Sunday, January 17, 2010

UNEPFI Membership: Will Islamic Finance turn to positive injunctions?

I have long been a critic of the Islamic finance industry focusing mainly on avoiding prohibitions, but not recognizing that prohibitions are secondary to positive injunctions:
إن الله يأمر بالعدل و الإحسان و إيتاء ذي القربى و ينهى عن الفحشاء و المنكر و البغي، يعظكم لعلكم تذكرون

"God commands justice, beautiful dealings, and generosity to one's kin, and forbids ugly dealings, blameworthy behavior, and transgression; he admonishes you, so that you may remember."
For instance, why are "Shari`a compliance" screens for stock investment simply negative in nature (avoiding certain types of stocks based on ratios that are often questionable religiously and economically, but that is another subject) and letting fund managers decide based on purely financial risk-return tradeoffs within the allowed universe of securities. It would make more sense for an "Islamic" portfolio to also balance how much good a company does in deciding how much weight to give it in an investment portfolio.

I second Michael Gassner's call, and hope that the trend toward more positive aspects in "Islamic finance" will eventually justify the name (rather than simply focusing on how to make people excessively indebted or otherwise mimic conventional financial players in ways that utilize medieval legal tricks).


Blogger Unknown said...

This initiative seems very interesting, and one would hope that more organisations will stand up and take notice especially given recent events. Unfortunately, I do not think that voluntary participation will lead to major financial institutions taking part (of which the Islamic Finance industry is just another arm as you have mentioned on numerous occasions). I think it needs some sort of government intervention that would impose this kind of scheme onto major financial institutions, and this is a golden opportunity to do this considering the wave of current public opinion and the simple fact that governments still hold large stakes in many financial institutions.

Unfortunately as you of course know people are driven by short term profits not long term sustainability, and if the free market financial institutions are left to their own devices to choose whether or not to participate in such a scheme they will inevitanly opt not to, or engage in some token gesture. Firms are driven by the simple concept we are taught in Economics and Finance undergraduate degrees, masters and PHD levels too. A firm solves its own profit maximisation function subject to constraints, and through the workings of the market we maximise the utilitarian social welfare function by each pursuig our own profit maximisation. The only solution to this problem is government intervention, which of course is not without problems itself.

7:46 AM  
Blogger nhusain said...


We love the analogy of putting holy water on a duck to make it shariah compliant.

3:44 PM  
Blogger nhusain said...

Nassim Taleb is recommending that Bernanke be fired.

7:06 AM  
Blogger Unknown said...

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4:45 AM  

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