Quora Answer: What Do You Think about Islamic Finance?

The following is my answer to a Quora question: “What do you think about the Islamic Finance?”

We have to make a distinction between the jurisprudence of transactions and assets in finance, and the branding that people call “Islamic Finance”.  They are not always the same thing.  When we consider the fiqh, the jurisprudence, there are many contentions that need to be unpacked, to be considered, to be updated.  There are very few true ahkam, rulings, and a lot of fatawa, legal opinions.  Even at a fundamental level, a great many contentions and foundational principles of modern finance have not been defined in terms of their relationship with fiqhi principles.

The primary problem we have is that many of the so-called experts on shari’ah are not actually experts in finance.  They are often ruling on transactions, protocols, and even modern economics, they do not fully understand, and avail themselves to the simplistic and literalist interpretation.  Those are the better ones.  For example, when you transfer $100 from one country to another, there is a cost.  Is that riba’, usury?  Most would say it is.  However, it does not consider the fact that there is a cost in transferring funds.  This includes the cost of administration, and transaction.  The next question is that if this is not riba’, when does it become riba’?  This is the state of the fiqh.

We must also consider the fact that many of these so-called religious authorities on “Islamic” finance sit on these shari’ah accreditation boards and councils, and get compensated by the very banks and institutions whose products they are supposed to accredit.  That is an unacceptable conflict of interest.

I am not convinced by Islamic Finance.  It is branding exercise, where they take conventional banking products, rebrand them using convenient Arabic phrases and terms to create the illusion of halal, and then sell it to the gullible who want to play at being religious.  These are not the best products.  They are selling them based on appeals to emotion, not the performance of the product in comparison to similar products.  If they were to sell on the merit of the product, there would be no real sales.

As of 2019, the size of the Islamic finance market is US$2.5 trillion.  This is a 3% growth on the previous year.  The size of the world financial industry is US$26.5 trillion, with a 6.5% growth.  This means that not only is it a tiny market, but it is a tiny market that is losing market share.  It is growth based on hype, and largely confined to the retail market because institutional fund managers are not going to put significant funds in an underperforming sector.

What we should be growing is ethical finance, which is not tied to the opinions of semi-educated mullahs that can be bought off for a pittance, by putting them is cosmetic shari’ah councils.  Ethical finance is based on defined values and principles.  These values are universal, and have broader market appeal.