It is most unfortunate that "Islamic Economists" over the past two decades have given in to the "Islamic Finance" paradigm of replicating conventional financial markets and institutions in Islamic garb. A few of us have tried to argue that the essence of Islamic jurisprudence and earlier religious teachings on finance is shunning excessive trading in risk (indeed, I have argued that the forbidden gharar is "trading in risk" and that the forbidden riba is "trading in credit," which is an extreme form of gharar). Of course, the financialization of the U.S. and global economies, and the simultaneous financialization of Islamic economic thought and practice over the past three decades, has been primarily about intensified trading in credit and risk through multiple "innovative" approaches ranging from securitized debt instruments to derivatives.
Innovation by itself is not a bad thing, and one expects new more efficient financial instruments to evolve over time. The problem has been an excessive emphasis on financial profit-making, at the expense of substance. My argument for mutualization was thus predicated on eliminating the profit motive from finance, thus reducing the incentive to take very large risks. My argument with Dr. M. Nejatullah Siddiqi (posted on this blog two and a half years ago) shows how some of the more conservative Islamic economists gave in to the temptation for faster growth at the cost of increased risk.
Today, an article quotes Stiglitz on the folly of following the hare-vs-tortoise recent western model of capitalism:
"People around the world once admired us for our economy, and we told them if you wanted to be like us, here's what you have to do — hand over power to the market," said Joseph Stiglitz, the Nobel Prize-winning economist at Columbia University. "The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us."Now we should probably see many of the terribly-designed and labeled sukuk backed by shoddy risk analysis and myopic for-hire interpretation of Islamic jurisprudence will begin to collapse. The model of Islamic finance that has emerged since the roaring 1980s should come to an end. Many have blamed the current financial crisis on the greed of financial-market participants. Some of the top bankers and most of the top "Shari`a scholars" will probably keep the millions that they have "earned." One of the prominent Shari`a scholars from the Gulf, whom a central banker from the Middle East said netted $3 million last year, once chastised me in KL, Malaysia, for questioning the fees that they collect: "the lawyers make more money," he said. How many, I wonder, will still feel that they have earned that money.