The fast-growing Islamic finance amidst the global financial uncertainties has captivated much interest especially as to whether it can serve as a viable alternative system. Facilitated by increasing data availability, Islamic banking and Islamic capital markets become subjects of increasing empirical inquiries. Over the years, many scholarly works have emerged to assess various dimensions of Islamic banking and finance. However, they are predominantly confined to empirical verifications of the performance of Islamic banks and Islamic capital markets. While there is much to be done due to contradictory findings from existing empirical studies, there are two critical avenues of research that need to be undertaken such that the viability of the Islamic financial system can be based on a sound and concrete ground. The first avenue relates to the micro-foundations of Islamic finance while the second is the extension of empirical studies on the bearings Islamic finance has on socio-economic aspects as embedded in the Maqasid al Shariah (Objectives of Shariah) of its establishment.
With few exceptions, existing Islamic finance studies can be viewed as empirical extensions of prevailing mainstream works on banking and finance, backed mainly by an argument that Islamic finance is different. Little attempt, however, has been made to place Islamic-specific characteristics in theoretical settings.
Theoretically, it would be insightful to explicitly derive the implications of banks’ or firms’ adherence to Islamic principles. Empirical analyses using existing data can be deceptive in demonstrating the distinct nature of Islamic finance since it has been well noted that, in practice, Islamic finance particularly Islamic banking has yet reached its ideal business model or has not departed substantially from conventional practices.
Moreover, in the case of Islamic stocks, taking firms that pass Shariah screening to be Islamic may not be fully accurate since the Maqasid al Shariah goes beyond the used screening criteria. As such, Shariah-compliant firms as classified may share a similar bottom line as any other firm, i.e. profit maximization, and hence no difference in their behaviour. Meanwhile, Islamic firms have Maqasid al Shariah governing their behaviour and, thus, they have more than profit maximization to achieve. Accordingly, the theoretical behaviour of the latter would be more relevant for understanding Islamic banking and finance.
Despite the need of theoretical foundations, we also believe that a fruitful avenue to pursue is to assess the bearings the present Islamic banking and finance have on the economy at large. The key question is: has Islamic finance fulfilled the objectives of Shariah?
These questions mean that assessments need to be made on the roles played by Islamic finance in, for examples, poverty alleviation, income distribution, equal and widened access to finance, and economic productivity and efficiency. Moreover, how the significant presence of Islamic finance would affect monetary policy instruments and the conduct of monetary policy or even whether monetary policy has any role would be important especially to monetary authorities in countries spearheading the development of Islamic finance. At present, our understanding on the relations between Islamic finance on one hand and socio-economic outcomes and macroeconomic policies on the other hand remains limited.
By Prof Dr Mansor Ibrahim