Ethics-based financial transactions: An assessment of Islamic banking

INTRODUCTION

This is an analytical chapter with the modest aim of assessing a 48-year old experiment commonly termed Islamic finance, which describes the profit sharing and risk-sharing contracting in financial transactions as being ethically consistent with human welfare. Profit-earning after risk-sharing in debt contracts (as has always been the case throughout history in equity contracts) has been practiced in financial dealings in settled societies for over four millennia, before the birth of modern banking practices which are debt-based on no risk-sharing, with pre-agreed fixed interest charges. In just 48 years, the ethics-based Islamic finance has gained a respectable foothold in some 76 countries, including seven major financial centers, as will be supported by evidence in this chapter. Its presence is felt in many countries. With the Bank of England’s adoption of a landmark liberal regulation in 2002, after careful study over many years, to accept Islamic financial institutions as another niche in banking, the pace of growth of adoption of this experiment has substantially accelerated. These two facets – foothold and wider recognition – have been hard earned, and deservedly so, if one were to examine Islamic finance as an alternative ethics-based financial practice, which it is claimed to be.