1.1 Overview
The framework under which macroeconomic policies can be formulated to create a stable economic environment is yet to be addressed. Meanwhile, many important and tenacious questions regarding the relationship between Islamic finance , risk-sharing and macroeconomic stability remain unanswered. This book provides original works and provoking ideas covering the theoretical and empirical issues related to the Islamic financial system, risk-sharing mechanism and macroeconomic stability . It highlights the new contribution of Islamic economics and finance towards economic development and macroeconomic stability. It also discusses the issues and challenges in practice, specifically in terms of their effect on growth , economic stability and economic shocks . In the nutshell, this book addresses some critical issues such as the ideal economic system to allocate economic resources from Islamic perspectives, the view of Islam on market and non-market mechanism and Islamic approach of distribution or redistribution of wealth for economic justice . On the theoretical fronts, the book compares Islamic economics vis-Ă -vis mainstream economics, i.e. neoclassical economic and other school of economic thoughts as well as discusses the appropriate rate of return as opposed to interest rate as an equilibrating mechanism of supply and. Finally, the book outlines some major challenges for implementing risk-sharing finance in a dual banking system.
In Part I, Chapter 2 of this book, Aydin discusses the compatibility of capitalism and Islamic economics and finance. He expands the existing arguments for Islamic economics and finance from social justice , equality , morality and riba-free system points of view to the need for a new economic paradigm . Chapter 3 by Islam analyses the Shariâah as the principal source of Islamic banking which includes the study of the sources of Shariâah, Maqasid-al-Shariâah , concept of ownership in Islam and distribution of wealth in Islam . In Part II, Chapter 4 by Halim et al. investigate whether the Malaysian Shariâah-compliant firmâs capital structure variation exhibits a market timing behaviour as well as the effects of the other dynamic forces behind capital structure variation. Chapter 5 by Onagun studies the regulation of capital adequacy requirements proposed by IFSB and compares it with Basel standards for commercial banks . Chapter 6 by Hadian proposes nominal GDP targeting (NGDPT) regime as an efficient monetary policy framework, which is also consistent with Islamic economics.
In Part III, Shah et al. (Chapter 7) explore the determinants of financial leverage in the Islamic banking industry of Pakistan . Chapter 8 by Manap estimates the systemic contribution of Malaysian listed banks (Islamic and conventional ) and measures an individual bankâs contribution to systemic risk. Chapter 9 by Ali et al. examines the relationship between credit risk and performance of Islamic banks in Pakistan using bank-specific characteristics . In Part IV, Arsyianti et al. (Chapter 10) examine low-income householdsâ perspective on regular charity-giving behaviour using theory of social production function and theory of planned behaviour . Chapter 11 by Kurunkatil addresses the issues of Islamic financial system to tackle financial exclusion and promote resilience in minority Muslim countries like India . Finally, Chapter 12 by Lajis considers the misconceptions of risk-sharing and the reasons risk-sharing should be the business model for contemporary Islamic finance .
1.2 The Nature of Islamic Economics and Macroeconomic Stability
Islamic economics is a scientific body of knowledge in that it admits the use of reason and analogy to establish âcausalityâ of relationships. In fact, the Quran does not shun rationality, where the scripture contains many statements about positivism . Based on religion, Islamic economics has a necessity of a dominant normative aspect. Since Islam prescribes a way of living in this world , it avoids idle theorizing. Principles of Islamic economics are essentially the principles of economic policy . The subject holds both positive and normative contents and prescribes programmes to achieve Islamic ends. In this context, it is suggested that mainstream economics is value neutral , while Islamic economics is value based . Values are implicit in their basic assumptionsâfreedom of enterprise, private ownership of property, market arbitration , competition , non-intervention and so on. These assumptions exist because of social approval and can also be changed or modified through a social agreement . In Islamic economics, values are God ordained; human beings can convey them with limited interpretive flexibility ; they cannot abolish or replace them. Thus, both economic disciplines have values; the difference lies in their source and the extent of human discretion in the matter. Hence, Islamic economics does make a difference.
The modern and post-modern streams have encircled Islamic economics such that Islamic economics does not allow differences in theory making and universalize itself through proposing its peculiar centricity and rationality assumptions, which methodologically does not differ from the mainstream economics. It takes nourishments from Eurocentrism and Western rationalityârejecting heterodox economic schools. The current state of the Islamic economics is to what Kuhn would have termed as âpre-paradigmâ, and it is yet to establish itself as a distinct paradigm . Therefore, a paradigm shift was impossible. Islamic economics in its present state lacks a clear-cut subject matter, well-organized body of knowledge, methodology to appraise theories and systematic accumulation of knowledge.
Islamic economics and finance have attracted some attention as a possible alternative paradigm. However, Aydin (Chapter 2) argues that after few decades of its development, Islamic economics is still in its early stage. It is also not clear whether it would be an old (morally improved) capitalism or a new economic paradigm. Most literature on Islamic economics in recent years is largely research about Islamic financial instruments and institutions. This gives an impression as if the main difference between conventional and Islamic economics is in the instrumental aspect, rather than fundamental. Similarly, Islam (Chapter 3) proposes to revisit the understandings of Shariâah as the foundation of Islamic banking. The Islamic financial system, therefore, cannot be implemented by only eliminating riba , but by adopting the Islamic principles of social justice , equity and fairness. Nevertheless, both authors conclude that if Islamic economics would offer an alternative paradigm , it has to contradict with the existing ones.
1.3 Islamic Bank Capital and Financial Regulation
Given the ambiguity and impreciseness associated with defining financial stability , most authors associated the loss of stability with excessive risk, crisis and negative externalities (Gadanecz and Jayaram 2009; Agenor et al. 2013). Hence, attempting to clearly define what financial instability is, it has to look into its driving sources and identify when the financial system is losing its stability and function in a way that adversely impacts economic conditions . Houben et al. (2004) suggest that both macro- and micro-theoretical approaches can explain the reasons behind the occurrence of financial instability. In the macroeconomic approach, two key drives are thought to trigger instability. These are intense fluctuations in prices and over-leveraging in the economy. Hence, it becomes clearer that for the financial system to function well and p...