Culture and Civilization Matters

October 24, 2009

Islamic Economics, Banking and Business Practices


With 1.3 billion people, a rich endowment of natural resources, and large pools of captial, Islamic nations are a significant component of the global economy.

As the video below outlines, Dubai is first among equals when it comes to doing business in this region:


The principles inherent in Sharia Law have a direct impact on how business in conducted in the Islamic World. According to Frank Voegel and Samuel Hayes of Harvard University, “Westerners who plan to do business in the Persian Gulf need to appreciate the extent to which religion and Islamic Law are intertwined and permeate all levels of society, including commerce.”

The three fundamental prohibitions in Islamic Finance Include:

    Riba(Interest) Essentially riba covers any return of money on money.

    Gharar (Uncertainty): This is often used as the grounds for criticism of conventional finance practices such as short selling, speculation, and derivatives.

    Maysir(Gambling): Often used to argue against conventional insurance and derivatives.

Sharia Law shapes Islamic Markets. Partnership is often preferred to hierarchy, speculation is prohibited, and charging of interest is not allowed because it is seen as exploitative according to the teachings of Islam. For example, prohibition of speculation forbids futures markets, currency hedging, or the representation of gambling companies in mutual funds.

The prohibition of fixed, predetermined interest payments also prevents the establishment of primary or secondary debt markets.


To gain a more in-depth understanding of how Sharia law impacts business in Islamic regions you are strongly encouraged to review the following report from KPMG:

You can access the full report by clicking here.



Gillian Rice of Thunderbird contends that “A free market capitalist economy uses market determined prices as a filtering mechanism to distribute resources. The use of a price system alone, however, can frustrate the realization of socio-economic goals.”

Dr. Rice continues, “Islam is absolutely unambiguous in its objective of eradicating form society all traces of inequity, injustice, exploitation and oppression. The intense commitment of Islam to justice and brotherhood demands that Muslim society take care of the basic needs of the poor. In the eyes of Islam the rich are not the real owners of their wealth: they are only trustees and, through Zakah, they are obligated to share that wealth to care for less privileged members of Islamic Society. In short, income redistribution is not only an economic necessity, but also a means of spiritual salvation.

The Islamic worldview implies that the market system should be maintained, but that the price mechanism be complemented with a device that minimizes unnecessary claims on resources. This device is known as the Moral Filter. This means that people adhering to Sharia Law would pass their potential claims on resources through the filter of Islamic Values so that many claims would be eliminated before being expressed in the marketplace.

According to Rice, there are there are three primary Moral Filters:

    Unity (tawhid): Unity is by Muslims as a coin with two faces: one face implies that God is the sole creator of the universe and the other face implies that people are equal partners or that each person is a brother or sister to the other. Tawid essentially means a brotherhood based on equality. Economically, Choudhury suggests that peoples of Islamic faith believe that behind the workings of an economy based on market exchange, the allocation of resources, the maximization of utility and profits there is a more fundamental truth – that of social justice.

    Justice (adalah): Islam teaches that all wealth should be productive and people may not stop the circulation of wealth after they have acquired it. Equitable distribution of income and wealth is incumbent upon both the Islamic state and the individual. At a micro-level the Islamic view of inheritance helps to redistribute private property. The primary motive of the law of inheritance is to put a final check on the concentration of material assets in the hands of the few. Sharia Laws centered on the Moral Filter of Justice can present unanticipated consequences for the economic development of a region as Duke Professor Timur Kuran explains in the video below:

    Trusteeship (khilafah): People are viewed as trustees of the earth on behalf of God. As we learned from Tom Standage, when Muslim merchants traveled to distant lands, the inhabitants of those lands were impressed by the trader’s social and business conduct and so became curious about their beliefs. In Islam, there is no conflict between the moral and socio-economic requirements of life. Resources are for the benefit of all and not just a few and everyone must acquire resources rightfully.

Perhaps this is why, as we learned from Tom in London, that most of the trade conducted in the Indian ocean during colonial times was governed by Sharia law.

According to Rice, “Muhammad advised Muslims to be moderate in all their affairs; in fact he even described Islam itself as the “Middle Way”. A balance in human endeavors in necessary to ensure social well-being and continued development of human potential.”

In Islam, business activity is considered to be a socially useful function. Muhammad himself was involved in trading for much of his life. The individual profit motive is not the chief propelling force in Islam. Social good should guide entrepreneurs in their decisions besides profit. In Islam it is established that worldly goods are for the advantage of all and that no one has the right to use these goods to cause a loss to other members of society. In regards to this value, the expected behavior of the firm would not be any different from the behavior of any member of society.

According to Masudul Choudhury, the main objective of a Muslim entrepreneur is based on:

    Reasonable Profit

    Just Price

    Just Wage

    The Welfare of Society

Islamic economics requires the market to work with cooperation, compassion, justice, charity and solidarity and to produce a socially acceptable optimality alongside economic efficiency.

In conclusion, based on her research, Dr. Rice suggests that “Leaders working in Islamic regions should develop and implement a balanced business philosophy which integrates the profitability requirements of multinationals with the social, economic, and sustainability needs of the region and those who live in it.”


As we learned in London, the Globe Project findings can enhance global managers’ global competence and cultural acumen. It compares countries on nine critical cultural dimensions (see below) and discusses the implications of the cultural similarities and differences for global managers.


Throughout the course we will be using these cultural dimensions that Cornelius Grove describes as’ “The Measuring Rods of Cross Cultural Research,” in his summary (click HERE) of the Globe Study to compare and contrast cultures during in-Region activities.

Given this refresher on the cultural dimensions and the History, Civilizaiton, Culture and Business content provided on this blog, please take the following poll to determine the most pronounced cultural dimension you believe you will encounter in Dubai.


Click HERE to return to CCL Dubai Main Page.



  1. Given the Sharia Law’s morale filters, does anyone know how Dubai that has developed a strong market pricing economy, is viewed socially and economically by the rest of the Islamic World that encourage communinal sharing and equality matching instead?

    Comment by Kyle Wei — October 27, 2009 @ 6:45 pm

    • Kyle, great question. Bill and I were discussing how interesting it was that we are coming form London that was high on Authority Ranking and Market Pricing and now we are going into a region that appears to be primarily driven on Communal Sharing and Equality Matching. Dubai is precisely in the Cross Hairs you mention as it’s heritage is arguably CS and EM, but it is clear when you walk around New Dubai that they are seeking to embrace MP.

      Any others have views on how the rest of the region views Dubai. Not just UAE but Saudi, Egypt, Iran etc…. Would welcome your insight and experience on this.

      Comment by wadatripp — October 28, 2009 @ 1:43 am

  2. Among other things, I’ve always found it intriguing that while futures markets and short selling are both frowned upon, the very idea of a stock market is still readily acceptable. In my mind this too should be disallowed if you follow the law to the letter, but conveniently there’s a cut-off as to it’s acceptability.

    I’m not all to sure about this point of view, of course, as I’ve never really been able to ask my former Pakistani customer deeper questions about this. Perhaps someone can shed some light on this: Why/how can Islam survive modern, international, capitalist markets without having to either (a) “sell out”, or (b) “reform” (much like what happened to Christianity and usury, during the European age of enlightenment)

    Comment by Ian — October 28, 2009 @ 12:11 pm

    • Ian, this question is the central tension we suggest that Dubai faces right now ; )

      Comment by wadatripp — October 28, 2009 @ 9:13 pm

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