How to Moralize a Market: The Empowerment of Moral Critics within Islamic Investment Banks

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.”  The origins of this experiment date from the mid-1970s and coincides with increased political economic power in favor of oil net exporting countries and a rise in public piety in Muslim-majority countries.  Today, approximately USD $1.9 trillion of this accumulated wealth is estimated to be engaged in this experiment.  Over 97% of these assets are located in the Global South.

In Islamic finance, moral critics (Shari’ah scholars) act as powerful gatekeepers who investigate proposed new financial products, judge their morality based on theological and secular ethical arguments, and decide which products the bank may produce and how they may be marketed.  As a consequence, transnational, publicly listed, for-profit Islamic investment banks are required to evaluate new financial products using moral as well as financial criteria.

While this gatekeeper role is little known in western sociology, this paper and conference presentation focuses on a less well-understood issue of relevance for secular social scientists and social movements advocating reform of financial markets:  how do these moral critics work with investment bankers to co-produce moral alternatives to existing financial products?

This paper draws on 36 focused, tape-recorded, ethnographic interviews conducted in 2012 and 2013 in Islamic investment banks with financial engineers and Shari’ah experts who co-produce “sukuk.”  Sukuk are created using transnational practices of “structured finance” and marketed as generating revenue without interest payments, and therefore as a Shari’ah-compliant alternative for conventional corporate and sovereign bonds.  The interviews focus on the informants’ experiences creating (or failing to successfully create) new, morally innovative financial practices that seek to simultaneously produce a new financial instrument as well as to reshape moral critics’ understanding of what constitutes a financial instrument ethically compliant with Islam.

The paper finds that the moral critics employed by Islamic investment banks have two primary forms of social control over the investment bankers:  agenda setting and narratives of moral accountability.  The paper uses Ragin’s fuzzy QCA methodology to explore the causal complexity of how diverse organizational features of the bank influence the moral critics’ social control of the investment bankers.  From this analysis, the paper identifies variance in two key organizational features that shape the empowerment of moral critics relative to the investment bankers:  1) where moral critics are employed in the financial innovation pipeline, and 2) specific organizational norms and procedures that influence time and information flows to the moral critics.

My data and analysis demonstrate that it is possible to empower moral critics relative to financial professionals and to thereby create new financial products that compete on morality as well as price with conventional financial products.  It also demonstrates the importance of organizational design to minimize issues of cooptation, corruption, and disempowerment of moral critics.  The conclusion lists possible implications for what financial reform social movements (such as Occupy Wall Street) should campaign for in order to successfully incorporate moral critics within conventional financial institutions.