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ddd eee zzz E orioriori c hhh o ututut n AAA o e e e m ururur sss i ooo c D sclsclscl DiDiDi e v c c c e bliblibli l uuu o PPP p m e n t a ddd eee n zzz d ririri ooo I hhh sl ututut a AAA m e e e rrr i uuu c sss ooo F clclcl in sss a DiDiDi n c c c c bliblibli e uuu PPP DIRECTIONS IN DEVELOPMENT ddd eee Finance zzz ririri ooo hhh ututut AAA e e e rrr uuu ososos Economic Development and clclcl sss DiDiDi c c c Islamic Finance bliblibli uuu PPP Iq b a l a Zamir Iqbal and Abbas Mirakhor, Editors n d M ddd eee ir zzz akh orioriori o hhh r ututut AAA e e e rrr uuu sss ooo clclcl sss DiDiDi c c c bliblibli uuu PPP Economic Development and Islamic Finance Directions in Development Finance Economic Development and Islamic Finance Zamir Iqbal and Abbas Mirakhor, Editors © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 16 15 14 13 This work is a product of the staff of The World Bank with external contributions. 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Library of Congress Cataloging-in-Publication Data Economic development and Islamic finance / [edited by] Zamir Iqbal and Abbas Mirakhor. pages cm ISBN 978-0-8213-9953-8 — ISBN 978-0-8213-9954-5 (ebook) 1. Finance—Islamic countries. 2. Finance—Religious aspects—Islam. 3. Economic development—Islamic countries. I. Iqbal, Zamir. II. Mirakhor, Abbas. HG187.4.E26 2013 332.0917’67—dc23 2013013763 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 Contents Foreword xi Acknowledgments xiii Contributors xv Abbreviations xix Overview 1 Views on Economic Development 3 The Islamic Concept of Economic Development 5 Summary of Chapters 10 References 22 pArt 1 theoretical Foundation 23 Chapter 1 Epistemological Foundation of Finance: Islamic and Conventional 25 Abbas Mirakhor and Wang Yong Bao An Ideal Conventional Financial System 26 An Ideal Islamic Finance System 31 Achieving the Ideal: Uncertainty, Risk, and Equity Markets 41 Summary and Conclusion 53 References 57 Background Reading 60 Chapter 2 Islamic Finance Revisited: Conceptual and Analytical Issues from the Perspective of Conventional Economics 67 Andrew Sheng and Ajit Singh Introduction 67 The Central Tenet of Islamic Finance: Absolute Prohibition against Interest Rates 69 Ethical Foundations of Islamic Finance 76 Modigliani and Miller Theorems 78 Risk Sharing, Risk Shifting, and the Risks of Bankruptcy 81 The Stock Market and Islamic Finance 82 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 v vi Contents Interim Summary of the Main Findings and Two Further Questions 83 Islamic Finance and Economic Development 85 The Real Challenge of Islamic Finance 86 Conclusion 87 Notes 88 References 88 Chapter 3 The Foundational Market Principles of Islam, Knightian Uncertainty, and Economic Justice 93 S. Nuri Erbas¸ and Abbas Mirakhor Introduction 93 The Foundational Islamic Market Principles 97 Knightian Uncertainty and the Islamic View of Uncertainty 99 Institutional Development, Trust, and Uncertainty 101 Islamic Contracts and Risk Sharing 106 Research Agenda for Islamic Economics: A Proposal 118 Concluding Remarks 119 Notes 120 References 125 pArt 2 Developmental Aspects 131 Chapter 4 Finance and Development in Islam: A Historical Perspective and a Brief Look Forward 133 Murat Çizakça Introduction 133 Basic Characteristics of an Islamic Economy and Finance 134 Implementation 135 Historical Evidence 136 Stagnation and Decline 141 Relevance for Today: What Needs to Be Done? 143 Conclusion 145 Notes 146 References 147 Chapter 5 Economic Development in Islam 151 Hossein Askari The Evolution of Western Thinking on Development 152 Economic Development in Islam 158 Concluding Comments 175 Notes 175 References 176 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 Contents vii Chapter 6 Islam’s Perspective on Financial Inclusion 179 Zamir Iqbal and Abbas Mirakhor What Is Financial Inclusion and Why Is It Important? 181 Issues with the Conventional Approach to Financial Inclusion 183 The Concept of Financial Inclusion in Islam 185 Redistributive Instruments of Islam 188 Public Policy Implications 191 Government as the Risk Manager Promoting Risk Sharing 192 Need for Developing a Supportive Institutional Framework 193 Institutionalization of Islamic Redistributive Instruments 195 Conclusion 198 Notes 199 References 200 Chapter 7 Financial Inclusion and Islamic Finance: Organizational Formats, Products, Outreach, and Sustainability 203 Habib Ahmed Introduction 203 Inclusive Finance: Scope and Constraints 205 Islamic Finance and Inclusive Finance 209 Islamic Inclusive Finance: An Overview and Comparison 213 Organizational Formats, Services, Outreach, and Sustainability 220 Conclusion 224 Notes 225 References 226 Chapter 8 Theory and Instruments of Social Safety Nets and Social Insurance in Islamic Finance: Takaful and Ta’min 231 Kamaruddin Sharif and Wang Yong Bao Islamic Social Safety Nets 232 The Institutional Framework of Social Safety Nets in Islam 234 The Concept of Social Security in Islam 239 Social Insurance: Takaful and Ta’min 241 Takaful in Practice 245 Conclusion 248 Notes 248 References 249 Chapter 9 Islamic Capital Markets and Development 253 Obiyathulla Ismath Bacha and Abbas Mirakhor Introduction 253 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8 viii Contents Are Capital Markets Necessary? 253 Issues Concerning Capital Markets 255 Concept of Islamic Capital Markets 257 Equity and Sukuk Markets in an Islamic Capital Market 260 The Reality of Capital Markets in the Muslim World 268 Concluding Remarks: Implementing the Risk-Sharing Framework 270 Notes 272 References 272 Chapter 10 Islamic Stock Markets in a Global Context 275 Andrew Sheng and Ajit Singh Introduction 275 Do Stock Markets Help Economic Development? 278 Lessons for Islamic Stock Markets 280 Stock Markets and Economic Efficiency: Further Lessons for Islamic Stock Markets 284 Issues of Globalization and of Long-Term Growth for Islamic Stock Markets 289 Conclusion 291 Notes 292 References 293 pArt 3 policy Formulation 297 Chapter 11 A Survey of the Economic Development of OIC Countries 299 Hossein Askari and Scheherazade Rehman Introduction 299 Fundamental Islamic Economic Doctrines 300 The Performance of OIC Countries 306 Concluding Remarks on Islam and Economic Performance and Prosperity 317 Notes 322 References 323 Chapter 12 Islam and Development: Policy Challenges 325 Azura Othman and Abbas Mirakhor Introduction 325 The Islamic Economy and the Role of the State 326 Policy Tools in Macroeconomic Management 328 Policy Instruments in an Islamic Economy 332 Challenges in Policy Implementation 338 Summary 342 Notes 343 References 344 Economic Development and Islamic Finance • http://dx.doi.org/10.1596/978-0-8213-9953-8