Since the financial system has proved crucial not only for the allocation and distribution of resources but also for the stability and growth of an economy, re-structuring the financial system in line with the socio-economic goals of Islam has been recognized as essential for a meaningful socio-economic reform in Muslim societies. (Challenges, 21)
It prompted Muslims to establish Islamic Financial Services Industry (IFSI) which aimed to imply that Islamic principles, goals and values were conducive to the establishment of a system different from the conventional one. The emergence of the IFSI and its substantial progress over the last three decades have raised considerable interest and critique among religious scholars, academics and practitioners. They hailed the existing IFSI as either different from conventional finance (as Chapra noticed) or 'business as usual'. (Islamic Finance, 1)
Ethics in Islamic Economics
The present essay takes up this same issue and examines whether Islamic finance is any different or it is merely labeled otherwise. To this end, the essay attempts to study the context in which the IFSI emerged, differences between conventional and Islamic finance, financial intermediation in both industries as well as examples from the actual practices of Islamic finance. By doing so, it employs three-fold ethical analysis of the subject in terms of its motives, the character or nature of the action itself, and the consequences of the actions or practices.
The essay will argue that the emphasis on allegedly interest-free and asset-based financing deprives Islamic finance of its meaning and shifts the attention to the legality of transactions. Nonetheless, the essay will also argue that human behavior informed by Islamic values and geared towards the objectives of Shari’ah may bring about a totally different intra- and international system characterized with considerably less disparity in growth, wealth and income, less damage to the environment and more genuine human happiness.
Conventional vs. Islamic Finance: Comparative Analysis
Although Islamic finance is presented as an alternative to the conventional finance, it has failed: "to question the system ‘the global capitalistic order’ in its essence, in its objectives, and most of all in its consequences." (Radical Reform, 33)
|It is noteworthy that Islamic finance was established within a global or capitalist financial system.|
Instead of questioning, criticizing or challenging the conventional economic assumptions, offering an alternative and hence transforming the dominant system, it has adapted to it and consequently rendered legitimacy to the conventional system by having acknowledged its domination. Hence, this part of the essay will question the conventional economic assumptions through the philosophy and objectives of human agency.
Under neo-classical economic theory and conventional finance economic rationality and self-interest are the main drivers of human behavior. It is assumed that rational and self-interested individuals (homo oeconomicus) seek to attain their specific and predetermined goals to the greatest extent with the minimum cost possible. Consequently, shaped by self-interested human nature, supply and demand in market are deemed to be sufficient to deal with all economic issues. However, obviously market forces have failed to achieve balanced and equitable growth and distribution not only within countries but also between countries.
All of the above stated calls into question whether there is any difference between the behavior of ‘homo oeconomicus’ and a Muslim, i.e. a person whose behavior is guided by Islamic values, principles and goals (“Homo oeconomicus”). Indeed, this difference may be seen as one of the major differences between conventional finance and finance informed by Islamic values and goals (1)
Yet, it is not to make an essentialist argument that homo oeconomicus or a Muslim economic behavior exist by nature. Rather, ''humans largely make themselves and each other, through the institutions, technologies, and other tools that they develop in the course of living and reflecting on how one should live.'' (2)
So, it is believed that this or another behavior can be brought into being through formulation of a particular set of norms, mechanisms, and instruments. Therefore, models, formulas, contracts and products used in finance (whether conventional or Islamic) ''are not descriptions of the world, but actually means of bringing a world (and the human subjects that populate it) into being.'' (2)
It is noteworthy that Islamic finance was established within a global or capitalist financial system. The latter pursues objectives of its own and consequently, has fostered development of means, tools and mechanisms that cater to these objectives. In such circumstances, the establishment of Islamic finance can be seen as Muslims' desperate search for ways to preserve their 'alleged and constructed authenticity' in a world where rules of game are set by others, and the space of debate is largely informed by anything but Islamic sources. (Globalized Islam)
''It is the West that defines the space of the debate. […] The debate occurs within a single 'cultural framework: that of the West.'' (Globalized Islam, 336-37)
This very statement implies that the discourse on Islamic finance takes place within the dominant episteme, i.e. ''a world-view, a slice of history common to all branches of knowledge, which imposes on each one the same norms and postulates, a general stage of reason, a certain structure of thought that the men of a particular period cannot escape – a great body of legislation written once and for all by some anonymous hand.'' (The Archaeology, 191)By virtue of this very episteme, those who are engaged in Islamic financial engineering are not likely to think out of it. Consequently, the means – financial products and mechanisms - they come up with are most likely to be similar to conventional ones no matter how well the former are dressed into an 'Islamic garb'. In this sense, Islamic finance is the effect of ‘configuration of knowledge, technology, infrastructure and so forth‘, informed by the dominant episteme.
In short, just like conventional finance is the brainchild of modernity, Islamic finance as it is today is the product of modern age.
More important, financial engineers have easily adopted the modern methodology of inventing social constructs, i.e. abstractions from reality, and have endowed these social constructs such as financial systems with objectives of their own which may override those of a human being and may achieve its objectives at the expense of those ordained by the Creator for human beings. The incompatibility of objectives of a social construct and those of a human being may be epitomized by the dichotomy between nation-state and rights of human beings or in the current case, between viability of the financial system as such and welfare of human beings.
Moreover, in order to ensure viability of such a social construct embedded in current realities, religious scholars and financial engineers adopt the language of “necessity“ or “need”. Such an approach implies that the dominant paradigm forces them to issue rulings that would let Muslims adapt to the conventional system. Although the world now is moving in the direction of human-centered design, we need God-centered design. All of our life revolves around worshipping God.
|Despite economic growth in many parts of the world, a large number of people are malnourished and ill-treated|
For if we are to respect an Islamic conception of life and death and humankind’s common welfare and interest, as well as the individual’s development, freedom, welfare, and solidarity and human brotherhood, it is important to engage in fundamental reflection about the growth and development models offered to contemporary societies.
Since industrialization, the first and foremost objective of economic policy has been to foster growth in the pursuit of development and happiness of the population. However, it has been observed that because of rising inequality, growth alone is not a reliable indicator of socio-economic development.
Despite economic growth in many parts of the world, a large number of people are malnourished and ill-treated as a result of unhindered market forces. ''Steady-state growth models and 'trickle-down' theory have demonstrated conclusively that they enhance inequalities of asset distribution by enabling the powerful and better-endowed groups to grow at an even faster rate than which they were growing before, leaving the masses in deeper misery.'' (Understanding, 6-7)
It follows that economic growth under neo-liberalism is not serving all; rather it is promoting poverty which turns into vicious circle and path dependency. Moreover, because the growth in GDP (Gross Domestic Product) is the main indicator of development of countries, all economic activities are clustered around increase in production and consumption.
Consequently, financial engineering is supposed to create products and tools that would inject more money into the economy in order to cater to the increasing needs of economy in terms of production and consumption. However, ever-widening production and consumption, the economic progress since the Industrial Revolution have caused severe environmental problems such as air and water pollution, loss of forest cover, erosion of soil, climate change and global warming, devastation of natural habitats, diminishing natural resources, destruction of biodiversity, overpopulation etc. It leads one to a conclusion that such production and consumption patterns are not sustainable in the long run, and there is an urgent necessity for the re-consideration of development models as well as an alternative that would foster human beings' development, promote justice, stop exploitation and fulfill the basic human needs.
Hoarding of wealth, speculative and wasteful practices would be strongly reprehended. Indeed, ''[t]he principle backed by self-interest alone as a secular core value is in direct conflict with the core Islamic value of 'moderation,' which would mean necessities of life together with some comforts aimed at minimizing the hardships of life.'' (33)
Since the current production and consumption patterns reflect wasteful practices reprehended in Islam, it is suggested that Islamic financial system should finance the real needs of the economy and hence, should be aligned with moderate production and consumption patterns. If so, financial practices would leave present and future generations neither with mind-boggling debts nor with dearth of resources.
To be continued...
Ayub, Muhammad. Understanding Islamic Finance. UK: John Wiley & Sons, 2009
Chapra, Umer. Challenges Facing Islamic Financial Industry. In Handbook of Islamic Banking ed. by Hasan K.M. and Lewis, M. (Edward Elgar), 2007
Kahf, Monzer. Islamic Finance: Business As Usual. Retrieved on December 27, 2012
Ramadan, Tariq. Radical Reform: Islamic Ethics and Liberation. Oxford, NY: Oxford University Press, 2009
Roy, Oliver. Globalized Islam: the Search for a New Ummah. NY: Columbia University Press, 2004
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