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According to the Islamic Finance Development Report 2019, the Islamic finance industry’s assets increased by 3% in 2018 to $2.5 trillion from $2.4tn in 2017. Iran, Saudi Arabia, and Malaysia were the three largest markets among the 61 nations that reported Islamic financial assets, each with more than $500bn in assets.
These countries conduct their businesses under Sharia law; moreover, Yemen, Brunei, the UAE, Qatar, etc also do business under Sharia law. Sharia-law countries, which are Islamic or Muslim-majority countries, have a legal structure influenced by Islamic ideas and jurisprudence.
Businesses operating in Sharia-law countries must adhere to Islamic finance principles, ethical business practices, and special contractual and partnership legal requirements. The regulations and provisions governing economic activity under Sharia law differ by country, but they are based on Islamic jurisprudence, Quranic teachings, and the Hadith.
Businesses in such nations frequently seek counsel from Islamic scholars and supervisory boards to ensure Sharia compliance. Regarding business-related issues, international companies generally search for a secure legal framework before settling in a country and launching their business.
Malaysia has a dual legal system that includes civil and Sharia laws. The legal framework for Islamic finance and business operations is well developed, and Malaysia is known for its Islamic finance industry.
The Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) have established regulatory frameworks for Islamic finance and businesses seeking to operate following Sharia principles. Additionally, some countries, such as Saudi Arabia and Iran, have stricter interpretations and implementations of Sharia law than others.
In a 2014 study, they assessed why and how the legal origins of Sharia law can explain the level of growth of Islamic banking in various circumstances. They discovered that nations with Sharia-based legal systems had highly developed Islamic banking systems using historical comparisons and cross-country regressions for 30 countries from 2005 to 2010.
Thus, while aiming to conclude necessary contracts and international transactions in Arab countries, business partners are challenged by the meaning of the application of Islamic law and the compliance of specific provisions of their agreements with Sharia Law requirements.
In countries that follow Sharia law, creditors give loans to the company, and as per the loan, they take interest. However, they cannot sit on board meetings of the companies. If the company needs to shut down, then the company must pay the debt to the creditors first, then the others.
Islamic law also developed some restrictions on business practices. For instance, the terms and conditions of a joint venture contract should be drafted to avoid any possibility of dispute during the conduct of business or at the time of sharing the profits or bearing the loss. Also, the business capital should be in the form of money if any partners are joining with their running business, commodity, or property.
In those cases, the value of their business shall be determined in terms of money, and this amount should be treated as the partners’ contribution.
In joint stock companies, the shareholders are only co-owners without enjoying agency rights. A typical company’s productivity and profit are measured based on invested capital. The proportion of partners’ respective shares in capital alone cannot be a factor in determining the partners’ claims to the business’s profits.
The financial accounting framework derived from the Sharia should be considered part of the social and economic system of Islam. Most importantly, the key to accounting objectivity rests with the integrity and personal responsibility of the accountant.
However, in the case of a Muslim accountant, because the Sharia lays down specific personal duties and obligations to society, the accountant cannot simply accept at face value the utility-maximizing theory that traditional neoclassical economic theory has advocated.
A thorough awareness of Islamic principles, cultural considerations, and legal nuances is necessary while conducting business in a nation that follows Sharia law.
The demand for Sharia-compliant goods and services, expanding markets, and ethical investment potential make it an appealing proposition for companies wanting to operate in this particular business environment while respecting regional cultures and values despite the hurdles.
Working with regional partners and seeking advice from legal and cultural authorities can be crucial for conducting business successfully in these nations.
Md Fahmedul Islam Dewan is a Lecturer at the Department of Law, World University of Bangladesh & and an Alumni of the prestigious DLA Piper Global Scholarship Program.
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