ISLAMIC ECONOMICS AND FINANCIAL SECTORREFORM Prof. Dr. Volker Nienhaus First Plenary Session Sharia Economics Conference 2013 Hannover, Germany – February 9, 2013
Nov 18, 2014
ISLAMIC ECONOMICS AND
FINANCIAL SECTOR REFORM
Prof. Dr. Volker Nienhaus
First Plenary Session
Sharia Economics Conference 2013
Hannover, Germany – February 9, 2013
search for an alternative economic system
(Pakistan)
developmental impact of finance (Mit Gahmr
savings banks)
abstract modes of PLS economy and monetary reform
soci
o-e
con
om
ic d
ime
nsi
on penetration of niche markets by Western
banks, expansion of Islamic finance in non-Muslim countries, regulation
1950s
1940s
1960s
Malaysia: from pro-Bumiputra policy to financial sector development: banks,
capital market, takaful, regulation, etc.Islamization of financial systems:
Pakistan, Sudan, Iran
com
me
rcia
l d
ime
nsi
on
financial stability claims,Islamic microfinance,
financial inclusion
financial needs of Gulf merchants:Shari’ah compliance
petrocapital, emergence and growth of genuine Arab banks (conventional)
Evolution of Islamic Economics and Finance
1970s
1980s
2000s
1990s
major market players
in Islamic Finance
rating
agenciesinformation
services,
media,
associations
consultancy
(legal, tax,
commercial,
Shari’ah)
training,
education,
research
legislators,
regulators,
standard
setters
stock
exchanges,
financial
centres, …
Shariah compliant
financial instruments
infrastructure
of the IFSI
• mudaraba
• musharaka
• …
capital market instruments
• Shari’ah compliant stocks
• Islamic securities (sukuk)
• Islamic derivatives …
• murabaha
• ijara
• …
interest-free finance contracts
Islamicbanks
specialized
Islamic finan-
cial service
providers:
investment
companies,
house finance
companies, …
conventional
market players
Islamic
subsidiariesIslamicwindows
Sukuk
14%
Takaful (Re-
Takaful)
1%
prohibition of interest,
speculation, gambling,
excessive uncertainty
problem: form vs. substance
investment & commercial banking 81%
Islamicfunds
4%
IFSB, AAOIFI,
BIS, BNM, CBB,
DFSA, FSA, …
IIFM,
IILM, …IIRA, …BIBF, IRTI,
INCEIF, …
total volume of Shari'ah compliant
assets 2012F: 1,6 trillion US$(GIFF 2012)
Structure of the Islamic Financial Services Industry
Prohibition of riba and Financing Techniques 4Prohibition of riba and Financing Techniques
purpose of financing:
acquisition of goods/services
access to liquidity
The „ideal world“ of
Islamic economics,
profit and loss sharing
(PLS) in the financing
and deposit business:
mudarabah, musharaka
trade/rent
contracts [bank as
intermediary
trader/lessor]
murabahah, ijarah
1/2
prohibited:
•riba (interest
on loans)
•gharar
(avoidable
uncertainty in
contracts)
•maysir
(gambling/
speculation)
permissible:
•profit from
trade and
leasing
•unilateral
promises
Shari‘ah
no provision of liquidity at fixed costs / with
fixed returns
no instruments for the new 'underwriting
approach' in (conventional) banking
[originate and distribute – securitization and
selling-off of loans]
Lim
ita
tio
ns
(dis
ad
van
tag
es
com
pa
red
to c
on
ven
tio
na
l fi
na
nce
)
Prohibition of riba and Financing Techniques 4Prohibition of riba and Financing Techniques
purpose of financing:
acquisition of goods/services
access to liquidity
trade contracts plus
unilateral promises
(wa‘d): complex
synthetic products for
interbank transactions
and financial trading
The „ideal world“ of
Islamic economics,
but hardly any
practical relevance
widespread
practice of Islamic
banks, economic
characteristics very
close to/identical
with interest
progressing
emulation/replication
of conventional
techniques/products;
dubious Shari‘ah
qualitiesovercoming
restrictions of
sales contractsform over substance
debates
profit and loss sharing
(PLS) in the financing
and deposit business:
mudarabah, musharaka
trade/rent
contracts [bank as
intermediary
trader/lessor]
murabahah, ijarah
2/2
prohibited:
•riba (interest
on loans)
•gharar
(avoidable
uncertainty in
contracts)
•maysir
(gambling/
speculation)
permissible:
•profit from
trade and
leasing
•unilateral
promises
Shari‘ah
combination of
trade/leasing contracts:
commodity murabaha,
tawarruq
securities with
predetermined returns :
sukuk
Money Market
(low risk/return, highly liquid)
Corporate Finance
(medium risk/return, liquid)
Venture Capital
(high risk/return, illiquid)
Level of risk
Narrow
Bank
General Public
investment activities
for return on capital
payment
services
Finance Houses / Funds
Real Estate
(medium risk/return, liquid)
Finance Holding
Basic Structure of a “Narrow Banking System”