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The Philosophy of Islamic Banking and Finance



Islamic banking and finance can be described as a system through which finance is provided in the form of money in return for either equity or rights to share in future business profits, or in the form of goods and services delivered in return for a commitment to repay their value at a future date. By now, a good deal of intellectual effort has been undertaken by a number of specialists in Islamic economics to explore different aspects of Islamic banking and finance. Even some conventional economists, intentionally or unintentionally, have dealt with the subjects, which may be considered closely akin to it. It is an undeniable fact that Islamic financial institutions have had only a marginal existence during the last 300 years. They did not get the same chance as western financial institutions to gradually evolve their institutional structure, tools and modus operandi to their full potential. Therefore, such evolutionary process of Islamic banking and finance must be done through serious intellectual work by economists rather than observing institutions at work. However, Islamic banking and finance has now been in the arena for more than a quarter of a century. It has taken a contemporary shape. Whether it has sufficiently approached the Islamic paradigm par excellence or not, is a different question. The philosophy of Islamic banking and finance is a set of theories and ideas related to its understanding.1 In this regard, we must first start with the rules of Islamic Shari[ah from which the very idea of Islamic banking has been drawn. Second, monetary and macro theory is required to explain why Islam considers dealing through the rate of interest as totally unacceptable, and the economy-wide consequences of such practice. Third, banking theory itself would be necessary to figure out the behavior of Islamic banking and finance as well as to assess its comparative performance.

Suggested Citation

  • Al-Jarhi, Mabid, 2004. "The Philosophy of Islamic Banking and Finance," MPRA Paper 66739, University Library of Munich, Germany, revised 2007.
  • Handle: RePEc:pra:mprapa:66739

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    References listed on IDEAS

    1. Huberto M. Ennis, 2001. "Loanable Funds, Monitoring and Banking," Review of Finance, European Finance Association, vol. 5(1-2), pages 79-114.
    2. Al-Jarhi, Mabid, 1980. "A Monetary and Financial Structure for an Interest-Free Economy: Institutions, Mechanism & Policy," MPRA Paper 66741, University Library of Munich, Germany, revised 2004.
    3. Uhlig, Harald, 2000. "Should We Be Afraid of Friedman's Rule?," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 261-303, December.
    4. Peter Ireland, 2003. "Implementing the Friedman Rule," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(1), pages 120-134, January.
    5. Harold L. Cole & Narayana R. Kocherlakota, 1998. "Zero nominal interest rates: why they're good and how to get them," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-10.
    6. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    7. Kathryn L. Dewenter & Alan C. Hess, 1998. "An international comparison of banks' equity returns," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 472-499.
    8. Auffret, Philippe, 2001. "An alternative unifying measure of welfare gains from risk-sharing," Policy Research Working Paper Series 2676, The World Bank.
    9. Gorton, Gary & Schmid, Frank A., 2000. "Universal banking and the performance of German firms," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 29-80.
    10. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    11. Gary Gorton & Frank A. Schmid, 1995. "Universal Banking and the Performance of German Firms Federal Reserve Bank of Chicago," Center for Financial Institutions Working Papers 96-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
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    Cited by:

    1. Al-Jarhi, Mabid, 2016. "An economic theory of Islamic finance," MPRA Paper 72698, University Library of Munich, Germany.

    More about this item


    Islamic banking; Islamic finance; Shari'ah; optimal monetary policies; interest rate; profit-sharing; credit markets; instability; contagion; risk-sharing; equity; banking theory; intermediation; information asymmetry; moral hazard; universal banking;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


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