A Critique of Islamic Finance in Conceptualising a Development Model of Islam: An Attempt in Islamic Moral Economy

Abstract

As part of Islamic identity development, in the postcolonial era Islamic economists, while dissatisfied with the western approach toward economic and institutional development, initiated a project of developing an economic system. Since, Muslim countries were faced with socio-political problems such as inequality, lack of political rights as well developmentalist failures, such cruel realities on the ground led to call for the revival of Islamic Moral Economy (IME). This socio-religiously constructed economic system understanding places the wellbeing of society at the centre and achieve human development through fair distribution and establishment of social justice and equity as proposed by maqasid al-Shari’ah or the objective of Shari’ah. While the IME project was being conceptualised, the emergence of OPEC in 1960’s and increases in wealth in the Middle East countries due to petrol price shocks added to such demand for Islamically permissible financial products and eventually led to the creation of Islamic Banking and Finance (IBF) resulting in a paradigm shift from ‘searching an authentic development strategy’ to ‘financialisation of economy’.
IBF was hailed as first step toward a unique and comprehensive IME, growing with more than 15% annually, which would allow Muslims to create a society based on justice and equity. However, development of debt like instruments and utilizing of such controversial instruments in majority for financing on the balance sheets of IBF clearly shows that IME discourse is only limited to the contractual aspects of these instruments. Such preference of economic incentives over religion has shifted IBF to become an integral part of international financial system. Thus, IBF, an operational tool of IME, failed to produce the economic development based on justice and equity in Muslim world as envisaged by IME, as majority of Muslim countries are still faced with basic issues such as health, education and overall wellbeing and are lagging behind on various development indices.
The aim of this study, hence, is to explore IME within alternative system approach in an attempt to propose an Islamic development model, while integrating both worldly developments from Islamic perspective with the spiritual development representing a search for an Islamic authenticity in economic development. In an attempt for doing so, this research located the economic development issues in the Muslim world through an extensive analysis and also extensively analysed the aspects of Islamic banks to identify the ‘social failures of IBF’ with the objective of developing ground for the development of an authentic model.
The theoretical model proposed in this study is, by definition, value laden in the sense of being determined by Islamic ontology and epistemology, integrating both qualitative and quantitative aspect of human life proposed by maqasid al-Shari’ah that not only helps to formulate policies related to economic aspect of human life but also broad enough to cover all aspects of human life in order to achieve falah in akhirah. In the model, axioms of IME and maqasid al-Shari’ah, serve as higher-order generalisations from which specific statements of lower order generality are deduced about the moral imperative which motivates individuals to work for social good. Furthermore, theoretical model of Islamic development is compared with the Sen’s capability Approach to establish parallelism in terms of processes and outcomes with the objective of identifying articulation and also the essentialisation of justice as the main crux of IME in the development process within the tawhidi knowledge universe.