Economic Development and Islamic Finance

Abstract

Islamic finance has been practiced in some form since the inception of Islam, its practice in modern financial markets became recognized only in the 1980s, and began to represent a meaningful share of global financial activity only around the beginning of this century. In recent years, significant interest in Islamic finance has emerged in the world's leading conventional financial centers, including London, New York, and Hong Kong, and Western investors are increasingly considering investment in Islamic financial products. The organizing principle of Islamic finance in an Islamic economy is transaction based on exchange, where real asset is exchanged for real asset. By focusing on trade and exchange in commodities and assets, Islam encourages risk sharing, which promotes social solidarity. The features of an Islamic economy will change the behavior of society. There will be greater consultation; hence there will be no impulsive-compulsive reaction in financial dealings. At the same time, the labor force in an Islamic economy will work under a rule of trust and full understanding of contracts and obligations. Workers also share in the gains achieved through the risk, based on productive efforts, which is a better incentive system than a fixed wage. Workers will be treated with respect, which reflects the importance of human dignity in Islam. This paper is organized as follows: chapter one discusses the epistemological roots of conventional and Islamic finance. Chapter two provide a perspective of conventional modern economists. Chapter three provides a brief taxonomy of the foundational Islamic market principles and evaluates them in the context of institutional and behavioral economics in the context of Knightian uncertainty. Chapter four accounts for finance and development in Islam from a historical perspective. Chapter five discusses the evolution of the concept of economic development. Chapter six provide an Islamic perspective on financial inclusion and argue that the core principles of Islam place great emphasis on social justice, inclusion, and sharing of resources between the haves and the have-nots. Chapter seven addresses financial inclusion. Chapter eight provide insight into Islam's perspective on social safety sets and social insurance. Chapter nine examines Islamic capital markets in a global context. Chapters ten examines the problems of primary and secondary aspects of the conventional stock markets and their critiques of corporate governance. Chapter eleven give a realistic view of the current state of affairs in Organization of Islamic Conference (OIC) countries. Chapter twelve addresses key economic policy challenges in the context of the Islamic economic and financial system.