Islamic finance is an inclusive field; its ideals are not unique to Islam, nor is its practice confined to Muslims. Just as monotheism is not exclusive to Islam, the ideas underlying “Islamic finance” and “Islamic economics”—including the prohibition of riba and the pursuit of economic justice—are not necessarily exclusive to Islam. Similar dos and don’ts are found in other religions, including the other two Abrahamic faiths, Judaism and Christianity, that predate Islam. The practice of Islamic finance is also not exclusive to Muslims.
Non-Muslims are also participating in Islamic finance in different capacities, including as entrepreneurs, business partners, professionals, investors, customers, and thought leaders. In fact, such ideas may also be shared by those who may or may not subscribe to any religion. It is not only Islamic economists, but also prominent mainstream scholars, such as Amartya Sen, Joseph Stiglitz, and Douglass North, who have challenged commonly accepted assumptions of neoclassical economics, the notions of utilitarian rationality, and perfectly competitive markets. Prior to An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Adam Smith—considered the founding father of modern economics—published The Theory of Moral Sentiments (1759), which regarded morality as natural, intrinsic, and built into us as social beings. Long before, the Greek philosopher Aristotle described money as barren and lending money at interest unnatural.
Interest-free banking is not a subject alien to conventional economic thinking. Khan (1986) referred to the similarities in Islamic economic thought and some of the ideas expressed by such economists as Fisher (1945), Simons (1948), and Friedman (1969). Lately, the idea of limited-purpose banking developed by Kotlikoff (2010) has elicited interest in Islamic finance circles. A number of its features, like that of Fisher’s “narrow banking,” are aligned with strands of Islamic economic thought. Islamic finance emphasizes risk-sharing, but risk sharing is not unique to Islamic finance. Mutual insurance companies, such as Royal London, were created without any reference to Islam and before the arrival of modern Islamic finance. Similarly, some initiatives to move away from interest-based banking have been undertaken without any reference to Islamic finance. For instance, JAK Members Bank, a small cooperative bank in Sweden that aspires to a just economy, says the following, “We regard receiving money in exchange for labor and for risk-taking as legitimate; however we do not consider it legitimate to earn money simply with money.”
Criticisms of excessive debt and credit creation in Islamic finance literature are similar to those in the literature on mainstream finance. Equity financing—the preferred mode of financing in Islamic finance theory—is practiced across the world without any reference to Islam. Perhaps a differentiating aspect of Islamic finance is that its ideas are derived from or inspired by Islam. In the wake of the bad press that Islam has received in international news media and the industry’s inclusive nature, it is a matter of continuing debate in Islamic finance practice whether it should be marketed by another name, such as “ethical finance.
Islamic finance attracts diverse, if not opposing, views. For instance, two fundamental issues in the Islamic finance literature are
- whether Islamic finance is indeed Islamic
- whether it adds economic value. Debates on these issues can be found in publications, conferences, and social media.
On the one hand, Mahmoud El-Gamal (2005), an academic based in the United States, dismisses the industry as “rent-seeking Shari’a arbitrage.” Tarek El Diwany, a writer and consultant based in the United Kingdom, has likened Islamic commercial banking to the oxymoron “Islamic alcohol.”4 Others, such as Timur Kuran, an academic based in the United States, see Islamic finance as “deceit.”5 On the other hand, some Shari’a scholars6 and bankers continue to declare it to be Islamic and economically competitive with, if not superior to, conventional finance. Hussain Hamed Hassan, a Shari’a scholar working in the industry, has argued that Islamic finance offers a solution to the recurring global financial crises. Iqbal Khan, the founding CEO of HSBC Amanah, believes that Islamic finance “has the ability to unify and stabilize our communities and economies.” Joseph DiVanna (2006), a business consultant and writer, presents Islamic banking as offering a “value proposition that transcends cultures.” Within this spectrum of harsh criticism and strong praises, there are other views, held by both Muslims and non-Muslims, on the Islamic authenticity and socioeconomic value addition of Islamic finance. In this literature review, we have tried to capture this diversity of views.