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2 Institutional Perspective of Islamic Economics Notes 2 Institutional Perspective of Islamic Economics 1. North (1995). 2. Uslaner (2008). 3. Geoffrey Brennan and James M. Buchanan (1985). 4. Verses of the Qur’an are referred to in the text by [verse: chapter]. 5. Al-Hakimi, Al-Hakimi and Al-Hakimi (1989). 6. One such scholarly study is S. K. Sadr (1996). 7. Al-Hakimi, et al. (1989). 8. Al-Hakimi (1989). 9. Al-Hakimi, et al. (1989). 10. Al-Hakimi, et al. (1989). 11. Al-Hakimi, et al. (1989). 12. Al-Hakimi, et al. (1989). 13. Al-Hakimi, et al. (1989). 14. Al-Hakimi, et al. (1989). 15. Al-Hakimi, et al. (1989). 16. McMillan (2002). 17. McMillan (2002). 18. McMillan (2002). 19. McMillan (2002). 20. Metz (1967); Kister (1965); Shihata (1977). 21. Al-Hakimi et al. (1989); Iqbal and Mirakhor (2011). 22. Knack and Keefer (1997). 23. E. Lorenz (1999); Uslaner (2008); Fukuyama (1995); Alesina and La Ferrara (2002); Berg and McCabe (1995); Zak and Knack (2001); Mirakhor (2005); Askari, Iqbal and Mirakhor (2009); Fehr and Kosfeld (2005). 24. Knack and Keefer (1997). 25. See the Prophet’s saying number 2218 in A. Payandeh, Nahjul-Fasaha, Tehran: Sazemane Entesharate Javidan (1974). 26. Al-Hakimi, et al. (1989); Qutb (1953). 27. Al-Hakimi, et al. (1989); Qutb (1953). 250 M Notes 3 Economic and Social Justice: The Policy Objective in Islam 1. Verses in the Quran also stress the importance of fair treatment, such as, Allah commands justice and beneficence [9:16]; Allah loves those who treat others with justice [25:57]; give (others) full weight and measure in justice and do not delib- erately undervalue the goods (produce or labor) of other humans and do no evil on earth, causing corruption [85:11]. 2. Al-Hakimi, et al. (1989); Qutb (1953). 3. Motahhari, 1975. 4. Lakhani, 2006. 5. See Ali Ibn AbiTalib, Imam’s Nahj al-Balagha Sermon 53. 5 Lessons from Financial Crisis: A Policy Failure? 1. This section is based on works of Mirakhor and Alaabed (2013a) and Mirakhor and Alabed (2013b). 2. Bogle (2012). Out of US$ 250 billion, US$ 25 billion went to Initial Public Offerings (IPO) and the remaining US$ 25 billion to established companies. 3. For further details see, http://www.mauldineconomics.com/. 4. The absence of debt means the economy is highly efficient and saves consider- able resources that are involved with the cost of issuing loans, administrating, recovering, and litigating loans (Carroll, 1965). 5. Sukuk (short form or abbreviation of sukuk al-ijarah) is an Islamic bond. It is a negotiable financial instrument issued on the basis of an asset to be leased. Investors provide funds to a lessor, such as a bank. The lessor acquires an asset and leases it out if it is not already leased out. The investors become owners of the leased asset in proportion to their investment. The holders of these bonds are entitled to collect rental payments directly from the lessee. These instru- ments can be made tradable on a stock exchange. 6. In conventional finance, the rate of return on equities is influenced by abun- dance of credit as illustrated by the South Sea Company in 1720, the Great Depression in 1929, and recent stock market experience (2000–2013). For instance, the marginal production of capital may be 4 percent per year; how- ever, the yield on stock may be 25 percent per year. It is speculation fueled by low interest rates and massive credit that weakens the link between equity returns and marginal product of capital (Holden, 1907). Speculators (e.g., hedge funds, equity funds, brokers, etc.) reap large gains from cheap money. Inevitably, distorted stock markets reach a tipping point beyond which they crash, with disastrous consequences. These elements of instability do not exist in Islamic finance, where equity returns cannot be distorted by credit and interest. Notes M 251 6 Financial and Capital Market Policies * For a discussion of role of social capital and markets in risk-sharing financial system, see Ng, Ibrahim, and Mirakhor (2013). 1. See Mirakhor (2010). 2. Beta is a measure of the degree to which the price of a stock or portfolio is cor- related to a benchmark, such as the overall financial market (measured by an index like the S&P 500 for US, stocks). The stronger the correlation, the larger the beta. The beta of the portfolio is simply the weighted average beta of assets within the portfolio. 3. In 1952, Harry M. Markowitz proposed a portfolio construction model based on mean-variance analysis. 4. The CML is a line that plots the increase in return an investor can expect to get in return for taking an additional risk. The CML with the highest slope would reflect the Markowitz efficient portfolio. The slope of the CML determines the equilibrium market price of risk. 5. Shiller, along with economist Mark Kamstara, has proposed that countries replace much of their existing national debt with shares of the “earnings” of their economies. The shares, or “trills,” would pay a quarterly dividend equal to exactly one-trillionth of a country’s quarterly gross domestic product. 6. Eichengreen and Hausmann (1999). The original sin refers to the fact that most governments/companies are unable to borrow abroad in their domestic currency; as a result, foreign borrowing always results in currency mismatch. This mismatch brings in a new dimension of risk—currency risk. 7. In a recent study across 142 countries, the Legatum Institute (2012) finds that social capital correlates negatively with government regulation. 7 Fiscal and Monetary Policy in Islam 1. Çizakça, Murat (2013), “Finance and Development in Islam: A Historical Perspective and a Brief Look Forward,” in Zamir Iqbal and Abbas Mirakhor (eds), Economic Development and Islamic Finance, The World Bank, Washington, DC, USA. 8 Developing Social Capital * This chapter is drawn upon valuable works of Ng, Ibrahim, Mirakhor (2013), Ng, Ibrahim, Mirakhor (2014a) and Ng, Ibrahim, Mirakhor (2014b). We thank the authors for their permission to benefit from their valuable work. 1. Muslim countries generally have lower levels of social capital, with Jordan, Turkey, and Malaysia ranked 44th, 49th, and 50th respectively according to Lee et al.’s social capital index. Bangladesh, Egypt, Indonesia, Iran, Morocco, 252 M Notes and Uganda are ranked in the last quartile of the index (2011). Rehman and Askari (2010a, 2010b) find a low level of adherence to Islamic principles in most predominantly Muslim countries. 2. According to the United Kingdom Islamic Finance Secretariat in October 2013, there is a wide margin of growth as Shari’ah compliant financial assets currently make up around 1 percent of the global financial assets while the Muslim population is around a quarter of the world’s population (TheCityUK 2013). 3. Professor Kay’s recommendation for an investors’ forum to be established to facilitate collective engagement by investors in British companies, and the British government’s acknowledgment of the involvement of overseas institu- tions in the investors’ forum, can also help to build “bridging” social capital. 4. The Legatum Institute shows that countries with low levels of social capi- tal, such as Greece, Italy, Portugal, Spain, and France, also have low levels of regulatory effectiveness compared with other developed Western European countries. 5. This can be done by “removing all legal, administrative, economic, financial, and regulatory biases that favor debt and place equity holdings at a disadvan- tage” (Askari, Iqbal, Krichene, and Mirakhor, 2011, p. 122). 6. According to the US Securities Exchange Act of 1934, “SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. SRO proposed rules are subject to Securities and Exchange Commission’s review and pub- lished to solicit public comment.” 7. Section 29(5) and (6) of the Islamic Financial Services Act 2013 of Malaysia provides that members of Shari’ah committee of an institution shall at all times comply with the internal policies and procedures adopted by such institution to implement standards specified by the Central Bank of Malaysia. Failure to comply with such standards will result in an offense that is liable to a maximum of eight years’ imprisonment or a maximum of 25 million ringgit or both. An institution and any director, officer or controller of such institution shall provide information that is accurate, complete, not false, or misleading in any material particular to the Shari’ah committee to enable the committee to carry out its duties or perform its functions under the act. 9 Financial Inclusion: Implications for Public Policy 1. World Bank (2013). 2. Among Muslims globally (in 148 countries) without a formal account, 7 percent cite religion as barrier, which is the least frequently cited barrier among this group. 3. Although sadaqah contributions are commonly considered a voluntary contri- bution, one could strongly argue that all such contributions should be consid- ered mandatory since these are ordained by Allah (swt) in the Qur’an. However, Notes M 253 these cannot be considered mandatory to qualify them to be taken by force by a government. 4. Iqbal and Roy (2014). 5. For further detail, see work by Askari, Iqbal and Mirakhor (2009), Chapra (2008), and Asutay (2011). 6. The three main forms of Islamic finance include murabhah (trust finance), musharkah (partnership finance), and mudarbah (markup contract sale). These are in addition to Salam contracts, Ijarah and Qard-al-Hassan, and Awqaf. Other long-term and sophisticated forms include salam forward purchase credit and istisna project financing. See also Iqbal and Mirakhor (2011). 10 Environmental and Natural Resource Policies 1. World Health Organization, quoted in “Environment and Islam.” Islamic Relief Summary Paper.
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