principles on which Islamic banks work and on an explanation of the banks’ main characteristics, in particular the relationship with interest, loan usury and clarification of the method of profit gain, the paper aims to evaluate the effect of Islamic finance and outline the current practice in the light of compliance with the fundamentals of Islamic financial law.