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Islamic Finance:Sructure-objective mismatch and its consequences

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  • Hasan, Zubair

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21536.

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Date of creation: Jan 2010
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Handle: RePEc:pra:mprapa:21536

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Keywords: Keywords: Islamic finance; convergence; Shari’ah compliance; credit creation; leverage; derivatives; financial crisis;

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Cited by:
  1. Czerniak, Adam, 2010. "Symptomy kryzysu globalnego a etyka gospodarcza religii światowych. Analiza porównawcza bankowości islamskiej i bankowości klasycznej w kontekście kryzysu finansowego
    [The differences between
    ," MPRA Paper 26971, University Library of Munich, Germany.
  2. Hasan, Zubair, 2010. "Dubai financial crisis: causes, bailout and after - a case study," MPRA Paper 26397, University Library of Munich, Germany.

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