The practice of many modern Islamic scholars to put forward Islamic alternative economic theories and the emergence of ‘Islamic'finan cial institutions is a relatively recent phenomenon and is still in a formative phase. The Islamic banks are well known today as the very first ‘Islamic'firms to be set up. Over 45 Islamic banks and other financial institutions currently operate according to the ‘Islamic'inte rest-free profit-and-loss system (PLS).

Four principal legal techniques used by Islamic banks are the contracts of Mudaraba, Musharaka (whereby both the customer and the bank contribute to providing capital dedicated to a specific venture), Ijara (lease financing) and Murabaha (cost plus trade financing). The achievements of Islamic banks have been judged by many as very successful, while other less enthusiastic commentators have expressed more cautious opinions because, in the end, the success of these institutions depends to a great extent on their competitiveness and their performance in the international markets.

A problem faced by ‘Islamic'financi al institutions in general, and Islamic banks in particular, has been the lack of an appropriate legislative framework to support their establishment and promote their growth. This problem has, to a considerable extent, been eased by the enactment of special regulations, sensitive and applicable to the nascent Islamic financial structure. One example of this new legislative trend is the Pakistani Mudaraba Ordinance, which arose from the Islamicization of commercial laws in Pakistan. Mudaraba is defined as ‘Business in which one person participates with money, and another with efforts or skills or both his efforts and skills, and shall include Unit Trusts and Mutual Funds.'The establishment and the control of the scheme is the duty of a registrar, especially appointed, as well as a tribunal created for this purpose. The Mudaraba is either a multi-purpose or a specific-purpose Mudaraba and it can be either for a fixed period or for an indefinite period; Murabaha is used to fund trade-related transactions on a cost-plus funding basis.

What is specific to the Pakistani Mudaraba Ordinance, as compared with the Malaysian Islamic legislation, is that the religious supervisory board, charged with checking the lawfulness of the operations conducted, is constituted by the government, and not by the company concerned, by virtue of a clause in its articles of association. The religious board, which has the power to order modifications, is required to give a certificate in writing, stating that the Mudaraba is not contrary to the Shari'a. This certificate is a prerequisite of the authorization which allows the floatation of the Mudaraba.

Section 18 of the Ordinance requires that the apportionment of the profits between the company and the investor be computed in such a manner that the former's portion does not exceed 10 per cent of the net annual profits. When 90 per cent or more of the annual profits are distributed to the investors, the income of the Mudaraba is exempted from income tax. The final notable point of the Mudaraba Ordinance is that, by virtue of Section 14, the company is required to circulate to all investors its annual balance sheet and profit and loss account, the auditors'report and a general report on the Mudaraba's activities and prospects.

Another example of recent Islamic legislation is the Islamic Banking Act of 1983 and the Takaful Act (1984) of Malaysia. Under the Islamic Banking Act of 1983, Islamic Banking has to be transacted by an Islamic bank (which cannot be a foreign bank) specially licensed for that purpose. The bank's activities must be subject to the control of a religious advisory body in charge of ensuring that the bank is not carrying out its business in a manner contrary to Islamic law. The Central Bank of Malaysia is granted wide supervisory powers over Islamic banks. It can demand that the bank hold a minimum amount of liquid assets at all times can also impose restrictions on credits granted to a single customer, and enjoys the conventional investigatory powers of Central Banks under conditions of secrecy. This ideal is somewhat compromised by a qualification exempting from secrecy the Central Bank and a competent minister, whose task it is to direct the Central Bank to investigate books, accounts and transactions of the bank if he ‘has reason to believe the bank is carrying on its business in a manner detrimental to the interests of its depositors', in which case the Central Bank may also assume control of the business of the bank. Finally, it should be noted that the implementation of the Islamic Banking Act 1983 led to consequential amendments of a number of other Malaysian laws.

Another example of Islamic legislation which is relevant is the Turkish Decree No. 83/7406, dated 16 December 1983, concerning the foundation of Special Financing Institutions allowing Islamic banking in Turkey. As Turkey is formally a secular State, the Decree does not expressly cite Islamic financial institutions and does not mention the Shari'a or any religious supervisory board, but it does establish profit-and-loss sharing financial institutions, which are services offered by Islamic banks.

These Special Financing Institutions administer current accounts on which no return is paid, as well as participation accounts, whereby the funds are deposited against a ‘contract to participate in the profit and loss of operations'.

The Special Institutions, which are submitted to the control of the Central Bank and the Prime Minister's office may finance commercial and agricultural activities, give letters of guarantee for projects abroad, and procure and sell in instalments or lease to firms the relevant equipment to secure investment. The new regulations are laid down in a manner which ensures an advanced and profitable integration in the economy. The Special Financing Institutions are regarded as ventures leading to beneficial financial results for the economy by mobilizing deposits through various investment channels, rather than as an opportunity for Muslims to invest their money in a manner sanctioned by the Shari'a, as is the case with certain ‘Islamic'comme rcial legislation in force in other countries. This is hardly surprising given that, in Turkey, the introduction of the new Islamic regulations provoked opposition from those deeply committed to the secular character of Turkish law. Accounts may be opened by Turkish citizens working abroad in a foreign currency and a special procedure has been established enabling those depositors to transfer abroad the profits earned on their account (although the Prime Minister may order that these profits be invested in a specific enterprise and field).

It is evident from this legislation that structures permissible in a Shari'a framework are being transplanted into existing conventional economic systems. Without qualifying, for the moment, the success of such structures, it might safely be said that the concept of an Islamic enterprise has arisen in practice, and efforts are being made to elaborate this concept in legal terms. However, it is too early to pass a definitive judgement on the viability of the new institutions and how competitive and lucrative they are likely to be. The main feature of an ‘Islamic'en terprise is that it must be acceptable to Islam and the Shari'a. Therefore, it has to adhere to a set of rules which embody Islamic restrictions as to the nature of the contracts entered into by the firm, and the investments made, stemming from the prohibition of riba and prejudicial gharar.