Why does Islamic finance require benchmarking?

Abstract

The post-COVID world has witnessed that Islamic finance has been rapidly expanding and gradually positioning to cope with its global emergence as a viable competitor to its conventional counterpart. Despite its significant growth and dynamic expansion with global appreciation, Islamic finance continues to attract numerous criticisms largely because it still operates in accordance with conventional rules and regulations. Another serious criticism is its overreliance on the use of the conventional finance interest rate-based benchmark to price its goods and services. This issue has raised pertinent research questions, which the literature has been silent on. Does the use of this benchmark show that there is a gap between the theory and practice of pricing in Islamic finance? Is there confusion between pricing products and services in real economic activities and benchmarking in financial market products and services? Why has there been a lack of a viable Islamic finance pricing model despite several attempts to develop one? Does Islamic finance really need a benchmark? This chapter investigates whether there is a genuine need for benchmarking in Islamic finance. To achieve this main objective, the chapter adopts an exploratory research design, specifically a qualitative method in the form of literature survey and thematic analysis of the issues related to the adoption of conventional finance benchmark by Islamic finance. The major findings of the study show that the adoption of a conventional interest rate benchmark by Islamic finance is still an unresolved issue and remains contentious. Furthermore, several attempts to develop an alternative Islamic finance pricing model have failed because there is still a looming confusion between pricing for real economic activities and benchmark for financial markets. A review of the works of past Muslim scholars show they have used three distinct terms for pricing: tathmin for pricing goods and usufruct based on the mutual consent of buyers and sellers; tas’ir for administrative pricing when governments intervene in the market under extreme conditions, and taqwim – valuation for the purpose of compensation. The authors have also argued that Islamic finance does not need a benchmark, but a viable pricing model developed axiomatically from Sharī ͑ah principles. The novel findings from works of these past scholars can be used as bases upon which future researchers could direct their studies in new areas of pricing models in Islamic finance.