Economic Development and Islamic Finance

375 Pages · 2013 · 5.21 MB · English

  • Economic Development and Islamic Finance




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    PPP Economic Development and Islamic Finance Directions in Development


    Economic Development and

    Islamic Finance

    Zamir Iqbal and Abbas Mirakhor, Editors © 2013 International Bank for Reconstruction and Development / The World Bank

    1818 H Street NW, Washington DC 20433

    Telephone: 202-473-1000; Internet: www.worldbank.org

    Some rights reserved

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    Attribution—Please cite the work as follows: Iqbal, Zamir, and Abbas Mirakhor, eds. 2013. Economic

    Development and Islamic Finance. Directions in Development. Washington, DC: World Bank.

    doi:10.1596/978-0-8213-9953-8. License: Creative Commons Attribution CC BY 3.0

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    1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org.

    ISBN (paper): 978-0-8213-9953-8

    ISBN (electronic): 978-0-8213-9954-5

    DOI: 10.1596/978-0-8213-9953-8

    Cover photos: © Giorgio Fochesato / iStockphoto.com. Used with permission; further permission required

    for reuse.

    Cover design: Naylor Design.

    Library of Congress Cataloging-in-Publication Data

    Economic development and Islamic finance / [edited by] Zamir Iqbal and Abbas Mirakhor.

    pages cm

    ISBN 978-0-8213-9953-8 — ISBN 978-0-8213-9954-5 (ebook)

    1. Finance—Islamic countries. 2. Finance—Religious aspects—Islam. 3. Economic development—Islamic

    countries. I. Iqbal, Zamir. II. Mirakhor, Abbas.

    HG187.4.E26 2013

    332.0917’67—dc23 2013013763

    Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 Contents

    Foreword xi

    Acknowledgments xiii

    Contributors xv

    Abbreviations xix

    Overview 1

    Views on Economic Development 3

    The Islamic Concept of Economic Development 5

    Summary of Chapters 10

    References 22

    pArt 1 theoretical Foundation 23

    Chapter 1 Epistemological Foundation of Finance: Islamic and

    Conventional 25

    Abbas Mirakhor and Wang Yong Bao

    An Ideal Conventional Financial System 26

    An Ideal Islamic Finance System 31

    Achieving the Ideal: Uncertainty, Risk, and Equity Markets 41

    Summary and Conclusion 53

    References 57

    Background Reading 60

    Chapter 2 Islamic Finance Revisited: Conceptual and Analytical

    Issues from the Perspective of Conventional Economics 67

    Andrew Sheng and Ajit Singh

    Introduction 67

    The Central Tenet of Islamic Finance: Absolute Prohibition

    against Interest Rates 69

    Ethical Foundations of Islamic Finance 76

    Modigliani and Miller Theorems 78

    Risk Sharing, Risk Shifting, and the Risks of Bankruptcy 81

    The Stock Market and Islamic Finance 82

    Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 xa0xa0v vi Contents

    Interim Summary of the Main Findings and Two Further

    Questions 83

    Islamic Finance and Economic Development 85

    The Real Challenge of Islamic Finance 86

    Conclusion 87

    Notes 88

    References 88

    Chapter 3 The Foundational Market Principles of Islam, Knightian

    Uncertainty, and Economic Justice 93

    S. Nuri Erbas¸ and Abbas Mirakhor

    Introduction 93

    The Foundational Islamic Market Principles 97

    Knightian Uncertainty and the Islamic View of Uncertainty 99

    Institutional Development, Trust, and Uncertainty 101

    Islamic Contracts and Risk Sharing 106

    Research Agenda for Islamic Economics: A Proposal 118

    Concluding Remarks 119

    Notes 120

    References 125

    pArt 2 Developmental Aspects 131

    Chapter 4 Finance and Development in Islam: A Historical

    Perspective and a Brief Look Forward 133

    Murat Çizakça

    Introduction 133

    Basic Characteristics of an Islamic Economy and Finance 134

    Implementation 135

    Historical Evidence 136

    Stagnation and Decline 141

    Relevance for Today: What Needs to Be Done? 143

    Conclusion 145

    Notes 146

    References 147

    Chapter 5 Economic Development in Islam 151

    Hossein Askari

    The Evolution of Western Thinking on Development 152

    Economic Development in Islam 158

    Concluding Comments 175

    Notes 175

    References 176

    Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 Contents vii

    Chapter 6 Islam’s Perspective on Financial Inclusion 179

    Zamir Iqbal and Abbas Mirakhor

    What Is Financial Inclusion and Why Is It Important? 181

    Issues with the Conventional Approach to Financial

    Inclusion 183

    The Concept of Financial Inclusion in Islam 185

    Redistributive Instruments of Islam 188

    Public Policy Implications 191

    Government as the Risk Manager Promoting

    Risk Sharing 192

    Need for Developing a Supportive Institutional

    Framework 193

    Institutionalization of Islamic Redistributive Instruments 195

    Conclusion 198

    Notes 199

    References 200

    Chapter 7 Financial Inclusion and Islamic Finance: Organizational

    Formats, Products, Outreach, and Sustainability 203

    Habib Ahmed

    Introduction 203

    Inclusive Finance: Scope and Constraints 205

    Islamic Finance and Inclusive Finance 209

    Islamic Inclusive Finance: An Overview and Comparison 213

    Organizational Formats, Services, Outreach, and

    Sustainability 220

    Conclusion 224

    Notes 225

    References 226

    Chapter 8 Theory and Instruments of Social Safety Nets and Social

    Insurance in Islamic Finance: Takaful and Ta’min 231

    Kamaruddin Sharif and Wang Yong Bao

    Islamic Social Safety Nets 232

    The Institutional Framework of Social Safety Nets in Islam 234

    The Concept of Social Security in Islam 239

    Social Insurance: Takaful and Ta’min 241

    Takaful in Practice 245

    Conclusion 248

    Notes 248

    References 249

    Chapter 9 Islamic Capital Markets and Development 253

    Obiyathulla Ismath Bacha and Abbas Mirakhor

    Introduction 253

    Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 viii Contents

    Are Capital Markets Necessary? 253

    Issues Concerning Capital Markets 255

    Concept of Islamic Capital Markets 257

    Equity and Sukuk Markets in an Islamic Capital Market 260

    The Reality of Capital Markets in the Muslim World 268

    Concluding Remarks: Implementing the Risk-Sharing

    Framework 270

    Notes 272

    References 272

    Chapter 10 Islamic Stock Markets in a Global Context 275

    Andrew Sheng and Ajit Singh

    Introduction 275

    Do Stock Markets Help Economic Development? 278

    Lessons for Islamic Stock Markets 280

    Stock Markets and Economic Efficiency: Further Lessons

    for Islamic Stock Markets 284

    Issues of Globalization and of Long-Term Growth for

    Islamic Stock Markets 289

    Conclusion 291

    Notes 292

    References 293

    pArt 3 policy Formulation 297

    Chapter 11 A Survey of the Economic Development

    of OIC Countries 299

    Hossein Askari and Scheherazade Rehman

    Introduction 299

    Fundamental Islamic Economic Doctrines 300

    The Performance of OIC Countries 306

    Concluding Remarks on Islam and Economic Performance

    and Prosperity 317

    Notes 322

    References 323

    Chapter 12 Islam and Development: Policy Challenges 325

    Azura Othman and Abbas Mirakhor

    Introduction 325

    The Islamic Economy and the Role of the State 326

    Policy Tools in Macroeconomic Management 328

    Policy Instruments in an Islamic Economy 332

    Challenges in Policy Implementation 338

    Summary 342

    Notes 343

    References 344

    Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8

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