Islamic Finance

Shari`a (Islamic law) is theoretically the inexorable expression of divine will, but it has rarely been treated as such in practice. Pakistan has from its inception debated the role of

Islamic idealism has some practical aspects.

The Islamic Development Bank (IDB) has moved to treble its capital of 2 billion Islamic Dinars (ID; one ID equals one SDR of the IMF) in order to meet the increased demand for trade and project finance in the organization's member states of the Middle East, Africa, and Asia. The decision by the 45 member Jeddah-based organization to increase the authorized and subscribed capital of the IDB was made last December. The move was decided on at the Islamic Heads of State summit in Dakar, Senegal.

As wealth stemming from oil found its way into Gulf hands in the 1970's, the amount of money Muslims had in the banking industry increased. Whereas devout Muslims had long kept money in conventional banks without taking any interest payments, the idea came to some believers that interest-free banking ought to be offered. The Islamic banking industry borne out of this sentiment now holds between $50 and $80 billion in deposits.

The Pakistani State Bank governor, Muhammad Yaqub, has identified two issues facing the banking system of the country. One, the condition of banks, more actutely of nationalized commercial banks. Two, the state of savings. After Moeen Qureishi, the caretaker prime minister, exposed the defaults of many loans made by banks, the state of the banking sector came under much question. Yaqub rightly criticized Qureishi's move, which created doubts about banks before their privatization.

The behavior of a single seller in an Islamic environment is not marked by greediness. Rather, the single seller seeks primarily to please God, not to maximize profit. Profit is only one of the single seller's motives, as he is expected to sacrifice part of his profits for the social good when social priorities require him to do so. The situation is formulated in its deterministic setting to derive the optimally necessary conditions. A family of utilities in the Cobb-Douglas form should also be considered.

An integrated macroeconomic model of an Islamic economy may be developed using the framework of an investment model. An Islamic ethical-value system and profit-sharing contracts can guide investment behavior. The typical firm's investment decision emerges from a dynamic inter-temporal maximization exercise over an infinite time horizon. Application of calculus can help one to arrive at the optimal investment/employment criteria for a firm.

As Islamic investments look for greater returns, Western banks are called in as agents to manage funds and to perform transactions. Western and conventional banks in the

Malaysia has an important role in the Islamic markets of the Middle East. Malaysia hopes to become a major force in the Middle East by serving as a catalyst for the return of Japanese companies to the region. Since Japanese corporations have business ties with Malaysia, these links make Malaysia a naturally suitable agent in transactions between Japan and the Middle East.

Early attempts toward the formulation of a humanistic political economy within Islamic societies and the principle of ethical endogeneity are reviewed. This principle demonstrates that society maximizes its social welfare through a consensus of decisionmakers reached within the framework of a choice of goals and policy variables.