Islamic finance is seen by many as an island existing in a vast global system of financial institutions and regulations. Much of the international dialogue today is focused on finding common approaches for financial regulations, standards, and ethical codes so that the global economy can operate more reliably and efficiently. How does Islamic finance fit into this process? Must it fit in?
A Telescopic Perspective of Societies
I use the phrase telescopic perspective to refer to the idea that when we look at things from afar, we can find many commonalities among them that otherwise appear different up-close. Of course there are many differences between Sharia Law and the principles that drive modern capitalism, but it seems there are some underlying commonalities:
- The importance of reducing exploitative behavior from institutions, consumers, and all those involved in transactions;
- The importance of reducing economic uncertainty and the dangers it creates for all of society; and
- A sensitivity to social responsibility—to ethical behavior and the cultural values that impact positively upon society (for many western societies this is only just beginning to emerge with corporate social responsibility [CSR], sustainable business practices, and other movements).
How the different systems attempt to arrive at these ends varies, but ultimately, both are constructive in nature. They concern the necessity of mitigating negative consequences. And in the modern sense, both seem to facilitate wealth and to some degree, the diffusion of its benefits to society. In both systems, people seek to conduct themselves along principled frameworks based on societal values and ideals. Where they do differ is through the lenses of culture, religion, and perhaps the experience of history.
The Evolution of Different Financial Systems
The modern principles and frameworks that underpin the financial industries encompass everything from economic theory to ethics. Many take origin from practices established in Medieval trading centers, such as Florence and Venice. They have evolved over time from thinkers such as Adam Smith, Jean Baptiste Sey, and John Maynard Keynes, whose theories provided explanations for everything from supply and demand to valuation and state/regulatory intervention. The rationale for how and why such principles conform to human nature was supported by Christian theologians, such as John Calvin, and political theorists, such as John Locke. The point here is that the financial principles common to most societies today have evolved across many disciplines and are caught between many strands of debate.
Islamic finance too is routed in a long tradition of theory and practice. In the Medieval Period, traders from the Islamic world engaged with the same European societies (e.g., Venice and Florence) that gave rise to the financial principles many of us utilize today. These societies were concurrently formulating a rationale to address concepts such as economic uncertainty, valuation, investment, money-lending, and contracts. Much of this rationale was based on Sharia Law and the moral codes of the Quran.
The body of ideas we regard today as “Islamic finance” represents a reformation of these principles that took place in the 1970s and 80s as investment and banking activities between western societies and the Middle East significantly increased. They have enabled the growth of the Islamic banking industry and the facilitation of trade for a variety of other industries, not necessarily because different modern societies are conforming to the same financial systems, but rather because a broader set of principles are able to co-exist All societies seek the soundness of transactions, reliable agreements between parties, and the creation of wealth. And perhaps at a more intuitive level, all humans are averse to exploitation, deceptive practices, and any form of system that cannot protect property and the norms and conventions we use to exchange goods and services.
Universalism: Are We Speaking the Right Language Yet?
It can be argued that a key feature of globalization is the notion that the practices and systems of different societies (whether they are financial, technological, or based on human rights) should become increasingly similar. Ideally, this would allow different societies to interact on common terms with universal conventions. In the end, most of us have the same objectives; however, we use different “languages” to arrive at them. Some may use the language of religion, others may use the languages of the social sciences (e.g., economics, sociology, and political theory) to explain the principles to which we aspire.
Perhaps before we think about globalization—about how different practices such as Islamic finance are to be integrated with the mainstream—we need to consider the ends and not the means. The “right” language of globalization may ultimately be just that: a simple understanding of what all or most societies ultimately seek. If we can all agree upon such overarching objectives, we may find it easier to achieve them. In this regard, trying to converge the complex systems and financial principles that currently distinguish our societies may actually be holding us back from developing more effective conventions. Perhaps someday, a truly global financial system will exist: one that is far simpler and far more accessible than anything we know today.
What are your thoughts? Can western forms of finance effectively co-exist with Islamic finance?
