Abstract
The main purpose of this paper is to trace epistemological roots of conventional
and Islamic finance. Based on an extensive literature review, this paper aims to
highlight, explain, and discuss an ideal conventional and Islamic financial system.
The ideal conventional financial system is discussed in light of various writings by
Smith and Arrow, plus based on Arrow-Debreu model. On the other hand, the Islamic
financial system is discussed in light of Qur’anic verses based on which the system is
built. The findings show that the present Islamic finance industry evolved from
conventional finance to address a market failure in conventional finance in terms of
unmet market demand for Islamic finance products. However, since most practitioners
in Islamic finance were bankers and market players from the conventional background,
they developed, more often than not, products that are similar to conventional ones
albeit with Shari’ah compatibility. Hence, the focus was primarily on avoiding riba while
ignoring the first part of the verse 275 of surah al-Baqarah which first ordains exchange
contracts. A way forward, hence, would be to move towards more risk-sharing products
which indicate a robust link between the strength of the financial system and economic
growth.
Abbas Mirakhor, Edib Smolo. (2014) EPISTEMOLOGICAL FOUNDATION OF FINANCE: ISLAMIC AND CONVENTIONAL, Islamic Banking and Finance Review, Volume 1, Issue 1.
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