Picturing a vision for Islamic finance for the second half of the 21st century entails some sort of loyalty, as well as imagination. First and foremost, a solid loyalty to the teachings of Islam must feature therein. Second, imagining a future where the marginal fulfilment of the Objectives of Shari’a (OS), affecting the industry at present, should be replaced by a return to the shared prosperity. Coming back to such a future implies rooting Islamic finance in its original sources of jurisprudence.
In this context, the autonomy of Islam as a monotheistic religion should lead the interpreter to critically evaluate the future sustainability of an industry that has grown in the last fifty years by combining elements of anti-capitalism, religious commitment, social endeavour, and post-colonial political economy.
Has this multifaceted recipe really allowed Islamic finance to nourish through the canons of Shari’a compliance? To be specific and straight to the point, we must re-assert the question: Has Islamic finance developed itself to a truly trade-oriented phenomenon2 or has this been partially obscured by the concurrent purposes of a dialectical (if not artificial and misleading) opposition to Western capitalism?
If the latter is true, how can Islamic finance come back to its own (authentic) future?
This chapter advances the suggestion to make Islamic finance a trade-oriented phenomenon for its future sustainability, both in terms of its own legitimacy and its potential to save conventional capitalism from a destiny of exploitation of the resources of the global economy.
Back to the Future
In the popular science fiction film Back to the Future (1985), directed by Robert Zemeckis and starring Michael J. Fox and Christopher Lloyd, teenager Marty McFly is accidentally sent back to 1955. The time machine that his eccentric friend Emmett ‘Doc’ Brown has built from a modified DeLorean, powered by plutonium, leads Marty to inadvertently prevent his parents’ meeting in the past, thus jeopardising his own existence in the future. Getting back to his own future, then, constitutes the key to his final success in the movie plot.
Starting around the 1970s, the story of Islamic finance has, indeed, some similarities with Marty’s adventure. At the beginning of the movie, Marty fears of becoming like his parents (his father George is an unassertive and weak man; his mother Lorraine is a depressed alcoholic) and is unsuccessful like his older siblings.
Likewise, the so-called fathers of Islamic economics, by originally condemning Western capitalism, founded much of their theoretical elaboration on the rejection of its vices. To this aim, their powerful time machine (powerful both in political, social, and religious terms) was the recall of classical Islamic law, as applied in medieval trade: a list of contractual arrangements, backed by the Quranic injunctions against interest, speculation, and gambling (the plutonium of the inexorable energy of Islam to guide Muslim believers to salvation), often summarised under the paradigm of Shari’a compliance. Within this conceptual framework, the original machine of Islamic economics itself resulted mainly in the form of a modified DeLorean: permanently engaged in a dialectical relation with Western capitalism in the attempt to overcome its defects, it kept a critical approach to its secular counterparty, and did not concentrate ab initio on developing its own autonomous paradigm (Cattelan, 2013).
In a recent contribution to a volume on the methodology of Islamic economics, Cattelan (2020) employed the metaphor of the parent-son relationship (which fits Marty’s destiny as well) in referring to The Tragedy of Hamlet, Prince of Denmark, by William Shakespeare.
Written at an uncertain date between 1599 and 1602, the tragedy focuses on the revenge that Prince Hamlet is called to by the ghost of Hamlet’s father, King Hamlet. Hamlet’s destiny is inextricably linked to that of his parents, similar to Marty’s; but as Prince Hamlet perishes at the end of the tragedy, killed by Laertes (as his existence is ruined by an obsession with revenge), Marty’s story has a much happier end. In fact, not only is he able to save his own future, but also that of his family. His actions in the past built an alternative destiny for his parents, with his father being confident, his mother fit and satisfied with her life, and his siblings successful in their jobs.
What is the Key to the Sustainability of Islamic Finance?
Crafting a vision for the future of Islamic finance, an agenda till 2050, entails a critical appreciation of its development and current practice. If much of the theoretical efforts of Islamic economics have been addressed to repudiate the foundations of Western capitalism as intrinsically adverse to Islamic moral economy, the sustainability of Islamic finance (as its capability to endure in the long term as an alternative to mainstream capitalism) still requires a radical paradigm shift (as philosopher Thomas Kuhn (1962) defined it) to make it independent from its Western counterparty.
In the 11th edition of GIFR, Chapter 4 remarked on this point by arguing that the real issue for the future sustainability of Islamic finance is not how to sustain a capitalistic debt economy grounded on the exploitation of resources so to make the debt itself sustainable, but rather to recognise how any debt is, per se, a source of exploitation; [and] that this exploitation is derived in commercial dealings from charging of interest, which intrinsically belongs to the logic of capitalism.
Accordingly, the contents of the idea of sustainability must move from a Western standpoint to an Islamic context to (re-)discover the fundamental essence of shared prosperity, which underpins the Islamic moral eco-system. Going ‘beyond debt’ (Rudnyckyi, 2019), that is to say, ‘beyond the logic of what that is due’ (hence moving away from the logic of the power relation of the creditor over the debtor) can remove the inescapable competition for resources, which is the ground for capitalism, opening Islamic finance to its own destiny.
This sort of ‘future self-determination’ of Islamic finance can represent the key to its future success: recalling Prince Hamlet’s and Marty’s destinies, whereas the former cannot escape from a fate of self-annihilation (represented by the vision of his father’s ghost), the latter realises his own future by saving his parents from their (miserable) destiny as well. Can we imagine at this point, a similar evolution for the future agenda of Islamic finance? Is the key to its sustainability in the long term, moving beyond the tyranny of debt, and the limits of the requirements of Shari’a compliance?
In this light, the next sections are going to summarise some fundamental contents, objectives, and methodological tools that this paradigm shift should embrace as a potential ground for the promotion of a new destiny for Islamic finance – going back to its own future. The proposal of trade-orientation and departing from the spurious factors of the dialectics with conventional capitalism will receive final comments in the conclusions of this chapter, to pursue this future of sustainability.
Making Islamic Finance a Trade-Oriented Phenomenon
“Shari’a compliance – abiding by the prescriptions of Islamic law – is what sets Islamic finance apart from conventional finance” (Bälz, 2014). Investigated in hundreds of books/articles (from the role of Shari’a boards to the impact of financial standards; from the operational impact to the governance of Islamic financial institutions to its associated risks), the paradigm of Shari’a compliance, as a common benchmark for the industry, has nurtured a growing discontent in the last decades.
In this regard, in 2006, a reference text already condemned “the prevailing form-over-substance approach” in Islamic finance practice, that “has arguably failed to serve the objectives of Islamic law (maqasid al-Shari’a).” Still today, this gap is a leitmotiv in Islamic finance literature5. In particular, the persistent theory-vs-practice dichotomy (which mirrors a general discontent in the doctrinal elaboration of Islamic finance) can be seen in three articulations of the current state-of-the-art (SoA) in literature.
On one side, this dichotomy is witnessed by the common claim that Islamic finance theory should be renewed6, and further rooted in Islamic monotheism7. Although the proposal to ‘return to the roots’ of Islam must be welcomed as an attempt to restore the autonomy of Islamic sciences from their Western secular counterparties (in line with the suggestion of this chapter), an excess of dogmatism seems to have prevented this renewal to be put in practice.
Its success, in fact, depends on the contextualisation of Islamic teachings within a current reality whose dynamics involve, as we are going to see, the impact of technology, environmental concerns, as well as the search for a more equal and inclusive society, especially in the aftermath of the COVID-19 pandemic.
On the other side, a more operative approach in the literature looks at the substance of the OS as the core factor for the improvement of Islamic finance practice.
In summary, this line of research investigation proposes to abandon the canons of Shari’a compliance in favour of criteria rooted in socially responsible investing and impact finance8. While, without doubt, this approach has the merit to concentrate on Islamic social finance (Cattelan, 2019) as the new frontier for Shari’a-based investments, the recall of the concept of sustainability seems to replace that of Islamicity in the elaboration of an independent Islamic finance theory, to the detriment of its possible autonomy as an alternative to conventional capitalism in the future.
Within this context, an important advancement in the SoA has been recently fostered by financial regulators (e.g., the ‘value-based framework’ by the Central Bank of Malaysia (2019), in relation to Islamic social finance) and by international bodies such as the World Bank, the OECD and the Islamic Development Bank9. These actors have moved from referring to impact finance to the incorporation/alignment of sustainable development goals (SDGs) and Islamic moral economy in the theoretical elaboration of a model of Islamic finance that will be able, at the same time, to promote Islamic values and avoid the persistent shortcomings of conventional capitalism.
While the three dimensions of the SoA have not yet overcome the limits of Shari’a compliance, ‘making Islamic finance a trade-oriented phenomenon may lead the industry back to its own future. This is the main value proposition of this chapter.
This chapter proposes a cross-cutting strategy that intersects three research objectives paired with a research methodology/approach (see below) to favour the sustainability of Islamic finance in the long term. In particular, following SoA3, it departs from the current state-of-the-art by replacing Shari’a compliance with an innovative halal trade paradigm that connects the OS and the UN SDGs. As a result, the future practice of Islamic finance will be embedded within the UN 2030 Agenda (United Nations, 2015), thanks to a shift that will benefit the industry renewal, the Muslim identity, and the global society at large – hence, making Islamic finance fully viable in the long term too.
The relevance of making Islamic finance a halal trade relates to the present level of criticality in the credibility of the industry as an alternative to conventional finance, which the proposal intends to remedy by filling the gap between Islamic finance theory/practice with a model of halal trade that links the OS and sustainability.
In doing so, the action suggests a comprehensive innovation for institutions governance and the politics of Muslim countries in connection to the sustainable transition as a key point towards both the UN 2030 Agenda regarding sustainability, and inclusive, innovative and reflective societies. In this way, the proposal can also contribute to a global and more inclusive recovery from the COVID-19 pandemic, embracing environmental issues as well.
Proposed Objectives to Foster Islamic Finance Sustainability
This chapter’s core purpose is to suggest to overcome the Shari’a compliance form-over-substance debate that still dominates scholarly elaboration with a paradigm that reformulates Islamic finance theory as halal trade and correspondingly re-locates Islamic finance practice within the canons of sustainability grounded in Islamic teachings. Furthermore, the three research objectives can be interconnected in this proposal for a paradigm shift, which are linked to the current state-of-the-art as previously described.
Objective 1 (OBJ1)
One relevant objective is to improve the understanding of Islamic finance mechanisms at a global level by overcoming the Shari’a compliance culture that still characterises the industry. This can help in the sustainability of Islamic finance in the future both by making it more attractive to non-Muslim investors and by renovating its practice through conceptual tools of decolonisation and gender equality [see also later, RMA1: From Shari’a-compliance to Shari’a].
Objective 2 (OBJ2)
The second important purpose that is inherent to the proposal here is to enhance governance of Islamic finance institutions in accordance with the halal trade paradigm. This can be done through the design of ad hoc strategies to interlink OS and SDGs in the daily operations of Islamic financial institutions, as well as by the screening of investment projects according to a value-based framework, as proposed by Central Bank of Malaysia (2019) or equivalent Islamic sustainable finance indexes. The impact of technology in the contemporary financial markets (from the use of Blockchain to smart contracts, and the legitimacy of crypto-assets) has to be taken into consideration as well in this scenario [RMA2: Halal-trade in practice: IsFIs corporate governance, Shari’a and sustainability].
Objective 3 (OBJ3)
A third (and probably more comprehensive) objective in terms of the social impact of this proposal to promote both financial pluralism (Cattelan, 2013) and economic sustainability on a global stage. To this aim, these strategies must be complemented with a call for a politics of sustainability transition in Muslim countries, with the need for greater attention by political leaders and policy-makers to gender equality, environment, and post-COVID pandemic recovery [RMA3: Halal-trade and the politics of sustainability transition in Muslim countries].
In relation to the objectives that have just been mentioned, the expected results can be briefly summarised as follows.
Expected Result 1 (ExRes1):
An innovative Islamic finance framework for the operations of the industry
The principles of halal trade, in fact, can make the paradigm of Islamic finance more understandable both to Muslim and non-Muslim market participants, removing the aura of a ‘prohibition-driven’ industry.
Expected Result 2 (ExRes2):
Convergence of Shari’a values and economic sustainability
A more coherent re-framing and re-branding of Islamic finance practice into halal trade can be reached through the convergence of Shari’a values and economic sustainability within the governance framework of Islamic finance institutions (IsFIs).
Expected Result 3: (ExRes3):
Shari’a legitimacy of SDGs
The connection of halal trade and the political agenda of Muslim countries can actively contribute both to the pursuit of the UN 2030 Agenda of SDGs and the legitimacy of this aim from a Muslim perspective. In this light, at a systemic level, the proposal contained herein can contribute to the general discussion about the development of a new Islamic sustainable finance where Muslim values and the rationales of sustainable finance converge in the economic development of the Muslim world. This will be advantageous to the future of the industry both in terms of the response to the environmental crisis and the COVID-19 pandemic.
To reach the general objectives of the proposal, a comprehensive research methodology has to be followed through an inter-disciplinary approach that functionally interlinks (RMA1) decolonisation/Islamic studies, (RMA2) corporate governance studies and (RMA3) political studies.
From Shari’a compliance to Shari’a10 – RMA1
A new theory for Islamic sustainable finance has to be grounded on decolonisation of Islamic studies through a critique of Shari’a compliance undertaken by means of a double-step doctrinal research methodology.
Using conceptual instruments of orientalism critique and social science philosophy, the current proposal will drive away the spectre of Shari’a compliance (where financial diversity and pluralism are inherently hampered by the hegemonic spirit of Western finance) by decolonising Islamic finance knowledge construction, hence going beyond SoA1. Though decolonisation is already a popular approach in political economy and social sciences, it has not been applied consistently to Islamic finance. The proposal can contribute to filling this research gap and promoting a more sustainable Islamic finance in the future.
After removing the spectre, the approached here proposes to ground Islamic finance operations on a Shari’a paradigm derived directly from the basic sources of Shari’a, and in particular from the likes of the Quranic verse 2:27513. By re-examining the literature on the OS, Islamic economics and other fundamental sources, the proposal at hand can contribute to reformulating Islamic finance theory by departing from the spectre of Shari’a compliance – that is to say, from a fate of death which belongs to the tragedy of Prince Hamlet as a metaphor of Islamic economics entrapped in an act of revenge against the ‘spirit’ of capitalism (Cattelan, 2020).
Halal-trade in practice: IsFIs corporate governance, Shari’a and sustainability – RMA2
The second possible methodological approach elaborates on corporate governance studies. It will conceptualise halal trade practice by grounding Islamic finance corporate governance on the alignment of Islamic finance sustainability indicators with the SDGs13. RMA2 can pursue OBJ2 in two steps. First, by designing a renovated corporate structure for Islamic financial institutions that complement the role of the Shari’a board with the inputs of social, environmental, and sustainable finance experts (ExRes2.2)15. This renovated corporate structure has to locate the new technological tools of the financial industry within the Islamic moral economy. Second, the consideration of the role of the market, state, and citizens in the paradigm of halal trade (ExRes2), and how this affects the alignment of Islamic finance business policies with the UN SDGs. Accordingly, the halal trade paradigm will be the core of Islamic financial innovation for three reasons.
- It will strengthen its legitimacy by reconciling religious values, economic interests, and financial practice.
- By concentrating on social impact in the light of the OS (hence strengthening tools such as zakat, qard al-hasan, takaful and waqf), Islamic finance operations will be connected to sustainable development and environmental values.
- By implementing sustainability in Islamic finance corporate governance, it will indirectly affect the political economy of Muslim countries as coherent background to pursue Shari’a objectives (see RMA3).
The feasibility of the convergence between Islamic finance and sustainability/SDGs (also in terms of gender equality) can be tested by qualitative research (data collection) through interviews with Islamic finance professionals, market actors and, more in general, consumers.
Halal-trade and the politics of sustainability transition in Muslim countries – RMA3
RAM3 follows RMA2 by pursuing OBJ3 through political studies inputs, underlining the role of policymakers, regulators, and the civil society for the success in the paradigm shift. The implementation of a politics of sustainability transition in Muslim countries will be pursued in connection to the UN 2030 Agenda (ExRes3)16. In this regard, a specific element of the transition can be related to the dimension of gender equality (UN SDG 5) and women empowerment through Islamic finance as well (see later). Here, qualitative research can consist of two actions:
- Data collection through interviews with policymakers and financial regulators (in particular, central banks of Muslim countries); and
- A halal-trade questionnaire in relation to sustainability transition and gender equality in Islamic sustainable finance with the environmental issues to be submitted to the customers of Islamic financial institutions, so as to test the satisfaction of the Muslim civil society in terms of the social impact of investing strategies. This questionnaire will collect their opinions about sustainability and Shari’a-based Islamic finance from a future-oriented perspective (in line with the inter-generational philosophy of the UN Agenda. Their opinions can be also tested in relation to the impact of the COVID-19 pandemic on the global economy). This will broaden the general conceptual plan of proposal from a professional to a political/civil arena.
As the brief outline of its contents, objectives, and methodology suggests, the proposal here is constitutively inter and cross-disciplinary in its programme. To reach its expected results it combines Islamic studies, social science, philosophy, law, decolonisation studies, corporate governance, gender studies, political science, and sustainability. Its multi-disciplinary approach is, in fact, at the core of its original pursuit of a halal trade paradigm.
In general, diversity values are at the heart of the proposal here. This aims to facilitate the full integration of Islamic finance in the global system to contribute to the pursuit of UN SDGs. The attention toward the aspects of financial diversification, pluralism, sustainability, and inclusion is a core aspect of its methodology. More specifically, this methodology includes the evaluation of gender equality (UN SDG 5) as an essential element of the halal trade paradigm shift (see RMA2 and RMA3), which is also receiving attention in the most recent Islamic finance literature.
Remarkably, the Board of Executive Directors of the Islamic Development Board has approved the first women’s empowerment policy only in February 201917, which is the evidence of a further need to push the future of Islamic finance toward gender equality: a task that the proposal here intends to pursue effectively.
Back to the Roots: Sustainability of Islamic Finance and its Future
Shari’a offers solid foundations for the performance of entrepreneurial activities balancing available resources, human needs and desires, so not to devour each other’s wealth and struggle in vain by transforming the market to a place of scarcity, division and competition, where the glory of the rich and the tragedy of the poor shadow each other.
By (re-)affirming the fundamental need to return to basics of Islamic teachings to guarantee a prosperous future of the contemporary Islamic financial market, these pages have proposed a paradigm shift as an epistemological turn for the sustainability of the industry, with an impact on both the construction of its theory and its practice. In fact, if the notion of entrepreneurship, with its social and human value, can be fully comprehended in the [autonomous] domain of Islamic economics19, the hermeneutical limits of the canons of Shari’a compliance (as a modified version of conventional capitalism through the prohibitions of interest and speculation) must be replaced by a halal trade model that is able to disclose its all-encompassing implications for the current evolution of an Islamic financial market ‘well-rooted’ in Shari’a.
In the previous sections, this Shari’a-rooted paradigm has been outlined by referring to its potential objectives, methodology and research programmes, highlighting the extent to which the future sustainability of Islamic finance will depend on the alignment of SDGs with the OS, so to correctly translate the concept of ‘sustainability’ into the domain of Islamic epistemology.
To conclude by recalling the comparison between Prince Hamlet’s fate to that of Marty’s, the change of the destiny for Islamic finance from a tragedy to a future of good fortune may well be found in a lightning bold, generating new power for the DeLorean machine. An energy rooted in the past, as the lightning that struck the town’s courthouse in 1955, but able to generate an alternative future both for Marty and his family. In the end, going back to the roots of Islam (by looking back at the past) through adopting a halal trade paradigm may be the best way to ensure a sustainable future not only for Islamic finance (Marty, in the allegory, kept in these pages), but also for the renovation of the global economy itself (his parents and siblings).