Islamic Finance in the Global Economy

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Islamic Finance in the Global Economy Islamic Finance in the Global Economy Ibrahim Warde EDINBURGH UNIVERSITY PRESS ABBREVIATIONS i Islamic Finance in the Global Economy Warde/Prelims 1 20/11/99, 2:12 pm ii THE ARABIC GRAMMATICAL TRADITION This page intentionally left blank Warde/Prelims 2 20/11/99, 2:12 pm ABBREVIATIONS iii Islamic Finance in the Global Economy Ibrahim Warde EDINBURGH UNIVERSITY PRESS Warde/Prelims 3 20/11/99, 2:12 pm iv THE ARABIC GRAMMATICAL TRADITION © Ibrahim Warde, 2000 Edinburgh University Press 22 George Square, Edinburgh Typeset in Baskerville by Koinonia, Bury, and printed and bound in Great Britain by Redwood Books, Trowbridge, Wilts A CIP record for this book is available from the British Library ISBN 0 7486 1216 5 (hardback) The right of Ibrahim Warde to be identified as author of this work has been asserted in accordance with the Copyright, Designs and Patent Act (1988). Warde/Prelims 4 20/11/99, 2:12 pm ABBREVIATIONS v CONTENTS Acknowledgements x A Note on Transliteration and Dates xi Abbreviations xii Introduction: Islamic Finance in the Global Economy 1 1 Islamic Finance in Theory and Practice 5 2 Islam, Economics and Finance 32 3 Riba, Gharar, and the Moral Economy of Islam in Historical and Comparative Perspective 55 4 The Evolution of Modern Islamic Finance 73 5 Islamic Finance and the Global Political Economy 90 6 Country Differences 112 7 Financial Products and Instruments 132 8 Strategic, Managerial and Cultural Issues 151 9 Economic Issues: Islamic Finance and Development 169 10 Regulatory Issues and Challenges: Global Norms and Religious Constraints 180 11 Islamic Finance and Politics: Guilt by Association 205 12 Religious Issues and Challenges: Defining Islam and Interpreting the Shariah 226 Conclusion 240 Glossary 242 Index 244 Warde/Prelims 5 20/11/99, 2:12 pm vi ISLAMIC FINANCE AND THE GLOBAL ECONOMY ANALYTICAL TABLE OF CONTENTS Acknowledgements x A Note on Transliteration and Dates xi Abbreviations xii Introduction: Islamic Finance in the Global Economy 1 1 Islamic Finance in Theory and Practice 5 1.1 Defining Islamic Finance 5 1.2 About Statistics and Performance Assessments 6 1.3 The Literature 9 1.3.1 The Problem of Authorized Literature 9 1.3.2 The Geoeconomics of Islam 10 1.3.3 Religious, Financial and Legal Reductionism 11 1.3.4 Islamic Banking from Commitment to Implementation 11 1.4 Perceptions, Labels and Classifications 12 1.4.1 Common Perceptions of Islam and Islamic Finance 12 1.4.2 The Diversity of Islam 15 1.4.3 ‘Fundamentalism’ and Other Labels 17 1.4.4 Traditionalism and Modernism 19 1.4.5 Oversimplification and its Consequences 21 1.5 Capturing the ‘Big Picture’ of Islamic Finance 22 1.5.1 An Emphasis on Context 23 1.5.2 A Historical Approach 24 1.5.3 A Comparative Approach 27 1.5.4 An Interdisciplinary Approach 28 2 Islam, Economics and Finance 32 2.1 Historical and Religious Background 32 2.2 Islamic Economics 38 2.3 Adapting to Changing Circumstances 41 2.4 Reconciling Homo Islamicus and Homo Economicus 44 2.5 Reconciling Islam and Finance 48 Warde/Prelims 6 20/11/99, 2:12 pm ANALYTICAL TABLE OF CONTENTS vii 3 Riba, Gharar, and the Moral Economy of Islam in Historical and Comparative Perspective 55 3.1 Riba 55 3.2 Gharar 59 3.3 Contemporary Interpretations: Religious and Secular Experts 60 3.4 The Moral Economy of Islam 62 3.5 A Historical and Comparative Approach 63 4 The Evolution of Modern Islamic Finance 73 4.1 Precursors 73 4.2 The First Aggiornamento 74 4.3 The Changing Context of Islamic Finance 78 4.4 New Forms of Islamic Finance 80 4.5 The Growing Pains of Islamic Banks 84 4.6 Toward a Second Aggiornamento 85 5 Islamic Finance and the Global Political Economy 90 5.1 The Political and Economic Context of the First Aggiornamento 90 5.1.1 Pan-Islamism 90 5.1.2 The Petrodollar Windfall 92 5.1.3 Relations with the US and the West 93 5.2 Islamic Finance in the Global Economy 95 5.2.1 The Global Economy and its Ideology 96 5.2.2 The Transformation of Banking and Finance 99 5.2.3 The Rise of Islamism 103 5.2.4 The Concern with Ethics 106 5.3 Embeddedness, Convergence and Fusion 107 6 Country Differences 112 6.1 Pioneers of Full Islamicization: Pakistan, Iran and the Sudan 112 6.1.1 Pakistan 112 6.1.2 Iran 117 6.1.3 The Sudan 120 6.2 The Special Case of Malaysia 123 6.3 Offshore Islamic Centres: The Case of Bahrain 128 7 Financial Products and Instruments 132 7.1 Murabaha and Other Mark-up Schemes 133 7.2 Leasing 134 7.3 Profit-and-loss Sharing 135 7.4 Stocks, Bonds, Commodities and Foreign Currencies 138 7.5 Derivatives and New Financial Products 139 7.6 Islamic Mutual Funds 141 Warde/Prelims 7 20/11/99, 2:12 pm viii ISLAMIC FINANCE AND THE GLOBAL ECONOMY 7.7 Development Banking 143 7.8 Zakat-related Products, Instruments and Practices 144 7.9 Micro-lending or Micro-finance 146 7.10 Insurance 147 8 Strategic, Managerial and Cultural Issues 151 8.1 Competitive Challenges 151 8.1.1 The Islamic Banking Franchise 152 8.1.2 Profitability and Social Goals 153 8.2 Management, Control, and the ‘Islamic Moral Hazard’ 154 8.3 Marketing Issues and Challenges 158 8.4 Problems of Liquidity 160 8.5 Cultural Issues and Challenges 161 9 Economic Issues: Islamic Finance and Development 169 9.1 Islam and Economic Liberalism 170 9.2 The Mobilization of Savings 171 9.2.1 The Special Role of Banks 171 9.2.2 Informal Finance 172 9.2.3 Assessing the Performance of Islamic Banks 174 9.3 Islamic Banks and Economic Development 174 9.4 Islamic Capital Markets 175 9.5 Macro-economic Policies 177 10 Regulatory Issues and Challenges: Global Norms and Religious Constraints 180 1o.1 Financial Regulation 180 1o.2 The Ideological Debates on Financial Regulation 181 1o.3 The Changing Paradigm of Financial Regulation: From National Control to Global Supervision 183 1o.4 The Making and Enforcement of the New Global Norms 185 1o.5 Recent Developments in Global Financial Regulation 188 1o.5.1 Capital Standards and Risk Management 188 1o.5.2 The Core Principles of Bank Supervision 191 1o.5.3 Free Trade in Services 192 1o.6 Applying the New Norms in the Islamic World 193 1o.7 The Supervision of Islamic Financial Institutions 196 1o.7.1 Prudential Regulation 196 1o.7.2 The Question of Dual Regulation 196 1o.7.3 Deposit Insurance and the Lender of Last Resort Issue 198 1o.8 Conclusion 200 Warde/Prelims 8 20/11/99, 2:12 pm ANALYTICAL TABLE OF CONTENTS ix 11 Islamic Finance and Politics: Guilt by Association 205 11.1 Business, Finance and Politics 206 11.2 Domestic Politics: The Power of Islamic Business and Finance 207 11.2.1 Saudi Arabia: Islamic Finance and the Possible Delegitimation of the State 207 11.2.2 Turkey: the ‘Dangerous Relationships’ between ‘Finance Houses’ and Islamic Fundamentalists 208 11.2.3 Iran: The Historical Ties between the Bazaar and the Ulema 209 11.2.4 Egypt: The Tensions between Secularism and Islamism 210 11.2.5 The Sudan: Islamicization of Politics, Politicization of Finance 212 11.2.6 Indonesia: Co-optation and Pre-emption 213 11.3 Islamic Finance and International Politics 214 11.3.1 ‘The Islamic Threat’ and the New World Order 214 11.3.2 Saudi Finance and Sudanese Politics 220 11.4 Guilt by Association 221 11.4.1 Rogue States, Rogue Banks and Rogue Financiers 221 11.4.2 The Impact on Islamic Finance 222 12 Religious Issues and Challenges: Defining Islam and Interpreting the Shariah 226 12.1 Interpreting the Shariah 226 12.2 Religious Diversity 230 12.3 Finance and Religion in Comparative Perspective 234 Conclusion 240 Glossary 242 Index 244 Warde/Prelims 9 20/11/99, 2:12 pm x ISLAMIC FINANCE AND THE GLOBAL ECONOMY ACKNOWLEDGEMENTS This book builds on a number of academic and professional projects I have been involved in over the years, some dealing with Islam and the Middle East, others with global finance and economics. My work on Islamic finance started at the University of California at Berkeley, where I studied and taught Middle Eastern Politics. I owe a debt of gratitude to Professor George Lenczowski, with whom I have been associated since my graduate student days, and to Dr Laurence Michalak, Vice-Chair of the Center for Middle Eastern Studies whose activities and resources proved most helpful to my research. For this specific project, I received assistance from Dr Samir Abid Shaikh, General Secretary of the International Association of Islamic Banks, and from Dr Omar Hafiz, Deputy Director of the Islamic Research and Training Institute at the Islamic Development Bank. Dr Muhammed Yunus, founder of the Grameen Bank, deepened my understanding of the relation between finance and development. I would like to single out Professor Chibli Mallat, formerly of the School of Oriental and African Studies at the University of London, now at Université Saint-Joseph in Beirut, on whose encyclopedic knowledge of Islamic law I relied extensively. Most of my articles on global economics and finance were published in Le Monde diplomatique, a stimulating publication that has challenged the pensée unique pervading the current political–economic discourse. I would like to thank the editors for their help and guidance, in particular Alain Gresh, whose own work on Islam and the Middle East is invaluable, and Serge Halimi whose editing skills and exacting standards have no doubt greatly improved my articles.
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