From a historical perspective, Islamic economic institutions have not been conducive to capital accumulation in Muslim societies (Kuran 2004, 2011). This has been further hampered by a lack of trust among different faith communities, where Muslims were historically charged higher interest rates by non-Muslim financiers (Kuran and Rubin 2018). Despite these institutional legacies, Islamic banking and finance has grown rapidly in the Muslim world over the past few decades. In some countries, Islamic ...
From a historical perspective, Islamic economic institutions have not been conducive to capital accumulation in Muslim societies (Kuran 2004, 2011). This has been further hampered by a lack of trust among different faith communities, where Muslims were historically charged higher interest rates by non-Muslim financiers (Kuran and Rubin 2018). Despite these institutional legacies, Islamic banking and finance has grown rapidly in the Muslim world over the past few decades. In some countries, Islamic finance is no longer considered a niche field, as the total volume of halal exchanges constitute a substantial share in the overall amount of financial transactions. This chapter focuses on the role of Islamic finance in development and argues that this relationship is further influenced by the conditions under which private money creation occurs. In particular, the case of Malaysia is a good example that showcases how the building of market institutions is not enough to stimulate equitable development: while an extensive network of Islamic finance institutions attract domestic and international investors, much of the loans extended by these banks finance real-estate and consumer-durables purchases. Islamic banks are less willing to extend credit to small and medium-sized businesses on the grounds of perceived high risk. The key beneficiaries of the Islamic financial industry are large financial corporations that raise capital via issuing Islamic equity, and governments that diversify their debt composition using shariʿa-compliant bills and bonds.
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