Conceptualization of the Real Economy and Islamic Finance: Transformation Beyond the Asset-Link Rhetoric

Abstract

A key factor behind the chronic crises in modern economies is the growing dominance of financialization and the resulting disconnect between the real economy and the financial sector, to which conventional financial industry is a key contributor.

In contrast, Islamic finance claims to be real-economy-oriented, as all transactions must be asset-linked (asset-backed or asset based). However, is Islamic Finance based on proper conceptualization of the real economy? What is the real economy and its dynamics? How Islamic finance is interfaced with the real economy?

In this paper the claimed real-economy-orientation is examined by presenting a conceptualization of the real economy and then evaluating the related discourse accordingly. The analysis presented, especially for non-economists, exposes serious gap between the claims about Islamic finance and the real economy it is supposed to advance. Appropriate conceptualization of the real economy can help the industry to be relevant and effective for broader socioeconomic transformation.

Keywords: Islamic finance; Islamic banking; financialization; real economy; asset-backed; Shariah-compliance

JEL Classification: A1, A29