Restoring the Ethical Basis of Finance

How to Cite

Abdullah, Abdul Karim. 2014. “Restoring the Ethical Basis of Finance”. Islam and Civilisational Renewal </Br> ICR Journal 5 (1).


Contemporary finance, both Islamic as well as conventional, is beset by challenges. These challenges have more in common than would appear at first sight. In Islamic finance, problems stem primarily from the tendency to replicate conventional instruments, while maintaining formal compliance with the Shariah. In conventional finance, it is becoming increasingly clear that the use of fixed income securities (borrowing at interest) is producing a range of unwelcome macroeconomic effects. These effects impose additional costs on society. They include indebtedness, reduced efficiency in the allocation of resources, inflation, unemployment, uneven distribution of wealth and instability in the form of business cycles. To the extent that Islamic finance replicates the instruments of conventional finance, it can be expected to replicate any adverse macroeconomic effects of debt financing as well. Thus, the response to the problems caused by interest-based finance, as well as its replication in Islamic finance, is to supplant financing by lending at interest with financing on the basis of risk sharing. In other words, it requires restoring finance to its ethical foundations. The transformation of finance from lending to risk sharing, however, will require not only a supportive transformation in social outlook, but also appropriate changes in the regulatory framework.



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