Murabaha: Form, substance, and the battle for the soul of Islamic finance.

In most of the world, religious authority no longer regulates economic activity. Islamic finance is an exception. Whereas the laws of other religions have little impact on financial practice today, $1.5 trillion - almost one percent of global financial assets - is managed according to Islamic law. So why does religious regulation of the economic sphere persist in Islam? This article argues that Islamic finance has thrived because Islamic banks, since the 1970s, have turned economic piety into a question of adherence to formal rules of Islamic law rather than to substantive economic principles. However, the observation that form has trumped substance is not new. This article aims to explain why. I posit a cycle that drives the industry toward formal solutions and away from substantive economic agendas. First, Islamic bankers try to practice Islamic finance in a conventional financial world, which creates ethical tradeoffs. They must choose between a less profitable solution that advances a substantive agenda and a more profitable one that merely complies with shariah's formal requirements. Whether to ensure the survival of Islamic finance or to please shareholders, the bankers choose the formal solution. Second, an apparatus (dispositif) of vendors, technologies, training programs, and fatwas emerges to enact this solution as efficiently, cheaply, and accurately as possible. A new ethical narrative also justifies it. Not only does the formal solution become an industry norm, but the technical exactitude with which it is executed becomes a measure of piety. Finally, new market challenges arise, generating more ethical tradeoffs. [ABSTRACT FROM AUTHOR]