Articles on Islamic Finance
The two most important problems identified in a post-financial crisis look back are perverse incentives and de-linking of financial sector growth and activities with the real sector of the economy. Islamic finance principles by basing all financial products with real assets fill the gap and this feature alone is a very important risk management tool inbuilt into the system.
From the risk and profitability perspective, Islamic modes of financing keep the Islamic financial system liquid and less prone to risk due to asset backing. Often, the investors with bank (the deposit holders) are risk averse and want consistent returns. But, small savers do not have enough funds to finance big volume projects directly. But, using investors’ pool of funds to provide financing, the investors are able to share in benefit of such economic activities.
The recent literature on Islamic economics hardly makes use of mathematics even for expositional purposes. Mathematics is a language. It keeps argument and logic straight. Just like growth models could talk of seemingly non-mathematical concepts like public infrastructure, social infrastructure and governance, one can incorporate Islamic principles to show how they could be more welfare enhancing. For instance, the need is to show the impact and effects of Islamic principles on allocation of resources, income distribution, externalities and so on using mathematics.
It is important to pursue financial engineering in innovative ways, but also keeping in view the Ahkam and Maqasid of Shari’ah.
Currencies are originally a medium of exchange and should only be exchanged for personal use in different countries. To make them a tradable commodity only for earning a profit is also against the basic philosophy of Islamic economics – Mufti Taqi Usmani
Agency conflict arises when the various parties have different incentives or objectives in a mutual relationship. This article discusses Islamic economics perspective on the agency conflicts.
The question arises that if people are generally risk averse, are interest based investments and lending not the safest option to these people in which except from default risk, people are safe from fluctuations in payoffs and there is less uncertainty in payoffs. This article discusses how Islamic economic framework incorporates diversity in risk preferences.
Islamic finance industry assets are now worth more than $2.6 trillion by 2019. The industry has shown resilience and double digit growth even in the face of global economic slowdown. After substantial double digit growth in assets, customer base and profits, Islamic banks are expected to embrace the vision to provide an egalitarian financial system which is inclusive for all and avoid the pitfalls which the conventional banking based on interest could not avoid.
To some scholars, it seems that practiced Islamic banking is yet to incapsulate the ideals of Islamic economic principles. These scholars caution against mimicking conventional banking products and using the same paradigm to make these products somehow conform to Islamic legal framework.
Time value of money is the problem for the investor to avoid keeping his/her money idle and to avoid forgoing the use of money that may bring positive value to his/her investment. However, it does not mean that the investor can demand an arbitrary increase as the cost of using money without taking the risk of a productive enterprise.
Islamic Economics Project 