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

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  • Singh, Ajit
  • Sheng, Andrew

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39007.

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Date of creation: 14 Nov 2011
Date of revision: 10 Apr 2012
Publication status: Published in Cambridge University CBR Working Paper Working Paper 430.2012(2012): pp. 1-35
Handle: RePEc:pra:mprapa:39007

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Keywords: Islamic Finance; Moral Hazard; Keynes; Zero Interest Rates; Usuary;

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  1. Beck, Thorsten & Demirguc-Kunt, Asli & Merrouche, Ouarda, 2010. "Islamic vs. conventional banking : business model, efficiency and stability," Policy Research Working Paper Series 5446, The World Bank.
  2. Pasquale Scaramozzino & Giancarlo Marini, 2000. "Social time preference," Journal of Population Economics, Springer, vol. 13(4), pages 639-645.
  3. Jared Rubin, 2011. "Institutions, the Rise of Commerce and the Persistence of Laws: Interest Restrictions in Islam and Christianity," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 121(557), pages 1310-1339, December.
  4. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu, 2003. "The Impact of Corporate Governance on Investment Returns in Developed and Developing Countries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(491), pages F511-F539, November.
  6. Chang, Ha-Joon, 2000. "The Hazard of Moral Hazard: Untangling the Asian Crisis," World Development, Elsevier, vol. 28(4), pages 775-788, April.
  7. Mirakhor, Abbas & Krichene, Noureddine, 2009. "The Recent Crisis: Lessons for Islamic Finance," MPRA Paper 56022, University Library of Munich, Germany.
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