Foundations of Islamic Banking

The whole world has suffered from the financial turmoil unleashed in 2008. Many people were taking by surrprise but should not have been really. Hyman Minsky had warned about the excessive growth of credit, that excessive debt causes instability in economic conditions and uncertainty in business forecasting and planning. He did extensive analysis of economic instabilities and concluded that most were due to excessive credit growth. The term (Minsky moments) has found its way even into mainstream financial news reporting. Until the financial crisis of 2008 unfolded, pundits paid little attention to Minsky’s thesis; afterwards, though, many began to talk about community and cooperative banks, by which the money supply can be increased to the benefit of small and medium enterprises while maintaining financial freedom and justice. The financial crisis in short gave a much needed boost to the demand for ethical financing. Almost all transactions in the current Islamic financial system are asset based whereas the main objective (and rationale) of an Islamic financial system is equity participation rather than debt-creation. The main question in the financial market is whether Islamic finance is more efficient, more ethical and more stable compared to the conventional system? Is Islamic finance able to satisfy the requirements of Muslim customers? Is it possible for the Islamic financial market to solve the problem of moral hazards, information asymmetry and the principal-agent problem? The essays in the book under review respond to these questions in a reasoned and reasonable manner.