The Role of Islamic Law in the Management of Formal and Informal Organizations in Saudi Arabia - Research Paper Example

Chapter 1 INTRODUCTION 1.1 Background A formal organization is one that complies with important rules and has all the necessary requirements of a standard organization in national context (Dammer 106). One the other hand, informal organizations have less stringent codes and practices. They are formed with limited regards for the corporate laws of the country. In the case of the Kingdom of Saudi Arabia, the country is governed by principles of Sharia Law (Long 66). The country's King has the duty of being considered as the “Custodian of the two Holiest Mosques”. This makes Saudi Arabia the center of Islam and with its rich cultural, historical and religious structures, it is seen as a model for other Muslim nations around the world. Hence, Saudi Arabia is ran as an Islamic Theocracy and the Quran is the basis of the country's constitution (Otto 164). The country is governed by stringent Islamic law which defines every aspect of the lives of people in the Kingdom. Since Saudi Arabia was meant to be Islamic from the onset, it has rules that strictly bind both the Muslims and non-Muslims of the country. Commentators like the Human Rights Watch have criticized Saudi Arabia for using Islamic Law in a compulsory manner that sometimes causes some degree of discrimination to non-Muslims in the Kingdom (1). Although proponents like Fouad argue that the universal application of Sharia in Saudi Arabia supports to bring benefits and stability to the country, there are some human rights issues that can be raised. First of all, the law focuses more on the Muslims since they are designed with the practicing Muslim in mind (Jones). Hence, there is a limitation on the individual rights of non-Muslims. 1.2 Research Aim The aim of this research is to examine the role of Islamic law in the management of formal and informal organizations in Saudi Arabia. In attaining this end, the research will evaluate the position of Sharia Law in the running of both formal and informal organizations in the Kingdom. This will seek to identify the extent to which Sharia Law operates in the country. 1.3 Research Objectives In attaining the aim of the research, the following objectives will be explored: 1. An examination of the role of Islam in formal and informal organizations in Saudi Arabia 2. Actual impact of Islam on formal and informal organizations in Saudi Arabia 3. Non-Muslim/Non-Saudi views about Islamic codes in formal and informal organizations in Saudi Arabia. These objectives are to be examined through a thorough framework of structured research. This will give conclusions about whether the phenomena identified in the objectives are valid or not. 1.4 Research Methodology In order to address the three objectives, the research needs to be classified in three phases to enable to researcher to complete the study in an appropriate manner. Each phase will focus on attaining the objectives identified 1.4.1 Phase 1: Role of Islam in Informal and Formal Organizations This phase will involve an examination of the status quo. It will assess the position of Islamic Law in the conduct of business in Saudi Arabia. The research will include an assessment of the different frameworks and concepts that regulate the conduct of business. The study will be conducted by the critical review of secondary sources. These sources will include books, journals and other relevant materials that define the position of Sharia Law in the business environment of Saudi Arabia. The conclusion to be drawn in this unit is the extent to which Islam regulates and controls the affairs businesses in the Kingdom. 1.4.2 Phase 2: Impact of Sharia on Formal and Informal Organizations This portion of the research will set out to measure the actual impact of Sharia on the operation of businesses throughout the Kingdom. This will involve interviews with some members of the Saudi business community that will provide an evaluation of whether or not they observe the strict sense of the Sharia Laws or not. Data for this phase will be collected through a sample of formal and informal organizations in the Kingdom. The data will be collected through a structured interview that will be summarized and analyzed as appropriate to provide conclusions on whether the Laws are actually observed holistically or partially. 1.4.3 Phase 3: Non-Muslim/Non-Saudi Views about the Islamic Codes of Saudi Arabia In this section, there will be a critical evaluation of what non-Sunni Muslims in Saudi Arabia think about the Sunni business codes that regulate businesses in the Kingdom. For the purpose of this study, Shiite residents of Saudi Arabia will be considered as 'non-Muslims'. This is because by the strict interpretation of the Wahabbi led administration of Saudi Arabia, Shiites are considered outside the scope of Traditional Islam. As such, this section of the research will attempt to identify what these persons think about the need to comply with Sunni norms and traditions in doing business. The data for this section will be collected through a survey that will be presented to respondents. The survey will provide information about how the various non-Muslim communities of Saudi Arabia respond to the demands and requirements of the State. Chapter 2: LITERATURE REVIEW This chapter will examine the important legal requirements for the conduct of business in Saudi Arabia. It will examine the role of Islam and Islamic laws in the operation of institutions and businesses in Saudi Arabia. In doing this, it will examine how the business codes affect formal and informal organizations. This chapter sets the important yardsticks for further measurements in the research. It provides a clear view of the role of Sharia in business and also identifies who “non-Muslims” are and their legal position under the Islamic Laws of Saudi Arabia. 2.1 Legal and Regulatory Structures of Saudi Arabia The Kingdom of Saudi Arabia operated under traditional Islamic laws that can be traced directly to the Prophet of Islam for several centuries (Otto 164). However, in an attempt to formalize and streamline this, King Fahd bin Abdulaziz Al-Saud declared the Kingdom's Fundamental Laws in 1992 (Vogel 1). These laws were meant to provide a structured framework that defined the actual legal system of Saudi Arabia. The Fundamental Law or Basic Law consists of several Articles which incorporate fundamental elements of traditional Islamic systems and practices into the country's constitutional and legal systems. The law had the following important elements (March 33): Article 1: The Constitution of the Kingdom is based on the Quaran and the Sunnah of the Prophet. Article 5: Power in the Kingdom of Saudi Arabia is based on justice, consultation (al Shura) and equality in accordance with Sharia and Article 5: Allegiance in the kingdom is owed to the King who emanates from the House of Sauds. Article 44: The country will maintain an independent Judiciary. Zegers and Al-Samaan state that “Islam is both a religion and a way of life in Saudi Arabia. Moe than anywhere else in the Muslim world, Islamic law underpins every aspect of life, from administration of justice to the formulation of government policy; from social connection to commercial relations.” (87). This implies that the Kingdom of Saudi Arabia is strongly steeped in the traditions and systems of Islam. Islam regulates and guides everything that the people of Saudi Arabia do. As such the country has a set of rules that makes it imperative for all people within the country to abide by these important Islamic principles and rulings. The main elements of the Islamic legal system that define the framework of the Kingdom include: 1. Quran: This is the Holy Writings of the Muslim people. 2. Sunnah: Traditions that have been handed down from generation to generation amongst Orthodox Muslims. 3. Hadith: Deeds and utterances of the Prophet of Islam. They constitute universal rules of conduct. 4. Idjima: Opinions of Islamic scholars that are reached by consensus. 5. Q'yas: Analogies or secondary sources based on primary principles of Islamic law (Zegers and Al-Samaan 88). Based on these crucial elements of the country's regulation, all the legal codes of the Kingdom of Saudi Arabia are formulated and implemented. 2.2 Business Codes in Saudi Arabia and Sharia “Commercial Court Law provides the basic framework for the regulation of commercial activities of Saudi Arabia” (O'Kane 8). In other words, the commercial court rules and regulation is the basic framework within which businesses and other entities within the Kingdom must operate. By default and the sovereignty of these courts, their influence stretches over both formal and informal entities in the country. However, due to the nature of the operations of informal sector organizations, it is quite common for some of them to operate without the direct supervision of the commercial courts. The commercial courts provide regulation in the following areas: 1. Arbitration 2. Trademarks. 3. Commercial registration 4. Agency and 5. Cooperative insurance (O'Kane 8) As such, the commercial courts have an oversight over all forms of entities. They control the registration and regulation of business activities in the company. Businesses are required to renew their licenses on a periodic basis. Hence, the court has the ability to make relevant changes to the systems and structures of businesses in order to grant renewals. 2.3 Institutional Supervision of Sharia Codes in Businesses Aside regulatory requirements for licensing and the like, there are some conscious supervision activities that keep formal and informal businesses in check under Islamic law in Saudi Arabia. Oxford Business Group identifies that some of the major supervisory entities are the Islamic Financial Services Board and the Saudi Arabian Monetary Agency (SAMA) which work hand-in-hand to ensure that businesses are regulated via the banking systems (104). As such, banks have duties and requirements to ensure that each entity operating in the country complies with relevant regulations. In most major companies, there are Sharia Supervisory Boards within the organization. “A Sharia Supervisory Board is the main vehicle to evaluate, approve contract documents and supervise all operations of a company in conformity with its objectives and in relation to the principles of Islamic Law” (Aldohni 80). This therefore means that in spite of the external supervision, most large organizations and banks need to have an internal structure that ensures that their activities are vetted and checked for Sharia compliance. This provides a framework of internal checks and balances that ensure that the organization operates in relation to required laws and expectations of the Sharia system. Also, other external entities like the Dar Al-Maal Al Islami ensures that financial operations and frameworks are streamlined and observed in the larger society (Presley 99). They define the framework and codify them and ensure that they provide guidance for practical application of these laws. 2.4 Business Codes and the Informal Sector The informal sector is a flourishing section of the economy of Saudi Arabia (IBP USA 33). This it is mostly made up of foreigners, both Muslim and non-Muslims (IBP USA 33). Based on this, there are some of the members of the sector who might not have the desire to adhere to the strict Islamic codes and systems that comes with doing business in Saudi Arabia. Most of such persons go on with their business without any proper documentation or adherence to strict codes of the state (Silvey 127). The informal sector of Saudi Arabia is typically made up of illegal immigrants and people who entered the Kingdom on Hajj visas but decided to overstay their visit (Silvey 127). Most of these people are women (Silvey 127). As such, they do not have the legal right to carry out their trade in the country. Hence, they go about their activities hidden from the authorities. In spite of the fact that the informal sector is made up of illegals, there are still some basic tenets and rules that must be followed in order to conduct business in Saudi Arabia. IBP USA argues that due to the illegality of the stay of most of the participants of the Saudi informal sector, most of them operate within the broad framework of the Islamic laws of the land (38). This is because any act that is contrary to the laws of the land will cause suspicion and lead to their arrest and deportation. As such, the informal sector remains compliant, although they are not under direct laws and requirements to do so. 2.5 Position of Foreigners under Islamic Business Codes. Varia states that “Saudi Arabia's justice system falls far short of international standards and imposes particularly formidable obstacles to migrants” (24). This means that the country has unique laws and systems that make it difficult for most migrants to carry out their trade and business activities in the Kingdom. “Saudi Arabia applies its interpretation of Sharia (Islamic Law) as the governing legal framework. The absence of codified Sharia laws and rules of precedence leaves the government and judiciary significant room for divergent interpretation of the law, and undermines equality before the law” (Varia 24). This therefore implies that there are significant discrimination that can be meted out against foreigners if they fall foul of the law. This is because there is no clearcut system or structure that guarantees their rights in the Kingdom. Also, the process of Saudization makes it imperative for businesses to have at least 75% of their staff members chosen from amongst native Saudis. Also, there is the need to ensure that at least 50% of the revenue goes to Saudis (Ramady 317). Saudi Arabian citizens have to pay an Islamic tax called Zakat in place of taxation (Etheredge 22). Zakat is 2.5% of the income or assets of the individual and under traditional Islamic laws, this goes to the poor in the society (Zuhur 166). Non-Saudi citizens and non-GCC citizens have to pay between 20% and 30% of their profits to the Saudi authorities each year (Zuhur 166). This is because they do not qualify to pay just the 2.5% that the Zakat requirements provide for. 2.6 Conclusions Saudi Arabia is ran on the basis of strict Islamic Laws. They are the strictest Sunni Muslim nation in the world. Saudi Arabia's Islamic laws are based on the traditions and practices of the Prophet of Islam and they are mainly Sunni in outlook. Saudi commercial court systems control the affairs of businesses in the Kingdom. This include the issuance of different rules and regulation and the provision of licenses for businesses. Aside these controls, there are external controls that are carried out by the Saudi Arabian Monetary Agency through banks and Islamic Financial Services Board. Most large entities in Saudi Arabia maintain internal regulation through the Sharia Supervisory Board. The informal sector of the Saudi economy is made up of Muslims and non-Muslims. It is made up of people who are mostly illegal immigrants and have limited laws in the country. As such, most of them carry out their activities without registering them and subjecting their businesses to mainstream control by the authorities. However, the pervasive and tough systems that regulate affairs in Saudi Arabia causes the informal sector of Saudi Arabia to become compliant with the rules and regulations of the Kingdom because any non-compliance warrants swift and tough action from the Saudi Authorities. There are unstructured laws that cover the activities of foreigners in Saudi Arabia. This means that there is room for some degree of discrimination against foreigners. Also, there are tax differences that affect foreigners significantly. Chapter 3: RESULTS This chapter divulges information about the field work conducted in the research. It includes information about the interviews and surveys conducted about: 1. The actual impact of Sharia Laws and codes on business operations (interview) 2. The views of Islamic codes on businesses in the informal sector and amongst non-Muslims (survey). 3.1 Methodology The field work was conducted through three structured interviews with members of the Saudi business community. The interviews were done with: 1. 1 Saudi CEO 2. 1 Non-Muslim Manager and 3. 1 Muslim non-Saudi Manager The responses are summarized and collated according to the questions asked. This provides an idea of how they all view Sharia compliance in their respective activities and operations. The study of non-Muslim/non-Saudi attitudes towards the regulation of the formal and informal sector of Saudi Arabia was done through a survey. The survey consisted of 7 questions that were sent to 10 respondents. The respondents were various formal and informal sector business owners and employees who were non-Saudi. Half of the respondents were non-Muslims. Two of them were Shiites [who are considered non-Muslim under Saudi law] and three were Muslims. The questions are found in Appendix 1 below. 3.2 Impact of Sharia on Operations of Formal Businesses This section includes a summary of the findings of the three interviews conducted. The findings are summarized according to the topics that were covered by the interviews. 3.2.1 Internal Structures All three respondents indicated that their organization had to make changes to their structures and systems because of the need for Sharia compliance. They all concede that Sharia is so important and vital that their businesses spend a significant sum of money each year to maintain connections with appropriate scholars to provide guidelines on their activities and operations. 3.2.2 External Controls Two of the respondents indicated that they have external controllers who come in-house to check their systems on a regular basis. These supervisors had the mandate and backing of the law. The third respondent indicated that although his company does not get external visitors, they are required to show evidence of compliance before the renewal of their licenses. 3.2.3 Appropriateness All the respondents stated that they respected the fact that the authorities ensured that their business operated according to Sharia. One indicated that nations have the right to exercise their sovereignty on the basis of what they believed in. However, some of the respondents identified that the compliance requirements are sometimes stringent and they get in the way of the operation of businesses. 3.2.4 Issues One respondent indicated that the differences in views and opinions about some issues in Sharia compliance is quite problematic and leads to ambiguity and identity problems. Another respondent identified that some of the supervision and visits prevent economic gains in the organization. The third respondent declined to comment about this topic. 3.2.5 How Issues are Addressed The first respondent stated that it will be best for the streamlining and codification of ambiguous aspects of Sharia Law. The second respondent stated that there should be a balance between economic gains and Sharia supervision, since this can make way for the attainment of optimum cooperation between supervisors and businesses. 3.3 Survey Results The survey produced some results which provide some trends amongst the respondents. These trends are collated statistically to show how people think and feel about things and situations 3.3.1 Restrictiveness of Islamic Codes in Saudi Arabia 3.3.2 Relative View of the Harshness of Saudi Business Codes 3.3.3 Effects of Sharia Internal Controls on your Business 3.3.4 Feeling of Limitation in Adhering to Sharia Codes 3.3.5 Experiences of Discrimination as a Foreigner 3.3.6 Perceptions on the Fairness of Tax Systems to Foreigners 3.3.7 Perceptions on the Benefits to be Gained from Reforms in KSA Chapter 4: ANALYSIS & DISCUSSIONS In this chapter, the major findings are evaluated and critiqued to find their implications. This provides clues about how the apply in the general sense. 4.1 The Saudi Business Terrain Saudi Arabia has a pervasive Islamic business environment that is based strongly on Islamic principles and systems. The commercial systems and structures as well as intermediaries like the Saudi Arabian Monetary Agencies have direct and indirect control and oversight of the operations and activities of businesses throughout the economy. Businesses therefore have internal controls and structures that ensure that they meet Sharia principles. Informal and undocumented businesses still have to adhere to the principles of Sharia because it is compulsory by law. There are loopholes and systems that ensures that causes the rights of some foreigners to be denied. This leads to some forms of discrimination. Another area of discrimination is in the case of taxes. Foreigners pay taxes and native Saudis pay just a nominal religious tax. 4.2. Impact of Sharia on Formal Business Operations Sharia has an impact on the internal operations of organizations. Hence businesses have to make changes and adjustments in their operations from time to time. This results in different restructuring in order to meet the obligations under Saudi Laws. There is typically an expense that is incurred by Saudi businesses to ensure that they are Sharia compliant. This therefore shows that Sharia compliance is an important part of businesses. Sharia compliance is supported by external controls and structures that are initiated by government authorities. These parties come in and supervise important activities of relevant businesses. However, in some cases where this is either unnecessary or impossible, there is the need for businesses to adhere to some of the Sharia principles in order to be granted some important recognition like licensing and the like. Most foreigners think that it is in order that the Saudi government exercises its power and authority. However, some foreigners and non-Muslims think that Sharia compliance could get so stringent and have a negative impact on a business' operations. One of the main issues in the application of Sharia is the ambiguity of Sharia laws. Also, there are some issues with the supervision of activities in an organization since this can get in the way of operations. To resolve this problems, it might be ideal to codify the laws of Sharia and also agree on supervision trends to prevent economic losses. 4.3 Views of Non-Saudis on the operation of Sharia Compliance Most of the respondents identify that the Islamic codes in Saudi Arabia is quite restrictive to the kind of lifestyle that they sought to live. A significant portion of the respondents indicate that it is quite restrictive whilst some say there are no restriction. This implies that there is some degree of restriction that is placed on foreigners by the country's codes. A majority of the respondents stated that the Sharia codes are quite harsh on foreigners. This shows that they feel that the Sharia codes are quite strict and might be better off if they are loosened up. However, some of the respondents identify that it is not as strict as one might expect. Some of the respondents identify that the need for Sharia compliance is causing a bit of a harsh effect on their business. This is because they have to adhere to some rules and regulations that have some tough impacts on their operations. However, a significant minority says it is not harsh whilst another significant minority state that it is quite harsh. On an individual level, a majority of the respondents identify that Sharia has a limitation on their individual operations in the country. This means that they have some personal limits to what they wanted to do and cannot do because of need for Sharia compliance. A vast majority also stated that they have received some kind of harsh treatment or discrimination in their demands for rights because they are foreigners. This shows that there is discrimination against foreigners. A majority of the respondents claim that the taxation levels in Saudi Arabia is fair. Another 40% seem to think otherwise. An overwhelming majority of the respondents think that reforms would benefit them. A small minority of the respondents think that reforms will not do much to affect them in any way. Chapter 5: CONCLUSION From the research, several inferences were made. Based on the sampling and the different approaches used in the research, this section attempts to generalize the findings and conclude on the relationships between Saudi Arabia's Islamic laws and foreigners living within its borders. It is identified that Saudi Arabia is a country that is strongly steeped in Islamic codes and systems. These codes are justified by the constitution and the country has important legal backings that support the implementation. Saudi Arabia's Sharia laws are carefully guided and monitored by the government and its agencies. In most Saudi businesses, there are internal controls that ensure that the businesses operate according to the standards and expectations required by Sharia Law. These codes are carefully monitored by external entities as well. The rights of foreigners and non-Muslims are not fully protected by existing laws in Saudi Arabia. This is because foreigners are not adequately covered and protected by Saudi national laws. Due to this, there is some room for discrimination and this has happened to a lot of foreigners who live in the country. Some elements of Sharia law is quite ambiguous. This is because there are several authorities that have different views on give subjects and pointers. Due to this, there are several solutions to particular legal issues. This therefore means that businesses might have difficulties choosing which approach to use to solve problems. This can lead to severe problems and confusion that can affect businesses. Most foreigners and non-Muslims in Saudi Arabia find Sharia law restrictive. This is because it tends to prevent them from doing what they want to do. Foreigners think that compliance is tough and it leads to some kind of hardships which they do not encounter elsewhere. Although taxation of foreigners is high in Saudi Arabia, most foreigners think that it is fair. This could be justified by the fact that it remains lower than most tax rates in developed countries around the world. In light with the difficulties that most foreigners experience in Saudi Arabia, most of them recommend that some kind of reforms should be undertaken in Saudi Arabia. This is because they believe that some of those reforms would make things easier and life as a foreigner or non-Muslim will be much more easier and fruitful. Works Cited Aldohni Abdul Karim. TheLegal and Regulatory Aspects of Islamic Banking. London: Routledge. 2011. Print. Dammer, Harry. Comparative Criminal Justice Systems, 2010. Print. Etheredge Laura. Saudi Arabia and Yemen. New York: Rosen Publishing. 2011. Print. Fouad, Al Farsy, Modernity and Tradition: The Saudi Equation: Panarc International Ltd, 2004. Print. Haghshenas, Seyyed. “Saudi Arabia Social and Political Structure and Religious Minorities. Iran, Tehran”, Ettelaat newspaper, June 2010. Print. Human Rights Watch. Denied Dignity: Systematic Discrimination and Hostility Toward Saudi Shia Citizens. 2009. Print. IBP USA. Saudi Arabian Central Bank and Financial Policy Handbook. New York: International Business Publications. 2009. Journal. Jones, John Paul. If Olaya Street Could Talk: Saudi Arabia- The Heartland of Oil and Islam. The Taza Press, 2007. Print. Long, David. Culture and Customs of Saudi Arabia. London: SAGE Publication. 2005. Print. March Andrew. Sharia (Islamic Law): Oxford Bibliography. Oxford: Oxford Univesity Press. 2010. Print. O'Kane Michael. Doing Business in Saudi Arabia New York: Michael O'Kane. 2010. Print. Otto, Jan Michiel. Sharia Incorporated: A Comparative Overview of the Legal Systems of Twelve Muslim Countries in Past and Present. 2010. Print. Presley John. Directory of Islamic Financial Institutions. London: Routledge. 2012. Print. Ramady Mohammed. The Saudi Arabian Economy: Policy, Achievements and Challenges. London: Springer. 2010. Print. Silvey Rachel. “Transnational Islam: Indonesian Migrant Domestic Workers in Saudi Arabia” Geographies of Muslim Women. London: Guilford Press. 2005. Print. Varia Nisha. “As if I am not Human” Abuses Against Asian Domestic Workers in Saudi Arabia. Geneva: Human Rights Watch. 2008. Print. Vogel Frank. Islamic Law and Legal Systems: Study of Saudi Arabia. Leiden: BRILL Publishing. 2000. Print. Zegers, Jenan-Benoit & Al-Samaan Yahya. “The Legal Framework in Saudi Arabia” Doing Business with Saudi Arabia Berlin: GMB Publishing. 2006. Journal. Zuhur Sherifa. Saudi Arabia. Pato Alto: ABC-CLIO. 2011. Print. Appendix 1 Dear Sir/Madam, As part of my studies towards my degree, I am conducting a research in partial fulfillment of my graduation requirements. The research is on the views of non-Muslims and non-Saudis about the Islamic codes and practices in businesses in Saudi Arabia. In line with this I will be very grateful if you could take a little time to fill out the questionnaire below. It consists of just seven questions and can be completed in about five minutes. Please be assured that this information is confidential. Hence, it will not be disclosed to any third party without your consent. Thank you Questionnaire 1 Do you find Saudi Arabia's Islamic codes restricting in business? [Yes] [Somehow] [No] 2 Relative to other countries that you know of, do you think that the restrictions placed by the Saudi Authorities on foreigners or non-Muslims is harsh? [Strongly Agree] [Agree] [Quite Harsh] [Not Severe] 3 Does your organization's internal Sharia controls affect you in any way? [Extremely] [Quite] [Not At All] 4 Do you have any limitations in adhering to any of the rules of the Saudi Authorities? [Yes] [No] 5 Have you had any encounter with any activity that has proven to be discriminatory to you as a foreigner? [Yes] [No] 6 Do you think that the discriminatory tax levied on you is fair? [Yes] [No] 7 Do you think that reforms to the existing business codes will benefit you as you are? [Yes] [No] Read More