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The State of Islamic Finance: Post-crisis and Future Prospects


  • Mirakhor , Abbas

    (International Centre for Education in Islamic Finance (INCEIF))

  • Smolo , Edib

    (International Shari'ah Research Academy for Islamic Finance (ISRA)
    International Centre for Education in Islamic Finance (INCEIF))


The main purpose of this paper is to trace epistemological roots of conventional and Islamic finance. Based on an extensive literature review, this paper aims to highlight, explain, and discuss an ideal conventional and Islamic financial system. The ideal conventional financial system is discussed in light of various writings by Smith and Arrow, based on Arrow-Debreu model. On the other hand, the Islamic financial system is discussed in light of Qur'anic verses based on which the system is built. The findings show that the present Islamic finance industry evolved from conventional finance to address a market failure in conventional finance in terms of unmet market demand for Islamic finance products. However, since most practitioners in Islamic finance were bankers and market players from the conventional background, they developed, more often than not, products that are similar to conventional ones albeit with Shari'ah compatibility. Hence, the focus was primarily on avoiding riba while ignoring the first part of the verse 275 of surah al-Baqarah which first ordains exchange contracts. Although the crisis had limited impact on IFI, it is due to the similar nature between the two that IFI is also subjected to the shocks in the conventional financial system. A way forward would be to move towards more risk-sharing products which indicate a robust link between the strength of the financial system and economic growth.

Suggested Citation

  • Mirakhor , Abbas & Smolo , Edib, 2012. "The State of Islamic Finance: Post-crisis and Future Prospects," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 6(3), pages 1-39, April.
  • Handle: RePEc:mbr:jmonec:v:6:y:2012:i:3:p:1-39

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    More about this item


    epistemology; Arrow-Debreu; conventional finance; Islamic finance; Shari'ah-compliant; financial crisis; risk-sharing; uncertainty; debt; interest;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G0 - Financial Economics - - General
    • N01 - Economic History - - General - - - Development of the Discipline: Historiographical; Sources and Methods
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems


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