Lancaster University Management School - 54 Degrees Issue 15

element requires both parties to have ‘skin in the game’. In part, this is achieved by compensation payable for unanticipated losses, in particular those arising from non-fulfilment of a contract. The Shariah-compliant principle is that all parties are beneficiaries. Innovations in respect of financial options, futures, and other derivatives invite continuous reference to the principles by which investors and financial institutions comply with Shariah principles. Uncertainty is ubiquitous, and to categorise ‘speculation’ as a non-productive and wasteful activity invites many exclusions. Given that Shariah prohibits transactions reliant upon chance rather than effort, this rarely, if ever, extends to include commercial risk-taking across capital and money markets, corporate trade and finance. By the Islamic principle of an equitable allocation of net proceeds between, for example, a bank (in providing finance) and an entrepreneur (in undertaking a business activity), a typical expectation is for entrepreneurs to compete in their field and thus to act as the ‘agent’ of those with financial capital. With these and like constraints, the monitoring costs of Islamic banking may be higher than those associated with Western practice; and if Islamic practices are more tightly constrained, they may also reduce both the pace of innovation and the risk of insolvency. As volatile post-war currency values led eventually to the termination of gold convertibility in 1971, currencies were no longer anchored to gold. Since then, a new discipline has emerged, whereby monetary policy is controlled by a central bank, guided by state-set inflation targets. That practice guides policy in the Eurozone, New Zealand, North America, the United Kingdom and elsewhere. Taken together with the rapid growth and widening relevance of Islamic banking, a core question invokes attention: is the discipline of Shariah principles more likely to deliver monetary stability than that ascribed to independent central banking? Although statistical studies have focused upon that conjecture, the financial disarray of the 2008 credit-crunch is too recent for conclusive conjectures. FIFTY FOUR DEGREES | 43 Gerry Steele is an Emeritus Reader in the Department of Economics. His paper Islamic and Western banking: A Chicago perspective is published in The Journal of Economic Affairs. g.steele@lancaster.ac.uk By the Islamic principle of an equitable allocation of net proceeds between, for example, a bank (in providing finance) and an entrepreneur (in undertaking a business activity),a typical expectation is for entrepreneurs to compete in their field and thus to act as the ‘agent’ of those with financial capital. ‘‘ ’’ Innovations in respect of financial options, futures, and other derivatives invite continuous reference to the principles by which investors and financial institutions comply with Shariah principles. ‘‘ ’’

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