Islamic Finance: The Structure-Objective Mismatch and Its Consequences

Abstract

This paper raises the issue of an initial structure-objective mismatch in the launching of Islamic finance. The abolition of interest and promotion of growth with equity were goals of the conceived system. These goals expressed a long term vision to improve the condition of the Muslim community across the world. However, the organizational form adopted for Islamic finance was that of the existing commercial banks, which essentially provided short-term loans on interest to industry and commerce. The choice thus involved an intrinsic mismatch between the structure and objectives of Islamic finance. The mismatch did carry some advantages, but–from a more important angle–it exposed Islamic finance to commitments and influences which could not align very well with the goals the pioneers had in mind. Note that the focus here is not a reversal of the mismatch but identifying its consequences, which have forced the nascent Islamic system to converge and compete with the mature conventional finance dominated by the West. The ground realities are not being adapted to Shari’ah norms; it is the norms that are being stretched to the limit to meet the demands of the conventional system. Ordinary Muslims who hoped to benefit from Islamic financing remain unattended. Thus, what Islamic finance can or cannot change will depend on where its ongoing integration with the conventional system leads it. Currently, most merits claimed for the Islamic system defy evidence. The basic reforms financial systems require in the face of current crisis are the control of credit, leverage lure and speculation. Islamic finance is, in principle, better equipped to achieve these ends.

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