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ABSTRACT
In light of the dramatic expansion Islamic finance (IF) has experienced over the past few decades, the industry has received increasing attention, not only within Muslim economies, but all around the world, as illustrated by the involvement of numerous non-Muslim public and private institutions. As the Islamic financial movement is increasingly becoming a global phenomenon, this paper critically examines the ‘materialist’-led contributions in the social sciences (especially in economics and finance) on the rise of this alternative set of practices and ideas. In doing so, social constructivism is introduced as a fertile intellectual framework to complement the current debates on this topic. At the end of this paper, three new perspectives on IF are distilled from the latter's encounter with social constructivism. These reside in (1) providing an alternative epistemological position on the encounter between conventional and Islamic financial knowledge; (2) highlighting the presence of structures of authority in the emergence of financial alternatives such as IF; and (3) emphasizing the role of key economic agents/institutions in the global diffusion of Islamic financial ideas.
Notes
1 I would like to thank three anonymous reviewers for their comments, Charles Jones, Duncan Bell and Jeong Cho for their inputs, and participants at the 2nd International Conference in Political Economy at the University of Istanbul (2011) and the 4th Oxbridge Taiwan Scientific Symposium at the University of Oxford (2011) for their discussions and comments.
2 37.5 per cent of the growth in Islamic banking assets over the past two years was recorded in non-Muslim economies (Nazim and Ibrahim, Citation2012).
3 As a fixed interest rate is seen as unfair because of the disproportionate amounts of risk different parties have to bear in a financial transaction, Islamic financial institutions prefer to opt for a profit-and- loss sharing (PLS) type of financing, where some of the risk is borne, at least theoretically, by the lender.
4 ‘Materialist’ here refers to the view that ‘the world comprises material objects whose existence is independent of ideas or beliefs about them’ (Campbell, 1993 in de Goede, Citation2003: 80).
5 Sunnah is an Arabic word that translates into ‘habit’ or ‘usual practice’ and refers to the sayings and living habits of Muhammad.
6 The capital value and return rate are, most of the time, not guaranteed.
7 Depositors give their banks the right to use their funds according to their discretion to finance a range of potentially profitable investments and share the profits and losses that incur from the investments made.
8 The timing corresponds to the diffusion of knowledge on Islamic financial practices through global markets.
9 CIPE literature builds on its variety and plurality of approaches in the study of interpretive phenomena. These range from ‘cognitive constructivism’ (Hererra, 2005, 2010; Dunia, Citation2010) to ‘poststructural constructivism’ (Best, Citation2010, 2005; de Goede, Citation2005).
10 The variance between the various classifications of social constructivism highlight the difficulties involved (see, for example, Brand, Citation2007; Abdelal et al., Citation2005, Citation2010; Watson, Citation2005). This paper relies on Abdelal et al.'s Citation(2010) terminology and conceptualization as a background. For clarity, the third type of constructivist analysis, ‘subjectivity’, was renamed ‘discursive power’ in this paper. A fourth pathway based on ‘cognition’ was also identified by Abdelal et al. Citation(2010), but will not be discussed herein.
11 This view, therefore, stands in sharp contrast to ‘materialist’ or ‘rational’ accounts, in which social reality is reduced by convention/assumption to a formalized platform on which facts can be derived. In this context, the world is populated by agents with clear goals and interests. Given the state of the environment in which they evolve, their behaviour (and hence market trends) can be derived and predicted based on changing structural variables. Economic developments hence become ‘knowable’.
12 This could mean entirely or only in form, that is, with Islamic financial products remaining on the market, but losing their effective ‘religious’ distinctiveness.
13 CitationFang and Foucart (forthcoming) point out that the ‘potential’ of IF as perceived by mainstream financial agents must be understood in economic terms and hence does not necessarily build on the ethical side of IF. This factor was identified, along with the ethical aspect of IF, as an orthogonal component in a principal component analysis (PCA) procedure.
14 The validation of IF practices in this time of crisis was revealed to be instrumental in calling into question the idea of convergence in a single – global – financial system, thereby highlighting the need to consider ‘variety’ within modern capitalism (see Boyer, Citation2005).
15 For instance, Campbell and Hall Citation(2009) advance that a ‘strong national identity’ is a central factor in determining the behaviour of economic actors in small states. This national role, which is both constructed by and for economic actors, facilitates cooperation and sacrifice in the name of (perceived) national interest. Thus, how economic actors interpret changes in the material distribution of assets, or how they perceive new environmental developments as beneficial or detrimental, is to a large extent reflected in the beliefs and values constructed by members of their identity group. On another front, meaning-oriented investigations also often study the creation and diffusion of norms in social groups. Barnett and Finnemore Citation(2004), for instance, provide an account of the role of international organizations in fixing meanings in the global economy, which form the legitimate boundaries of sound policymaking and economic behaviour in the increasingly globalized market. From this perspective, international norms define the boundaries of choice and thereby affect how societies, policymakers and market participants discern the meaning of various policy stances.
16 By the 1970s, most newly independent Muslim states had replaced colonial governance structures with a mixture of nationalism and socialism. However, as the socialist experiment failed soon after, disappointment over ideologies from the West spread in the Muslim world (Warde, Citation2010). This provided the grounds for an Orthodox Islamic revival movement in Muslim communities across the globe. This religious revival fuelled the demand for Shariah-compliant financial products and, in consequence, opened up this new market.
17 George's position stood in sharp contrast to that of his predecessor, Lord Leigh Pemberton (1983–93). The previous cognitive equilibrium in which George is argued to have made his contribution is best illustrated by Pemberton's intervention in front of the Arab Bankers’ Association in London in 1984, as it provides a telling snapshot of the former position of the UK regulators on Islamic banking. When asked to comment on the possibility of introducing Islamic banking and finance to the UK, Pemberton quickly dismissed such a possibility and even stressed the importance of not doing so (Abikan, Citation2012), stating that ‘Islamic banking … (did) not fall within the definition of what constitutes banking in the UK’ (Pemberton, 1984 in Gafoor, Citation1995: Chap. 4) because some of its core requirements were simply incompatible with British banking regulations. The requirement of PLS, for instance, was said to go against the principle of capital certainty for depositors, a ‘central feature of the banking system of the United Kingdom…(as) enshrined in the legal framework’ (Ibid.). As a consequence, the Bank of England was ‘not legally able to authorise under the Banking Act, an institution which does not take deposits as defined under that Act’ (Ibid.). The inability to fit Islamic financial products and services into the contemporary banking definitions led the regulators to conclude that there was an intrinsic incompatibility between conventional regulations and IF practices. Beyond this regulatory mismatch, Pemberton's intervention also depicted the general contemporary reluctance to set Islamic banking on par with its conventional counterpart, as the stability and viability of such practices were seen as highly problematic. It was thus made clear that Islam-based principles should remain outside of the financial system. The only possible entry point for Shariah-compliant operations in Europe would thus be through their articulation as religious facilities, ‘without using a banking name’ (Ibid.). The primacy of conventional practices over alternative ones was thus confirmed and it was deemed important ‘not to risk misleading and confusing the general public by allowing two essentially different systems to operate in parallel’ (Ibid.). Although Pemberton only stayed in office until 1993, his intervention on IF was used extensively to illustrate the Western position on IF until the late 1990s (Whittington, Citation1995; Gafoor, Citation1995; Warde, Citation2000) and, in some instances, called upon as an authoritative argument to confirm ‘the well understood definition of what constitutes banking in this country (the UK)’ (Whittington, Citation1995).
18 Starting in the late 1990s.
19 Epistemic communities are broadly defined as international networks of individuals recognized by private and public decision-makers for their knowledge-based expertise in a specific field.
20 The global sukuk issuance had increased by 217 per cent between 2005 and 2007 (World Federation of Exchanges, Citation2011)
Additional information
Notes on contributors
Eddy S. Fang
Eddy S. Fang is a Lecturer in Economics at Xi'an Jiaotong – Liverpool University (China), where he has been a faculty member since 2012. Eddy completed his PhD at the University of Cambridge in International Studies, with a focus on International Political Economy. His research interests lie in the areas of economic sociology and critical IPE theory. This led him to articulate his research on the diffusion of Islamic Finance in global markets. More recently, upon his arrival in China, Eddy started other research projects on the broader topic of social preferences in the modern Chinese economy – with special emphasis on environmental preferences, food safety, and social networks.
