Can We Tether Finance to the Productive Economy?: Experimental Monetary Practices in Islamic Finance

Islamic banking and finance is an ongoing experiment to critique conventional finance and to construct morally superior new monetary practices and representations that are “Shari’ah-compliant.”  $1.9 trillion USD of accumulated wealth is engaged in this experiment; over 97% of these assets are located in the Global South.

This paper focuses on the emic practices and representations of a key concept in this South-South dialogue—riba—so as to address an etic research project of interest to secular social scientists:  Is it possible to tether all financial activity to the productive economy?  If we can, is that desirable?  To investigate these two questions, this paper draws on 48 focused, ethnographic interviews conducted in 2012 and 2013 in profit-oriented investment banks with financial engineers and Shari’ah scholars who co-produce new monetary practices, as well as published debates regarding these products.

Pious Muslims are instructed to avoid profiting from riba (literally “increase” in Arabic) but the interpretation of riba in contemporary finance is far from self-evident.  The present dominant interpretation is that virtuous profits are derived by receiving money in exchange for providing a real asset or service.  In contrast, it is forbidden to make money from money (i.e., to receive money in exchange for money of the same currency, rather than in exchange for a real asset).  For example, earning interest is usually understood as riba because one earns money for owning or lending money.

Riba is an admittedly complex and contested emic concept.  This paper narrowly investigates a single characteristic of financial products that seek to elude riba:  the tethering of the financial activity to the non-financial productive economy.  Specifically, the paper describes three cases of novel monetary practices in Islamic finance.  The first case describes the non-problematic ease of tethering equity markets by creating Shari’ah-compliant stock market indices or incorporating Shariah-compliance in a stock market exchange’s listing requirements.  The second case describes ‘ina and tawarruq contracts that “monetarize” a productive physical asset such as platinum or palm oil, but that are perceived as nevertheless failing to tether financial activity.  It also investigates how the Bursa Suq Al-Sila’ market in Malaysia has sought to address such concerns.  Between these two cases—the first uncontroversial and unproblematic, the second controversial and yet difficult to resolve—we find our third case, sukuk, a moral replacement for interest-bearing sovereign or corporate bonds.  The work of financial engineers and Shari’ah scholars to co-produce sukuk—a diverse category of new monetary economic practices—demonstrates both the viability and the challenges of tethering finance to the productive economy.

Having demonstrated that it is a realistic goal to tether finance to the productive economy, we depart from emic concerns of riba to the etic question of whether secular social scientists should advocate for tethering finance to the real economy.  I suggest that the three cases provide contradictory evidence for this question.