INTRODUCTION

The search for Islamic institutions and changes in political and economy system of Arabs world

started toward the mid of nineteenth century and the primary objectives is to identify the specific

Islamic institutions. The rise of an Islamic political identity motivated various stakeholders to

necessitated critical foundational discuss that later birth Islamic Moral Economy (IME).

Moreover, be it nationalist, socialist or capitalist, IME is a religiously defined response to the

economic development failure in the Muslim world from which the literary meaning was derived

from the Qur’an and the Sunnah or the tradition of the Prophet Muhammad (Asutay, 2007).

Islamic moral economy is a problem-solving reaction as foundation for ‘the policy bases of

Islamic system’ of economics. Humanity and human resources development through the process

of Islamic norms and values system are the basis for foundation of Islamic economic. Based on

this, Islamic moral economy (IME), which provides the moral foundations of IBFI is important

to essentialize. The basis of social justice of IME is so much interested in the larger society and

contribution to social good.

It is against this backdrop that various scholars such as Khan (1984, p. 55) and Chapra (2000, p.

125) defined Islamic economic as a study of human salvation, welfare and prosperity through the

allocation scare resources in line with maqasid.’ From the definitions above by notable scholars

of Islamic finance, it means that the origin of knowledge of Islam could be attributed to different

economics meanings which can be established as a unique pattern of managing economy and

financial issues.

REALITIES OF ISLAMIC BANKS AND FINANCIAL INSTITUTIONS

The primary aims of IME’s moral framework are to shape the operation and nature of IBF aside
from the strict prohibition of interest. To evaluate the comprehensive approach to the Islamic
value and norms Iqbal and Molyneux (2005)described IME IBF as described as follows;

i. IBF is traceable to the basic principles of Islam which prohibit interest-based

transactions and also prohibition of productive activities that contract tenet of Islamic
values system such as speculation in economic activity

ii. The concept of IBF is ground in Islamic principles, norms and ethics. To develop the
real economy, credit and debt are not encouraged

iii. IME offers alternative financing options as incorporated to IBF operations

iv. The primary aims of IBF are to serve the communities and not the entire markets.

OBSERVED DIVERGENCE IN ISLAMIC MORAL ECONMY (IME)

Islamic bank financial institutions (IBFIs) follow the line of conventional banking system and

monetary economic system; hence, conventional banking system failure which resulted into

financial meltdown in 2008 is also affected all the Islamic banks not only their financial system

but also their business activities. Therefore, shock absorber characteristics of IBF during

financial crisis is over exaggerated. One of the most important principles of IBF is prohibition of

interest in any business activities but it is however confirmed that most of the IBF are using

interest as a benchmark to measure the time cost of money for project assessment and evaluation.

There is a relationship between return, monetary policy and interest rates among IBFIs’ as cited

by Gan, Pei-Tha and Ming-Hua (2009). Failure of Islamic financial regulational institutions to

have a standard benchmark for its banking operation necessitated the needs for IBF to follow the

conventional model of banking.

Islamic Monetary Economy (IME) is capable of dictating the rules and procedures of finance

according to Sharia economy which is quite different from conventional economy system and

can also integrate the financialisation of IBF to financial system which IME already embedded.

However, the recent changes in financial activities as necessitated the needs to introduce modern

instruments to cater for the needs of corporate governance. By this, IBF is getting closer to the

principles of conventional banking system which also result into failure of conventional banks in

recent past by this IBF is creating a fear by digressing from fundamental principles of Shari’ah in

financial activities.

On normal circumstances, IBF discourage the linking of finances to the real economy and as

removal of financial speculation. These are the main variables that compromises the value

system of IBF which necessitated the controversy surround the sukuk. Hence, financialisatin of

IBF is against the Shari’ah principles and is a challenge to IME. Thus, incorporating

financialisation as significant structure of IBF is against the and values of IME and IBF.

In a study conducted by Asutay and Aksak (2011), it was found out that a significant relationship

exist between IBF and conventional finance based on some financial indices. There is a high

correlation in performance of both financial sectors which showed that IBF does not guarantee

financial stability. Meanwhile, IME and IBF institutions were developed to serve as a

benchmarked and also to give direction to capitalist system (Asutay, 2008). Nevertheless, this

showed the variation in the primary objective of establishing IME and the realities of IBFIs.

Operational activities of IBF are dominated by debt financing as against the asset based

financing as prescribed by IME principles. Therefore, debt financing is in line with

financialisation which opposed the IME ideals which is based on healthy and economy stability.
Participatory economy is encouraged by IME principles by sharing profit and loss in lieu of risk

sharing of any business or productive activities between both parties to finance.

Profit and loss sharing is more valuable to IME equity to debt financial instruments. Having IBF

involved more in debt financing has indicated that IBF has degenerated from IME principles

which encourages profit and loss sharing but tinted toward conventional banking which is

against aspiration of IBF. Therefore, the primary focus of IBF is return on equity or investment

over value propositional value system of IME.

In the case of Sudan Islamic bank, it has shown from the financial records that the bank only

finance agricultural and industrial sector for the first few years of establishment but observed that

financing those sectors contribute insignificant return in financial strategy of IBFIs, thereby opt

for real estate investment and foreign financial investments simply because of short-term

investment advantage and higher return in form of interest on the money lend out (Ahmed,

2005). The implication of such investment creates anxiety considering the fact that the real-estate

boom led conventional financial institutions into the financial crisis in the recent past. Moreover,

there is no correlation between IBFIs and human development indices as Asutay (2010)

conducted a research with sample size of twenty- five countries and their respective

human development index scores with IBFIs. No positive correlation was found which showed

that upon asset base expansion, IBFIs has no effect to any proxy variables of economic and

social development.

As the most challenges problems in most Muslim countries is socio-economic development,

IBFIs should be a strong intuitions to reduce those challenges to nearest minimum. While IME

set out to solve those socio-economic challenges but the realities of IBFIs pointed at
degenerating from those objectives of IME. The problems is that IBFIs are more integrated to

conventional economy and finances by diverging away from such aspirations in everyday life.

While corporate social responsibility (CSR) is also embedded in IME principles with particular

references to tawhid, adalah, rububiyah, and tazkiyah among others but IBF rather follow

conventional system of CSR. What is expected of IBF is to follow CSR in accordance with

Shari’ah principles whereas management decision which was based on input and output process

and equity. Moreover, it is shameful that IBFIs don’t even know when to withdraw from CSR as

compared to conventional bank that could withdraw from CSR whenever they analyse the cost

benefit and weigh up the social cost. Moreover, inability of IBFIs to identify CSR issues is

indeed disturbing. This has shown that IBFIs has failed in CSR performance indicators by

showing less important to its fulfilment of the substance requirement of IME.

Social Failure of IBF and ICG

IBFs failed in its primary objectives of offering solutions to socio-economic and financial

problems which is unique function to ICG as laid down by Islamic financial institutions. Islamic

laws have laid procedures and guideline on how implement corporate governance practices in

Islamic moral ways without making reference to conventional methods. Islamic corporate

governance is so comprehensive that individual activities, roles and action to social environment

are embedded in its guidelines.

When IBs was first developed, they were adopting neoclassical economic approach because of

missing operational methodological axioms in their functional operation which made them copy

all the operational procedure of conventional banking which showed total neglection of IME

value system, ethical principles and spiritual dimension by align more to conventional economic

principles, thereby failed to comply with institutional procedures and policies of Islamic

economy (Asutay, 2012). Notwithstanding the fact that changes from IMEs to IBs showed a

clear deviation between IME’s aspirations and the realities associated with IB’s functions. The

deviations from IME’s ethical principles, social attributes and expectations justify the claim of

failure of IB’s. However, some notable scholars such as Asutay (2012) and Ahmed (2005) traces

the origin of original deviation from IME’s concept by IB’s which led to the failure by proffer

various suggestions to the challenges.

The credibility of IB’s is questionable despite the proof of financial stability against financial

crisis as the failure to follow the primary goals of its establishment on foundational basis of

Islamic economics. From the inception IBs have deviated from the goals and foundational

aspirations of IME by too focus on profit maximization by embracing what Shari’ah prohibited

such as riba ‘interest’ by patronizing real estate investment and foreign financial investment with

short term return

IME is systematically deprived of its aspirations to create a unique economic system that play so

much important on equality, human capital development, poverty reduction as IBs are facilitated

and systematically edge out to abandoned their primary aim of supporting moral economics

principles as laid down in IMEs guidelines. The primary focus of IME is not only about riba and

gharar prohibition but also embracing social good by integrating all aspect of the economy so as

to create new world order. Thus, this can be justify as IBF is an institutional machinery of IME
with the primary aim of eliminating financial imbalance, creating environment of social good by

improving human economic development not about profit maximization.

Corporate governance is one of the most exposed areas of IBF social failure. IBF framework is

design in such a way that larger stakeholders is internalize in ICG moral values and beliefs

whereas the observation of the operational activities of IBF’s showed that its structure of

corporate governance is rather share-holder oriented but the initial design framework of ICG is

stakeholder interest framework (Hassan, 2009). This is a good justification of failure of IBF’s

during global financial meltdown because IBF’s failed to comply with ICG that has essential risk

protection procedure for IBFs to embed in their structures and operation.

CONCLUSION
In concluding the meaning of IME should be looked at beyond economics. It is generally

viewed as an economic system embedded with ethics and moral values. Despite its various

definitions, depending on which perspectives it is looked from, IME is a complete humanistic

system that blends religion, economics, and social aspects to reach balance from many aspects

such as politics, economics, society, and religion. It is to achieve equilibrium in order to form

a unity by linking all the elements together as an integrated relationship, which deals with

observations and interactions in addressing the many aspects of life. Such a paradigm

inevitably has consequences for CG as well in shaping the relationship within an organisation.
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