Globalization Of Financial Markets And Islamic Financial Institutions

In this paper, I reflect on the implications of financial globalization for Islamic financial institutions in terms of coordinates selected from both history and theory. I present in outline the 18th century case for and against commerce, the 19th century case for and against a central institution acting as a lender of last resort, and modern theoretical developments in finance and insurance based on the law of large numbers and centered around the notions of arbitrage, naive and efficient diversification of risk, moral hazard and adverse selection. I argue that an informed understanding of the processes of globalization is a necessary prerequisite for charting out the impact on current financial institutions, and perhaps more importantly, on the development of future institutions based on Islamic values and assumptions. At the same time, I argue that this prerequisite also deepens and enriches our understanding of the values themselves, and thereby, through their derivation, leads to a closer and more-informed reading of the canonical text itself. As such, I question the extent to which the financial aspects can be bracketed, and argue for a lack of closure in what must be a mutually illuminating and necessarily interdisciplinary enquiry.