The interaction between globalization and traditional Islamic institutions presents a complex and multidimensional issue that cannot be given simplistic explanations. According to Hallaq, the authority of Islamic traditional financial institutions is one which is derived from a system of moral economy and one whose actions and practices are based on divine Qur’anic texts and Shari’a which is interpreted by the Ulama (scholars).This system of Shari’a ensures that financial activities are not only regarded as solely economic, but also ensures that sincere consent, fairness, and good faith are being taken into consideration. It encourages Muslims to attain wealth for themselves but under ethical and moral principles, without indulging in usury (riba) and other exploitative and deceitful practices. The system prioritizes moral and ethical considerations over profit gains (Hallaq, 2013).

On the other hand, Ariff (1998) argues that Islamic banks can provide an alternative to conventional banks by operating based on transaction fees, commissions, mudaraba “profit-sharing”, and musharaka “joint venture”, instead of a comprehensive moral system solely based on the rulings of sharia. He focused on the technical aspects of these financial transactions rather than the bigger question of morality and ethics.

Globalization as a Challenge to Islamic Finance

Globalization is a system which facilitates the movement and flow of goods, services, technology, people, and ideas beyond national borders (Askari et. al, 2009). It represent a multifaceted and multidimensional process of growing connectivity between countries which revolve around economic, financial, cultural, and socio-political activities. Similarly, Mirakhor (2007) argues that globalization is an economic consolidation which is motivated and driven by lower costs of transportation and information including the liberalization of trade and finance. Therefore, the concept of globalization is often associated with modernization, which is an idea that involves assimilating or transforming third world countries into western industrialized societies (Fatima, 2019).

However, Hallaq (2013), globalization is not as a neutral concept, but rather a project of powerful states including big corporations which impose deceitful economic and invasive political practices on weaker states. The market and economic forces behind globalization are capitalist in nature as they prioritize capital accumulation and profit maximization above all else.

The question of the extent in which globalization has eroded traditional Islamic financial authority have the attribute of a double-edged sword. Therefore, I argue that globalization provides unique opportunities for Islamic institutions to broaden their horizons, extend their reach, adapt to the challenges of modern practices, and possibly bolster their influence at the global level. The interplay between globalization and traditional Islamic finance has posed a significant challenge to Islamic institutions authority and it has at the same time, paradoxically provides it with an avenue to strengthen its authority.

Erosion of Traditional Islamic Financial Authority

The prominent feature of globalization which focuses on the smooth movement of goods across borders and the seamless flow of capital has created a global financial system prevailed by debt and interest, all of which are alien and unethical to the core principles that defines traditional Islamic finance (Askari et. al, 2009).

The unprecedented reality of having to operate in a global market which is largely according to the capitalist framework has led several Islamic financial institutions (IFIs) to incorporate practices which are inherent of conventional finance, and this happens usually through ambiguous legal terms and strategies which simulate interest-based transactions. This modern practice which is often termed as “interest simulation” or “sharia arbitrage” usually involves using Sharia compliant contracts to achieve the same economic outcome as that of conventional interest-based loans (Calder 2024). This practice even though technically permissible according to certain interpretations of the sharia, it is predominantly viewed by some scholars as a total deviation from the traditional ethics of Islamic finance which prioritizes moral ethics and social responsibility.

The need to compete in a global financial market which is driven my capitalist market forces has pushed Islamic sharia based financial institutions to prioritize profit making and market share at the expense of the core principles under which they were established (Nienhaus 2014). This pragmatic system, although enabling the development and growth of Islamic finance has however, raises concerns about the fragmentation of the inherent principles of sharia and the erosion of its unique moral authority.

Additionally, the concept of globalization has changed the shape and form of Islamic law including the regulations that govern financial institutions by imposing global standards on them, which tend to weaken their traditional authority (An-Na'im 2008). Furthermore, the standardization of global financial activities, regulations, and institutions according to capitalist ideology as part of the broader objective of globalization has increasingly posed a significant threat to traditional sharia-based decision-making. The reality of having to operate according to these international regulatory standards which are created to serve the interest of modern financial institutions have relegated traditional Islamic legal authority (Ahmed et al. 2014). Through these conditions, globalization with profit maximization at the center of its objectives has diluted the principles of traditional Islamic finance (Nienhaus 2014).

This issue can also be seen in the growing reliance on sharia scholars with knowledge of Western banking and financial instruments instead of traditional sharia scholars who lean towards the broader moral framework of Islamic finance (Calder 2024). The complex nature of modern financial instruments and global capital markets, together with the demand to provide easily traded liquid assets, has presented a scenario where structured products without clear differentiation between debt and equity have become popular in the financial market.

This has raised questions about whether these ambiguous transactions actually reflect the sharia principles of risk-sharing and ethical investment. Likely further wearing down the authority of traditional Islamic finance which at a point in time consider the community and social responsibility over short-term profit gains (Calder 2024).

Opportunities for Islamic Financial Institutions in a Globalized Economy

The advent of globalization, together with its inherent nature of capitalism has further fragmented traditional Islamic institutions. The ongoing struggle between the deeply rooted morals of Islamic finance and the profit-focused attribute of globalization has forced IFIs to pursue competitions instead of focusing on their ethical principles (Wilson 2014). This adaption to changes highlights the dynamism and resilience of Islamic finance rather than the total erosion of its traditional authority. Consequently, another noted prominent challenge to traditional IFIs is the concept of “Tawwaruq”, describes as a complex financial practice emulated by some sharia based financial institutions to generate the same outcome as that of interest based lending (Calder 2024). This type of practice has raised concerns and criticisms among Islamic scholars who sees it as a form of riba (interest), which is against the principles of sharia.

In addition, the incorporation of complex trading instruments by modern financial banks (including Islamic banks) which has little to do with actual economic transactions clashes with the authority of sharia financial principles which is firmly grounded on real economic activity and tangible trading assets (Calder 2024). The pressure to compete in a global capitalist market has led several IFIs to follow-suit the strategies and practices of modern banks. This has in a significant way, diminished the authority of traditional Islamic institutions (Nienhaus 2014).

Despite these challenges, the traditional authority of IFIs have not been ultimately diminished, they argue that sharia scholars continue to play an important role in the progress and development of Islamic finance, and their popularity and public trust has been increasing especially in certain regions (Adeyemo and Oloso 2013).

However, while the advent of globalization has introduced many challenges, it has also provided a platform for Islamic scholars to extend their reach and influence. For example, the establishment of international institutions such as the accounting and auditing organization for IFIs, and the Islamic Financial Services Board has created an avenue for these Islamic scholars to play a crucial role in the development of Islamic finance, although their stands and interpretations can be argued by some to be more standardized (Nienhaus 2014).

From a different perspective, the ever-increasing movement of capital, goods, and services across the world has created an extended market for Islamic finance, which has led to a dramatic rise of interest and demand for Islamic goods and services across the world in Muslim states (Karasik et al. 2007). This has provided an avenue for the diversification of Islamic products and services, thereby ultimately extending the reach of IFIs.

Islamic Finance as a Resilient Alternative

The rising popularity of moral and ethical financial investment has provided an unparalleled  opportunity for Islamic finance to attract a bigger audience which extend beyond Muslim states (Nienhaus 2014). However, IFIs can present themselves as viable and better alternative to modern financial institutions who are considered to be exploitative and unethical (El-Gamal 2006).

Another important point is the role of sharia boards presided by Islamic scholars who probe and investigate financial products and services to ensure that they are in line with the rules and regulations of sharia (Calder 2024). Their position as watch-dogs or gate-keepers further reinstates the authority of Islamic finance. The role of these sharia boards is very crucial in ensuring that the integrity of Islamic finance is being maintained, and that sharia traditional principles are being adhered to. Additionally, the “Halal” labelling and certification of products by these sharia boards provides assurance and confidence to consumers, knowing that they are not dealing with haram (impermissible) products. This contributes in bolstering the authority and legitimacy of Islamic scholars.

Additionally, the dependence on sharia boards has paradoxically created a new power dynamic within the financial system which provides Islamic scholars the leverage to play a key role in deciding the future of Islamic finance. Furthermore, the inherent nature of globalization has provided IFIs opportunities and platforms to exert their influence in a world which has now become skeptical of modern capitalist financial principles (Askari et. al, 2009). The occurrence of the global financial crisis in 2007-2008 has shined a light on the weakness of conventional financial systems due to their debt-based nature. This event made people to start looking for alternatives which provides a risk-sharing model that is ironically an inherent feature of Islamic financial system.

The financial crisis exposed some of the structured risks associated debt-based finance such as; unreasonable leverage and the formation of asset bubbles, which the nature of Islamic finance with its idea of risk-sharing and emphasis on equity can possibly help mitigate if not prevent entirely. This provides IFIs the opportunity to help and contribute in ensuring global financial stability, thereby further reinforcing its authority (Calder 2024).

While Hunt (2009) criticizes IFIs for abandoning their traditional ethical principles, he also highlights the new innovations in Islamic finance as a response to the challenging factors of globalization. However, the main attributes and practices of Islamic finance such as zakat (alms giving), and waqf which means (endowments), have remain intact despite the intense pressure from the advent of globalization (Siddiqi 2006). Meanwhile, Ismal (2014) suggests that the emergence of large Islamic markets like that of Indonesia and Turkey show-cases the ability of Islamic finance to be successful and at the same time adapt to the challenges of globalization, while still maintaining their Islamic traditional ethics and values.

Conclusion

The advent of globalization has presented a complex situation for traditional IFIs. Despite the fact that the inherent nature of globalization with its focus on profit maximization and economic and cultural integration has presented challenges that has undeniably eroded the authority of some traditional Islamic institutions, I argue that the concept of globalization has at the same time paradoxically provided an opportunity for IFIs to extend their reach, flourish and adapt to the challenges of the global capitalist market.

The highly dependence on sharia boards presided by Islamic scholars has created a new power dynamic in the financial system, and the shortfalls of conventional financial institutions has presented Islamic finance with a unique opportunity to provide a more ethical and moral alternative. The incident of the 2007-2008 global financial crisis has raised concerns with regards to the viability and sustainability of conventional financial institutions which led many to opt for alternatives like Islamic finance. It is evident that the fate of traditional IFIs will highly depend on their resilient commitment to protecting the core moral and ethical principles of sharia, while at the same time creating strategies that will enable them to adapt to the ever-changing realities of a globalized financial framework.

How IFIs are able to maneuver and operate within the pressure and demands of globalization? This will determine the extent at which they can be able to maintain and reinforce their authority and at the same time prove their ability to contribute in creating a more sustainable and equitable global financial system based on ethics and moral responsibility.