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:: Volume 6, Issue 3 (Spring 2012) ::
J. Mon. Ec. 2012, 6(3): 1-39 Back to browse issues page
The State of Islamic Finance: Post-crisis and Future Prospects
Abbas Mirakhor *, Edib Smolo
Abstract:   (3097 Views)

The main purpose of this paper is to trace epistemological roots of conventional and Islamic finance. Based on an extensive literature review, this paper aims to highlight, explain, and discuss an ideal conventional and Islamic financial system. The ideal conventional financial system is discussed in light of various writings by Smith and Arrow, based on Arrow-Debreu model. On the other hand, the Islamic financial system is discussed in light of Qur’anic verses based on which the system is built.

The findings show that the present Islamic finance industry evolved from conventional finance to address a market failure in conventional finance in terms of unmet market demand for Islamic finance products. However, since most practitioners in Islamic finance were bankers and market players from the conventional background, they developed, more often than not, products that are similar to conventional ones albeit with Shari’ah compatibility. Hence, the focus was primarily on avoiding riba while ignoring the first part of the verse 275 of surah al-Baqarah which first ordains exchange contracts. Although the crisis had limited impact on IFI, it is due to the similar nature between the two that IFI is also subjected to the shocks in the conventional financial system. A way forward would be to move towards more risk-sharing products which indicate a robust link between the strength of the financial system and economic growth.

 JEL Classification: D80, G0, N01, P51 


Keywords: epistemology, Arrow-Debreu, conventional finance, Islamic finance, Shari‘ah-compliant, financial crisis, risk-sharing, uncertainty, debt, interest
Full-Text [PDF 249 kb]   (763 Downloads)    
Type of Study: Research | Subject: Monetary Economics
Received: 2014/04/21 | Accepted: 2014/04/21 | Published: 2014/04/21
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Mirakhor A, Smolo E. The State of Islamic Finance: Post-crisis and Future Prospects. J. Mon. Ec.. 2012; 6 (3) :1-39
URL: http://jme.mbri.ac.ir/article-1-48-en.html

Volume 6, Issue 3 (Spring 2012) Back to browse issues page
Journal of Money and Economy Journal of Money And Economy
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