Islamic Finance Needs a New Paradigm

This paper offers a critique of Western financial development, and examines the potential of Islamic finance as an alternative method. It states that the domination of the stock market in the recent financial development of the world economy, rather than productive investment in agriculture and manufacturing, has led to increased unemployment and other social repercussions. It further states that the same situation will apply to the property market in South East Asia, where a large number of financial institutions are providing credit to developers while also investing in the property market.

The paper discusses various practices followed in Islamic finance and highlights the ability of Islamic finance to maximize social benefits at the grass-roots level. Islamic financial institutions, however, face challenges in areas such as resource utilization to meet the demands of poor people in rural areas, protection of people from hunger, and surplus funds instead of resource mobilization as a result of short term lending approach through Murabahah and Bai Bithaman Ajil. The paper suggests that for Islamic banks to be successful they have to:

• Closely monitor and follow-up to solve partner-client problems and market finished product;
• Effectively utilize human resources;
• Train university students to promote Islamic finance instruments.