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Islamic Finance
and Global Capitalism
An Alternative to the Market Economy
James Simon Watkins
Regent’s University London
London, UK
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Switzerland AG 2020
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
general use.
The publisher, the authors and the editors are safe to assume that the advice and informa-
tion in this book are believed to be true and accurate at the date of publication. Neither
the publisher nor the authors or the editors give a warranty, expressed or implied, with
respect to the material contained herein or for any errors or omissions that may have been
made. The publisher remains neutral with regard to jurisdictional claims in published maps
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This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Dedicated to Rachelle Delarosa—my wonderful mother, singer, poet and
thinker who did so much to inspire me, who did so much to support others
and who was so happy for me that I was writing this book—Thank you
Preface
vii
viii PREFACE
outbreaks meant public funds were used to help develop a potential coro-
navirus vaccine but this was abandoned by pharmaceutical companies due
to a lack of a guaranteed financial return in the short term.
One of the most striking comments at the start of the decade was from
the Allianz Chief Economic Adviser, Mohamed El-Erian who spoke of the
discord between “Wall Street and Main Street ”:
With markets focusing on the improvement in the “second derivative”,
that is a reduction in the rate of labour force dislocation, U.S. stocks rose.
This widens an already considerable decoupling from the real economy and
will fuel the debates on Wall Street versus Main Street, companies versus
people and the well-off versus the marginalised.1
Advocates of Islamic finance argue that the risk sharing nature of this
model would mean that the disconnect between markets and the real
economy that can occur in conventional finance, cannot practically happen
in Islamic finance.
It is not just COVID-19 that has led to the reappraisal of assumptions
that has belied the Washington Consensus for the workings of the global
economy.
When Margaret Thatcher declared that “there is no alternative” to free
market economics, most commentators in the 1980s and 1990s accepted
this comment as a statement of the obvious.
For the then UK Prime Minister was speaking at a time when commu-
nism was collapsing and free markets were seen not just as an economic
system but as a guarantor of liberty against the collectivist demands of the
State.
However, in the first few decades of the twenty-first century, following
the 2008 global financial crisis and the 2020 coronavirus outbreak, ques-
tions were being asked as to whether there is an alternative to business as
usual.
Consequently, the proponents of a stronger role for nation states
in national economies cite the 2008 financial crisis to argue for a
more enhanced economic role for the State whilst laissez-faire advo-
cates can revert to Adam Smith’s infamous ‘invisible hand’ to rebut such
arguments.
But is there an economic system that enables a market economy to
be effective whilst protecting the long-term interests of Governments,
regulators and consumers?
Could Islamic finance really be seen as that alternative?
PREFACE ix
Islamic finance has a rich structure and robust set of values which,
at first glance, seems almost utopian. It embraces the profit motive but
prohibits investment in sectors that are deemed unethical such as selling
arms and gambling.
It encourages long-term investment but prohibits short selling
(borrowing shares of a company from an existing owner through her/his
brokerage, selling those borrowed shares at the current market price and
pocketing the cash).
It focuses on returns to investors from the success of the business but
rules out returns that are based on interest.
In short, Islamic finance is a fundamental challenge to business as usual.
It embraces the positive nature of investing for long-term growth whilst
stopping businesses being obliged to pay interest-based loans that may
have no bearing on the current performance of the company.
There is also no conflict between ethics and enhancing profits as can be
seen with conventional finance. In addition, Islamic finance is structured
in such a way that it encourages long-term investment rather than making
money at the potential strategic expense of a company or a nation.
On the surface, this utopian system of ethical capitalism also seems to
be highly profitable. The industry’s total worth was estimated to be US$
2.05 trillion in 2017. Global Sukuk (Islamic finance bonds) surged by a
record 25.6% to close at US$399.9 billion as of 2017.2
Islamic finance is now visible across the world. From the Persian Gulf
to Malaysia and from London to New York to Tokyo, Islamic finance is
now a key feature of the global economy.
However, is Islamic finance as utopian in practice as it is in theory?
This book will examine the highs and lows of Islamic finance. Whilst
this model can be structured for long-term investment, in a number of
markets the sector is largely focused on short-term financing. Why is this
and are there inherent weaknesses in broadening the scope of Islamic
finance to meet all of a nation’s needs?
The richness of Islamic finance with its differences in contract struc-
tures is seen by its critics as a complex maze that could lead, eventually, to
an Islamic finance bust. Other critics argue that Islamic finance is based
on a false premise and is a ruse to pursue an ideological agenda.
Whilst this book takes cognisance of the critics, the structured nature of
Islamic finance—preserving the profit motive whilst avoiding the depreda-
tions of interest-based loans—is a unique form that offers a route through
x PREFACE
the boom and bust economics that all of us have got used to—often with
tragic results for left behind communities.
Islamic finance—as a model of capitalism—has proven to be prof-
itable for investors. There is hardly a bank or a consultancy which is not
involved—in one way or the other—in the sector.
But as the industry grows, can it really offer an alternative to conven-
tional finance?
The answers may surprise you—for by the time you finish reading this
book—you may question whether Margaret Thatcher’s dictum that “there
is no alternative” really does hold true for the 2020s.
Notes
1. Mohamed Al-Erin (7 May 2020), The Market Keeps Distancing Itself from
the Economy, Bloomberg website.
2. Global Islamic Finance Market—Growth, Trends, and Forecast (2018–
2024), (July 2019) Mordor Intelligence.
Contents
3 In the Beginning … 33
The Role of Money 35
Religion and Interest Rates 38
Interest Rates: The Economic Arguments 40
Islam and Riba 42
Avoiding Detriment 45
Avoidance of Gharar (Unnecessary Uncertainty
or Ambiguity) 46
Prohibition of Gambling (Qimar) 49
Prohibition on Speculation (Maysir) 50
xi
xii CONTENTS
5 Compliance 115
Is Interest Really Banned in Practice? 116
Bank of Credit and Commerce International (BCCI)
and Egyptian Islamic Finance Scandals 121
Role of Religious Scholars 123
Usmani and Sukuks 124
Religious Scholars: Will There Need to Be Greater
Accountability? 129
Multilateral Institutions 136
OIC’s Fiqh Academy 137
CONTENTS xiii
Index 517
List of Arabic Terms and List of
Acronyms
Common era (CE) chronology will be used throughout this book instead
of Anno Hegirae (in the year of the Hijra—AH) chronology unless
otherwise stated.
There are some Arabic terms that are used repeatedly throughout the
book.
For ease of reference these terms are:
Allah—God
Fatwa—Ruling or judgement
Fiqh—Islamic jurisprudence
Gharar—Uncertainty
Hadith—Sayings of the Prophet
Hajj—One of the five pillars of Islam with the pilgrimage to Mecca and
its environs
Halal—Allowed
Haram—Forbidden
Istisn’a—Long-term project finance contract
Ijara—Financial and operational lease contract
Ijtihad—Reasoning
Ijma—Consensus
Maqasid al shari’a—Objectives of shari’a law
Maysir—Speculation
Mudaraba—Direct equity investment contract. Losses borne by one party
to the contract
xvii
xviii LIST OF ARABIC TERMS AND LIST OF ACRONYMS
xix
CHAPTER 1
There is no alternative.
As the shock of the 2008 global financial crisis reverberated across conti-
nents, pundits stubbornly argued that the excesses of capitalism were
something we all had to grin and bear.
Whether it was the seventeenth-century craze for tulip bulbs or the
2001 dot com bubble, finance ministers through to brokers patiently
explained to shocked consumers that capitalism’s many upsides do come
with occasional downside risks.
Even respected observers of the global markets—years after the 2008
financial crisis—felt that it was all too complicated to change how global
capitalism works, including in the world’s number one economy:
Does the United States really know how to build a financial system that is
the servant, not the master, of the economy? Sadly, the answer is probably
no; at present it is hard to imagine what this would even look like.1
this crisis reminds us, we also need states that know how to negotiate, so
that the benefits of public investment return to the public.2
Other commentators saw the impact on capitalism from the 2020 crisis
very differently. Allister Heath argued, instead, that a more laissez-faire
approach to the economy will have to be adopted once the crisis was
over:
Hurting the rich for populist reasons is something that governments can
afford to do in the good years, not when they are desperate to attract
entrepreneurs, capital and talent.3
Mais cette finale était loin encore ; elle dépendait des coups de
dés qu’il hasarda, de 1806 à 1812, d’Austerlitz à Moscou.
Ici je ne parle que de 1800 à 1806, des six années insipides où il
ne fit rien, absolument rien, — que des décrets qui, enfouis au
Moniteur, changeaient peu la face des choses.
Il eût été moins ennuyeux, s’il ne s’était pas intitulé en brumaire
l’homme de Mars et de la Fortune. Mais, après avoir affiché si haut
la prétention de l’action, n’agir point, sauf de vaines cérémonies qui
souvent n’amusaient pas même les acteurs, c’était prodigieusement
fastidieux et assommant.
Ses intrigues en Allemagne, ses arrangements d’Italie avaient
pour nous peu d’intérêt. Tout ce que nous voyions de lui, c’était son
effort malheureux pour se faire une marine, poussant au hasard
dans nos ports des hommes de terre qui avaient horreur de la mer. Il
faisait en ce moment construire en face de l’Angleterre, à Boulogne,
une flottille de bateaux plats, en sorte que de l’autre côté du détroit,
on pouvait toujours craindre une descente. Son frère Jérôme était
chargé de surveiller ces préparatifs. Pour lui, il faisait constamment
des voyages à la côte, regardait la mer, revenait, avec sa
précipitation habituelle qui fatiguait à regarder.
Le peu de mouvement qu’avait laissé la constitution paralytique
de l’an VIII dans la nation cessa ; le Tribunat se tut. A huis clos, le
Conseil d’État, avec Bonaparte, discutait le code civil, et devait
inspecter les départements. Mais ces fonctions d’inspection
passèrent aux sénateurs, corps immobile, toujours assis et qui
s’ennuyait tellement que, pour lui faire prendre patience, on créa
dans chaque département des sénatoreries de quarante mille francs
de rente ajoutés à leur traitement.