The Wayang Kulit of Islamic Finance: Book Review

Islamic Finance in The Global EconomyIslamic Finance has seen many criticisms for the past decades, ranging from whether the right model was introduced in the first place, to questions on the mirroring of conventional products into islamic alternatives, accusations of Hilah and back-door riba, suitability of certain contracts in the banking space, and even the end accomplishment of the Maqasid of Sharia via a financial intermediary model.

Practitioners and regulators (including Sharia scholars) have been hard at work to address these issues (which the public seems to assume we are not aware of in the first place!!!). To a certain extent, a lot of the issues have been / are being addressed (whether to its full satisfaction or otherwise), but it is also important to be able to sit and identify areas where further improvements can be made.

Ms Rosana has become an avid observer of Islamic Finance practices and its shortfall, and found literatures that she hopes to bring forward into the constructive discussion with the industry. Her review today covers the book by Ibrahim Warde : Islamic Finance in the Global Economy (2010).

Review by Rosana Gulzar (Excerpt)

This book by Ibrahim Warde, a US academic, is among a few in the genre of political economy of Islamic finance. Although a much needed subject, it is hardly discussed in classrooms apparently due to political sensitivities. That may be the reason why this book stands out in its contribution but it can also very well stand on its own merits. The content is refreshingly intellectual, critical and direct. But even as I find it to be the most enlightening book I have read on the subject, I wish for more.

The question is, what is ‘political economy’? Or what does the subject cover? It is a fascinating field of economics which goes beyond the simple study of processes. Instead of describing production and trade as if they operate in silos or the often used phrase in economics, ceteris parabus (assuming all else stay constant – seriously, which world is that?), the study of ‘political economy’ combines theories from political science and sociology to bring about a fuller and more realistic perspective on how a country is run. A branch of political economics even draws from other academic areas such as culture and history. This definition from Investopedia is to me, the most appealing though it is arguably not the most reliable source: “International political economy is ultimately concerned with how political forces like states, individual actors, and institutions shape systems through global economic interactions and how such actions effect political structures and outcomes”.

The study of political economy is vital, I argue, in Islamic finance because how does one begin to understand a phenomenon without a frank discussion on the forces shaping it. To borrow from the Indonesians, who are the real dalangs (puppeteers) in this wayang kulit (traditional puppet-show)? Who are pulling the strings? As Warde says, “Quantity, not quality, is the defining feature of writings on Islamic finance. The recent boom in Islamic finance has resulted in a flood of writings that add very little to our understanding of a complex and multifaceted phenomenon. Overall, scholarship is marred by four flaws: the ‘authorised’ nature and pre-ordained conclusions of a significant portion of it; narrow geographic focus and lack of comparative analysis; reductionism (religious, financial, and legal); and faulty assumptions about the relation between theory and practice (p. 8).” In short, we have barely scratched the surface.



To have an open and honest discussion, do have a read a give us your thoughts, especially on the political economy aspect of Islamic Finance. Comments and feedback welcome.


6 thoughts on “The Wayang Kulit of Islamic Finance: Book Review

  1. Ms. Rosana’s full commentary is wroth the read. I like the analogy of a puppet show, but her focus is misdirected. When discussing the politics of Islamic finance, there isn’t a question of who are the puppeteers–the same 10 Sharia scholars comprise 67% of all chairman positions on Sharia supervisory boards! A problem is the gap between Sharia scholars and and practitioners.
    What are the forces driving Islamic finance? Consumers fed up with compounding interest, and banks that got burned by trading bad debt and are now more risk-averse. The real question is whether Islamic finance is bank-drive/product-driven or consumer driven. To use Ms. Rosana’s analogy, consumers want to know why is there a puppet show? Is the show good? What is it about? And banks are asking whether they should offer a puppet show. Will their customers like the show? This is why there is an explosion of superficial articles: banks are explaining products to consumers who don’t know what is going on and who don’t understand why or how Islamic finance is different from conventional finance products.
    Will creation of Central Islamic Finance Boards help harmonize the industry? Certainly, yes. But the bigger issue is educating consumers, including the unbanked and underbanked.
    And oh yes, there is a financial crisis round 2 coming. Banks still are not lending, the GDP in the U.S. is $17 Trillion, and consumer debt in the U.S. is $25 trillion. Debt is growing faster than the ability of earners and their valueless currency to pay it off. Not good.


  2. Thank you, all good points raised. Perhaps I need to be clearer. What I am interested in and want to know more of is the international/national political forces at work for Islamic finance. For example, the author made a good case about Saudi Arabia, the home of the haramayn (two haraams). The issue of ‘Islamic’ banking is sensitive over there because “the ruling family’s legitimacy is based on Islamic credentials, but the economy and the banking system are managed along Western practices (p. 216)”. Further, the “country’s vast bank deposits and foreign holdings generated substantial interest income (p. 217)”. Hence in the early years, Saudis who owned large Islamic banking groups such as Dallah al-Baraka had to operate out of the kingdom. And Islamic banks there are not allowed to use the word ‘Islamic’ in their names because that implies the other banks are unIslamic. These vital but largely swept-under-the-carpet facts are largely glossed over in the discussions I’ve attended on Islamic finance. I’m thinking how do we correct an industry if we don’t know the full brunt of these forces which are at work?

    Another example is Malaysia. The author says Islamic finance grew as part of a national agenda since Mahathir’s times in the 1980s. He advocated a progressive, modernist interpretation of Islam that would propel the economy forward, not backward. There is some reference to the paradox that is the Islam being practiced here but I think the picture is uglier. Outwardly, Islam is the country’s religion in the constitution and people on the streets seem adherents. But the powers who call the shots, both over the economy and the banking sector, do not seem Islamic. A woman ‘Islamic’ bank CEO does not wear the hijab (head covering) and calls customers to Shariah-compliant banking. The former governor is another example. The male CEOs – A number of them appallingly do not even understand the concept of Islamic banking. And yet they are lording over the ‘Islamic’ banks. So what really is going on here? Are we driving Islamic finance because we want a version that is truly compatible with the laws of the religion? Or is it just to make a mark in the world stage? The allegorical reference to the puppet show is meant to raise these questions – Who really are pulling the strings and what are their motivations? For effective reforms, one needs to know what we are dealing with. Hence the need, I argue, to know the real dalangs (puppeteers) behind this wayang kulit.


    • This is similar to what I have written much earlier, when PHD students come knocking on our banks and asked the question: why have we not go “fully” Islamic banking with contracts such as pure Mudharabah and Musyarakah financing. The answer that I have given is that always the model and the risk profile attached to the banks do not 100% fit into the risk profile of a traditionally banking set-up. Plus, there is a huge “conventional” entity running banking practices in Malaysia; it being a dual banking system. Of course, conventional banking have both the financial muscle and product innovation to control what is being practised in the market. Profitability wise, they are still better. This should also be taken into account when thinking about the so-called “dalangs”.


    • Got it. Before I say anything regarding banks in Saudi Arabia, let me share a brief encounter. When I was at a bank conference in a GCC nation, surrounded by Central Bank Governors, Bank Presidents, Regulatory officials both national and international, and some Royal family members, I asked the gentleman sitting next to me “What do you think would happen if I swing on the crystal and diamond chandelier?” He responded, “You would go to jail for a very long time.” I then asked, “What would happen if you swing on the chandelier?” He smiled and said nothing would happen, but that he didn’t want to. So I proposed that someone from Australia or New Zealand swing on it, as it would appear to be characteristic of their adventurous and happy nature, and that perhaps such a person could do this without getting in any trouble.

      Here’s the point–Royals get away with things, and can swing on the chandelier. Foreigners if they swing, some will go to jail; others will be applauded and a video would be made. We aren’t running an entire country, and don’t have the big picture, so it isn’t appropriate to tell the ruling family of any nation what should and shouldn’t be done. Consistency in rules, regulations, and enforcement would be good for the finance industry, and it is moving in this direction with the creation of central Shariah boards for Islamic finance. Saudi Arabia has made significant efforts to promote Islamic finance, including providing government guarantee of halal loans up to nearly 100% (the exact figure I have in my notes) and utilizing the Islamic Development Bank as an Institution to provide stability to other Muslim nations. Gradual implementation is best, which we all saw from the disastrous rollout of Islamic banks in Pakistan when done immediately and made mandatory.

      You are correct that the clothing and appearance of bank workers at “Islamic” banks sometimes is not appropriate. Sharia auditors take note of this, trust me, and it is one of the items to identify when entering a bank and observing. Regarding the former Governor for BNM, Dr. Aziz is an amazing and highly professional woman, the first woman in that position, and she is old enough that head covering is no longer required. She can swing on the chandelier.


  3. Wow! I really like the article! Especially the ‘Huge, old, rich monsters’. Let’s fight them!!

    On a more serious note, the article is a good insight into the real constraints faced by bankers on the ground, something which unfortunately I haven’t heard much of in my time in academia. You’ve raised good, real questions that indeed need equally good answers if we are to embark on credible reforms. Well done bro!


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