Fragmentation of Islamic Financial Products – An Exploratory Study of Islamic Schools of Thought

The international emergence and expansion of Islamic finance is an undeniable fact. Significant efforts from all stakeholders including regulatory bodies are currently under way to formulate universal framework, standards and codes of conduct for Islamic finance. This is necessary because of the heterogeneity of the Muslim community in the presence of different “Schools of thought” (hanafi, hanbali, maliki and shafi). “Schools of thought” has a great impact on development of Islamic jurisprudence and analytical thinking. Sources of Shari'ah law are clearly defined through Quran, Sunnah, Ijtihad, Ijma and Qiyas. However, multiple interpretations by various “Schools of thought” regarding Islamic jurisprudence including Islamic Finance result in minor and major disparities. Keeping in view this fact, it is logical that without a universal Shari'ah code, the acceptability of products introduced in Islamic finance shall remain fragmented. Moreover, the permissibility of certain Islamic financial products varies by region, depending on the “Schools of thought” prevalent in that geographical area. This paper explores the necessity of convergence of various “Schools of thought” to formulate a single Shari'ah code that will be universally applicable. We also intend to look at similarities between “Schools of thought” with special reference to Islamic finance. This effort may lead to development of instruments that have broader markets, multiple customer segments, enhanced liquidity and reduced liquidity premium