Neglected potentiality of Islamic finance: global development and conflict resolution/prevention

It is worth contemplating the limited involvement of Islamic finance in development and its inefficacy thus far as a means of distributing wealth and investment in sorely needed infrastructure or other building projects beneficial to less developed Muslim majority societies. Islamic finance and capital flows mediated by it has the potential to serve a redistributive function across the Islamic world. Such a function does not simply represent a means of zero sum redistribution or charity but as mutually advantageous investment benefiting both investors and the societies in which they invest.

In countries such as Britain financial instruments such as the sakk/sukuk have been promoted largely as a means of capturing liquidity flows, or setting policies and precedents that will over time do so. Unsurprisingly the sovereign motivation and perhaps slightly surprisingly the corporate motivation as well has not been religious in nature but rather represents an experiment with a new and relatively unfamiliar instrument largely adopted for the same reason as any other corporate financing tool — whether a bond or another issue of securities or commercial paper — with the added benefit of portfolio diversification and of being (notionally) asset backed and therefore safer as well as in demand (indeed oversubscribed) by a broad spectrum of investors on a global scale.

Max Weber’s treatment of Protestantism and the spirit of capitalism is pertinent in this regard. The intention is not to make a hackneyed rejoinder of the claim that Islam is is need of a Reformation, a liberation from theology or a theological class or the like. Rather the relationship between a religious sensibility and the concomitant sense of values and on the other side of the equation a specific form of economic life: capitalism. In the case of Islam, a form of pre-modern capitalism centered on barter as well as monetary exchange (the references in foundational texts to dirhams during the lifetime of the founding prophet) for goods, labour and services.

To recall: the marriage of religious redemption and this worldly virtue with the accumulation of wealth through diligence and effort is the central psychological and social dynamic force in Weber’s treatment of early modern Protestant capitalists. There are real similarities between his sociological observations and those that can be made of Muslim societies centuries earlier and remaining relevant and apt in an extension into the present. An important difference also remains: the preoccupation with the after-life and the frugality with value and spending in this world to store up redemptive value in the hereafter is not entirely absent but is decidedly secondary in the case of Islam, with greater freedom being given to the enjoyment of worldly wealth (subject to restraints on independent moral grounds and other religious dictates). In other words, there is less opprobrium attached to conspicuous prosperity, provided that wealth is also shared with others.

This strain within Islamic history and Muslim societies is insufficiently realised by a vehicle which is in fact well-suited to it: Islamic banking and finance. Islamic banks, investment houses, insurance companies, pension and equity funds as well as individual small investors could both demonstrate their charitable inclinations and even as they work to accumulate wealth, to increase their earnings and their patrimony both in this world (to the benefit of family descendants and the wider society — Muslim or not) as well as in whatever may follow in the afterlife.

Although far from a well formulated policy prescription this neglected angle on this nascent economic and financial sector compliant with Islamic law is worth exploring more broadly especially when considering the incidence of both conflict and poverty (and the correlation if not symbiosis between these) across significant swathes of the Arab Middle East: violence in Syria, Iraq, and Yemen, and poverty among the people of North Africa including Egypt and the Maghreb, as well as in Palestine – in other words everywhere in the Middle East with the exception of the small number of resource rich states. The Islamic spirit of capitalism, and the historical regularity that trade and war are inversely correlated, while no antidote combine to produce a conclusion that Islamic capitalism and its banking and financial components could beneficially be incorporated into policy both within the Middle East and beyond it in the larger Muslim world region. Even as the creation of a religiously attractive version of capitalism is needless to say difficult or impossible to create in war zones it may be pre-emptively adopted elsewhere and lead to investment in conflict zones — investment not in weaponry (an unlawful transaction in Islamic law and in the modern financial sector to which it has given rise) but in roads, housing, schools, bridges, in other words the requisites of countries that are or may soon be undergoing construction and development or re-construction and revival in a time of peace.  The historical role in the earliest modern democracies of the middle class and its contribution to the creation of representative government and accountability, where economic growth and its broadening across sectors of the population and socio-economic classes may be encouraged by means of an ideological-religious element that has as the Protestant ethic demonstrates concrete economic implications.

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