Doing business under the Sharia


International businesses generally search for a secure legal framework before choosing to settle in a country and launching business.

Thus, while aiming to conclude important contracts and international transaction in Arab oriental countries , business partners are challenged by the questions of the meaning so as the application of Islamic Law and the compliance of certain provisions of their contracts with Sharia Law requirements.

Unfortunately, the fulfillment of this objective is not always obvious due to the ambiguous aspect of Islamic Law. Uncertainties deriving from the shortage of knowledge of Islamic law is critical to doing business in Muslim and Arab countries added to the problem of language and customs.

Sharia Law can be hard to understand.  It governs virtually every aspect of life for Muslims and it is known by being vast, complex and flexible. That is why, before dealing with the scope and the extend of the Islamic law application it is with a great interest to discuss the Background of Sharia.


  1. The Background of Sharia


Starting from a basic religious background, Islam was revealed to the Prophet Mohammed first in AD 610 in Mecca, Saudi Arabia and developed several hundred years after the Prophet Mohammed’s death in 632 CE as the Islamic empire expanded to the edge of North Africa in the West and to China in the East.

Accordingly, the Quran is the main and the primary source of Islamic law called “Sharia”.

As a legal system, Sharia law is very expansive. While other legal codes regulate public behavior, Sharia law regulates public behavior, private behavior, and even private beliefs.

Sharia is an Arabic word meaning “the right path,” refers to traditional Islamic law. The Sharia comes from the Koran, the Moslem’s holy book, that Muslims consider the actual word of God inclosing the code of conducts and rules for the people to follow and covers all aspects of Muslim life, including daily routines, familial and religious obligations, and business dealings.

The Sharia also derives from the Prophet Muhammad’s teachings and interpretations examined and interpreted by certain Muslim legal scholars which is called the “Hadith”. Therefore, Islamic law or Sharia is the arsenal of rules and jurisprudence that grew along with the interpretation, elaboration and study of Quran and Hadith.

There are five central Islamic schools of interpretation and case law which are Hanafi, Maliki, Shaffi and Hanbali schools sunni and the Shiat Jafari School, which find its ground in the Shias community mostly established in Iraq, Iran and Bahrain. These schools differ in the weight each applies to the sources from which sharia is derived, the Quran, hadith and Islamic scholars.


  1. The scope of application of Islamic Law


Islamic law is vast and differs from country to country. For example, in Saudi Arabia, there is no law other than Islamic law, but for other countries the influence of Islamic law is subtler.

2.1 Islamic Law is most of Arab Countries

In most of the Arab countries the position and role of sharia had for many centuries a different impact on the law and governance. Many of Arab countries has adopted a mixed legal system that is mainly based on the French civil law system, with some influence from Islamic law in the areas of personal status and property.

Historically , when most countries especially  in North Africa, overcame the French colonization and obtained independence during the 20th century, their new political leaders enacted constitutions and national laws, and established national systems of law and governance based on codified and originated legal framework inspired from French law or others and which have a written constitution as well as Codes covering special fields such as civil code, corporation’s code, penal code, administrative code, commercial code.

Generally Sharia law is often used in full or in part, nationally or regionally in many other Islamic and Arabic countries through the application of statute law based fully or partly on Islamic law, or in order to fill legislative gaps when a particular statute lacks the necessary provisions.

Consequently, one of the shared landscapes between the laws of the Arab countries is the similarity of the provisions of the Civil Codes. Another major common feature is the application of Islamic law in all Arab countries especially in the matter of family law which always made up an important part of the Sharia.

This explains why there is not standard and uniform sample to follow while determining the scope and the modalities of the use of Sharia; its application differs from one country to another and it is generally influenced by the religious and political and social structure of the society and the background of its legal system.

2.2 Islamic Law as strictly applied in Saudi Arabia

Regarding the Application of Islamic Law, Muslims’ aspired Sharia state is the Saudi Arabia that has no legal code other than the Sharia which is enforced strictly through its legislative authority in the absence of developed codified legal system. In fact, in Saudi Arabia, the Basic System use the term “regulatory authority” to refer to the country’s legislative authority, which is entitled to establish statutory laws and regulations. It also has authority to approve international treaties, agreements, regulations and concessions.

Under Islamic Law, Only God can legislate. No other law is applicable if contrary to Sharia. In fact, in Saudi Arabia, the Basic Law of 1992 stipulates that Quran and Hadith are the only and exclusive sources of law and that all laws and regulations must conform to the divine law.

In addition to the rules of the Sharia, there are a vast range of statutory laws enacted in criminal, administrative, and commercial areas which correspond to the country’s development. These State regulations which cover many fields of law including the Company Law, the Code of Commerce and the Tender Law are lawful and enforceable as long as they do not contravene divine law.

In addition, all official legal materials in Saudi Arabia are written in Arabic, the official language of Saudi Arabia. Legal materials take many forms but can be classified under three main sources: Islamic Law, Statutory Law, and Royal Orders.

The application of Islamic law in Saudi Arabian Courts is mainly based on the rules of Islamic Sharia in accordance with the interpretation of the Hanbali School-the fourth orthodox school of law within Sunni Islam.


  1. Practical issues


From a practical business ground, there are major aspects of forbidden elements in business transactions under Islamic Law which are: Riba, Gharar and Maysir.

The Riba or Interest is strictly and explicitly prohibited under Islamic law. While the conventional banking system is based on paying interest at a pre-determined rate on deposits of money Riba is forbidden by sharia. It is a source of unjustified advantage and the prohibition of interest a considered as a way to establish justice between the financier and entrepreneur.

Gharar or Dubiousness in Contract is considered also by Sharia as an unjustified enrichment that arises out of uncertainty or undefined of the essential elements of contract so it is prohibited.

Maysir or gambling are prohibit as well  based on the fact that an apparent agreement between the parties is actually the result of immoral inducement provided by false hopes in the parties mind that they will profit unduly by the contract.

Islamic law developed also some restrictions toward business practices. For instance, the terms and conditions of a contract of joint venture should be drafted in a way 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 of the partners are joining with their running business or commodity or property, the value of their business shall be determined in terms of money and this amount should be treated as the partners’ contribution.

Plus, in joint stock companies the shareholders are only the co-owners without enjoying agency rights. The rights and duties of the partners depend on the nature of the joint business and are mainly governed by the custom, convention and usage.

Additionally, in a joint business, productivity and profit are measured on the basis of invested capital and the proportion of partners respective shares in capital alone cannot be a factor of determining the respective shares of the partners in the profits of the business.


  1. Doing business under the Sharia


To sum up, a thorough assessment and evaluation of the special circumstances of the legal systems in Arab or Muslim countries will offer not only assurance on the legal prospects of any venture but also an introduction into the market, which demonstrates the willingness of the foreign business partner to deal with local peculiarities and to be part of local business society. This is an opportunity accelerator, as in every part of the world.


Un grand merci à ma collègue Meriem Rezgui du bureau CARNEADES Braunschweig!