Chapter 9

Islamic Finance: An Alternative Finance

or an Antidote to the Crisis of Capitalism?
Geneviève Causse
University of Paris-Est and ESCP-Europe, e-mail: bcg7@wanadoo.fr

Abstract

Purpose – This chapter shows that Islamic finance does not aim at
substituting the conventional financial system, rather it can be used to
reform it. It can thus indirectly contribute to its survival.

Methodology/Approach – We first present the peculiarities of the Islamic

financial model. We then investigate its prospects: coexistence, integration,
substitution? It is the investigation of the strategy and activities of the
Islamic banks that allows to address this issue.

Findings – We find that the deliberate strategy is essentially to compete with

conventional banks. Consequently, there is a willingness to be part of the
conventional system. The study of the Islamic financial system allows to
conclude that their emergence serves a purpose. The Islamic financial
principles provide a benchmark for improving and reforming the conven-
tional system.

Originality/Value of Paper – The main contribution is to provide a clear

answer to the future of Islamic finance, and to present the contribution of
Islamic finance to renewal of financial and economic thought.

Keywords: financial system, conventional system, Islamic banking, crisis of

capitalism, cointegration of finance, wealth management, solidarity

International Symposia in Economic Theory and Econometrics, Vol. 22

F. Jawadi and W. A. Barnett (Editors)
Copyright r 2012 by Emerald Group Publishing Limited. All rights reserved
ISSN: 1571-0386/DOI: 10.1108/S1571-0386(2012)0000022014
174 G. Causse

1. Introduction

The traditional financial system,1 it works today, is the result of a long

maturation process. The first bank was created in France at the beginning of
the 18th century.2 The Paris stock exchange, as well as that of London and
New York, date back to the very beginning of the 19th century. It is at that
period that some national regulation appears, followed by some interna-
tional regulation, in the wake of the Bretton–Woods agreements in 1944.
Since those agreements were given up in 1976, industrialized countries have
been trying to set up new rules for financial markets, which have become
international. The prudential norms drawn up by the Basel Committee have
become the common reference for financial institutions.
Financial transactions, loans for example, existed prior to the creation of
that formal financial system; their development was made possible by the
charging of interest, which has not always been easily accepted. In Ancient
Near-Eastern nations (Babylon, Egypt, etc.) loans with interest are
commonplace; it will then be the case in Greece and in Rome, even if some
philosophers, such as Aristotle, were resolutely against. The people of Israel
alone are against that practice. Christians will take up the Jewish
prohibition.3 For centuries there will be an on-going controversy on the
subject of interest, whose actors are monarchies and the Church, until, with
Calvin, a distinction is made between productive loans and consumer loans,
the latter being systematically free. Bentham will be the following landmark
who, at the beginning of the 19th century, introduced the distinction
between interest and usury, then Keynes who will be in favour of rules for
usury. The practice of interest is then taken for granted. It enables move-
ments of capital and the resupply of banks; it is a monetary policy tool.
The financial system, built up gradually as time went by, with its own
institutions, its regulation authorities, its rules, its techniques and operating
modes, has become universal, and has been considered as such until the day
when another model emerged, governed by different principles. One may
then wonder whether it might be an alternative system.

1
Our understanding of a financial system is what establishes a relationship between
economic agents, capital holders and users of that capital, financial exchanges can
take place in markets directly (in formal or informal markets) or through financial
institutions. The system is said to be traditional in contrast with the Islamic financial
system.
2
In 1716, during the Regency years of Louis XV. Law, recently arrived from
England, is given permission to create the first private bank which will soon become
the royal bank. In 1800, under Napoléon Bonaparte, it becomes the Bank of France.
3
The Council de Nicaea (325) which prohibits interest will be taken up later by
Charlemagne (789), then by the Council of Lateran in 1179 (not only are usurers
excommunicated but they are not buried properly).
 Islamic Finance 175

That issue is all the more important since the traditional system has been
widely criticized after the various financial crises. In that context, the
principles and operating modes of the Islamic financial system (IFS) give it
the appearance of an ideal. The idea of fairness and of justice belonging to
he IFS seem to give it the potential to make economic activity more moral.
As a consequence, should Islamic finance be considered as an alternative as
a model that could be a reference for the reform of the global system?

2. The Islamic Financial System

Islamic finance is not only a body of techniques making it possible to organize

banking without interest rates. In fact, it is a financial system in itself, resting
on an economic theory which in turn is based on the rules and principles
of charia (Causse, 2012, p. 13–24). The main ideas of the Islamic econo-
mic theory – la lieutenancy of goods,4 the role of money,5 solidarity, social
justice – stem from principles of finance usually reduced to prohibitions
(riba or interest, le gharar or uncertainty, le maysir or speculation, money
hoarding, speculation, unlawful activities). The IFS is developing very
widely, in spite of obstacles of all kinds slowing down the process.

2.1. The Birth of the IFS

At the international congress of Islamic banks (IBs) organized by the

International Association of Islamic Banks in 1979, Islamic banking was
defined as follows: An Islamic bank is a banking institutions collecting
money and using it on the basis of the Islamic charia, in order to found a
society based on solidarity to carry out a fair sharing out of wealth
(El Idrissi, 2003, p. 25). It is thus a banking organization, with economic
goals, functioning under constraints of various kinds: religious, ethical,
social and societal (Benmansour, 1994, p. 239). Their mission confirms the
idea that IB can truly be considered as belonging to an alternative financial
system (Charpa and Khan, 2000, p. 27).
The creation of the first IB dates back to the first half of last century; it is
in the 1970s, with the significant rise of the price of petrol, that the IFS
officially took shape. As cash deposits accumulated in the Gulf countries,
some institutions were created to manage those deposits following the
principles of charia. Along with the board of directors, a charia committee

4
Individuals are not owners of their wealth but mere lieutenants; their responsibility
is to make it bear fruit for their own enjoyment and the enjoyment of others.
5
Money no longer is a productive asset but a mere instrument of exchange and
safeguard of wealth.
176 G. Causse

was in charge of making sure that the activity of the institution was in
conformity with the precepts of Islam. The next important event was the
creation of the Islamic Development Bank (IDB) in 1975. It’s objective was
to be a bank for the development of the Muslim world and, as such, it takes
part in ambitious projects. In the same period, some countries, which have
become Islamic republics, Islamized their financial systems thoroughly:
Pakistan in 1979, and Sudan and Iran in 1983. In the 1990s, another striking
event occurred, the opening of special departments or Islamic windows
within traditional banks already present in Muslim countries. The next step
will be the opening of banks and Islamic windows outside the Muslim world
from the year 2000.

2.2. The Present Situation of the IFS

September 11, 2001 can be considered as a landmark in the development of

the system. Gulf countries nationals, who had deposited their money in
foreign countries, fearing the freezing of their assets, partially transferred
them back. That shift of funds coincided with a significant rise of the price of
petrol6 and an increase in production. The combined effect of those events
was the accumulation of a huge amount of cash that triggered the develop-
ment of Islamic finance.
It has always been difficult to assess precisely the size of the Islamic
financial industry. The present market would be around 1000 billion US
dollars. It is present in about 60 countries. The significant evolution of the
system since the year 2000 has the following implications:
 the creation of new products, such as soukouks (kinds of bonds);
 the opening of new institutions, such as the IB that have been created in
the United Kingdom since the beginning of the decade;
 the internationalization of the activity, e.g. the emission of soukouks by a
German Lander in 2004.

2.3. Hurdles to the Development of Islamic Finance

Islamic financial institutions must face difficulties of a different nature,

essentially in terms of image but also of a technical order.

2.3.1. Problems of Image

For some people, including some well-known Muslim scholars, the creation
of those banks is a marketing operation designed to market traditional

6
The price tripled between 1999 and 2005.
 Islamic Finance 177

financial products, slightly altered in order to advertise them as being in

conformity with charia principles.7 For others, IBs are considered as
institutions designed to conservative Muslims.
Rumours about their involvement in the funding of terrorism have led to
a confusion between Islamic and Islamist matters.
Besides, IBs are criticized for their lack of transparency. The publication
of clear and relevant information is nevertheless more necessary in a system
in which both profits and losses are shared.
Finally, the lack of standardization of products, due to the absence of any
authority common to all Muslim countries, isolates each country and, inside
each country, each institution. This is also detrimental to the development of
Islamic financial markets.

2.3.2. Legal and Taxation Hurdles

Whether it is financial transactions based on the sharing of profits and losses
or commercial transactions, Islamic banking is faced with hurdles making it
less competitive than conventional banks. Thus, for all the transactions
based on a partnership (moucharaka, moudharaba, investment deposits,
emission of soukouks), the benefits distributed by the bank are considered as
dividends and not as a financial tax-deductible burden. In operations based
on sales and purchases (of a mourabaha type), or on letting-selling (ijara wa
ikina), the double transaction, purchase then sale, will generate risks as well
as financial costs. Countries in which Islamic finance is exercised have not all
taken steps to eliminate those hurdles.8

2.3.3. Specific Risks

Islamic financial institutions must face traditional banking risks, i.e. risks
linked with credit, liquidity, markets and operational risks. But the necessary
conformity with the charia makes them use different types of risk coverage.
Besides they must face specific risks linked with the characteristics of the
contracts they use,9 of the type of benefits they grant and of the variety of
contracts used for a transaction.

7
The experience, the techniques and the terminology of Islamic finance have now
been assimilated in major international banks (HSBC, Citi Bank, etc.) not because it
would be an efficient replacement solution but because the Islamic label opens new
markets (Ramadan (2008), p. 315).
8
Countries supporting the development of Islamic finance are the only ones to have
taken steps to eliminate ) tax frictions; it is the case in France (cf. instructions dated
July 23, 2010).
9
In participative transactions, they take up the entrepreneur’s responsibility; in
commercial transactions (purchase/sale) the owner’s.
178 G. Causse

2.3.4. The Absence of Substitution Products

Given the prohibitions in Islamic banking, such as riba (interest), gharar
(uncertainty), maysir (speculation), some banking techniques cannot be used
and make IB less competitive, in particular in the case of payment delays, in
the management of liquidities and in the coverage of financial risks
(normally derived products are not allowed).
On top of those difficulties, they are also confronted with problems that
are more or less specific and/or contingent, such as the mode of governance
(due to the presence of the charia committee) and to the lack of skilled staff.

2.4. The Solutions that were Adopted

In order to overcome obstacles and ensure their development Islamic

financial institutions adopted new practices. Besides, some national or
international organizations, in charge of standardization, of harmonization,
of research and training, were created to make the development of the
system easier.
In theory, given the prohibition of gharar and maysir, derived coverage
products (swaps, futures, options) are unlawful. As a consequence, to
protect themselves against risks, IB have gradually devised, ‘‘legal frame-
works’’ and have used Islamic contracts initially designed for other
purposes. Among those contracts, let us mention the arboun, a kind of
down payment, made by the buyer as and when the contract is agreed upon.
If the buyer does not take possession of the purchase, the money then
remains with the seller. That operation can be considered as an option. Since
2010, and the framework agreement Tahawwut (Tahawwut Master Agree-
ment) signed by ISDA (International Swaps and Derivatives Association) and
IIFM (International Islamic Financial Market) the use of some derived
products, under specific conditions, has been allowed and standardized.10
Practices that used to be considered as irregular are now admitted under
specific conditions. It is the case for the tawarruq operation (ou reversed
mourabaha), used when a client needs liquidities.11

10
See Causse & et Abdelhafid (2010) on the matter.
11
The tawarruq is based on the same principle as the mourabaha: a purchase followed
by a sale. The IB buys raw materials from a broker and sells them on to a client. The
materials are then sold on to another broker against liquidities. The client then pays
to the bank. Purchase and sale contracts are independent. Although that practice is
very popular in the Middle-East and allowed by charia committees, it is nonetheless
widely criticized. The Fiqh Academy, at a conference that took place in the UAE in
2009, initiated by OIC, declared those practices irregular.
 Islamic Finance 179

Among the organizations in charge of standardization, of harmonization,

of research and training, encouraging the development of the IFS, let us
mention:
 the AAOIFI (Accounting and Auditing Organization for Islamic Financial
Institutions) founded in 1990, located in Bahrain, in charge of setting up
standards and principles in accounting, audit, ethics, governance and
conformity with the charia;
 the IFSB (Islamic Financial Services Board), created in 2002 in Kuala
Lumpur, inter-governmental body whose mission is to encourage the
integration of Islamic finance in the global financial system;
 the IIFM (International Islamic Financial Market), located in Bahrain,
created by several central banks in order to create, regulate and promote
financial markets, by developing new financial processes compatible with
charia.
A few problems set aside, connected mainly with the regulation of Islamic
banking activities nationally and internationally and with the implementa-
tion of a monetary policy independent from interest, one may consider that
this is a system in itself. Indeed IBs work according to principles that differ
from those of traditional banks; they market different products and manage
specific risks. Specific organizations regulate, standardize and develop the
sector. The evolution of the global financial system was very slow, similarly
the IFS today organizes itself and evolves gradually.

3. The IFS: Is It an Alternative System or a Component of the

Global System?

Not only does the IFS have a very attractive social and societal dimension
but it is also presented as capable of escaping crises thanks to its very
principles. As such, could it be an alternative to the conventional system?
What is the future of that system?

3.1. Potential Solutions

Three solutions can be imagined for the future of the IFS:

 the first is that it replaces the traditional system;
 the second is the co-existence of both systems;
 the third is its integration in the traditional system.

The first solution seems to be excluded, even if universal temptations were

not completely absent at the beginning. Indeed, one should not overlook the
180 G. Causse

fact that Islamic finance being part of the Islamic religion has the same
ambitions as the religion itself.
As the IFS is a system in itself, the second solution can be imagined.
Of course, many problems of regulation and of articulation between the
two systems would have to be solved.12 But that solution depends on
IB themselves, i.e. on the status they claim for themselves: do they
consider themselves as financial institutions belonging to an alternative
system?
To answer that question, let us examine their strategy, in particular when
those strategies are in conformity with their initial mission.

3.2. The Mission of IB

The defining process of IB at their creation has been recalled above

(Section 1). The mission they have been given establishes a closer connec-
tion with a social economy based on solidarity than with the capitalist
economy.
The banks of the social economy that developed during the second half of
the 19th century to make up for the shortcomings of the banking system had
quite a similar mission. They were designed for craftsmen and small
industrialists. A framework law passed in 1917 defined their status. In 1930,
the Crédit Coopératif was founded whose clients are production coopera-
tives as well as retail cooperatives. The Credit Agricole as well as the other
banks of that sector – cooperative and mutualistic banks – were an
alternative to the ultraliberal capitalist system.
The protection of the inherent values to that sector – solidarity, dignity,
respect of persons and of social and societal values – are challenges that have
to be met against a worldwide financial sector whose main actors disregard
those values.

3.3. The Present Strategy of IB

At present it seems that the main strategy of IB is to compete with

traditional banks, they are mainly involved in short-term activities, specific
products have not been developed and their social and societal strategy is
little developed if not non-existent.

12
Even in countries with a multicultural tradition, such as Lebanon, which have
administrative provisions for the co-existence of financial institutions of both types,
all the problems have not been solved.
 Islamic Finance 181

3.3.1. The Importance of Short-Term Commercial Transactions

The few statistics that can be obtained on the structure of the activities of IB
show that transactions are mainly of the mourabaha type, i.e. products based
on purchase-sale or purchase-let transactions with a margin. At the very
creation of IB, warnings against that straying tendency soon appeared. In
1981, in Pakistan, the report published the Board of Islamic Ideology on the
elimination of interest refers to an ideal alternative system, based on the
sharing of profits and losses and on the qard hassan (loan with no
counterpart) that has nevertheless to accept other practices with some grief.
In 1983, Siddiqi writes: A financial system that is built solely on those modes
of funding (mourabaha, salam, etc.) can hardly claim any superiority on the
basis of criteria of efficiency, stability and growth over a conventional
system allowing interest.
The concentration of the activity on ‘commercial’ transactions is all the
more criticized as margins appear as a substitute for interest.

3.3.2. A Strategy of Competition with Traditional Banks

The promotion of IB is a proof of that strategy of competition. Never-
theless, competing with traditional banks is complex since all existing
financial tools are based on interest and institutions are not comparable in
terms of size and experience.
Current research supports that strategy since its aim is to design similar
products enabling the coverage of financial risks, rather than design-specific
products or to improve the offer of existing specific products based on the
sharing of profits and losses.
It seems to be systematically been made use of the principle of necessity in
order to design an offer as close as possible to the conventional offer, e.g. the
sharing of profits and losses is replaced by a fixed margin determined
according to interest rates, debt thresholds are tolerated, as well as the
practice of interest in case of delay of payment.

3.3.3. The Absence of Interest Rates as a Main Foundation

That is the distinctive feature which is mentioned first, or considered as
essential. Thus, when in 2002, a fatwa published by an imam from al-
Azhar University admitted that a remuneration defined a priori for a
determined period was not prohibited by the Koran or sounna, a move-
ment of protest arose among promoters of Islamic finance who felt
‘threatened from inside’. Yet, a specific mode of charging – margin or
sharing of profits and losses – could not as such characterize, let alone
define Islamic finance.
182 G. Causse

3.3.4. The Social and Societal Strategy Is in the Background, If Not

Absent
That strategy is at the core of Islamic finance (see the definition of Islamic
banking given by the International Association of Islamic Banks in 1979),
indeed the aim is to found an economy based on solidarity and to introduce
some kind of justice in the distribution of wealth. And yet:

 that strategy is absent or non-formal, it is the case in specialized

institutions (real estate credit, for example);
 the management of the zakat (compulsory donations which are suppo-
sed to be collected and distributed by banks) has been left behind by
major IBs.

Some banks fulfil their mission by managing social funds or by spon-

soring projects (social, humanitarian, etc.). But that is not specific to IBs.
They often compare their financial performances with those of traditional
banks, which proves that they consider themselves as competitors and that
their main focus (if not the only one) is their profitability.
It is well-known that IBs find it hard to maintain their competitiveness
without compromising on their ideology. There are numerous causes: risk
involved by participative operations, lack of skilled staff, asymmetry of
information, heavy taxation, absence of a monetary market, etc. Clients
making deposits are not keen to take risks either. It is then easy to
understand why the calculation of the financial remuneration does not vary,
and is determined by comparison with traditional banks. The reasons are
real and account for the small number of long-term operations based on
participation. Yet the latter are specific to those banks: they should be at the
core of their activity and could attract non-Muslim customers. It is simply
more profitable and less risky to devise ‘adapted’ conventional financial
products. But is it not a very narrow view of Islamic finance?
Criticism is mostly on the strategies used but also on the very nature of
Islamic finance:

– y have we really designed an alternative system or are we still imitating

the traditional system?13
– Is Islamic banking genuinely Islamic? y Thanks to some complex
financial engineering, IBs have managed to find products in keeping with
the principles of Islam to substitute for classical financial instruments.14

13
A. A. Badawi, Prime Minister of Malaysia, November 12, 2008, retrieved from
http://www.financeislamiquefrance.fr/archives-actualités-internationales.php
14
P. Fouet: Le développement de la finance islamique vu du Moyen-Orient, Revue
Banque et Strate´gie n1 253, novembre 2007, p. 16.
 Islamic Finance 183

– y some people argue that the new paradigm may at best be interest free.
It cannot really be called Islamic in the sense of free from exploitation
(Iqbal, 2007, p. 103).
The severest criticism comes from Ahmed Al Naggar, the pioneer of
Islamic banking in Egypt, who was the first secretary of the Association of
IB. When he retired in 1991, he said, ‘Islamic banks have not yet began to
accomplish their specific task, their social and educational mission is still a
failure, because on their excessive focus on religion y most Islamic banks
have sold their soul y (Galloux, 1993, p. 471).

3.4. The Future of IB

What has been stated above about the present strategy of IB leads us to
believe that their fate is similar to that of banks belonging to the social
economy to which they belong. Similar to solidarity banks, which have a
tendency to become mere banks, IB tend to lose their specificities gradually.
Some charia committees or Islamic institutions change their minds about the
lawfulness of some products surprisingly quickly. Thus, after 3 years of
negotiation, coverage transactions on rates or on currencies can be set up
within the limits of a reference contract in keeping with the charia,15 that
decision is coherent.
According to Cheick Usmani (2004), a well-known religious expert,
Islam being a way of behaving in life, there are two possible sets of rules:
one based on the ideal goals of charia that can be applied in normal
conditions, the other based on some slackening that can be admitted in
abnormal situations. IBs seem to find it hard to work in an ‘abnormal’
environment and therefore renounced the strict application of their
model, slackening their rules in order to survive and develop (Chapelliére,
2009, p. 283).
This slackening will undoubtedly enable Islamic finance to become part
of the global system. The third solution seems to be adopted. Some
operations that are Islamic in themselves could take the form of ‘ethical’
products and be retailed by the traditional banking system in non-Muslim
countries.
They will probably not have fulfilled their initial mission, yet they will
have made it possible for a new model to emerge, and that is a good thing,
especially today when the dominant system is being questioned.

15
Le Tahawwut Master Agreement (cf. www.agefi.fr du 3 mars 2010).
184 G. Causse

4. Islamic Finance: An Antidote to the Crisis of Capitalism?

The global financial system was strongly shaken by the crisis. The latter has
now become trivial. It has been considered as being cyclical phenomenon
among others; no lasting remedy is therefore looked for. It would be sufficient
to change behaviours and to manage risks better. In fact, since the last
crises (in the 1980s) the context has been changing because of deregulation
and financial liberalization. Capitalism has become financial capitalism.
Never has the financial sphere seemed – rightly or not – to run for itself,
totally disconnected from the ‘real’ world, i.e. the corporate world (Albouy,
2010). Financial flows are 45 times the real flows (Berruyer, 2011). A reform
of the financial system itself becomes necessary. Numerous people have
spoken in favour of it. They are echoed by news headlines: For an
alternative approach to economy, what antidote against the crisis? Is there
an alternative to capitalist banking? In favour of alternative finance, y yet
what is meant by ‘alternative’ finance?
In continental Europe, that concept usually encapsulates all the
establishments belonging to the ‘social economy’, i.e. essentially mutualist
and cooperative banks. Unfortunately, and for various reasons – notably
the lack of consideration of states for those socially oriented establishments
and the pressure of financial markets which have led them to practices off
their field of activity (securitization, creation of classical subsidiaries) – the
quest for an alternative solution, based on another economic logic, has not
really succeeded. What is meant by another logic is the logic that gives
priority to stakeholders over capital and to the well-being of organization or
community members over monetary gains. The social economy sector finds
it hard to fulfil its mission. Its role cannot be overlooked, but it is not
sufficient to question the financialization of the economy.
The model of financial system found in social economy is probably too
close to that of the traditional system, which is why it did not encourage
reformers to rethink it in depth. Conversely, Islamic finance, with its strong
ethical dimension, its corpus of rules, could be seen as capable of doing it.
As underlined earlier on, its rules come from what could be called the
Islamic economic theory. Its theoretical foundation is the charia (the Koran,
sounna and fiqh), but it has to some extent undergone the influence of the
West.16

16
According to Ghaussy (2001, pp. 37–38): The norms and values of the West
have y influenced and partially transformed an understanding of the social and
economic organization that had been autonomous so far y. The spectrum of
modern approaches goes from liberal and lay conceptions to conceptions based on
social reforms or on strong state leadership. The author mentions the influence of
18th century France (Les Lumières) on Turkey, as well as the influence of reformist
 Islamic Finance 185

Islamic economics, as most economic theories, intends to set up a society

in which fundamental human needs are satisfied, where the use of resources
is maximized and wealth is shared out fairly. But the pregnancy of moral
and religious dimensions makes it necessary to differentiate the importance of
the various objectives; profitability does not come first (Austruy, 2006, p. 39;
Ayub, 2007, p. 32). Priority is given to the respect of values derived from
the charia which can be used as valuable references to challenge the dominant
system. The following lines of thought will be explored: the embeddedness
of finance in society, the principle of stewardship of goods, the importance
of the work factor, the production-distribution logic, the role of money, the
notion of equality of value and solidarity.
It may seem strange not to mention the prohibition of interest, but it is a
logical consequence of the principles mentioned above.

4.1. The ‘Embeddedness’ of Finance in Society

The crisis is not solely economic; it has a strong social dimension, in its causes
and its consequences. As a consequence, remedies cannot be exclusively
economic. That is why reference will be made to texts written by sociologists
like Polanyi (2009) dealing with the articulation of economic and social
matters. More than half a century ago, that author was already fighting
against the myth of the market – the basis of the present economic system –
that was supposed to regulate itself. To describe that situation, he speaks of a
disembedded economy, meaning an economy in which markets are set free
from the social regulations proper to previous economic systems y an
economy where the pursuit of individual gain is general and y governed by
market prices alone (Le Velly, 2009). Market rules are indeed established
independently from social consequences; they are a kind of dictatorship.
Individualism has become one of the strongest components of social and
economic life.
Furthermore attempts at re-embedding are appearing, thus the current
debate on the social responsibility of organizations and on the respect of the
common good. Numerous reforming movements are emerging17; they reveal

or modernist theories coming from France or from Britain on the Arabic world and
on Persia. Socialist movements were on friendly ground. He adds nonetheless that
those theories never threatened the influence of Islam on basic social organization,
even in socialist-oriented Muslim states.
17
Movements in favour of a human economy, started by economist Jacques
Généreux attracting supports from all over the world (cf. Manifeste pour l’économie
humaine, 2000), or of a purple economy whose aim is to restore the cultural
dimension of the economy (cf. L’économie mauve, une nouvelle alliance entre culture
et économie, Le Monde, May 19, 2011).
186 G. Causse

the necessity to bring values back to the business world. The fair trade
project also belongs to that ‘re-embedding’ attempt.
Alongside those ‘lay’ movements, it seems that renewed attention is paid
to the relationships between growth and religion18 in the same logic as Max
Weber’s works, notably ‘Protestant Ethics and the Spirit of Capitalism’
(Weber, 2003). The link between the economic development of a country
and its moral values cannot be doubted and it must be admitted that religion
conveys values – such as solidarity, work ethics, honesty – weighing on the
economy. In that respect the Muslim religion stands out from the rest, first
because spiritual and worldly matters are confused (Arkoun, 2007, p. 65),
second because it is equipped with principles regulating economic activities.
In the other religions, spiritual and worldly matters are disconnected thus
diminishing the pregnancy and the collective character of moral values.
They have become everyone’s business; the market does not care about
(or no longer does) restrictive values that would endanger profitability.
The principles of good governance that Islamic financial institutions
must respect are inherent to the Muslim religion and had existed long
before the birth of those institutions a few decades ago. Ibn Khaldoun
(Al Muqaddima), in the 16th century, called for good governance in the mid
term and in the long term. He gave the following definition: ‘Politics is the
art of governing a family or a city according to moral standards and to
principles of wisdom, in order to encourage populations to act for the
conservation and the durability of the species’ (Goumeziane, 2011, p. 185).
As the author puts it: Are we not here close to the definition of sustainable
development, as it was adopted in 1992 at a United Nations summit in Rio,
stating the necessity ‘to meet the needs of present generations without
compromising the possibility to meet the needs of future generations’.
It would probably be utopian to imagine an economy that would be
completely ‘embedded’, i.e. promoting mankind, but what can be wished
for, as advocated by reformist movements, and Islam among them, is an
articulation of economic, social and societal matters.

4.2. The Principle of Lieutenancy or the Stewardship of Wealth

According to Islamic doctrine, property, as we understand it in the West,

does not exist. The true owner of the Earth and of its resources is the

18
Cf. Barro (2005, p. 2). The rise of the Asian dragons (Donnadieu, 2005, p. 15) is
seen as a Confucian–Buddhist heritage, a link is established between dechristianiza-
tion and economic decline in Europe (Ferguson, 2005, p. 10); some Christian
financiers disagree openly with organizations that have no other purpose than the
pursuit of interest (cf. Manifeste de financiers chrétiens atterrés, La Croix, December
5, 2011).
 Islamic Finance 187

creator, i.e. God. Human beings are ‘lieutenants’ of God on Earth.19 Wealth
has been bequeathed to human beings and they must fructify it for their
own benefit and for the benefit of society. Time is also an element of that
wealth, but contrary to traditional finance, it is not considered as a
commercial value, but as something that must not be wasted and must be
used for the benefit of God.
That notion of non-exclusive property entails a responsibility that should
avert some abuses such as the concentration and/or accumulation of capital,
waste of ill-use of wealth. The responsibility that has to be exercised in
commercial transactions is expressed notably by the prohibition of hoarding
and of maysir (speculation).
The prohibition of hoarding is justified by the obligation to fructify one’s
wealth for the benefit of all.20 The prohibition of speculation is a warning
against risks. It has various implications, notably the idea that each
transaction must be based on a real asset. Financial coverage transactions
(swaps, futures, etc.), also speculative are therefore, in principle, prohibited
in the IFS.21
In the traditional system, speculation has become one of the ways of
improving company profitability. Safeguards making it possible to deter-
mine the origin of profits have even been removed. According to new
accounting standards, which have become mere financial norms,22 stock-
exchange added-values deserve as much consideration as the gains derived
from the sale of engineered products or from services done.
It is all the more dangerous as financial market prices do not represent
real values y the market is a place where evaluation norms are being set
up, where a specific vision of the future emerges y financial power and
autonomy are then assessed according to the ability to impose judgement
and assessments (Orléan, 2000). The extreme volatility of prices can only be

19
‘And it is He who has made you successors upon the earth y (S. 6, V.
165.) y spend out of that in which He has made you successors (S. 57, V. 7.).
20
And those who hoard gold and silver and spend it not in the way of Allah –
give them tidings of a painful punishment y so taste what you used to hoard!
(S. 9, V. 34, et 35).
21
A master agreement Tahawwut was signed jointly by ISDA (International Swaps
and Derivatives Association) and IIFM (International Islamic Financial Market),
according to which some derived products can be used for risk coverage under
specific conditions. According to the principles of Islamic finance, the use of those
products is not lawful; the prohibition of gharar (uncertainty, deceit, risk, ambiguity)
stands in strong opposition to it. Principles of a superior order alone (good
stewardship of wealth, work ethics or the necessity of efforts) must justify their use.
(cf. Causse & et Abdelhafid, 2010).
22
The IFRS (International Financial Reporting Standards) set up by a private
organization, the IASB (International Accounting Standards Board), adopted by
most developed countries under the pressure of the market.
188 G. Causse

accounted for by the changes of the real economy. Finance and the real
economy are disconnected.
Islamic finance, by prohibiting speculation, by limiting securitization, and
by reducing the use of derived products to the coverage of risks, leads to the
idea that the creation of wealth by companies can only stem from their
industrial and commercial activity. It can never result from stock-exchange
gambling.

4.3. The Importance of the Work Factor

As stewards of goods, humans must exploit them. Work is an obligation and

a responsibility.23 In the Islamic economic model, work not only occupies a
special place – ample reference is made to work ethics which is both an
obligation and a responsibility – but it is considered as a main production
factor which, as such, deserves a relevant remuneration. On that point let us
mention Ibn Khaldoun once again, who, long before the 18th century
classical theorists (Adam Smith, David Ricardo), emphasized the role of
work in the creation of wealth.
In the capitalist system, as its very name suggests, the main factor is
capital. The employee and the company sign a contract according to which
the former provides his/her work and receives wages as a counterpart for it,
in the same way as a supplier of goods signs a contract according to which a
fixed quantity of goods is delivered against payment of some kind.
The whole logic of financial capitalism is founded on that principle from
which management tools were derived. Thus in accounting terms, work is a
cost, similarly to raw materials. When a company generates some wealth,
the residual surplus (after the remuneration of capital) joins the initial
capital. The creation of wealth is supposed to stem from that factor
exclusively.
This procedure is opposite to the stakeholder theory24 which, although it
appeared several decades ago, has never been applied concretely. The
‘organizational surplus’ should be shared out between all the actors who
contributed to it; shareholders are no longer seen as exclusive residual
creditors.
Islam, for the sake of social justice, encourages a functioning mode in
which profits, as well as risks, are equally shared out between the actors.
Procedures of participative funding according to which a fund holder must
associate with an entrepreneur, the former bringing capital, the latter his/her

23
And that there is not for man except that [good] for which he strives (S. 53, V. 39).
24
The stakeholders theory, developed from an article by R.E. Freeman, published in
1984.
 Islamic Finance 189

work, belong to that logic. After the transaction, they share the benefits
derived from it. It cannot be denied that most of the transactions carried out
by IBs are not based on the sharing of benefits and losses but the principle is
there and is one of the main specificities of Islamic finance.
It can be added that this functioning mode, based on the association of
work and capital and on the sharing of profits and losses, is undoubtedly
one of the main remedies to the financialization of the economy.

4.4. The Production-Distribution Logic

That principle, also called principle of sequentiality,25 means on the one

hand that one cannot sell what one does not own, and on the other hand
that one cannot distribute wealth before it has been generated.
The prohibition to sell an item that does not exist26 has triggered many
controversies. According to that principle, the salam contract through which
a bank pays in cash an item that will be delivered later at a predetermined
date is unlawful. It is also the case of the istina’a contract. In that case,
payment is postponed but the product that has to be manufactured does not
exist when the contract is agreed upon. The prohibition of such contracts is
an obstacle to the good management of goods. Some solutions were found,
apart from the principle of necessity (darura)27; the supply of precise
information about the goods makes it possible to consider them as virtual
goods that can then be involved in a transaction. The information must be
sufficiently precise to avoid gharar (uncertainty, deceit, risk ambiguity).
Conversely, that does not apply to derived products, which remain
controversial and are used in very strict conditions.
Besides, the principle of sequentiality justifies, in itself, the prohibition of
the practice of interest, or rather of riba. Wealth cannot be distributed
before it has been created.28 The prohibition of riba (interest) is often
presented as the main characteristic, if not the only one, of the IFS. What is
meant here is every contractually stipulated interest, previously established
on the basis of the capital initially loaned and on time agreed upon
independently from the potential results of the transaction.

25
Cf. Hassoune A., conference at the Ministry of Finance, Paris, November 2009.
26
It is a consequence of the prohibition of gharar, taken notably from the following
hadith: The Prophet has prohibited the purchase of any animal not yet born, still in
its mother’s womb, the sale of milk still in the teat, y the purchase of a fisherman’s
catch before he goes to sea.
27
That principle makes it possible to forget some prohibitions: Allah does not charge
a soul except [with that within] its capacity (S. 2, V. 286).
28
y And that his effort is going to be seen, then he will be recompensed for it with
the fullest recompense y (S. 53, V. 40 et 41).
190 G. Causse

The interest, the fixed cost borne by the entrepreneur-lender, before any
return, is nothing more than the distribution of a potential result, in the
future. The money lent has generated income although it has not created any
wealth and perhaps never will. Burdening a project heavily, at the very start,
endangers its success. The alternative to interest is the sharing of profits and
losses. That mode of remuneration has very different characteristics; it
represents a genuine sharing between the partners of the creation of wealth,
as well as of the risks. The amount that is distributed varies; it depends on
the profitability.

4.5. The Role of Money

Money and wealth have taboos in most religions.29 What is original in Islam
is that money cannot be for sale or to let because it has no value in itself with
a price determined by the market. It is a mere tool of measurement, of
exchange and for the storage of value. As a consequence, riba (interest and
usury) is prohibited.30
As in other monotheistic religions, which were equally combating the
usurious practices of merchants, the main foundation of that prohibition is
social justice. It has been widely discussed in the three monotheistic reli-
gions.31 Christians, on the basis of the Gospel, have banned the practice of
interest, then a distinction was made between interest and usury. That
distinction was not established in the Muslim religion and the word used
is riba.

29
Some verses from the Old and the New Testaments prove it: Ye cannot serve God
and mammon (Matthew 6:24). It is easier for a camel to go through the eye of a
needle, than for a rich man to enter into the kingdom of God (Mark 10: 23–27). The
Koran is clear on that matter: Woe to every scorner and mocker, who collects wealth
and [continuously] counts it, He thinks that his wealth will make him immortal! No!
No! He will surely be thrown into the Crusher [hell] (S. 104, V. 1 à 4).
30
Several verses of the Koran consider it as not desirable: And whatever you give for
interest (usury in some translations) to increase within the wealth of people will not
increase with Allah (S. 30, V. 39.); in another one the prohibition is clear: {O you
who have believed, do not consume usury, doubled and multiplied, but fear Allah
that you may be successful. And fear the Fire, which has been prepared for the
disbelievers (S. 3, V. 130, 131.); in the end, interest is definitively condemned: {O
you who have believed, fear Allah and give up what remains [due to you] of interest,
if you should be believers (S. 2, V. 275 à 278.). That last sura (2) is the longest
and presumably the most recent.
31
See two issues of Finance and Common Good, nr 16 {Interest Rates and Moral –
Religious Perspectives, Autum 2003, and nr 17 {Capital Remuneration: Con-
temporary Practices, Winter 2003–2004, notably the article by D. Ramelet: {La
prohibition de l’usure au Moyen-Âge. (the prohibition of usury in the Middle Ages)
 Islamic Finance 191

Interest and/or usury being more or less prohibited by all religions,

various theorists have successively fuelled the debate on that matter. At the
beginning of the 19th century, Jeremy Bentham32 shows how difficult it is to
set up regulations in the matter: difficulty to draw a distinction between
interest and usury and to fix a maximum interest rate. In the 20th century,
John Maynard Keynes33 shows that the satisfaction of the desire of liquidity
among individuals is an obstacle to full employment. He is therefore in
favour of regulations establishing a rate compatible with full employment.
But theories explaining the attractiveness of immediate consumption will
defeat his arguments.
Beside the fact that interest represents the unfair sharing of wealth that will
not always be created, it discourages the enterprising spirit. What is more, it
encourages inflation; interests are costs resulting in a rise of the selling price
as well as in a dichotomy between the real economy and the monetary
economy. That last argument has much weight in our present situation. The
practice of interest has led to the creation of financial products involved in
speculative transactions, independently from any underlying economic
operation creating wealth, which has led to the recent financial disasters.
In Islamic finance, no contract is legitimate if it enables money to generate
money independently from the association of work and capital within a
productive activity.

4.6. The Notion of Equality of Value or Fairness

Islamic ethics emphasizes the notion of equality of value, or fairness. It is

applied very concretely in the Muslim business law. What is meant by Muslim
business law is the charia rules, taken from the Koran and the sounna,
supplemented by the fiqh (jurisprudence), applied to transactions. Chehata
(2005), whose achievement was to set up a general theory of obligation in
Muslim law, establishes the principle of equality of value as the basis of the
two main principles of Muslim law, i.e. the respect of a strict equality between
contracting parties and the avoidance of any dispute resulting from
ignorance, from the vagueness or the risky nature of a contract.
As a consequence, beside the fact that the contract must deal with
something real (goods, services, usufruct) and be agreed upon by all
parties,34 some contracts are prohibited, in addition some duties are
imposed on the signer of a contract. Are prohibited the contracts with a

32
Défense de l’usure, 1787.
33
The General Theory of Employment, Interest and Money, 1936.
34
O you who have believed, do not consume one another’s wealth unjustly but only
[in lawful] business by mutual consent. (S. 4, V. 29.)
192 G. Causse

suspensive condition, i.e. contracts whom the validity depends on the arrival
of an event, or double contracts, i.e. merging two contracts in a single one
(a sale and a loan for example), as well buying back from a person what
one has just sold (Cf. Vogel and Hayes, 1998, p. 68). The goal of those
prohibitions is to avoid possible disputes in complex contracts, or to comply
with the strict prohibition of riba and gharar.35 Among the duties imposed
on every Muslim, let us mention36 the pursuit of mutual benefits (fairness in
reciprocal commitments), the allocation of profit according to the risk
taken, the supply of maximum information (reveal to the buyer the defects
of the object of the transaction), the avoidance of negatives externalities for
the three parties (including society in general), the prohibition of unequal
exchanges (elimination of clauses and practices that rob the other party) and
the respect of the letter and of the spirit of a contract. Those duties are
clearly derived from verses of the Koran dealing with delusions on the very
object of the contract.37

4.7. Community Spirit and Solidarity

Solidarity and social justice are strong values in monotheistic religions, yet
in the west, as the time went by, under the influence of various factors
(capitalism, urbanization, the decline of religion y), individualism has
become one of the components of social and economic life. Conversely, in
the Muslim world, Islamic doctrine, where worldly and religious matters
cannot be separated, emphasizes the idea of cooperation, ‘the community
spirit’, the pre-eminence of the group over individuals y. That cooperation
Ibn Khaldoun calls solidarity, is the basis of the tribe or of the clan meant as
social organizations (Siagh, 2003, p. 31).
Humans have the responsibility to fructify the goods of which they are
stewards; they can benefit from the fruit of their work but on the condition
that the wealth created should be partly redistributed. That obligation is
repeated several times in the Koran.38

35
Take the example of Iqbal (2007), this is how he illustrates why goods that have
been sold must not be bought back. Thus A sells his house to B for a price of US $
500,000 paid cash and in the same time, buys it back for a price of 600,000 $ with a
loan. The final amount of the exchange is $ 500,000 today and will be $ 600,000
tomorrow. The price difference is the price of time.
36
Most of them are taken up in The 10 commandments to be observed as formulated
by Iqbal (2007), p. 19.
37
And O my people, give full measure and weight in justice and do not deprive
the people of their due y (S. 11, V. 85).
38
That obligation appears in several versus, here it is most peremptory: y And those
whose scales are heavy [with good deeds] – it is they who are the successful; But those
 Islamic Finance 193

The duty of solidarity is exercised notably through the payment of the

zakat. The zakat is a compulsory alms giving, a kind of tax, which every
Muslim with some patrimony must give. The aim is twofold; on the one
hand it is the redistribution to the needy, on the other hand the ‘purification’
of one’s wealth.39
As far as Islamic financial institutions are concerned, that principle of
solidarity implies the obligation to have a social and societal strategy,
according to the definition of Islamic banking drafted at the international
conference of IBs organized by the International Association of Islamic
Banks, in 1979 (cf. Section 1). They fulfil their social and societal mission,
the ones managing the money of zakat and other social funds (waqf), the
others – similar to ‘socially responsible’ or ‘ethical’ companies – by
sponsoring various projects (humanitarian, sports, artistic, etc.). The waqf is
the resurgence of an old practice of immobilizing (as a kind of perpetual gift)
goods within a structure in order to fructify them and distribute the benefits
to those in need. Those goods, or assets, must bring in benefits that are made
public, a permanent alms giving of some kind.40
As far as solidarity is concerned, it seems interesting to compare the
definition of Islamic banking with that of the Banque populaire as it was
given by one of its promoters, Capuchin priest Ludovic de Besse (1831–
1910), who created social works, several of which were financial institutions
called Banque Populaire or Crédit Mutuel et Populaire.41 He says, the
banque populaire must be a vast association that brings together in a
brotherly spirit all the capital owners and all the honest workers, so that,
through the fruitful union of capital and of work, wealth should first be
multiplied and then better shared (Gueslin, 2002, p. 29). It is very
astonishing to find in this very definition all the fundamental elements that
are considered to be specific to Islamic finance. Those principles do not
belong to religion, but to ethics. Unfortunately, the alternative to
ultraliberal capitalism that banks of the social economy represented,
although it has been going on to the present day, is now threatened. As
Surzur (2002, p. 262) puts it: y economic, financial and regulation changes

whose scales are light – those are the ones who have lost their souls, [being] in Hell,
abiding eternally (S. 23 V. 102, 103).
39
In Islam there are various types of prayer, one can pray through one’s deeds or
through one’s wealth.
40
In the same way the AlBaraka bank in Algeria, created, in November 2010, a
monetary waqf, which is a company shareholder, the SPA Trans Waqf, a taxi
company whose dividends are given to charities.
41
One can also mention Louis Even (1885–1980), a Frenchman who had emigrated
to Canada, who, during the crisis, founded the Crédit social. It was quite a success
and became popular with several Canadian provincial governments.
194 G. Causse

combined with the cultural evolution of society have been imposed on a

sector that, at its origin, was designed for solidarity not for banking.
The principle of solidarity is not easy to implement for a financial
institution that is in competition with other institutions that have different
missions. The history of the banks belonging to the social economy shows
that managing an organization that has multiple purposes – economic,
social and societal simultaneously – is a virtually impossible exercise. One
may then wonder whether Islamic financial institutions have fulfilled their
mission. But this is not our aim here; the social and societal mission of those
institutions being taken for granted; it is the responsibility of each entity to
determine the ways of fulfilling it.

5. Conclusion

The principles of Islamic business ethics, as they have been listed, can first
appear as utopian. Yet they are common sense, even if it has been forgotten.
The objectives pursued by the promoters of the financial institutions of the
social economy as stated above come as a proof. As underlined by
Guéranger (2009, p. 78): Islamic finance, shaped by Muslim ethics, is no
alien object but an approach the European tradition used to be familiar
with, retrieved today by the Western ethical movement for reasons both of
morality and of efficiency.
Attempts at restoring some moral principles, and a bit of humanity, in the
financial and economic world are then numerous. Since the emergence of a
capitalism, amoral by nature, now essentially financial, various attempts
have been made, from the mid-19th century to the present day. Yet, in spite
of the widely acknowledged necessity to change paradigms, thorough
reforms do not seem to be close at hand. Changes are minor and remained
confined to the strict financial field.42
Western economies are so suffused with concepts of individualism, of
pursuit of profit, that an articulated approach, founded on strong principles,
is necessary to restore moral values within the financial system. Solidarity,
fairness, the respect of individuals and of values both social and societal are
as many challenges to be met, against a global financial system whose main
actors overlook constraints linked with values. In the end, the success of
such a reform of the system would be a return to some forgotten or partially
overlooked values.
Islamic finance has given much hope to various categories of people: to
Muslims who wish to act according to their religion, to small entrepreneurs
in developing countries who find no funding for their projects, but also to

42
They do not go beyond the improvement of prudential rules.
 Islamic Finance 195

those who crave for ethics and are confronted with a financial system with
which they are not content. The observation of IBs, after 30 years of
existence, leads to the conclusion that, similar to mutualist banks, they will
gradually become part of the global system, even if they retain some of their
specificities. Yet that is not a failure. They may not have fulfilled the mission
given to them at the start but the eliciting of a new reference model is a
good thing, especially today when the system is being challenged. The body
of Islamic principles is a strong basis on which a reforming movement
can build.

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