Critical Essays in Islamic Banking and Finance

Abstract

This thesis contributes to the socio-economic development of the majority Muslim countries by scrutinizing Islamic banking and finance (IBF). It consists of four papers focusing on the most prominent IBF institution and instrument: Islamic bank (IB) and Islamic securitization (sukūk). The first part of this study (Chapters 2 and 4) empirically investigates the IBF performance on materializing the ethical objectives of Islamic law (Maqāsid al-Sharī’ah). The second part of it (Chapters 3 and 5) theoretically recommends how to disrupt (improve or rebuild) IBF architecture in light of the Maqāsid al-Sharī’ah.

Chapters 2 and 4 derive the ethical framework behind the prohibition of ribā and gharar. The former embodies financial decoupling and unjust price gouging, while the latter involves asymmetric information and excessive risk-taking. We then apply these notions to investigate the socio-economic performance of IBs and sukūk empirically. We document that the unethical issues of ribā and gharar are still prevalent in IBs’ most utilized financing of the debt-based mark-up Murabaha and its variants. This result also holds for sukūk, where we establish the positive nexus between its development and income inequality led by ribā and gharar.

Chapters 3 and 5 theoretically propose improved structures of IBs and sukūk. We reconstrue the IBs Murabaha facility as trade credit instead of bank credit and integrate it within a modified Universal Banking architecture. It mitigates financial fragility by transforming the debt claim into a risk-sharing one and offering more competitive financing rates. We also disrupt infrastructure sukūk by amalgamating the literature on project financing, charitable endowment, and development finance. We mathematically model the proposed structure emulating the Continuous Workout Financing and Participating Facilities to offer fragile-free infrastructure financing that alleviates financialization and inequality.