Origins, Evolution and the Future
Studies in Islamic Finance, Accounting and Governance series
Chapter 1: Two Approaches to Islamic Economics and Finance
Two distinctly different approaches rival each other in modern Islamic finance. One of them, the Shari’ah compliant approach, dominates the field with important consequences. In this chapter we will focus on this problem. To the extent that modern Islamic finance is not built directly from the Shari’ah (Shari’ah based approach) but rather from the Islamically modified conventional banking (Shari’ah compliant approach), the result is high costs, low profits and most importantly, a dilution of respectability. If Islamic finance is to emerge as the heart of a viable alternative capitalist system, it must progress from being Shari’ah compliant to being Shari’ah based. While the former briefly means borrowed from the West after being made compliant to the Shari’ah, the latter simply means not borrowed from the West but evolved from the original sources of Islam.1 Shari’ah based also means, not only a system built up from the roots, based upon the true teachings of Islamic law, but also a profound understanding of how that law was practised over the centuries leading to specific financial institutions in history – thus comprising law as well as its centuries-long application and evolution. It will be argued here that Islamic financial engineers can develop truly Shari’ah based instruments only if they are well informed about the existence of such institutions in the past. Failure to be equipped with such knowledge would lead to an embarrassing waste of creative talent with financial engineers reinventing institutions that have actually existed for centuries. Thus the other essential goal of...
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