Islamic finance revisited: conceptual and analytical issues from the perspective of conventional economics

Singh, Ajit and Sheng, Andrew (2011): Islamic finance revisited: conceptual and analytical issues from the perspective of conventional economics. Published in: Cambridge University CBR Working Paper , Vol. 2012, No. Working Paper 430 (May 2012): pp. 1-35.

Abstract

After a brief recent empirical sketch of Islamic finance, the paper turns to its main theoretical and conceptual purpose. It seeks to relate the concepts of Islamic and conventional finance, and to examine certain important questions which arise from the interaction between these systems. The paper is written from the perspective of conventional modern economics, as the authors are students of the latter.

The paper discusses the main tenets of Islamic finance, as well as those of modern economics, including the implications of zero interest rates and those of Modigliani and Miller theorems.

The most notable finding of this paper is that John Maynard Keynes’ analysis of employment, interest and money provides, inadvertently, the best rationale for some of the basic precepts of Islamic finance. The paper concludes that there is no inevitable conflict between the two systems and cooperation between them is eminently desirable and feasible.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic Finance; Moral Hazard; Keynes; Zero Interest Rates; Usuary
• Subjects: A - General Economics and Teaching > A1 - General Economics > A13 - Relation of Economics to Social Values; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General; B - History of Economic Thought, Methodology, and Heterodox Approaches > B4 - Economic Methodology > B41 - Economic Methodology

References

Ahmed, Jaseem and Harinder S. Kohli (2011) ‘Islamic Finance : Writings of V.Sundararajan’, Ahmed, J and H.S. Kohli (eds.), Sage Publications India Pvt.Ltd., India, 2011.

Akyuz, Yilmaz (1991) ‘Financial Liberalisation in Developing Countries: A Neo-Keynesian Approach’, UNCTAD Discussion Paper 36, March 1991.

Amsden, Alice H. (1990) ‘Why isn’t the Whole World Experimenting with the East Asian model to develop: Review of the East Asian Miracle’, World Development Vol. 22, Issue 4 pp.627-633.

Beck, Thorsten, Asli Demirgüç-Kunt and Ouarda Merrouche (2010) ‘Islamic vs. Conventional Banking : Business Model, Efficiency and Stability’, The World Bank Policy Research Papers, Working Paper No.5446, October 2010.

Brown, Kevin (2011) ‘Asia-Pacific: Singapore Launch Raises Profile in the Region’, Financial Times, May 11, 2011.

Çevik, Serhan and Charap, Joshua (2011) ‘The Behaviour of Conventional and Islamic Bank Deposit Returns in Malaysia and Turkey’, IMF Working Paper WP/11/56, July 2011.

Chanay, Eric (2011) ‘Islamic Law, Institutions and Economic Development in the Middle-East’, Review Essay, Development and Change, Vol.42, No.6, pp.1465-1472.

Chang, Ha-Joon (2000) ‘ The Hazard of Moral Hazard: Untangling the Asian Crisis’, World Development, Vol.28, No.4, pp.775-788.

Cho, Y-J. and D. Khatkhate (1989) ‘Lessons of Financial Liberalization in Asia : A Comparative Study’, World Bank Discussion Paper No.50.

Deakin, S. and Singh, A. (2008) ‘The Stock Market, the Market for Corporate Control and the Theory of the Firm: Legal and Economic Perspectives and Implications for Public Policy’, Cambridge University CBR Working Paper No. 365. Published subsequently in a revised form in Bjuggren, P., and Mueller, D.C., (eds.) The Modern Firm, Corporate Governance and Investment Elgar Publications, 2009. pp: 185-222.

Dobb, Maurice H. (1960) ‘Essay on Economic Growth and Planning’, Law Book Company of Australasia, Pyrmont, Australia, 1960.

Donaldson, G. (1961) ‘Corporate Debt Capacity’, Harvard University Press, Boston, Massachusetts.

Eaton, Jonathan, Mark Gersovitz and Joseph E. Stiglitz (1986) ‘The Pure Theory of Country Risk’, European Economic Review, Vol.30, pp.481-513.

Fazzari, S.M., R.G. Hubbard and B.C. Peterson (1988) ‘Financing Constraints and Corporate Investment’, Brookings Paper on Economic Activity, 1.

Fazzari, S.M. and B.C.Peterson (1993) ‘Investment Smoothing with Working Capital: New evidence on the Impact of Financial Constraints’, RAND Journal of Economics, Vol.24, Issue 3, Autumn, pp. 328-342.

Fry, Maxwell J. (1988) ‘Money, Interest and Banking in Economic Development’, Baltimore, John Hopkins University Press.

Fry, Maxwell J. (1997) ‘In Favour of Financial Liberalisation’, Economic Journal, Vol. 107, Issue 442, pp.754-770.

Hellmann, Thomas and Joseph E. Stiglitz (1998) ‘Credit and Equity Rationing in Markets with Adverse Selection’, European Economic Review.

Keynes, John Maynard (1936) ‘The General Theory of Employment Interest and Money’, New York, Harcourt, Brace and Company.

Khan, Mohsin S. and Abbas Mirakhor (1992) ‘Islam and the Economic System’, Review of Islamic Economics, Volume 2, No.1, 1992, pp.1-29.

Khan, Mohsin S. and Abbas Mirakhor (1994) ‘Monetary Management in an Islamic Economy’, Journal of KAU: Islamic Economics, Vol.6, pp.3-21.

Khan, Mohsin S. and Abbas Mirakhor (1989) ‘The Financial System and Monetary Policy in an Islamic Economy’, Journal KAU: Islamic Economics, Vol.1, pp.39-57. Kuh, E. (1963) ‘Capital Stock Growth: A Micro-econometric Approach’, Amsterdam.

Kuran, Timur (2011) ‘The Long Divergence:How Islamic Law Held Back the Middle East’, Princeton University Press, 2011.

Levine, R. (1997) ‘ Financial Development and Economic Growth: Views and Agenda’, Journal of Economic Literature, Vol.35, Issue 2, June, pp.688-726.

Marini and Scaramozzino (1999) ‘Social Time Preference’, forthcoming in Journal of Population Economics McKinnon, R.I. (1973) ‘Money and Capital in Economic Development’, Brookings Institution, Washington.

Metwally, Mokhtar M. (1984) ‘The Role of the Stock Exchange in an Islamic Economy’, Journal of Research in Islamic Economics, Vol.2, No.1, pp.19-28.

Meyer, J.R. and Edwin Kuh (1957) ‘Investment Decision: An Empirical Study’, Harvard University Press.

Meyer, J.R. and R.R. Glauber (1964) ‘Investment Decisions, Economic Forecasting and Public Policy’, Boston, Harvard University, Department of Business Administration, Research Division.

Milgate, Murray (2011) ‘Unsustainable Equilibria’, Cambridge Journal of Economics (in press).

Minsky, Hyman P. (1975) ‘John Maynard Keynes’, Columbia University Press. Reprinted 2008, Mc-Graw Hill, USA.

Mirakhor, Abbas ( 2009) ‘Recent Crisis: Lessons for Islamic Finance’, SC-UM Visiting Scholar Programme Public Lecture, Suruhanjaya Sekuriti, Malaysia, 29th September 2009.

Mirakhor, Abbas (2010) ‘Hopes for the Future of Islamic Finance’, Institute of Islamic Banking and Insurance, 2010.

Mirakhor, Abbas ( 2011) ‘Keynote Address’, Foundations of Islamic Finance Conference Series, Epistemological Foundation of Finance: Islamic and Conventional, March 8-10, 2011.

Mishkin, Sarah (2011) ‘Middle East: Market Remains Buoyant Despite Unrest’, Financial Times, May 11, 2011.

Modigliani, F. and M. Miller (1958) ‘The Cost of Capital, Corporate Finance and the Theory of Investment’, American Economic Review, Vol.48, pp. 261-297.

Modigliani, F. and M. Miller (1963) ‘Corporate Income Taxes and the Cost of Capital : A Correction’, American Economic Review, Vol.53, pp.433-443.

Myers, S.C. (1977) ‘Determinants of Corporate Borrowing’, Journal of Financial Economics, Vol.5, pp.147-175. Myers, S.C. (1984) ‘The Capital Structure Puzzle’, Journal of Finance, Vol.39.

Myers, S.C. and N.S. Majluf (1984) ‘Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have’, Journal of Financial Economics, Vol.13.

Oakley, David (2011) ‘ Good Omens Amid Turbulence’, Financial Times, Special Report : Islamic Finance, May 11, 2011.

Pigou (1920) ‘The Economics of Welfare’, London, Macmillan.

Ramsey (1928) ‘A Mathematical Theory of Saving’, Economic Journal, Vol.38, pp.543-559.

Reuters (2012) ‘Goldman Sachs in new flap over Islamic bond’ 11 January

Rubin (2011) ‘Institutions, the Rise of Commerce and the Persistence of Laws: Interest restrictions in Islam and Christianity’, The Economic Journal, Royal Economic Society, Vol.121, No.557, December 2011, pp. 1310-1339.

Sachs, J.D. (1985) ‘External Debt and Macroeconomic Performance in Latin America and East Asia’, Brookings Papers on Economic Activity, Vol.1985, No.2.

Sen, Amartya (1962) ‘Choice of Techniques : An Aspect of the Theory of Planned Economic Development’, Oxford–Blackwell Publications, 1962.

Shaw, E.S. (1973) ‘Financial Deepening in Economic Development’, The Hebrew University of Jerusalem, Working Paper No.233.

Sheng, Andrew (2009) ‘From Asian to Global Financial Crisis’, Cambridge University Press, New York, 2009.

Sheng, Andrew (2010) ‘Is Islamic Finance the new challenge to Wall Street?’, Commentary, The China Post, 7 November 2010.

Sheng, Andrew (2011). ‘Finance Cannot be Left to Free Markets: An Asian Tribute to Minsky’, 20th Hyman P. Minsky Conference, Levy Institute, Bard College, New York, 15th April 2011.

Singh, A. (1992) ‘Corporate Takeovers’, in The New Palgrave Dictionary of Money and Finance, edited by Eatwell, John, Milgate, Murray and Newman, Peter, Macmillan, London and New York, pp. 480-486.

Singh, A. and Hamid, J. (1992) ‘Corporate Financial Structures in Developing Countries’, IFC Technical Paper No. 1, World Bank, Washington, DC, (xii + 147 pp.).

Singh, A. (1995) Corporate Financial Patterns in Industrialising Economies: A Comparative International Study’, IFC Technical Paper No. 2, World Bank, Washington, DC, (ISBN 0-8213-3231-7).

Singh, A. (1997) ‘Financial liberalisation, the Stock Market and Economic Development’, Economic Journal, May, pp. 771-782. Subsequently re-published in Portuguese in Nova Economia, Vol. 8, No. 1, July 1998; also re-published in Controversies in Macro-Economics: Growth Trade and Policy, pp. 206-218 ed. by H. Dixon, Blackwells, Oxford. 2000.

Singh, A., (2003) ‘Corporate Governance, Corporate Finance and Stock Markets in Emerging Countries’, Woking Paper No. 258, Working Paper Series, Centre for Business Research, University of Cambridge. A revised version of this paper has been published in the Journal of Corporate Law Studies, Vol. 3, Part 1. April, pp. 41-72.

Singh, A. (2007) ‘Economic Crisis and the Asian Way of Doing Business’, The Business Economist, Vol.38, No.2, 2007, pp. 9 - 21.

Singh, A. (2011) ‘Financial Globalisation and Human Development’, forthcoming in the Journal of Human Development and Capabilities.

Standard & Poors (2011). ‘Fund Ratings’. Standard & Poor's Financial Services LLC, The McGraw-Hill Companies, Inc., USA.

Stiglitz, Joseph E. (1969) ‘A Re-Examination of the Modigliani-Miler Theorem’; Also in Review of Economics and Statistics, Vol.59, 1969.

Stiglitz, Joseph E.(1988) ‘Why Financial Structure Matters’, Journal of Economic Perspectives, Vol.2, No.4, pp.121-126.

Stiglitz, Joseph E. (1994) ‘The Role of The State in Financial Markets’, Proceedings of the Annual World Bank Conference on Development Economics, World Bank, Washington DC, 1994.

Stiglitz, Joseph E. (2005) ‘Modigliani, the Modigliani-Miller Theorem and Macroeconomics’, Paper presented at the “Franco Modigliani and Keynesian Legacy Conference”, New School University, April 14-15, 2005.

Sundararajan, V. (2011) ‘Islamic Finance, Writings of V. Sundararajan’, Edited by S. Ahmad, J. Aseem. and Kohli, S Harinder, Sage Publications New Delhi.

Tan, Eu Chye (2009, review of) ‘Islamic Finance Principles and Practice’, by Hans Visser, Edward Elgar, 2009. University of Malaya, Kuala Lumpur

Toutounchian, Iraj (2008) ‘The Role of Central Banks in Islamic Banking’, Institute of Islamic Banking and Insurance, September 29, 2008.

Van Duyn , Aline (2011) ‘The US: Moves are Under Way to Lower Barriers’, Financial Times, May 11, 2011.

Villamil, Anne P. (1992) ‘The Modigliani-Miller Theorem’, The New Palgrave Dictionary of Money and Finance.