conceptual and theoretical fundamentals of islamic finance as a subject of study

8/13/2019 Conceptual and Theoretical Fundamentals of Islamic Finance as a Subject of Study

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Concepts and Theoretical

Fundamentals of IslamicFinance

Salman Syed Ali

Islamic Research and Training Institute


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Overview

1. Conceptual Fundamentals of Islamic Finance

2. Strengths of the Conventional Financial System

3. Weaknesses of the Conventional Financial System

4. The Needed Reforms5. Need for Stability


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Conceptual Fundamentals ofIslamic Finance

The financial system is part of the overalleconomic system

Characteristics of Market System Freedom of participants to interact with each

other Discipline Efficiency Equity (Justice)


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Strengths (Characteristics) of theConventional Financial System

It mobilizes resources from savers It makes these resources available to the

users It is thus an intermediary between the

savers and users

This makes possible the use of idleresources It, thus, increases efficiency


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Weaknesses of the ConventionalFinancial System

Whoever has the collateral and ability topay interest gets the resources the enduse is not a major concern

It promotes excessive lending >>


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It promotes excessive lending Causes booms and busts The lender gives no respite sale of collateral

Price of collateral falls steeply Causes recession Since it is only the rich who can provide collateral,

they get the resources. This increases inequalities of

income and wealth It also diverts resources to speculation It promotes inefficiency It promotes injustice


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The Needed Reform

Introduce greater discipline P&L sharing

Introduce greater justice Make an alternative arrangement for collateralso that even the poor may have access tofinance

Social pressures Group solidarity system (e.g. of Grameen)


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Introduce greater efficiency in the use ofresources Ensure that resources are used productively

not for gambling and speculation PLS will help in this Also regulation and supervision


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Keynes (1926) The End of Laissez -faire

The world is not so governed from abovethat private and social interests always coincide.It is not so managed here below that in practicethey coincide. It is not a correct deduction from

the principles of economics that enlightenedself-interest always operates in the publicinterest. Nor is it true that self-interest generallyis enlightened; more often individuals actingseparately to promote their own ends are tooignorant or too weak to attain even these.

Keynes (1926). The End of Laissez -faire, Sidney Ball Lecture given byKeynes at Oxford in November 1924 and a lecture given by him at theUniversity of Berlin in June 1926. Available on the internet at

http://www.panarchy.org/keynes/laissezfaire.1926.html
http://www.panarchy.org/keynes/laissezfaire.1926.htmlhttp://www.panarchy.org/keynes/laissezfaire.1926.html


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Economic Cycles

Unregulated creditexpansion

Regulated creditexpansion

Forbearance enacted

No forbearance

Credit for this slide: Sami Al-Suwailem (2008)


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Europe is ablaze with knowledge and skillsTruly its fountain of life is in pitch darkness.

In splendour, in seduction and in grace,The buildings of banks outsoar the churches!

What they call commerce is a game of dice;For one, interest, for millions swooping demise.

Muhammad Iqbal, (Poet of the East) in Bal-i Jibril


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Thank You

conceptual and theoretical fundamentals of islamic finance as a subject of study

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