Summary of Nagaoka Shinsuke's (2012) paper

Critical Overview of the History of Islamic Economics: Formation, Transformation, and New Horizons (2012)

The paper talks about the development of IE, which started of as a separate discipline on the outcome of the Mecca 1976 “International conference in Islamic economics”. Initially, Islamic economics developed as a response to the many conventional practices dominating the Islamic world then. For instance, the British set up their own Ottoman Imperial Bank on formerly Ottoman territories, that practiced riba and this horrified the Muslims.

It was also a problem in other parts of the Muslim world as well, including Pakistan. All this led to the resurging need on the implementation of an Islamic system and the conference seemed like a milestone in the pursuit to that goal. However, later there were several diverging schools of thought on the issue of riba itself. The first is the Usury-riba school, which allowed for interest as long it does not amount to usury, or excessive interest. They view interest as a lubricant for the economy and stated that the actual riba that was prohibited was actually riba al-jahiliah that was practiced at the time of the Prophet. That type of riba would charge double interest to lenders who would make late payments and seems highly oppressive in nature.

It is interesting to note, that during the 1976 conference and subsequent to that, Islamic economists agree that mudarabah financing is the best type of Islamic financing to be used and should be the ideal form used widely. However, it eventually became apparent that murabahah was the form that dominated, and it still is leading in popularity. Indeed, Harran (1995) estimated that murabahah comprised around 80-90% of financial instruments in the Islamic world between 1970 to 1990.

Many countries tried to implement Islamic finance in the system, but they had many challenges and were not entirely successful. Interest based banking systems were not abled to be abolished. Some of the reasons for this was because the difficulty to implement Islamic finance on public and external debt and monetary policy (Omar and Haqq 1996). Two schools emerged on how to deal with this situation for IE, the aspiration oriented and the reality-oriented school, the former taking a more rigid approach, and striving for the complete replacement of the current economic system with a sharia-based approach, while the accepts the current situation of Islamic finance and succumbs to the dominance of Murabahah.

Mohsin Khan (1987) belongs to the aspiration-oriented school and is of the view that Islamic institutions that uses a two tier mudaraba system would have a quicker recovery rate of their balance sheets at the time of recession, compared to conventional ones. This is due to the former combining assets and liabilities together, as opposed to conventional ones. The paper then goes on to talk about the rapid growth of Islamic finance, and presented opinions by scholars on the impermissibility of tawarruq and the reasons for that (including that it closely mimics conventional financing with riba’.