Debt Instruments in Islamic Finance: A Critique

in Arab Law Quarterly
Restricted Access
Get Access to Full Text
Rent on DeepDyve

Have an Access Token?

Enter your access token to activate and access content online.

Please login and go to your personal user account to enter your access token.



Have Institutional Access?

Login with your institution. Any other coaching guidance?


This article assesses the employment of traditional Islamic debt instruments by contemporary Islamic banks from an economic efficiency perspective. We highlight the fact that the performance of the bulk of the instruments pales in front of the modern facility of participating preferred ijāra. Thus, the shortcomings of the traditional instruments illustrate that the future does not augur well for either the Islamic banking industry or the emerging Muslim economies. For the Muslim world to move beyond its current malaise, it is necessary to scientifically restructure its financial intermediation system in such a way as to meet the challenges of the modern age also conforming to the spirit of the Sharīʿa.

  • 2

    Mario I. Blejer‘Economic Growth and the Stability and Efficiency of the Financial Sector’Journal of Banking and Finance 30 (2006): 3432.

    • Search Google Scholar
    • Export Citation
  • 3

    Edward L. Glaeser‘Comment and Discussion: Real Estate and the Macroeconomy’Brooking Papers on Economic Activity 2 (2000): 146-150.

    • Search Google Scholar
    • Export Citation
  • 4

    See Timur Kuran‘Islam and Underdevelopment: An Old Puzzle Revisited’Journal of Institutional and Theoretical Economics 153 (1997): 41-71; Timur Kuran ‘The Islamic Commercial Crisis: Institutional Roots of Economic Underdevelopment in the Middle East’ Journal of Economic History 63 (2003): 414-446; Timur Kuran ‘Why the Middle East Is Economically Underdeveloped: Historical Mechanisms of Institutional Stagnation’ Journal of Economic Perspectives 18 (2004): 71-90.

    • Search Google Scholar
    • Export Citation
  • 5

    James Politi‘Europe urged to act as death toll from migrant boats mounts’Financial Times20 April 2015 p. 6.

  • 17

    Clifford W. Smith and Jerold B. Warner‘On financial contracting: An analysis of bond covenants’Journal of Financial Economics 7 (1979): 117-161.

    • Search Google Scholar
    • Export Citation
  • 18

    Michael J. Barclay and Clifford W. Smith‘The Priority Structure of Corporate Liabilities’Journal of Finance 50 (1995): 899-917.

  • 19

    See Stewart C. Myers‘Determinants of Corporate Borrowing’Journal of Financial Economics 5 (1977): 147-175.

  • 20

    See Zvi Bodie and Robert A. Taggart‘Future Investment Opportunities and the Value of Call Provision on a Bond’Journal of Finance 33 (1978): 1187-1200; Jacques A. Schnabel. ‘An Agency-Theoretic Perspective on Participation Clauses in Loan Contracts’ Journal of Business Finance and Accounting 20 (1993): 133-142.

    • Search Google Scholar
    • Export Citation
  • 22

    See Al-Zuhailīsupra note 7.

  • 23

    Arijit Sen‘Seller Financing of Consumer Durables’Journal of Economics and Management Strategy 7 (1998): 435-460.

  • 24

    Mahmoud A. El-GamalIslamic Finance: Law Economics and Practice (Cambridge: Cambridge University Press2006).

  • 25

    Muhammad Rashid and Devashis Mitra‘Price Elasticity of Demand and an Optimal Cash Discount Rate in Credit Policy’Financial Review 34 (1999): 113-125.

    • Search Google Scholar
    • Export Citation
  • 26

    Rajesh K. Aggarwal and Tarik Yousef‘Islamic Banks and Investment Financing’Journal of Money Credit and Banking 32 (2000): 93-120.

    • Search Google Scholar
    • Export Citation
  • 28

    Muhammad Ibn Qayyim al-JawziyyaAʿlam al-muwaqqi’in ʿalā rabb al-ʿalamin (Beirut: Dār al-Jīl1973) vol. 3 p. 170. See also Haneef supra note 1; Habib Ahmed and Nourah Mohammad Aleshaikh ‘Debate on Tawarruq: Historical Discourse and Current Rulings’ Arab Law Quarterly 28 (2014): 278-294.

    • Search Google Scholar
    • Export Citation
  • 31

    See Abdul Hamid SiddiqiṢaḥīḥ Muslim Translation (New Delhi: Kitab Bhavan1986) iv: 1405-1406 (Ch. 1115 Ḥadīth No. 6466).

  • 32

    Andrea L. Eisfeld and Adriano A. Rampini‘Leasing, Ability to Repossess, and Debt Capacity’Review of Financial Studies 22 (2009): 1621-1657.

    • Search Google Scholar
    • Export Citation
  • 34

    An Yan‘Leasing and Debt Financing: Substitutes or Complements?’ Journal of Financial and Quantitative Analysis 41 (2006): 709-731.

    • Search Google Scholar
    • Export Citation
  • 40

    Muhammed Shahid Ebrahim‘Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?’ Journal of Economic Behavior and Organization 72 (2009): 864-883.

    • Search Google Scholar
    • Export Citation
  • 45

    Joseph Stiglitz‘The role of the state in financial markets’ in Proceeding of the World Bank Conference on Development Economics (Washington dc World Bank 1994) pp. 41-46. World Bank World Bank Development Report 2000/2001: Attacking Poverty (New York: Oxford University Press 2001); Hossein Jalilian and Colin Kirkpatrick ‘Financial development and poverty reduction in developing countries’ International Journal of Finance and Economics 7 (2002): 97-108.

    • Search Google Scholar
    • Export Citation
  • 48

    See Ebrahimsupra note 40. See also Murizah O. Salleh Aziz Jaafar and Muhammed Shahid Ebrahim ‘Can an interest-free facility be more efficient than a usurious payday loan?’ Journal of Economic Behavior and Organization 103 (2014): 74-92.

  • 53

    See Ebrahimsupra note 40 for a description of a mathematical model (i.e. an algorithm) to reduce the risk of default.

  • 56


Index Card
Content Metrics

Content Metrics

All Time Past Year Past 30 Days
Abstract Views 99 94 8
Full Text Views 99 99 2
PDF Downloads 7 7 0
EPUB Downloads 0 0 0