Theoretical Studies in Islamic Banking and Finance

Citation

Shubber, K. (2008), "Theoretical Studies in Islamic Banking and Finance", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 1 No. 2, pp. 182-184. https://doi.org/10.1108/17538390810881035

Rationale and benefits of an Islamic financial system

It may be argued that this book is somewhat dated, as over two decades have passed since its publication. However, due to its predominantly theoretical nature, the book's relevance and contribution to its general field is not diminished.

The volume is a virtual symposium, in that it is a collection of nine papers, in addition to three appendices, whereby the latter go to some length in developing the theoretical concepts and providing proofs for the mathematical models contained in the main text. Altogether, six writers have made contributions to the book, albeit to differing degrees within their own areas of specialism. Almost, 40 graphs and numerous formulae are a distinctive feature of this text.

Twofold aim

The book's objective is twofold: showing how an interest‐free Islamic economy functions, and illustration of the benefits of an economic system built on Islamic principles.

The party which shouldered the task of producing this volume is the Institute for Research and Islamic Studies, whereupon several experts in the field were approached with a view to providing the requisite material. The various chapters had previously been published as papers, designed in the main to tackle certain primary theoretical issues concerning the impact and intricacies of adopting an Islamic financial system.

Viewed in a collective fashion, the various papers represent an attempt by a group of Muslim economists, trained in the west and well‐versed in analytic and quantitative techniques, to apply modern methods to answer some pertinent questions. The book's two editors have had experience at the International Monetary Fund and World Bank, and contribute quite strongly to six of the nine chapters and one of the three appendices.

Four questions

All in all, the volume attempts to answer four prime questions:

1. 1.

   Nature of the theoretical framework underlying an Islamic financial system.

2. 2.

   Extent of the ability of an Islamic and interest‐free financial system to be more stable than conventional interest‐based systems.

3. 3.

   The possible impact of an Islamic interest‐free system on prime macro‐economic variables, such as investment, saving, employment and growth.

4. 4.

   How monetary policy can function within such a system.

The book begins with a paper presenting a brief overview of the structure and practice of Islamic banking, whereupon it is stressed that abolishing interest is but one aspect of an Islamic economy. Islam provides wide‐ranging guidelines governing such issues as individual rights, property rights, contract formulation, employment, accumulation and distribution of wealth, and the role of the state.

The next four chapters examine the underlying theoretical framework and the stability of the Islamic system. Here, the view is taken that replacing interest by some type of profit‐sharing makes the system equity based. Using this concept, a theoretical model is put together, so as to illustrate the workings of a non‐usurious financial set‐up. The argument is put forward that this system may turn out to be better suited to absorb any shocks or crises than an interest‐based financial system.

Two other papers/chapters consider the effects of an interest‐free system on saving and investment. The authors use model‐building to show that any resultant effects need not be wholly negative. One other paper/chapter examines the functioning of the Islamic financial system and the role of monetary policy, using mathematical modelling, while the final paper/chapter deals with the tendency among banks to concentrate on short‐terms assets.

The editors and contributors of this work may at some stage consider revising the contents, particularly with regard to the increasing consequences of globalisation of the financial services sector, and imperative of every Muslim nation to be exposed to the outside (non‐Muslim) world. A glossary of technical terms would also be a useful addition to the text.

An important feature of the volume is the transliteration table at the beginning of the book, where letters and vowels in Arabic and Farsi are given their equivalents in Latin. A further practical feature is using the appendices for working out the more involved aspects of mathematical modelling.