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Islamic Finance at Crossroads

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Abstract

After more than 40 years of practice, the Islamic finance industry is riddled with products that have a camouflage of Islamic form, but lack Shari'ah validity of purpose. The increasing tendency to mimic conventional finance, had the industry converging to its conventional counterpart. It is therefore seriously threatened with increasing cynicism and popular decline in interest. The paper looks into the essence of Reba prohibition from an economic perspective, using a concise classification of transactions, and how popular monetary theory looks on a positive rate of interest with disfavor. It evaluates Shari'ah scholars approach to the validation of contracts as well as the attitude of monetary authorities towards the Shari'ah content of Islamic finance transactions. It reviews the macroeconomic advantages of Islamic finance within an Islamic macroeconomic environment. Then it tries to explain why managers of Islamic banking and finance institutions, IBFI, mimic conventional products despite such advantages. The paper surveys the literature that measures the extent of conversion as well as provides an alternative explanation. The study finds that IBFI violate the true paradigm of Islamic finance, because its advantages are all external and impossible to internalize. It lists several pieces of empirical evidence on increasing convergence. The paper concludes by drawing a plan composed of regulatory actions, research agenda as well as a series of dialogues with stakeholders.

Suggested Citation

  • Al-Jarhi, Mabid, 2017. "Islamic Finance at Crossroads," MPRA Paper 88555, University Library of Munich, Germany, revised Aug 2018.
    • Handle: RePEc:pra:mprapa:88555
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    References listed on IDEAS

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    Cited by:

    1. ALJARHI, Shadia, 2020. "Reforming Islamic Finance," MPRA Paper 103393, University Library of Munich, Germany.
    2. Mabid Ali Al-Jarhi, 2020. "Reforming Islamic Finance إصلاح المالية الإسلامية," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 33(2), pages 101-107, July.

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    More about this item

    Keywords

    Islamic economics; Islamic finance; interest rate; monetary theory; real and nominal transactions; Islamic finance regulation.;
    All these keywords.

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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