Islamic Finance and Islamic Economics 2022

Running head: ISLAMIC FINANCE AND ISLAMIC ECONOMICS
ISLAMIC FINANCE AND ISLAMIC ECONOMICS
Name of the student
Course name
Course ID

ISLAMIC FINANCE AND ISLAMIC ECONOMICS 1
The global financial crisis of 2008 did not affect the Islamic economy, and this has drawn the
interest and attention of a number of economists, who have focussed on analysing the
principles which underpin the Islamic economy1. The latter primarily derives its approach from
the Quran and the Sunnah, as interpreted from era to era, as well as secondary sources-the
Qiyas and the Istihsan. The theories which underpin the Islamic economy differ significantly
from those of capitalism and socialism, and this has encouraged a number of non-Islamic
countries, and many economists, to try and ring-fence their own banking systems by
introducing elements taken from Islamic economic theory2. For example, the French senate
produced a report recommending the integration of the Islamic banking system within the
French banking system, since the former is founded on rules derived from Islamic law which
will benefit everyone, whether Muslim or non-Muslim 3. In addition, the report asserts that the
Islamic banking system can be applied in France. This paper sets out to examine and assess
Islamic economic theories against the background of banking and finance by harnessing a
number of social and economic perspectives - and will evaluate whether these theories have
offered other financial markets with fresh, practical alternatives4. The opening section will
compare Islamic theories with traditional economic theories, before the second section
compares Islamic banking products with those of non-Islamic banks, in order to reach a
conclusion.
To begin with, rather than discuss economic theories in isolation, this section will compare the
Islamic system with other traditional economic systems, in order to gain a comprehensive
understanding of how they work and differ. Thus the market economy and command
1
Laldin, Mohamad Akram, and Hafas Furqani. "Innovation versus Replication: Some Notes on the
Approaches in Defining Shariah Compliance in Islamic Finance." Al-Jami'ah: Journal of Islamic Studies
54.2 (2016): 249-272.
2
Lone, Fayaz Ahmad, Fayaz Lone, and Fayaz Ahmad Lone. Islamic Banks and Financial Institutions.
Palgrave Macmillan UK, 2016
3
Lone, Fayaz Ahmad, Fayaz Lone, and Fayaz Ahmad Lone. Islamic Banks and Financial Institutions.
Palgrave Macmillan UK, 2016
4
Mohd Yusof, Rosylin, Mejda Bahlous, and Roszaini Haniffa. "Rental rate as an alternative pricing for
Islamic home financing: an empirical investigation on the UK Market." International Journal of Housing
Markets and Analysis 9.4 (2016): 601-626
1

ISLAMIC FINANCE AND ISLAMIC ECONOMICS 2
economies, found all around the world, will be assessed, alongside their economic and social
benefits5.
The market economy theory is the foundation for many European and North American
economies6. This theory views the economic system as one in which economic decision-
making is shaped by investment, production and distribution factors, based on the relationship
between supply and demand, which mechanically determines the price of goods and services. A
market economy, or a free economy, makes decisions shaped by financial markets and capital,
rather than government decisions on production and ownership7. Economic market theory thus
has a number of advantages, including the fact that - as noted by Brancaccio - it encourages and
drives free market competition. Abdul Rahim points out that the market economy is
distinguished by private ownership of the means of production, the absence of direct
government interference in the economy and individuals' pursuit of profit8. The US
Constitution bolsters and supports the market economy, since Article 1, paragraphs 9 and 10,
declares that it supports freedom of choice by forbidding states to impose levies on goods and
services coming from other states9. The ninth and tenth amendments to the Constitution restrict
the government's freedom to hinder and meddle with the rights of others, unless the
Constitution clearly assigns it that right10. Taken together, these facts encourage competition
between businesses, lead to a rise in quality and reduce the cost of products due to the
involvement of multiple traders.
5
Poon, Jessie PH, Jane Pollard, and Yew Wah Chow. "Resetting neoliberal values: lawmaking in
Malaysia's Islamic finance." Annals of the American Association of Geographers 108.5 (2018): 1442-1456
6
Abdullah, Adam. "Examining US approvals of Islamic financing products and the Islamic theory of
lawful profit." International Journal of Islamic and Middle Eastern Finance and Management 9.4 (2016):
532-550.
7
Rammal, Hussain Gulzar, and Ralf Zurbruegg. "Awareness of Islamic banking products among Muslims:
The case of Australia." Islamic Finance. Palgrave Macmillan, Cham, 2016. 141-156
8
Abedifar, Pejman, et al. "Islamic banking and finance: Recent empirical literature and directions for future
research." Journal of Economic Surveys 29.4 (2015): 637-670
9
Alexakis, Christos, Vasileios Pappas, and Alexandros Tsikouras. "Hidden cointegration reveals hidden
values in Islamic investments." Journal of International Financial Markets, Institutions and Money 46
(2017): 70-83.
10
Reni, Andi, and Nor Hayati Ahmad. "Application of theory reasoned action in intention to use Islamic
banking in Indonesia." Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah 8.1 (2016): 137-148
2

ISLAMIC FINANCE AND ISLAMIC ECONOMICS 3
The market economy theory produces a large number of social advantages, the most crucial of
which is the fact it inspires individuals to develop social and technical skills and the knowledge
they need to succeed in this economy11. This theory attracts global investors and produces a
workforce which have a high degree of flexibility and are ready to respond to investors' needs
and requirements, for example, by upgrading their education12. Additionally, the market
economy theory incentivises the creation of more investment in the country, which in turn
reduces unemployment by creating new jobs. This combination of high employment and
investment opportunities is a significant social advantage, since its end result is a rise in
wealth13.
In contrast, unlike the market economy, the Islamic economy is not based on unlimited
freedom, since freedom of competition is restricted by a series of inviolable religious rules,
which apply to all investors. Al-Ansari argues that the market economy's absolute freedom is a
negative feature of the theory and creates a range of socio-economic issues14. Thus unhindered
total freedom, which is not constrained by religious or legal limits, will bring usury, monopoly
power and oppression of the poor in its stead15. Similarly, the market economy's absolute
freedom of competition results in the creation of powerful monopolies and related economic
problems. Islamic theory is based on principles of social and economic equality and investment
is viewed as a tool for bringing these social improvements16. Investors are required to pay zakat
on any money which remains static for 12 months, thus they have an incentive to do something
11
Sarker, Md Nazirul Islam, Arifin Sultana, and A. S. Prodhan. "Financial Performance Analysis of Islamic
Bank in Bangladesh: A Case Study on Al-Arafah Islami Bank Limited." World 3.1 (2017): 052-060
12
Abubakar, Abbas Said, and Josiah Aduda. "Islamic Banking and Investment Financing: A Case of
Islamic Banking in Kenya." International Journal of Finance 2.1 (2017): 66-87
13
Alaa Alaabed, Finocracy, and Abbas Mirakhor. "Accelerating Risk Sharing Finance via FinTech:
NextGen Islamic Finance." The 1st International Colloquium on Islamic banking and Finance. 2017
14 Shafiq, Ahsan. "A REVIEW OF JOURNALS & PUBLISHING HOUSES IN THE FIELD OF
ISLAMIC ECONOMICS AND FINANCE." (2019).
15
Alharbi, Ahmad. "Development of the Islamic banking system." Journal of Islamic Banking and
Finance 3.1 (2015): 12-25
16 Ariff, Mohamed, and Meysam Safari. "Valuation of Islamic debt instruments, the Sukuk: Lessons
for market development." Islamic banking and finance–Essays on corporate finance, efficiency and
product development 1 (2015).
3