The return of moral/ethics in the face of unsustainable production and consumption patterns in particular since late 1960s; see the references made to the ethical deficiency of capitalism in the face of financial crisis;
Hence, recognition and acknowledgement of values as an important variable/factor explaining through different mechanism of economic and financial behaviour, but also aiming to construct alternative economic systems. As part of this recognition, we have witnessed the emergence of Islamic moral economy and Islamic finance since late 1940s;
• Islamic finance industry has progressed from humble beginnings
– Concept has been rediscovered to build a USD 2 trillion industry
– Global momentum behind industry: consumer, corporate and government
– Islamic finance has become the proposition of choice in the GCC region and Malaysia , and likely to become proposition of choice throughout the world, where Muslims reside.
Objective of Islamic Finance
“Finance is not about ‘making money’ per se. It is a ‘functional’ science in that it exists to support other goals – those of the society. The better aligned a society’s financial institutions are with its goals and ideals, the stronger and more successful the society will be.” (Shiller, 2012: 7)
Finance “is not, and should not be, merely a zero-sum game, but rather an adjunct to, and a means toward, a productive life.” (Shiller, 2012: 104)
Islamic finance is located within Islamic moral economy by defining and expressing the moral foundations, Islamic finance in its original form is located within the foundational claims of Islamic Moral Economy, as the aim was to creating an Islamic moral economy with Islamic finance being the operational aspect of that system.
However, Islamic finance seems to be expanding neo-classical norms and forms; resulting into a new debate: Islam based financing vs. the Shariah compliant financialisation.
What is Islamic Moral Economy?
Moral economy is the study of the ethical character of economic life.
Moral economy is ‘the critical study of the ethical character of economic activities and relationships, and of how this shapes and is shaped by other dimensions of social and political life’.
Moral economy comprises a particular set of relationships, beliefs and norms that constitute a particular kind of economic life.
Consequently,  As can be seen, all these three dimensions of moral economy fits into articulated nature of Islamic economic order; and therefore by definition Islamic proposition is a moral economy in every sphere of economic, financial, social and political dimensions of everyday life.
The notion of the moral economy rests with a central principle: embeddedness;  Pre-modern economies are moral because they are an integral part of social relations and non-economic institutions; Islamic moral economy is based on the values which Islam as a faith introduced to economic and financial transaction taking place in the societies it influenced.
Features of Islamic Moral Economy

  • Embeddedness in real economy;
  • Embeddedness and essentialisation of also non-economic factors (values) in determining economic and financial choices;
  • De-commodification and non-fictitiousness
  • Reciprocity and distribution;
  • Community and charity;
  • Convention and coordination;
  • Collective action, mutuality and takaful.

Islamic Moral Economy: A Value Oriented Proposition

  • Islamic moral economy, in modern sense, developed since 1970s aiming at development issues; and therefore in the essence of this constructivist world view there was a response to the failures of capitalist and socialist economic development projects in the Muslim world;
  • The founding fathers aimed at creating an Islamic response to this failures by constructing a human-centred development model based on the ontology and epistemology of Islam;
  • In this socially constructed world-view based paradigm, the aim has been to emancipate and empower individual through ‘functioning individuals’ and ‘enabled and being individuals’;
  • While market and private property is considered as essential, Islamic moral filter is considered as a mechanism to establish optimality in economic and social choices;
  • Islamic financing expected to provide an alternative solution as a financing tool and method;
  • Ethicality in this value proposition in the original sense is not only prohibition of riba (interest) but relating to larger social and economic development issues;
  • A financing proposition shaped by the rules (fiqh) but also moral values of Islam; ‘form’ but also ‘substance’ is expected to be Islamic as well.

Classical Aspirations of Islamic Moral Economy

  • Ibn Khaldun’s (15th century CE) framework provides a summary of the interdisciplinary dynamic model for Islamic socio-economic system:
  • “The strength of the sovereign (al-mulk) does not become consumed except by implementation of the Shariah;
  • The Shariah cannot be implemented except by a sovereign (al-mulk);
  • The sovereign cannot gain strength except through the people (al-rijal);
  • The people cannot be sustained except by wealth (al-mal);
  • Wealth cannot be acquired except through development (al-imarah);
  • Development cannot be attained except through justice (al-adl);
  • Justice is the criterion (al-mizan) by which God will evaluate mankind; and
  • The sovereign is charged with the responsibility of actualising justice”.

Foundations of Islamic Finance
Fundamental tenants are derived from Shariah
– Absence of interest-based transactions
– Avoidance of economic activity involving speculation
– Prohibition on production of goods and services which contradict the values of Islam
Concept is grounded in ethics and values

  • – Principles akin to ethical investing
  • – Emphasis on risk-sharing and partnership contracts

Islamic finance offers an alternative paradigm
– Asset-backed transactions with investments in real, durable assets
– Stability from linking financial services to the productive, real economy
– Credit and debt products are not encouraged
– Restrains consumer indebtedness
Islamic banking is community banking
– Serving communities, not markets
– Aims to enable and function individuals
– Open to all-faith clients
– Instruments of poverty-reduction are inherent part of Islamic finance (zakat & qard hasan)
Islamic moral economy assumes certain objectives of Sharia: The Maqasid al-Shari’ah 

  • Unitarity or complementarity (tawhid) ; everything is linked and embedded; unitary balance; extended stake holding; and vertical ethicality;
  • Social justice and beneficence (adalah and ihsan); hence, horizontal ethicality (individuals being equal in their access to the resources)
  • Growth in harmony (tazkiyah);
  • Enabling individual, society and natural environment to reach its perfection, sustainability (rububiyah);
  • Trust (amanah) that all the resources that are in our disposal given as trust and hence their development and growth is essential (sustainability);
  • To overcome the conflict between individual and society, voluntary action is not perceived to be enough; and hence certain social/economic oriented financial and economic obligations are being fard (obligatory);
  • Responsible individual, as the vicegerent of God on earth (khalifah, vicegerent individual) to fulfill the expected duties in their economic and financial behavior to make their decision through a financial filter;
  • Considering right (haqq) in the economic and social development;
  • Responding to solidarity (uhuwwah);
  • Operational dimensions of these axioms are achieving ‘human well being’ (Maqasid al-Shari’ah – objective of Shari’ah: human well-being by motivating economic forces for economic and human development, which constitutes a base for the articulations of economic and financial choices to be linked to their ‘consequences’ beyond only ‘intentionalism’.
  • Articulations of Maqasid al-Shari’ah(i) Safeguarding the value of human life – (a) Faith (b) Human rights
    (ii) Safeguarding the human self – (a) Self (b) Intellect
    (iii) Safeguarding the society – (a) Posterity (b) Social entity
    (iv) Safeguarding the physical environment – (a) Wealth (b) Environment (Ecology)
    Thus, Islamic moral economy is based on freedom, justice, equity, human dignity, freedom of enterprise and moderation.

Ethos of Islamic Moral Economy in Practice
(i) Prohibition of interest or riba, which is explicitly revealed in the Qur’an: reference to the social but also economic consequentialist reasons and rationale for this prohibition; prohibition of interest provides a stable and socially efficient economic environment.
(ii) An important consequence of the prohibition of interest is the prohibition of fixed return as provided by interest: capital should be able to gain whatever return is due for its share through an economic activity in the real economy rather than in the financial economy.
Thus, by prohibiting interest, IME aims at productive economic activity or asset-backed financing over debt-based system; the latter being the main feature of conventional banking and finance. Thus, the asset backing principle requires that all financial activities must be referred to as tangible assets.
(iii) The Islamic Moral Economy position related to money provides another rationale for the prohibition of interest, which states that money does not have any inherent value in itself; and therefore money cannot be created through the credit system.
(iv) By prohibiting interest, Islamic Moral Economy does not undermine the position of capital, but rather changes the nature of the relationship between capital and work.
o The principle of profit and loss sharing (PLS) is the essential axis around which economic and business activity takes places. This prevents capital owner from shifting the entire risk onto the borrower, and hence it aims at establishing justice between work effort and return, and between work effort and capital.
o This implies that risk sharing is another important feature of Islamic Moral Economy.
(v) An important feature as the consequence of profit-and-loss sharing principle is the participatory nature of economic and business activity through participatory financing. Through profit-and-loss sharing, Islamic financial instruments, capital and labour merges to establish partnerships through their individual contributions.
The consultative method of governing business is, thus, a natural outcome of this process, which is expected to lead to good governance processes in political sphere as well.
(vi) By essentialising productive economic and business activity, in addition to prohibiting interest, uncertainty (gharar), speculation and gambling is also prohibited with the same rationale of emphasising asset-based productive economic activity. However, new legal (fiqhi) scholarship is in favour of acceptable levels of uncertainty to facilitate modern financial instruments.
The Process of applying Islamic Moral Economy Principles to Islamic Finance
Economy’s need for Banking and Financial Services
Apply Islamic Sharia Jurisprudence – Sources
– Quran (Holy Book revealed to Prophet Mohamed (PBUH)
– Sunnah (Saying and Actions of the Prophet Mohamed (PBUH)
– Ijma’ (jurist consensus), – Qiyas (analogy),  – Ijtihad (reasoning)
Resultant Concepts used in Islamic Finance –Fiqh al-Muamalat Contracts
– Musharaka – Business Partnership
– Mudaraba – Investment Partnership
– Murabaha – Purchase-resale (cost plus financing)
– Ijara – Lease
– Istisna’ – Manufacturing contract
– Salam – Forward sale
Islamic Finance : For socially and environmentally responsible value oriented just economic and financing system, which can enable individuals to function and which can aim at well-beings of individuals…

  • Utopias should exist so that realities can be constructed and engineered…

Thanks and Acknowledgement to Professor Mehmet Asutay, Professor, Middle Eastern and Islamic Political Economy & Finance – Durham University Business School
Director, Durham Centre for Islamic Economics and Finance (DCIEF), for the concept and knowledge in his paper presented at the Durham Islamic Finance Summer School.