Islamic Political Economy as the Missing Link of the Islamic Financial System

Abstract

Despite half a century of experimentation and attempts to introduce elements of Islamic finance, no country in the Islamic world has yet created a fully-featured Islamic economy and financial sector organised in full compliance with Sharia requirements. The key reason for this is lack (weakness) of theoretical foundation of Islamic political economy. As the result, at present Islamic finance is developing as an exotic appendage, as an integral part of the global (traditional) financial system. The situation can be rectified by the author's concept of an Islamic political economy. One of conclusions is that in addressing the dilemma of whether to prioritise economic growth or to reduce income inequality, Islamic authorities must give priority to the reduction of inequality. This study provides governments in Islamic countries with general recommendation on how to bring their country's economy into line with the requirements of Sharia.