Asian and African Area Studies, 11 (2): 89-92, 2012

Frontier of Islamic Economics and Finance: New Challenges
Preface
Kosugi Yasushi*
Middle Eastern Studies has argued various economic issues which are specific to the region, such as
its oil-driven economy, the nationalization/privatization of its industry and foreign labor migration.
From the mid-1970s onward, this region encountered a new economic phenomenon; that is, theestablishment of, and the subsequent flourishing of, Islamic banks, and the rise of the commercial
practice of Islamic finance. Its rise coinciding with the re-emergence of the Islamic world, Islamic
finance has gradually developed into a considerable economic factor in the economies of the Middle
East and other regions with Muslim populations, forming a new economic sphere of the emergent
Islamic world. Although many economists have recognized its importance, they have neither had
a proper methodology nor the capability to utilize Islamic finance for solving the existing economic
problems in their regions.
On the other hand, on intellectual and academic levels, since the middle of the twentiethcentury, relentless efforts have been made toward restructuring the economic system according toIslamic principles, especially in the Middle East and later in Southeast Asia. Although, in the beginning, these looked like piecemeal attempts to find ways to avoid the elements forbidden in Islamic
law, such as riba (interest/usury) and speculation, it soon appeared that the ultimate collective objective was to implement, or at least, to try implementing, an alternative form of economic and financialsystem, which differed substantially from the modern capitalist standard. These efforts resulted in
the development of the novel academic discipline called “Islamic economics.”
The fruits of such endeavors were partially materialized when the first commercial Islamicbanks were launched in the latter half of the 1970s. The subsequent flourishing of Islamic banks andother Islamic financial institutions, and their success in affirming their economic viability, however,
did not necessarily imply that the practice of Islamic finance had directly reflected the theoretical
proposals or framework of Islamic economics, presented by renascence Islamic economics.
This disparity between the actual practice of Islamic banks and the vision of an ideal Islamic
finance continues up to the present day, with Islamic banks for the most part adopting debt-based
financial products, instead of the equity-based products suggested by major Islamic economists.

* 小杉 泰，Graduate School of Asian and African Area Studies, Kyoto University89

Asian and African Area Studies, 11 (2)Widening the gap even further, the current practice of Islamic finance encourages the development of
new products which replicate the latest innovations of financial engineering in the globalized market,
crafted by the conventional main-stream banks, in order to be competitive in the international financial markets. Those who view such a situation with critical eyes insist that the practice of Islamic
finance has departed from the substance of the concept of Islamic economics, or has never reached it,
and that there is a need to shift toward the realization of the fundamental idea.
In this sense, Islamic economics continues to be a frontier science. It had already opened a newhorizon for the Islamic revival in the economic domain, and attracted popular attention among theriba-conscious Muslims. Its contributions had already created a space in which actual Islamic banks
were able to operate, and these banks’ activities had brought in more riba-conscious customers,
partly because they strongly advocated their anti-riba stance to bolster their competivity against
the non-Islamic banks. These Islamic banks, however, opted more often than not to rely on Islamic
financial products that were not ideally Islamic but judicially permissible, managerially viable, andoperationally profitable. This gap between the ideal and the practical has given rise to many arguments and controversies about the nature and substance of Islamic finance.
We should accept the aspect of managerial viability and operational profitability in a positive
way, because the gap between the ideal and the actual always generates efforts and endeavors tonarrow the discrepancy, as happens in any domain of our society. By providing ideals, ideas andtheories, Islamic economics have a huge potential to unveil new horizons and are indeed continuing
to reveal such horizons.
The current global economic system and the economic sciences which support this system havemanifested a substantial number of fundamental problems, such as global economic disparity, thevulnerability of the global eco-system under unsustainably rapid development, and the economic
instability highlighted by the current financial crises. Towards solving these problems, any serious
proposals for alternatives or alterations are of fundamental importance, if mankind is going to havea brighter future. The role of Islamic economics in this respect seems quite apparent, both for theeconomies of the Islamic world and the global economic system as a whole.
With this vision, the Center for Islamic Area Studies at Graduate School of Asian and African
Area Studies, Kyoto University and Durham Centre for Islamic Finance and Economics at Durham
University have been collaborating to evaluate the achievements of Islamic economics, actual
correlations of conflict and accordance between the theories of Islamic economics and the practiceof Islamic finance, and subsequently the prospective roles of Islamic economics in this age ofglobalization, especially in relation to the critical condition of the current economic system. Our90

KOSUGI: Preface

team has organized several conferences at Kyoto, Durham, Cairo and Barcelona since 2007, andprovided several publications on Islamic economics and finance. This special feature with the title“Frontier of Islamic Economics and Finance: New Challenges” is the latest in a series of the fruits ofour collaboration, and focuses particularly on new challenges facing Islamic economics and finance,such as corporate governance, CSR (Corporate Social Responsibility) and asset management.
Mehmet Asutay’s paper focuses on Islamic moral economy. In the late 1960s and early 1970s,
this concept emerged in the modern sense as an attempt to develop an authentic understanding of theIslamic economic system. Although Islamic banks and financial institutions are considered as theinstitutional aspects of this moral economy, the transformation of Islamic banking into a commercial
banking form since the 1970s has been at the expense of the aspirations of Islamic moral economy.
This paper aims to explore the social failure of Islamic banks and financial institutions and locate thesources of this failure, and suggests that a third institutional development in the form of non-banking
financial institutions should be created with the objective of serving the social and developmental
needs of Muslim societies.
Nagaoka Shinsuke’s paper illustrates the historical development of Islamic economics as ascience and Islamic finance practiced in the real world from a unique perspective. He argues that theemergence of the commercial practice of Islamic finance, after the birth of Islamic economics as adiscipline, has created a tension between theory and practice, and that this tension has resulted in adivision of the scholars of Islamic economics into two groups, namely, the aspiration-oriented school
and the reality-oriented school. The former emphasizes the ideals of Islamic economics and adheres
to what he calls the “mudaraba consensus,” which considers the mudaraba contract as the best
Islamic solution for non-riba finance, while the latter gives importance to the economic feasibilityof Islamic finance and accepts the current practice of commercial Islamic finance that relies on debtbased financial products. This division has promoted the development of Islamic economics througharguments between the two schools. However, he points out that both schools share a common
ground regarding the definition of riba as inclusive of all forms of bank interest, and those who try to
exempt some forms of bank interest from the definition of riba are comparatively marginalized.
Shifa Mohd Nor’s paper focuses on Corporate Social Responsibility (CSR) in Islamic economics and finance. The escalating social and economic problems in particular during the current
financial crisis have raised new questions as well as expectations about corporations’ governance,ethics, and social responsibilities. Commentators have raised ethics as the missing link in financing
and also in the running of financial institutions. CSR has emerged and developed with the aim ofdefining and directing the responsibilities of firms toward the society. The main objective of this91

Asian and African Area Studies, 11 (2)paper is to study the concept of CSR from an Islamic perspective. Importantly Islamic banks are
criticized for not considering the social dimensions related to development, which is an essential
distinguishing point of Islamic moral economy. This paper therefore attempts to respond to this bysuggesting a new paradigm within CSR framework to help Islamic banks and financial institutions
to overcome the gap between aspirations and realities.
The paper by Shehab Marzban and Mehmet Asutay focuses on Sharia-compliant investments.
Sharia-compliant investments are managed in a Sharia-compliant manner which goes beyond
defining a set of rules or guidelines to generate a static list of automatically screened equities. Sharia
screening is about identifying the set of investments that adhere to Sharia principles and would thus
be considered eligible for an Islamic investor to invest in. Generally, different Sharia mandates canbe found across the industry that may result into different asset universe sizes and constituents. The
main distinction between the different rulebooks is the use of either total assets or market capitalization as base to value a company and to use as denominator for the different financial ratios. By
using the top 200 large cap companies in the United States as well as Japan, their paper reveals thatdifferent Sharia mandates result in discrepancies in asset universe size, constituents, asset allocationand most importantly, return and risk. Therefore an analysis of the Sharia mandates is crucial
before launching a new Islamic fund to ensure that the advantages and disadvantages of the different
mandates are recognized and taken into consideration. Their analysis also revealed that different
mandates might be advantageous in different regions and time spans.

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