Beyond the Theoretical Dichotomy in Islamic Finance: Analytical Reflections on Murābaḥah Contracts and Islamic Debt Securities

Abstract

Islamic finance had been originally considered as the financial system based on the notion of profit-sharing and participatory finance due to the fact that ribā (interest) is forbidden in Islam. However, since the rise in the practice of Islamic finance in the 1970s, mainly two discussions relating to the legitimacy of the modes of financing have been raised: one pertains to murābaḥah contracts and the other, to Islamic debt securities. These discussions have led to divergence in the practice of Islamic finance. Existing literatures on the historical overview in Islamic economics and financial studies appear to opine that these discussions have roots in the dichotomy between those who attach greater importance to the ideal of Islamic finance and those who deem it desirable to respond to the practical demands of Islamic finance. Subsequently, each discussion tends to result in convergence after many arguments. This paper primarily aims to trace several arguments in each discussion and summarize them into a framework of theoretical divergence and convergence, which is premised by many works, regardless of whether the framework is described explicitly or implicitly. However, the divergence/convergence framework reviewed in this paper appears to lack certain crucial points pertaining to the relationship among theoretical standpoints and the structure of discussions. Therefore, this paper examines these points by using as examples the discusisons on murābaḥah contracts and Islamic debt securities and aims to present an advanced picture of the framework beyond mere dichotomy. Furthermore, based on the overview, this paper also attempts to explore the underlying and essential features of Islamic finance that have been commonly shared by the scholars who participated in each discussion. The following two chapters deal with the overviews of the discussions on murābaḥah and Islamic debt securities. The fourth chapters discusses the divergence/convergence framework within which the theoretical discussions on Islamic finance can be located and it also presents an advanced picture of the framework beyond mere dichotomy. Then, the underlying features of islamic finance are outlined.

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