The reform movement in the Muslim world can be traced back to the mid-nineteenth century and the search for authentic Islamic institutions has dominated the objectives of the reform movements of the Muslim societies since the beginning of the twentieth century.
In the case of financial institutions the major developments have taken place in the last quarter of the twentieth century in the form of Islamic banks and financial institutions (IBFIs). With the establishment of the first Islamic bank (IB) in 1975 in the Gulf region the institutional development of Islamic banking took the ‘commercial form’ as opposed to the short-lived experience of Islamic social banking in the case of Mit Ghamr in Egypt in the 1960s.
Since the first IB in 1975, IBFIs have not only successfully expanded in their asset bases, diversity and sophistication of products they offer but also in terms of numbers of such institutions. An important reason for the success of IBFIs is that they managed to find ways into the financial centres of the Western world as well; the UK, France, Germany and Luxembourg being amongst other countries that have attracted IBFIs.
Against the backdrop of global financial crises, IBFIs have managed to achieve modest growth in their asset base and also in other institutional and financial variables. Therefore, the issue of the ‘resilience of IBFIs’ has become a popular topic in conferences and writings, while the observed ‘resilience’ has been attributed to the religious-ethical foundations of Islamic banking and finance (IBF). However, a very limited number of defaults have also been observed in this specialized industry. It is, however, important to essentialize Islamic moral economy (IME), which provides the moral foundations of IBFIs. The discourse on IME is shaped around social justice and conducting economic and financial
activities in considering their larger social impact and contribution to social good. This chapter, hence, aims to discuss the foundational issues in IME with the objective of identifying the moral nature of IBF.
A critical analysis of the progress, expansion and performance of IBFIs indicates that the values and norms of IBF have been compromised by a ‘financialization’ fostered by financial engineering, which has ‘endogenized’ the problems of the current financial system into the IBFI realm. It is therefore important to make reference to norms and values of IBF as formulated by IME, which provide authentic meaning to the ‘Islamicness’ of IBF. This chapter, hence, aims to present the IME framework in order to express the distinguishing nature of IBF as a value-oriented proposition.
Title: Islamic Moral Economy Foundations of Islamic Finance
Author(s): Mehmet Asutay
Published in: Islamic Finance in Europe
Length: 16 pages