Islamic Banking and Finance in the Global North: Secular Incubators, Elementary Accommodation and Strategic Negligence

Abstract

Dating from the mid-1970s, Islamic banking and finance (IBF) is an ongoing experiment to critique the conventional interest-based financial system and to construct an alternative “Sharia-compliant” industry. This chapter develops an analytic typology to describe how states respond to this project based on whether the state 1) practices industrial policy to promote the IBF industry and/or 2) whether it promotes a legislative and regulative divarication of the dominant financial market to accommodate IBF. This response can and does differ between the IBF wholesale and retail markets, and such government accommodations are more important in retail than wholesale financial markets. This chapter develops this framework to investigate the social forces promoting and inhibiting Islamic finance in Muslim-minority countries in the global North. Specifically, it argues that Islamic finance has expanded in the United Kingdom after the state moved from a position of elementary accommodation to that of a secular incubator. In contrast, only wholesale Islamic finance has flourished in Luxembourg, in part because the state continues a strategy of elementary accommodation. More pointedly, in spite of a more favorable environment than either the UK or Luxembourg, in the United States IBF has failed to take root because of the government’s position of strategic negligence.

Keywords: Islamic banking, Islamic finance, United States, United Kingdom, Luxembourg, political economy of regulation, finance and society, Muslim-minority countries

JEL Classification: Z1, Z12, Z13, P48,O57, G28, G20, A13