Islamic economics and Islamic finance in the world economy

• Date: 01 March 2018
• Author: Mansor H. Ibrahim,Nafis Alam
• Published date: 01 March 2018
• DOI: http://doi.org/10.1111/twec.12506

SPECIAL ISSUE ARTICLE

Islamic economics and Islamic finance in the world

economy

Mansor H. Ibrahim

1

|

Nafis Alam

2,3

1

International Centre for Education in Islamic Finance (INCEIF), School of Graduate Studies, Kuala Lumpur, Malaysia

2

Nottingham University Business School, University of Nottingham Malaysia, Semenyih, Selangor, Malaysia

3

Sunway University Business School, Sunway University Malaysia, Bandar Sunway, Selangor, Malaysia

1

|

INTRODUCTION

Islamic economics as a discipline applies the injunctions of the Sharia or Islamic laws in dealing

with the allocation of scarce resources for individual and collective achievements of spiritual,

moral and material well-beings. In line with an Islamic world view based on divine revelations

and human reason, Islamic economics places collective/society welfare above personal gains. It

visions an economic system that protects ownership, requires participation and ensures equity in

all economic transactions. Mannan (1987) summarises Islamic economics succinctly as economics

imbued with Islamic values.

While Islamic economics can be traced back to the writing of al-Muqaddimah by Ibn al-Khal-

dun, the emergence of Islamic economics as an academic discipline is generally attributed to the

period of Islamic resurgence of the 1970s. During the period, economists, Islamic jurists, practi-

tioners and policymakers were drawn together to discuss Islamic economics in various forums,

the milestone of which is the International Conference on Islamic Economics, better known as the

Makka (Mecca) Conference held on 21–26 February 1976. From the writing of al-Muqaddimah to

the 1970s, two fundamental pillars of Islamic economics were persistently highlighted, namely the

prohibition of riba and the importance of partnership-based business transactions. While there was

much debate on what riba is during the early years, there is consensus today that the charging of

interest rate as practised in the conventional banking constitutes riba and, thus, is prohibited. In its

place, Islamic economics propounds partnership-based arrangements where, to justify financial

rewards, parties in the transactions must participate and bear risk related to business undertakings.

The practical applications of the Islamic economics have been mainly manifested in Islamic

finance. Thus, it is not surprising that Islamic finance has received most of the attention since the

1970s. In line with the fundamentals of Islamic economics, Islamic finance demarcates itself com-

pletely from interest rate and applies partnership contracts and/or real sector-based contracts for its

financial transactions using such contracts as Mudaraba,Musharaka and Murabaha contracts. In

addition, in line with Islamic teachings, Islamic finance is free from ambiguity (gharar), gambling

(maysir) and corruption (rishwah). Needless to state, transactions or activities undertaken are con-

fined to only those allowable by Islam. Accordingly, sales and production or financing related to

DOI: 10.1111/twec.12506

668

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©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2018;41:668–673.