Islamic finance starts from one basic concept that is to avoid trading directly present for future money. Finance is provided in the form of money in return for either equity or rights to share proportionately in future business profits. It is also provided in the form of goods and services delivered in return for commitment to repay their value at a future date. This is an obvious option in addition to the conventional practices of interest-based finance through which people borrow money and pay it back in the future in addition to interest. This paper addresses itself to four questions: (1) Why all the fuss about the rate of interest? (2) Is Islamic finance, as an alternative to interest based debt finance viable and efficient? (3) What Islamic finance implies for the whole economy? (4) Given that Islamic finance is really viable, why it has not been adopted at a larger scale?
As to the rate of interest, economists found that a zero nominal interest rate is a necessary and sufficient condition for optimal allocation of resources. Deflating the economy at a rate equal to the real rate of interest would automatically set the (nominal) rate of interest to zero, which is an optimal monetary policy that insures that financial resources are allocated efficiently. Unfortunately, this would bring with it several problems both conceptually and practically. Resorting to Islamic modes of finance appears to be a better course towards optimality than deflating the economy.
CONTENTS
ABSTRACT
ISLAMIC FINANCE: A CONCISE DESCRIPTION
I. THE RATE OF INTEREST:
II. ISLAMIC OPTION
A. ISLAMIC BANKING AND FINANCE
B. ISLAMIC MODES OF FINANCE
C. BANK DEPOSITS IN ISLAMIC BANKING
D. ISLAMIC FINANCIAL INSTRUMENTS
ADVANTAGES OF ISLAMIC FINANCE
I. EFFICIENCY
II. STABILITY
III. MORAL HAZARD AND ADVERSE SELECTION
IV. FINANCE AND DEVELOPMENT
V. INTEGRITY
VI. EQUITY
VII. SUSTAINABILITY
ACCEPTANCE OF ISLAMIC FINANCE
I. ACCOMPLISHMENTS OF ISLAMIC FINANCE
II. RELATIONS BETWEEN ISLAMIC AND CONVENTIONAL FINANCIAL INSTITUTIONS
A. LESSONS ISLAMIC AND CONVENTIONAL BANKS CAN LEARN FROM EACH OTHER.
B. CAN CONVENTIONAL BANKS LEGITIMATELY OFFER ISLAMIC
FACILITIES?
III. EQUAL OPPORTUNITY FOR ISLAMIC FINANCE
REFERENCES
SELECTED BIBLIOGRAPHY
