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

Islamic banking and finance is an ongoing Southern 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.

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 (e.g., to receive interest, i.e., to receive money in exchange for money of the same currency, rather than in exchange for a real asset).

The paper describes three cases of novel monetary practices that are designed to elude riba by tethering financial activity to the productive economy.  The first case describes the creation of Shari’ah-compliant stock indices and the second case describes the monetary practice of tawarruq.  Between these two cases—the first uncontroversial and unproblematic, the second controversial and yet difficult to resolve—we find our third case, sukuk, a diverse category of new monetary economic practices designed to replace interest-bearing sovereign or corporate bonds.

The paper concludes by answering our two questions.