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The Politics of Islamic Finance$
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Clement Henry and Rodney Wilson

Print publication date: 2004

Print ISBN-13: 9780748618361

Published to Edinburgh Scholarship Online: March 2012

DOI: 10.3366/edinburgh/9780748618361.001.0001

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The Murabaha Syndrome in Islamic Finance: Laws, Institutions and Politics

The Murabaha Syndrome in Islamic Finance: Laws, Institutions and Politics

Chapter:
(p.63) 3 The Murabaha Syndrome in Islamic Finance: Laws, Institutions and Politics
Source:
The Politics of Islamic Finance
Author(s):

Tarik M. Yousef

Publisher:
Edinburgh University Press
DOI:10.3366/edinburgh/9780748618361.003.0003

Islamic intellectuals observed that the Muslim societies' banking and finance, which should be pegged on religious tenets, have undergone a rapid transformation in the past decades. According to the prevailing interpretations of Islamic law, financial instruments should be based on the principle of profit-and-loss sharing (equity contracts) and should avoid predetermined or fixed returns (debt contracts). However, evidence on the current practice by Islamic banks suggests that the majority of their financial operations are not based on equity, but rather on the use of the murabaha contract – an instrument which is akin to the standard debt contract in conventional banking systems. This departure from the theory and religious doctrine has spurred debates among scholars, and economics and finance specialists. The predominance of the murabaha represents a challenge to the very notion that Islamic finance would provide an alternative to interest-based conventional financial systems. And while there has been a tendency on the part of critics of Islamic finance to overplay the murabaha syndrome, defenders have been equally guilty of dismissing its significance for evaluating the contribution of modern Islamic capitalists. This chapter aims to provide a comparative framework for explaining the murabaha syndrome in Islamic finance. The observation that the financial structure in Islamic sub-systems is no different from those in conventional banking systems establishes the necessity of a systemic examination of financial structure. Starting from the paradigm of corporate governance, the chapter incorporates the insights of recent work on the systemic determinants of financial structure, including the role of law, institutions and politics. This analysis places the murabaha syndrome into a broad national and international context, and elucidates the constraints faced by Islamic capitalists in adhering to the goals of the equity-based model of Islamic finance. The implications for the future of Islamic finance are included also in this chapter.

Keywords:   Muslim societies banking, finance, murabaha, Islamic finance, corporate governance, law, institutions, politics

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