EMERGENCE OF ISLAMIC FINANCE

Abstract

322 pagesStudies on globalization of ideas and markets largely focus on the spread of Western political and economic liberalism, secularism, and scientization. From board independence in corporate governance, democracy in political governance, central bank independence, floating exchange rate regimes, and free trade to the overall laissez-faire economic and political management, the 20th century is argued to be marked by the triumph of the Western ideas, practices, organizations, and institutions around the world. In such milieu, the rest of the world is observed as enthusiastic, imitative, or grudging adopters, futile resisters, and ignorant/incapable non-adopters. However, in the same period, the emergence of Islamic finance, unknown even in the early 20th century, questions the paucity of research and evidence on how the Muslim world and its related actors theorized an economic organization (Islamic finance), alternative to the larger paradigms, i.e., Western liberalism, communism, and secularism. I am further intrigued by how such an economic organization (Islamic finance) took shape into practices and spread to 135+ countries, and what social mechanisms were responsible for both ‘successful and failed’ transformation of economies towards Islamic finance. Moreover, the Islamic finance organizations had to allocate resources while balancing across the competing goals of economic goal of optimizing return and serving Muslim community and distributing financial resources across various groups within the Muslim community. At this backdrop, I address the following questions in this dissertation. First, I use event history models to analyze the mechanism for the emergence and growth of Islamic finance organizations in nation states over the period 1948 - 2016. I find that the act of Islamic Development Bank to implement Islamic finance contracts together with the national government actors illustrates the local viability and legitimacy of investing through Islamic means. This gives rise to local Islamic finance organizations subsequently. However, the growth of Islamic finance organizations in nation states is also paradoxically linked to the countries having a common law legacy. Second, I use comparative cases studies of four countries – Malaysia, Pakistan, Turkey, and Saudi Arabia – to understand why Islamic finance organizations were more successful in some nation states but not in others. I show that the success, timing, and nature of Islamic finance implementation relies on a complex interaction between the ‘legal contention’ in countries and the coordination across various branches of the state in responding to such contention. Furthermore, I use the case of Islamic Development Bank (IDB) to understand how an Islamic finance organization undertakes national entry and expansion strategies while balancing across multiple economic and social goals. To this end, I identify the role of wars in dividing countries across various social-civilizational groups and the effect of such grouping in the resource allocation of a supranational, faith-based financial organization. Also, I illustrate the dynamics of vicarious and experiential learning relevant to IDB.2024-09-0