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”