Islamic Banking and Finance: Social Failure

Abstract:     
The phenomenal growth of the Islamic banking and finance (IBF) industry has been remarkable since it came into existence just over thirty years ago. However, a closer reading of this positive development indicates that IBF industry does not necessarily shares the aspirations or the foundational claims of Islamic moral economy (IME), an authentic value system for human-centred economic development and social justice. Despite its contribution in expanding the financial base in the Muslim countries and overcoming financial exclusion through product diversification, IBF, in responding to the realities of the international financial system has converged towards conventional notion of managing wealth, resulting in tensions with the foundational axioms upon which an Islamo-ethical financial system was intended to be built. In such transformation, the identity of IBF is reduced to the mere removal of riba and conducting financial activity in contractual norms derived from the Shari’ah. The result, therefore, has been the divergence between the aspirations of IME, and IBF as an instrument of that system.

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working papers series