Islamic Finance and Social Justice

JOBNAME: Ali PAGE: 3 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 11. Islamic finance and social justice: a reappraisal Raza Mir and Muqtedar Khan INTRODUCTION In this chapter, we attempt to juxtapose the principles of Islamic humanism against the practices of Islamic finance to uncover potential tensions and offer ways in which these tensions may be resolved. In order to do so, we first survey the existing instruments of Islamic finance as they are being practiced in various parts of the world. We then articulate the principles of economic justice as articulated in various Islamic texts, notably the Holy Qur’an. We then offer a friendly evaluation of the state of Islamic finance, suggesting ways in which it can be oriented toward social justice issues. Islam as a religion is characterized by a fierce commitment to social justice. The Qur’an abounds in verses that extol the virtues of charity, proscribe hoarding and warn against usurping the rights of the poor and dispossessed. Similarly, there are several Hadith traditions ascribed to the Prophet Mohammed exhorting Muslims to make the agenda of social justice the cornerstone of all economic and trading activity. It should follow, therefore, that all commercial activities that aspire to Islamic standards should focus on reducing inequality and utilizing commerce for social welfare rather than on profiteering. As the economic principles of capitalism become increasingly hegemonic in the world, they come into conflict with the economic principles and traditions of Islam. It becomes increasingly necessary, therefore, for Islamic economists, organizational theorists and social scientists to offer a way forward for Muslims engaged in commerce. The religion, after all, boasts over 1 billion followers and, by the year 2030, at least 50 nations will have over 50 percent of their population who identify as Muslims (see Table 11.1). 231 Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 1 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 4 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 232 Islamic ethics and financial conduct Table 11.1 Countries sorted by Muslim population Columns Design XML Ltd Country 2010 Muslim Population % Muslim 2010 2030 Muslim Population (Proj.) % Muslim 2030 (Proj.) Morocco Afghanistan Tunisia Iran W. Sahara Mauritania Tajikistan Yemen Iraq Jordan Mayotte Somalia Turkey Azerbaijan Maldives Comoros Niger Algeria Pal. Terr. Saudi Arabia Djibouti Libya Uzbekistan Pakistan Senegal Gambia Egypt Turkmenistan Syria Mali Kosovo Bangladesh 32,381,000 29,047,000 10,349,000 74,819,000 528,000 3,338,000 7,006,000 24,023,000 31,108,000 6,397,000 197,000 9,231,000 74,660,000 8,795,000 309,000 679,000 15,627,000 34,780,000 4,298,000 25,493,000 853,000 6,325,000 26,833,000 178,097,000 12,333,000 1,669,000 80,024,000 4,830,000 20,895,000 12,316,000 2,104,000 148,607,000 99.9 99.8 99.8 99.7 99.6 99.2 99.0 99.0 98.9 98.8 98.8 98.6 98.6 98.4 98.4 98.3 98.3 98.2 97.5 97.1 97.0 96.6 96.5 96.4 95.9 95.3 94.7 93.3 92.8 92.4 91.7 90.4 39,259,000 50,527,000 12,097,000 89,626,000 816,000 4,750,000 9,525,000 38,973,000 48,350,000 8,516,000 298,000 15,529,000 89,127,000 10,162,000 396,000 959,000 32,022,000 43,915,000 7,136,000 35,497,000 1,157,000 8,232,000 32,760,000 256,117,000 18,739,000 2,607,000 105,065,000 5,855,000 28,374,000 18,840,000 2,100,000 187,506,000 99.9 99.8 99.8 99.7 99.6 99.2 99.0 99.0 98.9 98.8 98.8 98.6 98.6 98.4 98.4 98.3 98.3 98.2 97.5 97.1 97.0 96.6 96.5 96.4 95.9 95.3 94.7 93.3 92.8 92.1 93.5 92.3 / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 2 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 5 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 Islamic finance and social justice: a reappraisal 233 Country 2010 Muslim Population % Muslim 2010 2030 Muslim Population (Proj.) % Muslim 2030 (Proj.) Kyrgyzstan Indonesia Oman Kuwait Guinea Albania Bahrain Qatar UAE Sierra Leone Sudan Malaysia Lebanon Burkina Faso Kazakhstan Chad Brunei Nigeria 4,927,000 204,847,000 2,547,000 2,636,000 8,693,000 2,601,000 655,000 1,168,000 3,577,000 4,171,000 30,855,000 17,139,000 2,542,000 9,600,000 8,887,000 6,404,000 211,000 75,728,000 88.8 88.1 87.7 86.4 84.2 82.1 81.2 77.5 76.0 71.5 71.4 61.4 59.7 58.9 56.4 55.7 51.9 47.9 6,140,000 238,833,000 3,549,000 3,692,000 14,227,000 2,841,000 881,000 1,511,000 4,981,000 6,527,000 43,573,000 22,752,000 2,902,000 16,480,000 9,728,000 10,086,000 284,000 116,832,000 93.8 88.0 87.7 86.4 84.2 83.2 81.2 77.5 76.0 73.0 71.4 64.5 59.7 59.0 56.4 53.0 51.9 51.5 One tradition that has emerged in the world of investing is that of Islamic finance. The broad ideas of Islamic finance provide an opportunity for Muslim investors to participate in the global financial system without sacrificing their religious principles. Islamic finance has been a spectacular success in terms of quantity and depth. Despite a relatively recent provenance (the first instruments of Islamic finance emerged mostly in the 1970s), the ideas of integrating investments by Muslims in the global financial system in a religious manner have been extremely successful (Durán and García-López, 2012). Ernst & Young estimated that global Islamic assets held by commercial banks were valued at around US$1.3 trillion in 2011 and would reach $1.8 trillion in 2013 (Ernst & Young, 2012), representing an average annual growth of 19 percent over the past four years. The growth trend in Islamic assets and instruments appears to be heading for a bright future (Al-Salem, 2008; Bellalah and Elllouz, 2004). In a mere matter of four decades, Islamic finance has reached a maturity that would be the envy of any mainstream economic instrument. This phenomenon is not limited to Muslim countries, but also Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 3 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 6 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 234 Islamic ethics and financial conduct is becoming increasingly visible in the west (Malik et al., 2011). We now have Islamic banks, Islamic mutual funds, private equity and even a variety of indices (the most prominent being the Dow Jones Islamic Index1) that aim to provide sharia-compliant investment opportunities to a variety of Muslim investors. Interestingly, Islamic practices have also seeped into mainstream investment decisions. Some of the cornerstones of entrepreneurial financing, such as venture capital and angel investing, have picked some of their practices from the principles enshrined in Islamic finance (Koehler, 2009). In effect, Islamic finance has taught Silicon Valley a few things about responsible risk sharing between investors and financers! How can Islamic finance remain compliant with not only the letter, but also the spirit of Islamic guidelines governing commerce? This debate is always ongoing, with critics contending that Islamic finance investors and researchers have focused primarily on issues relating to interest (riba) when discussing Islamic finance and may have focused less on issues relating to equality and social welfare (Cebeci, 2012; Khan, 1999). As Cebeci (2012, p. 166) argues, ‘It is still debated whether Islamic Finance has created a structure that systematically contributes to social development in the Muslim world.’ Moreover, much of the research on Islamic finance has focused on the performance of Islamic funds benchmarked against the most traditional and capitalist measures of performance (return on equity (ROE), for example, is the dependent variable of choice in most studies that compare Islamic finds against benchmarks such as the S&P 500). While this may satisfy the letter of the law (given that most Islamic funds come with some religious imprimatur of sharia compliance from religious bodies), the question of adherence to the spirit of Islamic finance remains unresolved. This produces a gap in the research on Islamic finance, which sooner or later will assume serious dimensions. In this chapter, we attempt to discuss Islamic finance in light of the economic principles that are fundamental to Islamic politics and jurisprudence. In this way, we wish to offer a new focus to Islamic finance in a manner that honors the egalitarian traditions of Islam. The rest of this chapter comprises of four sections. In the first, we discuss the current state of Islamic finance research, in a manner that is more descriptive than evaluative, to present a state of the field. Following that, we touch on the egalitarian foundations of Islamic economics, hinting at possible incommensurabilities between existing routines of Islamic finance and Islamic philosophy. Then we touch upon the global geopolitical realities, where we examine how nations in the Islamic world need to address population-level inequalities if they wish to adhere to the spirit of Islamic Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 4 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 7 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 Islamic finance and social justice: a reappraisal 235 economic prescriptions. Finally, we conclude by offering a series of suggestions whereby financial institutions can operate in a truly Islamic manner. THE STATE OF ISLAMIC FINANCE RESEARCH One could argue that the principles of Islamic finance have existed since the sharia law was first formalized, but its origin in the modern world can be linked to the formation of Islamic banks in Egypt in the 1960s. As Sheikh Taqi Usmani wrote in his definitive introduction to Islamic finance: ‘The basic difference between capitalist and Islamic economy is that in secular capitalism, the profit motive or private ownership are given unbridled power to make economic decisions’ (Usmani, 2002, p. xiv; quoted in Robbins, 2010, p. 1127). In effect, therefore, Islamic finance is supposed to be characterized by restraints of various kinds, which should be linked to issues of social welfare. The clear Islamic proscriptions against usury have guided the development of financial products within the Islamic realm. Most Islamic financial products are either predicated upon risk sharing (through equity participation and other means) or a contractual partnership based on transparency. Financial products such as mudharabah, mushakarah, murabaha, ijarah, bai bithaman ajil, wadiah, sukuk and tawarruq are all premised in some fashion on the notion that participation in equity by investors is essential to avoid being considered an act of interest-based lending (see Robbins (2010) for a detailed review). In addition, there are a variety of national institutions in Islamic countries that provide regulatory oversight over investment practices (see Markom et al. (2013) for a detailed analysis of the Malaysian experience). Islamic finance has also been practiced with great diligence in nonIslamic nations; for example, Australia (Freudenberg and Nathie, 2012) and the UK (Wilson, 1999). However, three strong clusters of activity define Islamic finance, namely the Middle East, South Asia and Southeast Asia (see Khan and Bhatti (2008) for a detailed analysis). The geographic convergence does not necessarily imply an institutional coherence. For example, in the Middle East, Iran operates very differently from Bahrain or Saudi Arabia. Syria entered the Islamic banking system late, in 2005, but has recently been ravaged by its internal political problems to the point where its presence is miniscule. In South Asia, the two prominent players, Pakistan and Bangladesh, have political problems that preclude integration. In Southeast Asia, convergences between Malaysia and Indonesia are quite tight, but not so much with Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 5 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 8 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 236 Islamic ethics and financial conduct Singapore. Overall, it is difficult to think of a monolithic or even coherent system of Islamic finance, though the tendencies toward convergence continue to remain marked. One of the greatest challenges faced by any Islamic finance system, of course, is how to integrate with the global financial order (Bianchi, 2007). This is not merely a social problem, but an institutional one. The global financial system operates based on a tight set of rules and regulations that do not necessarily take Islamic principles into account. These regulations are periodically overhauled and new instructions are given to participants in the system, necessitating changes in practices and oversight. For example, the Basel Committee on Banking Supervision has issued a variety of guidelines on how an institution operating in the financial system should behave. These guidelines are non-negotiable, as far as global financial institutions, and present governance challenges for Islamic financial institutions. Moreover, it is a geopolitical reality that Islamic countries are unfortunately tainted with suspicions of terrorism, and all financial practices by Islamic financial institutions are compelled to provide proof that they are not associated with terror-related financial flows. Many similar pitfalls exist, but Islamic financial institutions have dealt with them admirably. For instance, the formation of the Islamic Financial Services Board (IFSB), in 2002, eased coordination problems faced by many banks operating from the Middle East. A constant interaction with sharia scholars ensures that Islamic funds adhere to the demands of the global system in a timely fashion. The penetration of mass markets by Islamic funds has broadened the base of Islamic finance. However, it has also added to the problems in other ways. For example, the 2008 global financial crisis touched Islamic funds as well, as shown by the near-default on sukuk payments by Dubai World in 2009 (Bajaj and Bowley, 2009; Derbel et al., 2011). The prospect of default by Islamic funds should technically always be present. Indeed, risk sharing by investors is a cornerstone of Islamic finance. Nevertheless, the prospect of an Islamic fund defaulting was a sobering call to investors, reminding them that the boom-and-bust cycle of capitalism touches all investors. Overall, concerns remain that the exponential growth of funds based on Islamic finance has led to several compromises by Islamic investing agencies. Consider, for example, the concept of ‘hedge funds.’ On the one hand, one could make a forceful argument that hedge funds are by definition violative of Islamic strictures. They are based on high levels of leverage (similar to riba), they exist in an atmosphere of extreme uncertainty (prohibited in Islam as gharar) and their scatter-shot investment approach does not offer complete protection against investment in forbidden industries (gambling, pork, alcohol). However, several Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 6 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 9 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 Islamic finance and social justice: a reappraisal 237 Islamic hedge funds are now in operation and have been in operation for over a decade, the first having opened in 2003 by the Saudi Economic Development Company (SEDCO) (Karasik et al., 2007). With respect to research in Islamic finance, there appears to be some way to go. Despite the presence of good data on deposits and flows (as represented in the aforementioned Ernst & Young report), current research on Islamic finance relies overwhelmingly on case studies (Mujtaba, 2012). Of course, case studies often provide rich data and are helpful in reconciling complex theological problems with existing financial cash flows and investment decisions. One exemplary case is Holly Robbins’s study of tawarruq as a financial instrument (Robbins, 2010). In that case study, the author first explains the arithmetic behind tawarruq in modern times. She then lists some of the objections that Islamic scholars have raised against tawarruq in that it sometimes appears indistinguishable from interest-based financial arrangements. To that extent, some Islamic theologians accept tawarruq as a permissible financial instrument, while others declare it proscribed (haram). She then offers three ways forward in modifying tawarruq to make it acceptable to skeptics. They include educational reform amongst scholars of Islamic finance; limiting corporate governance conflict amongst financial practitioners; and creating a new ratings method to rate companies on sharia compliance. While such studies are useful to tease out the philosophical conundrums that underlie Islamic finance, there is a need for supplementing them with data analysis that can chart the performance of Islamic finance compared to more traditional capitalist funds. Such studies have now begun to emerge. For example, Alam and Rajjaque (2010) developed an interesting model of comparative research. They constructed three portfolios based on the constituents of S&P Europe 350. One portfolio represented the overall market, the second represented the market without the financial firms and the third represented the market of shariacompliant equities. After rigorous analysis, they concluded that shariacompliant equities ended up outperforming the other two portfolios in most arenas. Other sophisticated analyses conducted to evaluate Islamic finance include the use of non-parametric statistical techniques to compare the performance of international and Islamic mutual funds (Rubio et al., 2012). Some theorists have used financial simulations to stress-test Islamic finance modules (Arouri et al., 2013). Others have used probabilistic evolutionary models to track the survival rates of Islamic finance funds and compare them with the mainstream (Masudul and Hossain, 2013). Overall, one can conclude that, like the entire project of Islamic finance, academic research on the subject is a work in progress with a lot Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 7 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 10 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 238 Islamic ethics and financial conduct of promise and much left to deliver. The overall results indicate that Islamic funds are at the very least on par with traditional funds when measured against traditional measures of performance. THE EGALITARIAN FOUNDATIONS OF ISLAMIC FINANCE Islamic finance should be linked, of course, to issues of Islamic economics in general, which are in turn closely linked to issues of Islamic political science and Islamic philosophy. The broad question that needs to be asked of Islamic finance is whether it has contributed to social development in the Islamic world. Arguing for the integration of social maslaha into Islamic finance, Ismail Cebeci argues that the provision of public benefits is a significant yardstick against which Islamic finance must be judged (Cebeci, 2012). Cebeci further argues that, at the current moment, Islamic banking has failed to provide such social benefits. This is partially related to the institutional context in which Islamic banks are imbedded, but also because they have been excessively eager to use the capitalist model as their default ideal.2 In that regard, Cebeci is on the same page as other scholars of Islamic finance who have invoked the holistic traditions of Islam and concluded that investments are required to play an important role in poverty alleviation (Kayed and Hassan, 2011). Why have scholars and researchers of Islamic finance ignored its social dimensions? One reason, of course, is the tyranny of disciplinarity. Modern social sciences discourage interdisciplinarity; finance scholars are encouraged to stay away from sociologists, political economists, organizational scholars and such. Thus, in the mainstream academy, the interdisciplinarity of Islamic finance has tended to ignore the softer dimensions of performance and used the data available to benchmark the performance of Islamic funds based on secular criteria alone. Among the disciplines that Islamic finance needs to consider is management. It is extremely relevant to note that management theorists have developed sophisticated analyses of stakeholder theories that are of great significance to Islamic finance. Moreover, the vessels through which Islamic finance is enacted are themselves firms, subject to the pressures of coordination that organizational theorists study. To that extent, this volume is a welcome intervention in the discussion on how Islamic commerce and modern management theory interact. The editor of this volume, Abbas Ali, has been an early and significant researcher whose findings have been used to inform Islamic finance researchers and Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 8 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 11 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 Islamic finance and social justice: a reappraisal 239 theorists. For example, he and his co-authors have recently argued that profit maximization is incompatible with Islamic values (Ali et al., 2013). It goes without saying that such an analysis will have a significant impact on our understanding of Islamic finance. If we were to use a statistical model to analyze the performance of an Islamic fund and compare it with a more traditional capitalist fund, we would have to find a more innovative and comprehensive dependent variable than mere financial performance. Islamic economic traditions are also deemed to be essential for Islamic organizational practices, such as human resource management (Ali, 2010) in order to play a proactive role in the world. This understanding also has significant impact on Islamic finance. It suggests that Islamic funds, which are run by organizations, have to look inward as well and ask if their staffing practices follow the philosophical strictures of Islam. It bears repetition here that Islamic economics informs Islamic finance very critically in one aspect. The performance of Islamic finance must be judged only on the criteria of whether it alleviates the sufferings of citizens and produces routines of social welfare. To that extent, all the studies that compare the performance of Islamic funds against traditional funds (and often find them overperforming) miss the point. The fact that an Islamic fund provides a greater return on an investment to an investor should not be a relevant criterion to evaluate it. On the contrary, an Islamic fund that provides very high returns should be viewed with suspicion, because excessive profiteering has been identified in Islam as both usurious and conspicuous consumption. It is at this stage that Islamic theology and Islamic finance must necessarily be combined. For such a process to unfold, we need to examine the highest written authority in Islam, the Qur’an, to provide a textual and hermeneutical solution to this problem. Fortunately, on this matter, the Qur’an is quite unambiguous. For instance, Khan (1999) has identified 60 verses in the Qur’an that extol charity and social justice, compared to merely 7 that prohibit interest.3 It stands to reason, therefore, that Islamic finance needs to focus much more on issues of reduction of inequality and achievement of social welfare than it is currently set up to do. Of course, this is not to say that there has not been vigorous debate on this matter among theorists of Islamic finance. In fact, the debate has been quite significant and many disciplines have become involved. For example, theorists of Islamic law (for example Oseni, 2013; Ismail and Tohirin, 2010) have taken great pains to discuss which financial contracts are admissible according to the principles of Islamic jurisprudence and which are prohibited. Their arguments predictably link Islamic finance to social issues. The move in the global economy from a regime of trust to one of Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 9 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 12 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 240 Islamic ethics and financial conduct contracts puts a lot of strain on the Islamic legal system, but one from which it emerges stronger and with greater clarity (Trakic, 2013). Closely related to the issue of equality is the matter of conspicuous consumption. Indeed, even when the issue of social welfare has been sorted out, the religion continues to caution against excess.4 Theorists of Islamic finance have no option but to take that into account as well. In modern terms, a progressive taxation on capital gains has been seen as the greatest deterrent of conspicuous consumption. To that end, a regime of progressive taxation must be considered as being consistent with Islamic principles. The conclusion to be drawn from this section is that of interdisciplinarity. Theorists and researchers of Islamic finance ignore the findings from other related and seemingly disparate disciplines at their own peril. In the end, an exclusive focus on financial performance should be considered flawed research. True analyses of Islamic finance are by definition and by compulsion based on multiple disciplines and traditions. GEOPOLITICAL REALITIES AND ISLAMIC FINANCE In 1999, Khan argued that the tremendous growth rates in the per capita GDP of East Asian economies constituted a benchmark for Islamic economists to emulate. This raises an interesting question: if a country has a policy that is more oriented toward its suffering masses and strives to reduce inequality, is it not more Islamic than a Muslim-identified nation whose society is characterized by vast wealth disparities and the suffering of the lower rungs of society? The question of course is moot, but perhaps it is useful to produce what might be a set of Islamic principles and benchmarks against which to evaluate all societies. Some scholars have attempted that. For example, Anto (2009) attempted to develop an Islamic Human Development Index that could be used to evaluate all nations. Islamic economics, and by extension Islamic finance, can be predicated upon a variety of parameters. These include higher GDP growth rate, lowered inequality, higher savings rate (indicative of low israf) and higher participation in global relief (indicative of charity and sadaqa). The persistence and growth of intra-population inequalities should be considered a contravention of Islamic values. If we develop a composite measure of economic performance as desired by Islam, the topperforming nations not only include traditional European powerhouses, such as Sweden and Germany, but smaller European nations, such as Slovenia and Hungary. Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 10 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 13 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 Islamic finance and social justice: a reappraisal 241 To that extent, researchers who study Islamic finance and use nations as their unit of analysis need to deploy these criteria to evaluate the success of such regimes. Given the institutional heterogeneity that exists across nations practicing Islamic finance, it might be an effective research exercise to compare Islamic finance practices qua Islamic finance practices (rather than benchmarking them against traditional capitalist enterprises). In other words, how do Islamic finance practices in Kuwait differ from those in Indonesia? How do Islamic banking routines in Oman differ from those in the UK? Can we produce and develop metrics that scale financial practices in these contexts and eventually help us to rank individual nations and firms according to desirability from Islamic criteria? This would even help Muslim investors to produce financial portfolios that they are most comfortable with. One could even benchmark more traditional capitalist firms and secular portfolio according to Islamic characteristics. For example, socially responsible funds, such as TIAA-CREF’s ‘social choice’ portfolio,5 share much in common with an Islamic investment practice. The task at hand for a principled organizational researcher, therefore, is to distil Islamic principles based on which a variety of secular financial products may be evaluated. Many financial products are reprehensibly un-Islamic, based on predatory investments and beggaring the dispossessed. They are the easiest to evaluate. Equally easy to evaluate are pure Islamic products that hew to the traditions of Islam, come with religious sanction and simultaneously aspire toward social welfare and upliftment of the poorest. It is the middle ground that deserves the interest of the researcher to tease out a band of acceptability within the capitalist system for Islamic financial practice. TOWARD A NEW RESEARCH AGENDA FOR ISLAMIC FINANCE In this chapter, we have attempted to make two interrelated points. The first, a critical intervention, attempts to unpack the overreliance on procedural concepts such as riba in defining Islamic finance. We have contended that Islamic finance is predicated on a broad understanding of social justice and reduced inequalities. Riba, or any form of interest, is forbidden precisely because it is a tool to produce injustice and inequality. Thus, any attempt to formulate an infrastructure of Islamic finance by focusing on eliminating riba without addressing unjust practices and economic inequalities is at best missing the broader Islamic point and, at worst, is a cynical way to get past Islamic strictures and guidelines. Our Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 11 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 14 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 242 Islamic ethics and financial conduct second, more constructive point, has been to visualize a process whereby an Islamic system of finance can address the concerns articulated in the critique. Since our primary professional affiliation is as academics, we have also attempted to frame the problem as a research challenge and engage theorists and academics as they move forward in their efforts to tackle the challenges faced by Islamic finance. In order to do that, one must place the problem in context; this is a problem produced by success rather than failure. As already mentioned, the ‘World Islamic Banking Competitive Report of 2012–2013,’ developed by Ernst & Young, concluded that ‘Islamic banking assets with commercial banks globally grew to $1.3 trillion in 2011, suggesting an average annual growth of 19% over the past four years.’ This is a phenomenal growth rate, suggesting that Islamic finance is no longer a nascent boutique investment practice but is firmly integrated into the global financial system. To the extent that some fundamental incommensurability between Islam and capitalism exists, it behooves us to treat this growth of Islamic finance with some degree of theoretical carefulness and to evaluate it with academic and spiritual integrity. In this chapter, we have suggested that research on Islamic finance proceeds according to four sequential steps. Two of those steps have been better performed than the other two. The first step is to develop qualitatively rich case studies that analyze different instruments of Islamic finance and track their implementation, the obstacles they face, the way they negotiate those obstacles and proceed toward maturity. The case study of tawarruq outlined in this chapter is a good case in point. The second step is to develop more sophisticated methods to evaluate and compare the performance of Islamic finance against traditional instruments. Sophisticated statistical techniques need to be applied to check various instruments of Islamic finance for viability in the mainstreams of global finance. This approach is also ongoing and we have seen sophisticated analytics (simulations, non-parametric methods) being deployed, often providing promising information about the long-term viability and competitive power of instruments of Islamic finance (such as funds) as well as institutions (as in banks) that practice them. Our contention has been that while the above two approaches have been well used, the next two need a lot more work and attention. Our chapter may be construed as a call to develop the following two methods. The first is to change the dependent variable in assessing the performance of Islamic finance practices from a return-based metric to a more complex understanding of performance that is based on social justice and the mitigation of inequalities. In other words, the success of an Islamic fund should be predicated not upon how much return it gives to its equity Columns Design XML Ltd / Job: Ali-Handbook_of_Research_on_Islamic_Business_Ethics forts /Pg. Position: 12 / Date: 19/8 / Division: 11IslamicFinanceandSocialJustice- JOBNAME: Ali PAGE: 15 SESS: 7 OUTPUT: Fri Aug 21 10:12:41 2015 Islamic finance and social justice: a reappraisal 243 investors, but its role in producing a society that is characterized by social justice, reduced inequality and a chance of spiritual renewal. The final step is to develop a metric whereby all financial instruments can be evaluated according to Islamic criteria. That would allow us to evaluate all investment practices, be they Islamic or not, and see how closely they reach an Islamic ideal. This practice constitutes ‘integration in reverse’ whereby the mainstream financial institutions are integrated with Islamic ideals, rather than vice versa. NOTES 1. 2. 3. 4. 5. http://www.djindexes.com/islamicmarket/. Such an approach can be seen as constituting a form of mimicry (see Bassens at al., 2013). An assertive approach to Islamic finance can perhaps mitigate this issue. According to Khan (1999), ‘While there are only seven verses in The Quran that prohibit interest (2:275, 2:276, 2:278, 2:279, 3:130, 4:161, 30:39), there are 60 verses that stipulate, mandate, encourage charity, discuss its virtues and rewards, warn of punishment to those who eschew charity and also warn against hoarding (9:34, 2:261, 2:265, 2:276, 2:280, 30:39, 34:39, 35:29, 57:11, 57:18, 64:17, 2:271, 2:245, 5:12, 57:11, 57:18, 64:17, 73:20, 2:273, 2:83, 19:31, 19:55, 9:91, 17:29, 2:3, 2:43, 2:110, 2:177, 2:195, 2:254, 2:267, 2:227, 5:55, 9:71, 13:22, 14:31, 21:73, 22:41, 22:78, 24:37, 24:55, 24:56, 27:3, 30:38, 31:4, 33:33, 47:38, 57:7, 57:10, 58:12, 58:13, 63:10, 64:16, 2: 264, 2:266, 16:75, 4:38, 2:3, 3:180, 2:215). It is astounding how Islamic economists have overlooked the significance of charity, welfare, redistribution of wealth and prevention of income inequalities and wealth disparities. If anything, the sheer weight of Allah’s interest in charity and distributive justice should have made Islamic economics synonymous with “charitable/welfare/distributive just” economics rather than interest free banking!’ ‘O children of Adam (…) be not excessive. Indeed, He likes not those who commit excess’ (Qur’an, 7:31). http://www1.tiaa-cref.org/public/performance/retirement/profiles/1005.html. REFERENCES Alam, N. and M. S. Rajjaque (2010), ‘Shariah-compliant equities: empirical evaluation of performance in the European market during credit crunch,’ Journal of Financial Services Marketing, 15, 228–40. Ali, A. J. (2010), ‘Islamic challenges to HR in modern organizations,’ Personnel Review, 39(6), 692–711. Ali, A. J., A. Al-Aali and A. Al-Owaihan (2013), ‘Islamic perspectives on profit maximization,’ Journal of Business Ethics, 117(3), 467–75. Al-Salem, F. 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