Munich Personal RePEc Archive

Islamic Finance at Crossroads

Al-Jarhi, Mabid (2017): Islamic Finance at Crossroads. Published in:

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After more than 40 years of practice, the Islamic finance industry is riddled with products that have a camouflage of Islamic form, but lack Shari'ah validity of purpose. The increasing tendency to mimic conventional finance, had the industry converging to its conventional counterpart. It is therefore seriously threatened with increasing cynicism and popular decline in interest. The paper looks into the essence of Reba prohibition from an economic perspective, using a concise classification of transactions, and how popular monetary theory looks on a positive rate of interest with disfavor. It evaluates Shari'ah scholars approach to the validation of contracts as well as the attitude of monetary authorities towards the Shari'ah content of Islamic finance transactions. It reviews the macroeconomic advantages of Islamic finance within an Islamic macroeconomic environment. Then it tries to explain why managers of Islamic banking and finance institutions, IBFI, mimic conventional products despite such advantages. The paper surveys the literature that measures the extent of conversion as well as provides an alternative explanation. The study finds that IBFI violate the true paradigm of Islamic finance, because its advantages are all external and impossible to internalize. It lists several pieces of empirical evidence on increasing convergence. The paper concludes by drawing a plan composed of regulatory actions, research agenda as well as a series of dialogues with stakeholders.

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