Capital Muslim Issue cover

The Inefficiency of Islamic Banking

The last twenty-five years, rife with numerous banking and financial crises, has re-emphasized two factual realities. First, that the current banking/financial system is inherently unstable. Second, that the system is unjust. However, we live in postnormal times, where the old system no longer works, but where newer systems have not yet replaced the dysfunctional ones. Hence, we are living in a transition period in which contradictions, paradoxes, ironies, and chaos prevail. The result is a disillusionment among the masses. 

This state of affairs is unprecedented. According to the 2022 World Inequality Report, ten percent of the global population owns 76 percent of all the wealth and 52 percent of global income. The bottom 50 percent earns 8.5 percent of the global income and possess a mere two percent of the total global wealth. To say poverty has run rampant is beyond an understatement as we struggle to define its metrics. Those barely able to attain any semblance of a ‘middle ground’, whatever that seemingly arbitrary label may actually be, are almost made invisible by the pockets of the rich and super-rich. To try to balance the field, we even try to target what has been called the ‘super-poor’, an almost comical label that exists to give policymakers a sliver of hope that they have something close to a handle on the situation.

The Covid pandemic only laid bare the deeper realities of our economic malaise. According to the Oxfam, ‘the 1,000 richest people on the planet recouped their Covid-19 losses within just nine months’. Oxfam also pointed out that it could take more than a decade for the poorest to recover from the economic waves of the last couple years. The economic dismay of the pandemic was complimented by simultaneous crises which, thanks to our increasingly complex world, left much of the globe in an untenable position. Food insecurity, which is being faced by no less than fifty-three countries, aggravates this. Approximately 193 million people are in extreme need of food assistance. At the same time, more people are dying of obesity than malnutrition for the first time in history. Around 4 million people die annually due to obesity. According to the 2022 World Obesity Atlas, by 2030, one billion people are estimated to be living with obesity. Meanwhile, natural resources are depleting at an unsustainable rate and global temperatures are rising at historic levels. A climate crisis abounds as numerous reports emphasise our need for a swift and rapid action plan to transform our industries, particularly transportation, construction, food, and even our financial systems to avoid disaster. Meanwhile across the globe, states are failing to meet their targets as per the 2016 Paris Agreement that hopes to keep global warming below a 2°C increase. Social and political crises add on top of this with no signs of slowing down. The Russian-Ukraine War, a less bilateral war than it would appear on paper, has intensified food and energy costs while also adding humanitarian emergencies and a furthering of the global refugee crisis to the mix.

Yet before the hurricane of crises we find ourselves in today, there were earlier signs that we needed to find new ways of thinking. In a sort of teaser for what would come two decades later, the Asian financial crisis of 1998 led to economic and even political crises in many Asian countries. Although it was heard here and there before 1998, after the Asian financial crisis, the phrase ‘there is a need for a new economic and financial architecture’ has become a household saying amongst economic thinkers. However, even before that, indeed since the 1970s, pioneer Islamic economists throughout the Muslim world had expressed dissatisfaction with the western economic system; and called for an alternative economic, banking, and finance framework. 

This titanic undertaking aimed at developing a proper Islamic economic system that could stand as a viable alternative to both capitalism and socialism. Islamic banking was to be a religion-based ethical alternative to modern, debt-based banking. The call was to realize that Islamic banking could drive an Islamic economics and finance capable of achieving the socio-economic goals of society. Unfortunately, while many successes did take place, the overall goals have fallen short of those pioneers’ vision. Where hopes of innovation and the production of genuine alternatives were the aim, instead mainstream replication took place. While it showed that Islamic banking was practical, it also begged the question, was Islamic banking or finance really any better than the current mainstream – neoliberal – global banking and financial system? But the latest chapter need not be titled despair. The last decade and a half have allowed for a new beginning to take root. Faced with internal and external events and criticism, Islamic banking has come under pressure to go beyond mere profit. An impetus motivates us to rethink the old visions as the collapse of banks and repeated crises only reaffirm the growing realisation that the ‘business as usual’ approach cannot sustain itself.

Faced with such existential terms, there is a strong urge to move forward, lest the cycle of crises be allowed to continue.

Following the 2008 financial crisis, the Queen of England asked a group of experts why the crisis was not anticipated. It took almost four years for her to get what is admittedly only a partial answer. Sujit Kapadia, a senior economist at the Bank of England, explained that the global economic boom in the pre-crisis years resulted in an overall complacency that led many to believe regulation was unnecessary. To appreciate the profound simplicity of this pitfall, one has to acknowledge the underlying worldview of modern capitalism and neoliberal market banking and finance in which economists ignored the facts, did not ‘see’ the crisis, and mistook elegant maths and technical analysis as replacement for sound theory. It is not that many thought regulation was not necessary, rather that is what the ideological base on which neoclassical liberal market capitalism is based on. The assumption that markets would solve everything, that ‘greed was good’ in economics and finance, and that it was ethically acceptable to transfer risk in order to maximise your own gains: these were the underlying ‘beliefs’ that delivered us willingly into the chaos of economic permacrisis.

Going back a bit further, Keynesian views prevailed after the Great Depression of the 1930s and advocated government intervention, via public policies, to achieve full employment and price stability. In the banking and financial sector, the 1933 Glass-Steagall Act prevented commercial banks from involvement in riskier financial operations. Coupled with relevant fiscal and tax measures a stable middle-class was developed, as a higher real minimum wage met the reduction of income inequality. A period of Great Moderation (1945-1980) was heralded in. However, with the seeming inability of Keynesian economics to offer viable solutions in the 1970s, coupled with the fact that Keynesian economics did not fully serve the interests of financial lobbyist, four important events led us to the increasingly volatile and unstable situation we find ourselves in today. 

First, in 1971, the Bretton Wood system, which had set the rules for financial regulation in the US, Canada, Australia, western Europe, and Japan following World War II, collapsed. The Bretton Wood system required all players to place their currency in relation to the US dollar, which was fixed to its convertibility to gold bullion – the Gold Standard. In its wake the hegemony of the US dollar was fixed. Second, during the 1980s, pro-business and private sector policies under Ronald Reagan and Margret Thatcher led to the adoption of financial liberalisation. As a result, financialization took root. As the first two events were taking place, the third creeped in the background. An innovative financial engineering known as financial derivatives was born. It became a trillion-dollar industry. American entrepreneur, Warren Buffet rightly called financial derivative products ‘financial weapons of mass destruction’ as the 2008 crisis would make abundantly clear. The final nail in the coffin came in 1999 with the repealing of the Glass-Steagall Act by the US Congress.

Within the relatively short period between 1970 to 2010, the world has seen approximately 425 profound events of financial distress including major banking crises, monetary crashes, and sovereign debt crises. The Global Financial Crisis of 2008 was the biggest such crisis since the Great Depression; it was an outcome of greed, excessive risk exposure, and, above all, the utter disregard of regulations. The 2010 passing of the Dodd-Frank Act hoped to prevent future crises. Yet this imposing 848-page document of additional regulations was not enough to help change the system, particularly at a broader level. Sami Al-Suwailem, acting Director-General of the Islamic Development Bank Institute, framed it nicely, ‘imposing stricter regulatory measures while keeping the fragile foundation in place is likely to help only temporarily but make things down the road even worse’.

Only a little over a decade later, in March 2023, the financial world witnessed the largest bank failure since the Global Financial Crisis of 2008. You may begin to start seeing a pattern here. Photos presenting the bank run of Silicon Valley Bank (SVB) and Credit Suisse dominated the business news, magazines, and social media. A bank run is a phenomenon whereby a large number of depositors withdraw their money from banks due to a sharp decline in the share price, or the book value of assets. These increased expectations of a potential crisis due to the bank’s inability to pay depositors. Many hold that the failure was the fault of regulatory oversight and the risky investment profile of SVB. While federal insurance will keep the burden of sustaining these banks off of the taxpayer directly, the new fees and rates as a result of the necessary new regulation to follow in the wake of this event will certainly be felt by account holders across the banking world before the banks themselves.

The question that arises is, despite all the technological advancements and sophisticated tools that have been built into the system, why is it that, to this day, we are unable to avoid or at least predict a potential financial crisis? Can more stringent financial sector regulations, improved risk management strategies, and enhanced transparency help prevent future financial crises? The answer to this goes back to the ideological, worldview foundations of modern neoclassical economics, banking, and finance. The system as it stands cannot be fixed. Nothing short of comprehensive, systemic, and ideological reforms can address these foundational and structural flaws in our current financial architecture.

Ironically, we live in an age of easy money where the power to create money rests largely in private hands. This makes our monetary system structurally unstable. Equally ironic is the fact that in today’s globalized world power belongs to those who control the power to create money. Ha-Joon Chang, in his book 23 Things They Don't Tell You About Capitalism, notes ‘that the prevailing view of capitalism as a self-regulating system is wrong. But it is still the dominant idea. And that is one of the most wrong ideas that dominate our world today’. Statistics can be manipulated, and economic theories are designed to serve and protect the interest of those in power. To date, conventional economics textbooks continue to teach theories that are proven to be obsolete in the wake of numerous financial crises.

Let us look at one such example. Capitalist ideology is based on materialism which can encourage unsustainable economic growth and accumulation of wealth. To fuel perpetual growth, capital must be compounded, which requires a continuous supply of more and more money. The role of the banking and financial system has become essential for powering material development to keep the capitalist system running. This is seen out through mass production, satisfying conspicuous consumption and pressing artificial demand of goods via our pervasive, continuous media obsessed lives. The conventional textbooks used in almost all business schools present banks as ‘financial intermediaries’ that are responsible for channelling funds from surplus units to deficit units. However, this is a gross oversimplification. In reality, banks hold the power to create money out of nothing through the clever use of credit. It is therefore not wrong to say that the banking system is the heart of capitalism. And money that takes the form of debt or credit serves the function of blood. It is the lifeline of a capitalist system. Yet, the system requires continuous injection of debt for its survival. The simple concept of money creation is vastly misunderstood thanks to many of our modern teaching tools and even the insights of experts.

A majority of neoclassical economists consider money as a neutral entity, and private debt as irrelevant while ignoring the bank’s role in their macroeconomic models. The German economist, Richard Werner empirically verified that banks are not mere financial intermediaries, rather banks’ lending creates deposits through credit creation. The ratio of private credit to GDP is widely used as a proxy for financial development by many empirical studies. Private debt was an important component of the ‘Financial Instability Hypothesis’ developed by the late American economists Hyman P. Minsky in 1977 and the ‘Debt Deflation’ phenomenon coined by the late American economist Irving Fisher, referencing the Great Depression of 1933. The Australian economist, Steve Keen noted that ‘credit was as high as 15.3 percent of US GDP in 2006-Q4 and as low as -5.1 percent in 2009-Q3’. Where does this leave us? The American economists Stephen Zarlenga and Robert Poteat notes profoundly ‘perhaps no subject as important to mankind as the nature of money has been so neglected and misunderstood in both the popular and professional mind, to the great detriment of the intelligent and just operation of societies’. The American economist Richard H. Thaler hits the nail on the head in his book Misbehaving: The Making of Behavioural Economics when he says, ‘the purely economic man is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool.’

So, what can Islamic economic thought do with the mess neoliberal economics has dug for us? In tracing the historical motivations of Islamic economics, we might be able to see where things went wrong. Two widely cited events spurred the need for an Islamic economic and financial system in twentieth century. The emergence of independent Muslim states out of colonial domination and the discovery of oil in the Middle East followed by the subsequent need to manage petrodollars. The idea was that Muslim states needed to break from the oppressive structures of the colonial era while also responsibly utilising their blessings – resources – for the greater wellbeing of society. Beginning in the late 1950s, Islamic reformers and pioneer Islamic economists deduced the foundations and guiding principles of an Islamic Economic system from the two primary sources: the Qur’an and Sunnah of the Prophet Muhammad. It is important to mention and note a few brief moments in this history. Throughout the 1960s, the Pakistani thinker, Sayyid Abdul Al’a Mawdudi compiled the economic teachings put forth from Qur’an. In 1989, Pakistani economist, M. Akram Khan collected the economic teachings from the traditions of Prophet Muhammad. Between the 1960s and 1980s, the Iraqi philosopher, Baqir Sadr presented a comparative analysis of capitalism, socialism, and the Islamic economic system. In the late 1970s and 1980s, the Indian economist, Mohammad Nejatullah Siddiqi and Saudi economist, Umer Chapra developed and presented alternative Islamic banking frameworks. The one common feature amongst all these writings was that they envisioned an Islamic system that aimed at a higher objective then mere material gains. All of them viewed material development as part of a larger human development. Moral and ethical values that led to justice, equity, and wellbeing for all were central features of any attempt to talk about economic progress. Siddiqi, very wisely, said:

The manifold increase in GNPs and the general uplift in standards of living in most if not all parts of the world match ill with the rising levels of anxiety caused by instability, frequent job losses, and uncertainties relating to currency values and exchange rates. Many wonder if investments exclusively targeting higher profit margins, uncaring about social responsibility and moral obligations, can ever rectify the situation, which is, partly at least, its own creation.

Chapra also suggested three characteristics of an ideal Islamic system: strong individual and social character, brotherhood, and justice. He further argues that ‘mere maximization of total output cannot be the goal of a Muslim society’, it ‘must be accompanied by ensuring efforts directed to…spiritual health, justice and fair play’. Islam does not allow the ownership of resources by unethical means such as misappropriating in trade and gaining at the expense of others. To attain justice and magnanimity, Muslims are required to avoid riba, taking excessive risk, and involvement in speculative activities. In fact, one of the main economic objectives of the prohibition of riba is to ensure equitable distribution of income. A link between growth and human lives must be created consciously through deliberate public policy, for example through public spending or social services as well as fiscal policy that redistributes income and assets. Contrary to the popularly belief of Western economists, this link does not exist in the automatic workings of the marketplace, which often further marginalises the poor.

Pioneer Islamic economists contended that an Islamic economic and financial system, if adopted in its true letter and spirit, will help in attaining equitable distribution of wealth, socioeconomic justice, and economic development. To see out these ends, efforts were geared towards developing Islamic financial institutions that catered to the needs of Muslims by riba or interest-free financial products and services based on shari’ah principles and a risk-sharing philosophy. To date, Muslim majority countries struggle to implement a wholistic and real Islamic system as envisioned by the pioneers. What went wrong?

Since its inception in the 1980s, the Islamic Financial Services Industry has witnessed tremendous growth. According to Islamic Financial Services Board Stability Report 2022, the global worth of the Islamic Financial Services Industry was estimated to be $3.06 trillion in 2021, with a growth momentum of 11.3 percent per annum. Islamic banking constitutes the biggest share of this industry with 68.7 percent, followed by Islamic capital market with 30.5 percent and Takaful, or Islamic insurance, with 0.8 percent. Despite a significant share and growth rate, there are indications that this growth is slowing down. In addition, the Islamic banking and finance industry has received a lot of criticism. Some attempts have been made to assess the extent to which the current practices of Islamic banking and finance lived up to its ideals as envisaged by the pioneers of Islamic economics. A critical evaluation of the five decades’ long history of Islamic banking and finance shows clear divergence between the ideal and the practice. While Islamic banking has achieved considerable success and established itself globally, it has, to a large extent, been absorbed into the conventional global banking system. Riasat Amin, Associate Professor of Economics at International Islamic University Malaysia (IIUM), looked at the development of Islamic banking and finance from a systems approach. He found that the development of Islamic banking and finance depends on internal incentives, such as those found in corporate governance frameworks and external incentives, like a shari’ah governance framework. The reason why its practice tends to emulate its counterparts, to whom, we must remember, it was created to be an alternative to, is because the internal incentives override the external ones.

The criticisms levelled against Islamic economics have varied greatly. In the late 1970s and especially throughout the 1980s, the criticism was about specific instruments used. These include the heavy reliance on debt-based instruments rather than equity-based financing modes, the practice of benchmarking against interest rate, and over reliance on shari’ah-compliance frameworks while ironically mimicking the same growth strategies and development paths of conventional mainstream economics that ultimately resulted in short term rent seeking activities and indebtedness. More recently, criticisms have moved away from types of instruments used to actually asking what has Islamic banking done for the wellbeing of the ummah, since it seems to serve those who have money to begin with. There are also critics who argue that simplistic ‘Islamisation’ efforts lack genuine financial innovation, instead it attempts to Islamise conventional banking products. Critics like Ziauddin Sardar call it ‘patchwork’. To get a real break from the mainstream Islamic economics, there is a need to develop a genuine Islamic perspective forged in a critical self-evaluation that also brings us back to basics by re-evaluating our philosophical foundations. No genuine Islamisation can take place without foundational reforms. Therefore, some of the challenges faced are addressing epistemological and methodological concerns critically, so that we may develop benchmarks based on Islamic ethical values, and devise appropriate methodologies for Islamic economics, usul al-iqtisad, and metrics to measure success. 

Another pressing challenge in reforming Islamic banking and finance comes by way of education and practice. The practice of Islamic banking and finance has seen conventional bankers incorporating mainly fiqh scholars to act as ‘shari’ah advisors’. Based on their knowledge and training, these scholars focus on the narrow legal dimensions of the shari’ah and look almost exclusively from the legality of contracts in practice rather than incorporating wider ethics and values into decision-making. This is how the Islamic banking and finance industry has developed. As Siddiqi proclaims, ‘the Islamic Economics movement has become an Islamic Banking and Finance industry’. This narrow fiqh-legal approach of black and white, right or wrong determinations is also supported by many Islamic banking and finance educators. Since the 1980s and especially in the last twenty years, there has been a strong growth of university-level Islamic banking and finance programmes globally. As part of the outcome from a Malaysian government grant, the International Council of Islamic Finance Educators (ICIFE) was established in 2013. Two major aspects of the ICIFE were to develop and analyse Islamic finance curriculum and Islamic finance human resources, put another way, where the academic expertise was coming from. Practitioners were claiming that Islamic banking and finance programmes were not producing graduates with sufficient knowledge and skills in banking and finance. This was rather an odd claim.

In 2016, a study that was conducted to investigate this claim and to find out exactly what was being taught and by whom and if there really was a ‘banking and finance deficit’ in the knowledge attained. By looking at more than twenty main public and private universities with Islamic banking and finance programmes in Malaysia, the study found that there were about 400 academics specialising in the five domains that would be deemed necessary to attain a sufficient Islamic finance education. Those are banking and finance, economics, management and marketing, accounting and governance, and the shari’ah/fiqh/legal domain. For a degree to gain the nomenclature ‘Islamic banking and finance’ there would be a need to have at least 40 or 50 percent of the courses in banking and finance, albeit from an Islamic perspective. All other four domains would constitute between 10 to 15 percent of the curriculum. However, the finding was quite an eye-opener. It found that out of over 400 academics specialising in Islamic banking and finance education, close to 40 to 45 percent were from fiqh/shari’ah backgrounds. Only about 25 percent had banking and finance backgrounds. The study concluded that there was a curriculum-human resource mismatch in Islamic banking and finance education, with an over-representation of academics from the fiqh or Islamic studies background and an under-representation of those with banking and finance backgrounds. This has led to a heavy fiqh-oriented curriculum and a narrow approach to Islamic banking and finance in practice. Unfortunately, the claims made by some practitioners that there was a lack of banking and finance knowledge remained to be addressed.

To address this, both the curriculum and academic experts teaching these subjects need to go beyond the fiqh-legal component and to recognize the higher objectives of the shari'ah. Our education should reflect our hope that the practice of Islamic economics should aim to establish justice and wellbeing for all human beings. It is imperative to provide more exposure to banking and finance knowledge, balancing the fiqh academics but in the medium to long term. Focus must be put on producing ‘banking and finance’ graduates, not fiqh graduates. The industry needs professional bankers and finance-qualified personnel, not fiqh adjudicators. Fortunately, the number of ‘shariah advisors’ remains quite small. Recent headways in sustainable development, climate change, social economics and finance, and circular economics has created an opportunity for the Islamic banking and finance industry and educators to re-examine their existing practices and curriculum. It also provides an opportunity to re-visit the inherent foundations and theories of decision-making. Islamic banking and finance need to play a more effective role in helping to achieve a greater wellbeing of society. 

Contrary to the dominant exploitative and callous conventional wisdom that recognizes the ‘price of everything, but value of nothing’, pioneer Islamic economists envisioned an Islamic economic system that takes a more far sighted, inclusive, ethical, and humane approach to resolving socio-economic issues. Genuine risk-sharing and partnerships and participatory modes of financing were envisioned. Making money from just lending money was seen as riba. However, over time, the Islamic banking practice moved away from this vision and became an imitative version of its conventional counterpart.

Since the 1990s, the global development discourse has seen a move away from the pure self-interested, individual profit models to alternatives that promoted a wider conception of development. Human development, social development, and sustainable development have all become part of the global agenda of advancing societies. Add to this environmental concerns as well as climate change which now finds the pure laissez-faire market ideology under tremendous pressure, pushing a greater revision of the decision-making models found in mainstream economic and finance theories. Talk of microfinance, social finance, corporate social responsibility, green finance, and the like have presented an opportunity for a wider re-visiting of the ideas proposed by the pioneer Islamic economists of the 1970s. It is a critical time to divert Islamic banking practices from its present trajectory and ‘to bring it back home’ so that it may become part of the wider Islamic economics umbrella.

The foundations for a new approach to economic and financial decision-making can be found in the primary sources of Islam. For instance, the Qur’an, while recognising that all human beings are the khalifah or vicegerents on earth, acknowledges that differences in capabilities will naturally lead to unequal returns and distribution of resources both at the micro and macro levels. However, these differences are seen as a test to both those who have and those who have not. Striving and never losing hope on the one hand versus curbing the love for wealth toward the inculcation of the spirit behind sacrifice and generosity on the other. The Quranic injunctions require that a decent portion of the effluent’s wealth must be distributed among the needy through Zakat (compulsory charity), Infaq (voluntary charity), and Waqf (endowments). Allah praises those who ‘give a fair shar of their wealth to the beggars and the deprived’ (70:24-25).

While this provides the basis for the third sector in an Islamic economy – a sector comprising of non-profit seeking, socially oriented, stakeholder-centred financial institutions such as Islamic micro finance institutions as well as socio-economic institutions such as zakat and awqaf - this is only one aspect of social economics and finance. It is important that we do not limit Islamic social finance to just zakat, waqf, and microfinance. Rather, any economic and finance decision that goes beyond mere individual self-interest, that includes consideration for others or that has ‘positive social impact’ should be included in this new framework for Islamic finance. This is actually the way social finance is regarded globally. With a wider and more relevant definition and scope for Islamic social finance, Islamic finance would be able to project a new approach to economic and finance decision-making. In conventional discourse, interdependent utility functions were already discussed in the 1970s. One could also argue interdependence has been an essential part of the greater Islamic discourse going back to the days of the Prophet. My wellbeing is also dependent on others’ wellbeing. Hence, any decision that has a positive social impact on others or on the environment, would be a better and preferred choice.

This clearly translates into moving away from narrow shareholder models to wider stakeholder models. The natural inclination of Islamic finance towards caring for others, society, and the planet is totally in line with the Islamic view that man is a social being. While the individual will be held accountable in the Hereafter, his or her contribution to others will also be evaluated. This important change opens new avenues for Islamic banking and finance to live up to its original ideal and regain its higher objectives envisaged in the Qur’an and Sunnah, and proposed by the pioneer Islamic economists of the past.

By way of an example, an investigation into the relationship between circular economics – a model of production and consumption that promotes sharing, reusing, and recycling of goods as long as possible to reduce waste - and Islamic banking and finance has been launched. While the the limitations of the circular economy were analysed, it was also suggested that circular economics could strengthen the Islamic economics discourse by shifting it towards the development of social finance to achieve socio-economic justice. The investigators also suggested that reforms initiatives by Islamic banking authorities and Islamic economics educators have the potential to re-align and promote a stakeholder model that concerns society and the environment instead of merely focusing on profit maximisation.

In March 2009, then German Chancellor, Angela Markel famously remarked, ‘we cannot keep stumbling from one crisis to the next’. In this regard, public awareness for genuine monetary reforms is rising. It does not take an economist to point out the logical flaws of a system based on debt, beset by endless and reckless cycles of booms and bust, each crisis worse than the last. The injustice is clear and the exploitative and inequality proliferating nature of our financial system is making things worse. It is a time of change. 

Many scholars have suggested a hundred percent reserve banking as a necessary step towards limiting the powers of banks and non-bank financial institutions. Also, it is considered a pre-condition for economic stability and sustainable growth. The German economics, Richard Werner, suggests that since bank’s lending creates deposits and influences the money supply in the economy, the right monetary tool is credit guidance whereby banks should be regulated to extend credit for productive purposes only. The philosopher Ildus Rafikov also suggests monetary authorities in Muslim countries use credit guidance as a tool, at least in the short run. This will help these countries to stimulate the economy by extending credit to small and medium enterprises that provide jobs to a large segment of society.

Another notable reform initiative was taken by the Iceland Government known as the ‘Iceland Plan’. The plan criticizes the private banks’ creation of money and suggests that the power to create money should rests with the government. Pakistani economist, Asmatullah suggests that money creation as the sole legal right of government is in line with the shari’ah. Pakistani economist, Asad Zaman, has outlined an Islamic version of Iceland's plan that addresses the deficiencies of the current financial system and ensures price stability, encourages productive investments and employment. 

To attain financial stability and sustained growth we need to take a radical break from the past. This can be achieved by developing some alternative Islamic financial institutions, a socially inclusive framework for Islamic finance, leveraging upon circular economics and social finance, and by implementing a stringent macro prudential policy framework comprised of strong social norms, institutional structures, and upheld regulations.

To support this new direction of Islamic economics, Islamic educational curricula will need to develop new models that incorporate ‘others’ wellbeing into banking and finance decision-making. The current concern for the environment and the circular flow-social finance discourse gives an opportunity for the developing an effective role for Islamic economics in society. To further define these models, and to implement them effectively, a re-alignment of the human resource involved in Islamic finance education is urgently needed. Islamic finance must be brought back home to Islamic economics. It must be approached from a wider ethical and value-based framework rather than its current narrow legalistic approach if we are to pursue higher principles of justice and equity. 

Citations 

Previous works from the author used to provide a guiding foundation for this article see Haneef, M. A. (2011). Islamization of Knowledge After Thirty: Going Back To The Basics. American Journal of Islam and Society28(3), 75–91; Haneef, M. A. (2015). Values Based Economics and Finance in the 21st Century: Economic Man versus Man as Abd-Khalifah. Keynote Address, 2nd IFAM Conference, 2 November 2015, Singapore; Haneef, M. A., & Furqani, H. (2011). Methodology of Islamic Economics: Overview of Present State and Future Direction. IIUM Journal of Economics and Management, 19(1); Haneef, M.A., & Jamaludin, H. (2021). The Circular Economy and Its Possible Collaboration with Islamic Economics and Finance. In: Ali, S.N., Jumat, Z.H. (eds) Islamic Finance and Circular Economy. Gulf Studies, vol 5. Springer, Singapore. 

To gain a better appreciation of the pioneers of Islamic economics, banking, and finance, see Chapra, M. U. (1985). Towards a just monetary system. International Institute of Islamic Thought (IIIT); Khan, M. A. (1989). Economic Teachings of Prophet Muhammad. International Institute of Islamic Economics and Institute of Policy Studies; Mawdudi, S. A. (1963). Economic and Political Teachings of the Qur'an. A History of Muslim Philosophy, 178-90; Mawdudi, S. A. (1969) Ma’ashiyat-i Islam, tr. Economic System of Islam, tr. & ed. Khurshid Ahmad (2011) First Principles of Islamic Economics (Islamic Foundation, UK); Siddiqi, M. N. (2004). Riba, bank interest and the rationale of its prohibition. Jeddah: Islamic Research and Training Institute; Siddiqi, M. N. (2004). Islamic economics: Current state of knowledge and development of the discipline. Round Table on Islamic Economics, 26-27.

For more on the flaws of our global economic and financial system see Al-Suwailem, S. (2023, April 23). A Paradigm Change for the Global Financial System. IsDBI Blog. https://blogs.isdbinstitute.org/a-paradigm-change-for-the-global-financial-system/; Ansari, V. A. (2018). Financialization and inequalities in income and wealth. Journal of King Abdulaziz University, Islamic Economics31(1), 129–135; Askari, H., & Krichene, N. (2016). 100 percent reserve banking and the path to a single-country gold standard. The Quarterly Journal of Austrian Economics19(1), 29–64; Bartlett, B. (2013, June 11). Financialization as a Cause of Economic Malaise. New York Times; Chang, H. J. (2012). 23 things they don't tell you about capitalism. Bloomsbury Publishing, USA; Fisher, I. (1933) The debt-deflation theory of great depression. Econometrica, 1(4), 337-357; Keen, S. (2011). Debunking macroeconmics. Economic Analysis and Policy, 41(3), 147-167; Keen, S. (2021). The New Economics: A Manifesto. John Wiley & Sons; MaLeay, M., Radia, A., & Thomas, R. (2014). Money creation in the modern economy: An appraisal. Bank of Engliand Quarterly Bulletin, (Q1), 14–26; Minsky, H., P. (1977). The financial instability hypothesis: An interpretation of Keynes and an alternative to 'Standart' theory. Nabraska Journal of Economics and Business, 16(1), 5-16; Piketty, T. (2015). Putting distribution back at the center of economics: Reflections on capital in the twenty-first century. Journal of Economic Perspectives29(1), 67-88; Stiglitz, J. E. (2012). The price of inequality: How today’s divided society endangers our future. New York; Thaler, R. H., & Ganser, L. J. (2015). Misbehaving: The making of behavioral economics. W.W. Norton & Company.

For more on the efforts to improve Islamic economics, banking and finance see Asmatullah, M. (2014) Money and its usage: An Analysis in the light of the Sharia, translated by Omar Javaid; Ghani, G. M. (2020). Towards a More Socially Inclusive and Sustainable Framework for Islamic Banking and Finance. International Journal of Economics, Management and Accounting28(2), 361–391; Imon, R. A. (2018). The Malaysian Islamic banking sector viewed through systems theory. Doctoral dissertation, International Islamic University Malaysia; Kameel, A., Meera, M., & Larbani, M. (2006). Seigniorage of fiat money and the Maqasid al Shari’ah: The compatibility of the gold dinar with the Maqasid. Humanomics; Lietaer, B. (2017). A Possibly Shariah-Compatible Global Currency to Stabilize the Monetary System. Journal of King Abdulaziz University: Islamic Economics30(2); Mirakhor, A. (2010). Whither Islamic finance? Risk sharing in an age of crises. MPRA Paper No. 56341, posted 31 May 2014; Mirakhor, A., & Askari, H. (2017). Ideal Islamic economy: an introduction. Springer; Rafikov, I. (2021). Monetary Policy for the Real Economic Sector in Muslim Majority Countries. Turkish Journal of Islamic Economics, 8(2), 481-499; Werner, R. A. (2014). Can banks individually create money out of nothing? - The theories and the empirical evidence. International Review of Financial Analysis36, 1–19; Werner, R. A. (2016). A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis46, 361–379; Ul Haq, M. (1995). Reflections on human development. Oxford University Press; Zaman, A. (2020). Islamic banking after financial crises: A version of the Iceland Plan for Monetary Reform. In H. A. Khan & K. N. M. Sonko (Eds.), Islamic finance as a complex system: New Insights (pp. 159–180). Lexington Books; Zaman, A. (2021, November 11). An Islamic Approach to Macro-Prudential Regulation. WEA Pedagogy Blog: Perspectives on Economics & Society. https://weapedagogy.wordpress.com/2021/11/11/an-islamic-approach-tomacroprudential-regulation/; Zaman, A. (2022). Islamic Economics: The Polar Opposite of Capitalist Economics. Islamic Research Institute International Islamic University, Islamabad, Pakistan; Zarlenga, S., & Poteat, R. (2016). The nature of money in modern economy-Implications and consequences. Journal of King Abdulaziz University, Islamic Economics29(2), 57–73. 

For more on the Iceland Plan see Sigurjonsson, F. (2015). Monetary Reform: A Better Monetary System for Iceland. Retrieved from https://eng.forsaetisraduneyti.is/media/Skyrslur/monetary-reform.pdf