Islamic Finance and Economic Development: Risk, Regulation, and Corporate Governance

PART One

Emergence of Modern Islamic Finance

Financial services are core to economic activity. Individuals and institutions need to place excess liquidity and access financial resources for investments or consumption. Also, they need financial services to settle their transactions. The financial intermediation industry has developed over time, responding to these economic needs but also to prevailing societal values. Most regulation governing finance has developed to provide public trust in an industry based essentially on information and confidence. Trust and confidence are essential values that allow societies to remain cohesive and to develop.

Thus, by its very nature, successful financial intermediation corresponds to the values of the societies where it operates. Values evolve and over time codes of conduct of business evolve with them. For example, conventional finance has gradually come to integrate environmental, social, and governance considerations in its business conduct, reflecting modern societies' evolving values.¹

Islamic finance has emerged in modern times to provide correspondence between the conduct of financial intermediation and the values of communities wanting to abide by Islamic Shari'a principles. Postcolonial identity assertion and natural resource–based financial surpluses in the 1970s combined with the need for value correspondence to create enabling conditions for the development of Shari'a-compliant financial services. Chapter 1 provides a historical ...