Reforming Islamic Finance for Achieving Sustainable Development Goals

Abstract

The paradigm of Islamic economics and finance is guided by the motivation of comprehensive human development (CHD) and its preservation as manifested in the objectives of Sharīʿah (maqāṣid al-Sharīʿah). However, the real world free-market economies are driven by the linear economy paradigm under the influence of Hotelling’s 1931 famous work concerning the economics of exploiting natural resources, in which, the ecological environment is not recognized as a resource. The global financial architecture is designed to protect and preserve the linear economic paradigm. In practice, Islamic finance has also remained a ḥalāl sub-set of this system. The resultant social, environmental, and governance imbalances have recently led to different initiatives sponsored by the UN including the Sustainable Development Goals (SDGs). Like the maqāṣid, the SDGs also aim at achieving and preserving human development. In practice, for the first time, a real paradigm shift from the linear to the ecological/circular economy is noticeably taking place, also inducing the transformation of the financial architecture. In this paper, in a broader perspective, we use the CHD and SDGs interchangeably, and discuss a number of paradigmatic and regulatory reforms that will be required to enhance the actual effectiveness of Islamic finance in achieving the ideals of CHD, and the SDGs at large. The paper in fact outlines a wider scope of the potential reform initiatives.