Conceptualization of the real economy and Islamic finance: Transformation beyond the asset‐link rhetoric

A key factor behind the chronic crises in modern economies is the growing dominance of financialization and the resulting disconnect between the real economy and the financial sector, to which conventional financial industry is a key contributor. In contrast, Islamic finance claims to be real‐economy‐oriented, as all transactions must be asset‐linked (asset‐backed or asset‐based). However, is Islamic Finance based on proper conceptualization of the real economy? What is the real economy and its dynamics? How Islamic finance is interfaced with the real economy? In this article, the claimed real‐economy‐orientation is examined by presenting a conceptualization of the real economy and then evaluating the related discourse accordingly. The analysis presented, especially for noneconomists, exposes a serious gap between the claims about Islamic finance and the real economy it is supposed to advance. Appropriate conceptualization of the real economy can help the industry to be relevant and effective for broader socioeconomic transformation.     

The global financial crisis and Islamic finance

The conventional view holds that the current global financial crisis was caused by extraordinarily high liquidity, reckless lending practices, and the rapid pace of financial engineering, which created complex and opaque financial instruments used for risk transfer. There was a breakdown of the lender‐borrower relationship and informational problems caused by a lack of transparency in asset market prices, particularly in the market for structured credit instruments. There was outdated, lax, or absent regulatory‐supervisory oversight; faulty risk management and accounting models; and the emergence of an incentive structure that not only encouraged excessive risk taking but also created a complicit coalition of financial institutions, real estate developers and appraisers, insurance companies, and credit rating agencies whose actions led to a deliberate underpricing of risk. Such a crisis would not have occurred under an Islamic financial system—due to the fact that most, if not all, of the factors that have caused or contributed to the development and spread of the crisis are not allowed under the rules and guidance of Shariah. The current global financial crisis is largely seen as a real test of the resilience of the Islamic financial services industry and its ability to present itself as a more reliable alternative to the conventional financial system. © 2011 Wiley Periodicals, Inc.     

Islamic economics and a third fundamental theorem of welfare economics

The discipline of economics started as a moral science but became detached from moral concerns over time to emulate natural science and to adopt positivism. Consequently, mainstream economics assumes people to be sordidly selfish. The teachings of Islam, however, promote social preferences where individuals should be other‐regarding and have preferences over social outcomes. This paper replaces the selfish agent with a social agent and presents the results in a theorem referred to as the third fundamental theorem of welfare economics (TFTWE). The TFTWE states that “when the selfish agents are replaced with the social agents, market outcomes are Pareto optimal, equitable, and unique”. This is an important result which has widespread implications. We show that the TFTWE holds under conditions where the first two fundamental theorems of welfare economics fail and that a Walrasian equilibrium is more likely to exist when selfish preferences are non‐convex. Unlike the popular convention, there is no equity‐efficiency trade‐off. In fact we point to the possibility of reversal in equity‐efficiency trade‐off.     

汽车金融服务业中的规模经济与范围经济

国际上一些专门的汽车金融公司有两个显著的特点：一是规模都相当大；二是围绕汽车消费的金融业务范围很广。如果以规模论，象美国的通用、福特汽车公司的金融公司，客户有上千万，资产达到一、二千亿美元。如果以业务范围论，这些汽车金融机构几乎提供了与汽车消费有关的所有金融服务，从购车贷款到汽车消费的各个方面，如安全保障、维修、燃油消费以及汽车旅行等多个环节，都有金融服务的渗透。比如你持有一张大众汽车银行的信用卡，从储蓄、购车、租车到维修、燃油、保险甚至其它日常消费，就都能得到满足。这就是所谓的全能化金融服务。     

Reaganomics and the world economy

The upswing in the US economy, which has long since surpassed all expectations, has undoubtedly been a great success for the economic policy embarked upon by President Reagan. But has the treatment which has done the USA so much good also been good for the rest of the world? American observers always draw attention to the import boom, whilst overseas commentators are more concerned with the worldwide effects of the USA's very high interest rates.     

Upswing in the world economy

The world economy gained distinct momentum last year. Following North America, the forces for growth have now prevailed in Western Europe and the Japanese economy has also picked up. Real gross domestic product in the industrial countries rose faster than expected at 3%. Will this upward trend keep going, as it must to alleviate unemployment?     

Marked recovery in the world economy

With expansion accelerating strongly since last summer, the world economy has overcome an extended period of weakness. The USA, driven by highly expansive fiscal policies, is once again proving to be an important locomotive for global economic development. The strong fiscal stimulus will diminish sharply this year, however. Can the recovery continue nonetheless? This is of importance for the euro area in particular, where exports have so far been the primary foundation of economic resurgence. Is the substantial appreciation of the euro jeopardising prospects of catching up with the rest of the world?     

No momentum in the world economy

The upswing in the world economy has lost momentum surprisingly fast. A slowdown in growth in North America had been expected, but the budding hopes in Japan and Western Europe for a continued recovery in utilisation of capacity and employment were disappointed. Are there grounds for such hopes in 1996 or have the structural constraints on growth now become so powerful as to prevent a more significant economic revival?     

Continued growth in the world economy

After the stock market crash in the autumn of 1987 even optimists were predicting a sharp slowdown in the growth of the world economy in 1988. In the event, the GNP of the industrialised countries increased by 4% in real terms last year. What is the outlook for 1989?     

Lasting recovery in the world economy

Economic recovery has returned to the industrial countries as a whole. However, expansion is moderate. In continental Europe, utilisation of capacity is still below the long-term average. In Japan, under-utilisation of capacity is even more pronounced. At the same time, unemployment has remained high. Elsewhere, though, and particularly in the USA, resources have been exploited to a high degree. Here too, however, wage and price increases remained moderate. Economic convergence is accompanied by a convergence of economic policy—not just in those countries striving to take part in the European Monetary Union. In view of this, how good are the prospects for economic development and for employment in the coming year?     

Hesitant recovery in the world economy

So far there has been no far-reaching recovery in the world economy. While the recession of 2001 was overcome at the beginning of last year, demand and output growth has been restrained in spite of expansive economic policies. This is partly due to a mood of great uncertainty, caused not least by geopolitical tensions and declining confidence on the financial markets. Will the dampening effect of these factors ebb away this year and so lead to a marked upward trend in the world economy?     

The petrodollars and the world economy

The quadrupling of the oil price by the OPEC in 1973 was a poignant event in the post-war development of the world economy. Which measures and mechanisms conduced to the international income redistribution necessitated by the hoisting of the oil prices in the past five years?     

Weaker world economy

Last year's marked slowdown in the world economy, which followed a phase of very rapid expansion, has led to fears that a recessionary climate may be at hand. A key role in this is played by economic trends in the USA. How reliant is the rest of the world on the tractive power of what has up to now been the engine of economic growth? is the drop in oil prices sufficient to stabilise economic activity?     

Islamic finance and market segmentation: Implications for the cost of capital

This paper considers the impact of full Islamic shari’ya compliance on developing stock exchanges in their effective provision of development capital. Evidence from a unique study focussing on the Sudan telecommunications company and its listings on the Khartoum as well as Arabian Gulf stock exchanges reveals that costs of capital are considerably higher in the former than latter markets. While there are firm governance benefits arising from Islamic finance monitoring costs are substantial and the banking system is better placed to administer financing arrangements. Larger firms are better placed to circumvent this segmentation through cross-listing on regional exchanges.     

Trends towards regionalism in the world economy

The world economy has for some time been characterised by a growing generalised trend towards regionalism. This is often considered to be on a par with the formation of blocs, fragmentation of the trading system and a relapse into the disastrous conditions of the thirties. However, if regionalism is understood not as a defensive or aggressive policy of bloc building, as in the thirties, but as a regional grouping that is open towards the world economy, it appears to have something to offer as an alternative to the old international economic order.