Islamic Finance:Structure-objective mismatch and its consequences

Hasan, Zubair (2010): Islamic Finance:Structure-objective mismatch and its consequences.

Abstract

This paper raises the issue of an initial structure-objective mismatch in the launching of Islamic finance. The abolition of interest and promotion of growth with equity were goals of the conceived system. These goals expressed a long run vision to improve the condition of the Muslim communities across the world. However, the organizational form adopted for Islamic finance was of the existing commercial banks which provided essentially short-term loans on interest to trade industry and commerce. The choice thus involved an intrinsic mismatch between the structure and objectives of Islamic finance. The mismatch did carry some advantages, but on a more important side it exposed Islamic finance to commitments and influences which could not mostly align well with the goals the pioneers had in mind. Note that in focus here is not the reversal of the mismatch but its consequences that have forced the nascent Islamic system to convergence and competition with the mature conventional finance the West dominates. It is not the ground realities that are being adapted to Shari’ah norms; it is the norms that are being stretched to limit for meeting the demands of the conventional system. Ordinary Muslims who hoped to benefit from Islamic financing remain unattended. Thus, what Islamic finance can or cannot change will depend on where its ongoing integration with the conventional system leads it to. Currently, most merits claimed for the Islamic system defy evidence. The basic reforms financial systems require in the face of current crisis are the control of credit, leverage lure, and speculation. Islamic finance is in principle better equipped to achieve these ends.

• Item Type: MPRA Paper
• Language: English
• Keywords: Keywords: Islamic finance, convergence; Shari’ah compliance, credit creation; leverage; derivatives; financial crisis
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Ahmad, Khurshid (2007)”Capitalism, socialism, the welfare state and Islam: Lecture. IRTI, Jeddah.

Akhtar Aziz, Zeti (2008): A global growth opportunity amidst a challenging environment, Governor’s Keynote Address delivered on 8 October at State Street Islamic Finance Congress, 2008, Boston U.S.A

Anwar, Zarina in an interview with Anna Maria Aug/Sep. 2008 down loaded from SC web site. IFSL Research Report (Islamic finance 2010)

Askari, Iqbal and Mirakhor (2009): Globalization and Islamic Finance: Convergence, Prospects, and Challenges: John Wiley & Sons (Asia) Pte Ltd. Singapore.

Bank Negara Malaysia (October 2008) Governor’s keynote address Islamic finance: A global growth opportunity amidst a challenging environment, at State Street Islamic Finance Congress 2008, Boston. Akhtar, Shamshad (April 2008): Islamic finance: Authenticity and inn0vation – a regulator’s perspective,

Duetsche Borse Group White Paper (April 2008): The Global Derivative Market - An Introduction: Frankfurt/main Germany < www.eurexchange.com>

Downside World News http://www.globalresearch.ca/index.php?context=va&aid=10265

El Gamal, Mohmoud A: (2009) Macro vs. micro- considerations in Islamic financial ijtihad, Lecture IIFF Istanbul

Grais, Wafik, and Zamir Iqbal (2007): Diversity in the regulation of Islamic Financial Institutions , The Quarterly Review of Economics and Finance, Volume 46, Issue 5, pp. 778-800. See Table 2 even as it is based on 2000-2001 data. The situation may have since changed substantially.

Hasan, Zubair (2002) Mudarabah as a Mode of Financing in Islamic Banking: Theory, Practice, and Problems, Middle East Business and Economic Review Vol.14, No.2, Sydney, Australia, pp.41-53

Hasan, Zubair (2009): Islamic banking: Commodity murabahah remains in a lurch – Note, International Journal of Islamic and Middle-eastern Finance and Management, Vol.2, No. 1 (Emerald) pp. 77-79

Hasan, Zubair (2010): arrives at similar results in his Islamic banks: Profit sharing, equity, leverage lure and credit control, (Forthcoming) JKAU Journal Islamic Economics, Vol. 23, No. 1

Hasan Zubair (2008): ‘Credit Creation and Control: An Unresolved Issue in Islamic Banking’, International Journal of Islamic and Middle Eastern Finance and Management, UK Vol. 1; No. 1, PP. 69-81 (Emerald)

Honohan, Patrick (July 2001): Islamic financial intermediation: economic and prudential considerations: Development Research Group of Financial Sector Strategy and Policy Department, World Bank.

Jutia Group (July 24, 2008: Global derivative market now values at $1.14 Quadrillion

jutiagroup.com/2008/.../24/global-derivatives-market-now-valued-at-114-quadrillion/

Kamali, Muhammad Hashim (2002): Islamic commercial law: an analysis of futures and options, Ilmah Publications

Singh, Harbhajan (February 11, 2008): Sukuk debate rages- Shariah compliance questioned, News Analysis: Islamic Finance, The Malaysian Reserve,

Stieglitz, Joseph (2009): Freefall: Markets and the sinking of the global economy, Allen Lane.

The Seventh Harvard University Forum on Islamic Finance (April 22-23, 2006): Integrating Islamic Finance in the Mainstream: Regulation, Standardization, and Transparency, Cambridge, Massachusetts.

Usmani, Muhammed Taqi (2009): Post crisis reforms – some points to ponder, presented at the World Economic Forum.

Weil, Laurent: (2009): Do Islamic banks have greater market power? Working paper (http://courmot.u-strasbg.fr/large)