J Econ (2010) 100:91–93

DOI 10.1007/s00712-010-0125-4

BOOK REVIEW

Visser, H.: Islamic Finance

XI, 184 pp., Edward Elgar Publishing, Cheltenham 2009.
Hardcover £ 53.96

Martin Schreiner

Published online: 12 March 2010

© Springer-Verlag 2010

During the last decade Islamic finance emerged as an intensively discussed topic
among practitioners of finance, economists, regulators, policy makers, as well as Mus-
lim theologians. Still a rather minor niche in absolute terms, assets in Islamic Finance
in 2009 grew by 29%, to $ 825 billion from $ 637 billion in 2008, signalling a vigorous
momentum of remarkable growth. In the fall of 2009 globally publicized uncertainties
over payments from the world’s so far biggest Islamic bond (sukuk), issued by Nak-
heel, a real estate firm affiliated to the Emirate of Dubai, further enhanced interest in
all matters concerning Islamic Finance. Yet information on Islamic finance tends to
be scattered among banks’ publications and notes, research papers, and other sources
not easily at hand for a wider audience. Up to now, a comprehensive and compact
book on Islamic Finance was difficult to get hold of. Hans Visser’s excellent mono-
graph Islamic Finance, Principles and Practice fills this void. The book thoroughly
covers all key aspects of Islamic Finance in a non-technical manner, thus making its
topic effortlessly accessible to a large range of professionals and financial laypersons.
The book is outstandingly well structured with the author entertaining a precise and
straightforward style.
The introductory chapter “Why Islamic Finance” discusses theological and ideo-
logical roots of contemporary Islamic finance. The chapter “Sources of Islamic Law”
presents key religious tenets and their interpretations by the various Islamic Schools of
Law, whose readings of the Ur-texts can be rather conflicting. The third chapter clarifies
core rules and principles governing Islamic financial activities: the prohibition of riba
or interest, the ban on gharar, i.e. risk taking, and the ban on maysir—gambling, which
in Islamic law also includes financial speculation. In addition, the principal demand
that all financial transactions should be backed by tangible assets is explained. Chief

M. Schreiner (B)
National Urban Development Agency, Hanoi, Vietnam
e-mail: mart.schreiner@web.de

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consequences for the execution of Islamic financial economic activities are expli-
cated. A subsequent section expounds major financial instruments applied in Islamic
finance: profit and loss sharing instruments such as mudaraba—trustee finance, and
musharaka, partnership financing; murabaha or mark-up financing; ijara, i.e. leasing;
bai’salam, prepaid purchase; quard hasan, or beneficence loan; and sukuk, the Islamic
bond. Based on these building blocks it is examined how banks realize the principles of
sharia law, and which types of financial instruments they offer, followed by a judicious
dissection of the practices of Islamic banking and their inherent downsides. A further
chapter elaborates on specific topics such as insurance and mortgage finance, while
chapter seven analyzes attempts being made to implement tenets of Islamic finance in
the areas of macroeconomic and fiscal policy as well as in public finance. Debating
the pros and cons of Islamic finance, the final chapter fuses the strands of the previ-
ous discourse and presents a cogently argued conclusion. An appendix juxtaposes the
quran’s basic statements on riba and maysir with some of the bible’s key statements
on interest. Detailed references, a list of useful web addresses, and a glossary further
advance the book’s usefulness.
Covering the intellectual origins of contemporary Islamic finance, the first chapter
delivers a particularly captivating contribution. Centered on the ideas Maulani Maud-
udi developed in pre-partition India and in Pakistan during the 1940s and 1950s, a
Muslim intellectual reform movement against perceived Western dominance emerged,
which scholars in Islamic studies tend to classify as ‘salafi reformist’, as it is based on a
more or less literal reading of Islam’s religious sources. Discussing the work of Maud-
udi and his followers, Visser shows that the roots of Islamic finance need to be situated
within a broader context of efforts aimed at establishing a holistic theological basis for
Islamic national economies in post-colonial twentieth century. The author’s insightful
portrait of Maududi’s endeavours, biography, and impact on normative Muslim eco-
nomic thinking condenses extraordinarily valuable pieces of information hitherto not
widely disseminated beyond the narrow confines of some small and rather specialized
academic communities.
A meticulous investigation of the sources of Islamic law and their assorted differ-
ences forms a further distinct ingredient of the book’s accomplishments. The extensive
discussion of both Sunni and Shia law schools leads to a persuasive result: “There is
not one common view on the authority of the various sources of Islam nor on their
applicability to the modern world” (p. 23). Visser explicates some of the historic rea-
sons for the considerable leeway that characterizes Islamic finance in practice. The
findings derived from the discourse on Islamic law underpin the monograph’s succes-
sive sections in an essential manner. Thus, the reader better understands the incessantly
recurring necessity to execute authoritative exegeses of the religious sources before
a new Islamic financial product can be put to market. It becomes evident why all
modern Islamic financial products need to be approved by sharia boards consisting of
high-ranking Muslim theologians.
The defining feature of chapters three to seven is the author’s benchmarking of
Islamic instruments and procedures depicted against mainstream practises of global
finance, which, driven by competition, permanently strive for efficiency improvements
(at least in theory). Through his persistent contrasting, Visser illustrates the specific
constraints and limitations intrinsic to Islamic financial instruments. The unswerving

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way of addressing relative shortcomings and lower levels of efficiency many Islamic
financial instruments reveal when exposed to this benchmarking exercise gives Visser’s
book its distinct feature. The predicament becomes particularly visible in the author’s
discussion of some of the grave principal-agent problems affecting Islamic profit and
loss sharing arrangements. Another challenge is the absence of overdraft facilities,
which impedes the supply of SMEs with adequate working capital. The virtual ban
on derivatives generates a further major deficiency: as a consequence, Islamic finance
commands few ways and means to tackle risks related to fluctuations of commodity
prices, or to hedge against exchange-rate risks. Moving beyond the financial realm,
Visser argues that additional constraints arise from the mandatory usage of Islamic
contract law, which, for instance, seems to provide only little scope for effective penalty
clauses.
In the final chapter, Visser succinctly presents the essentials of his critique. The
comparison of Islamic finance with the standards of conventional finance arrives at a
sobering result: “Seen through the eyes of the non-Muslim observer, applying Islamic
principles in finance comes down to submitting economic activities to a number of
restrictions” (p. 134). Positive facets of Islamic finance are scarce. It probably lowers
barriers of access to financial services for such consumer groups for whom observance
of sharia rules in finance is imperative. Islamic finance arguably lessens the risks deriv-
atives might entail. Yet in Visser’s view, aggregate drawbacks carry such a weight that
the question inevitably arises whether Islamic finance might impede economic growth
in national economies that implement its principles on a large-scale. Higher transaction
costs for virtually all basic Islamic financial instruments already imply unavoidable
structural disadvantages. Devising Islamic versions of more complex financial tools
further pushes up price tags by the requirements to write complicated sequences of
governing contracts and to set up special purpose entities. Even if ways to mimic con-
ventional instruments or to reverse-engineer them in Islamic form (though probably
not in substance) prove to be quite ingenious—at the end of the day there is no free
lunch. Visser’s forcefully argued judgement is persuading. This notwithstanding, the
author concedes that in sum Islamic finance and banking still are in an experimental
phase and will further evolve—hence the attachment of the epithet ‘tentative’ to his
summarizing verdict.
The controversies surrounding Islamic finance are bound to gain additional vig-
our. The debate—inescapably fraught with some ‘Huntingtonian’ subtext—attains an
extra dimension of complexity through expanding debates among Islamic theological
circles on the religious authenticity of both Islamic financial products and Islamic
banking practices. Everybody who wishes to acquire a solid base from which to fur-
ther observe these interesting developments will be well advised to start out with Hans
Visser’s outstandingly competent contribution.

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