Practical analysis for investment professionals
20 January 2012

Occupy Wall Street and Islamic Finance: Economic Justice Is Enticing — But Elusive

Economic justice has been a central theme of the Occupy Wall Street (OWS) movement. It is often found written on placards and in the tweets of OWS protesters. The term is well known: A search for it on Google will yield millions of results. But what exactly does economic justice mean?

In common usage, economic injustice tends to refer to economic outcomes and opportunities, such as a high degree of concentration of income and wealth and limited access to financing. Much of the debate concerns whose interests drive a government’s economic decisions in shaping these outcomes and opportunities — for example, how taxes are levied and spent.

Academic writings show the complexity of the topic. In his book Justice: What’s the Right Thing to Do?, Michael Sandel of Harvard University explains that an individual’s definition of economic justice depends on his beliefs. For instance, some may believe that any distribution of income and wealth produced by a free market is just.

But there is no such thing as a free market, according to Ha-Joon Chang of Cambridge University. Chang argues that regulations restrict the freedom to contract in all markets — from restrictions on child labor to requiring banks to hold capital. If there is no free market, how can the distribution of income and wealth produced by it be just?

Nobel laureate Amartya Sen has offered some clarity to this complex debate. In his book The Idea of Justice, he explained that we do not need a theory of the ideal state of justice in order to pursue justice. In addition, public reasoning and discussion can help reduce injustice.

“When people across the world agitate to get more global justice . . . they are not clamouring for some kind of ‘minimal humanitarianism,’” Sen wrote. “Nor are they clamouring for a perfectly just world society but merely for the elimination of some outrageously unjust arrangement to enhance global justice.” Perhaps the OWS protesters would agree.

Following the global financial crisis that started in 2008, many commentators pointed out the negative externalities imposed on society by the financial sector. They expressed deep concerns about the privatization of profits and the socialization of losses by the financial sector — or, as an OWS protester might put it, economic injustice perpetrated through political manipulation.

The frequent references to economic justice by the OWS movement should strike a familiar chord in the small but growing field of Islamic finance.

The literature on the subject is full of mentions of justice. Mohammad Nejatullah Siddiqi, who has been writing in the field since the 1950s, has even called Islamic finance a “quest for justice.” Similarly, Taqi Usmani, a prominent Muslim jurist, repeatedly talks about “distributive justice” in his writings on Islamic finance.

In late 2011, an OWS protester in London was photographed holding a placard that said, “Let’s Bank the Muslim Way?” Unsurprisingly, her photo received much attention in Islamic financial circles and quickly found its way into some PowerPoint presentations. That the OWS movement derives inspiration from the Arab Spring adds more color to the context and the theme of economic justice.

Clearly, it is too much to burden the Islamic financial sector with delivering economic justice all by itself. That necessarily involves wider economic policy, and the Islamic financial sector is but a small niche within global finance. But why is Islamic finance expected to facilitate economic justice?

One explanation is that the Islamic prohibitions of riba and excessive gharar include in their scope the lending of money on interest and the trading of risk. While they restrict the freedom to contract, they also keep finance tied to the real economy and promote enterprise and risk sharing. This is in sharp contrast to many established elements of conventional finance — from treasury bills to credit default swaps.

In theory, because of these prohibitions and other moral checks and balances — such as avoiding socially harmful industries and excessive consumption — Islamic finance should facilitate the distribution of wealth and opportunity, thereby facilitating economic justice.

The initial experiments in Islamic finance in late 1960s are often seen as broadly consistent with the spirit of economic justice. Since the establishment of the first Islamic commercial bank in 1975, however, Islamic finance has largely consisted of commercial banking within conventional fractional reserve banking. According to a research report published by TheCityUK, as much as 72% of the assets in this nearly one-trillion-dollar sector are in commercial banking.

Observers have long held the view that, legal form and religious symbolism aside, the economic substance of Islamic commercial banking is very similar to, if not the same as, that of conventional commercial banking. In the concluding chapter of their book, Islamic Law and Finance: Religion, Risk, and Return, Harvard University professors Frank Vogel and Samuel Hayes III wrote that it is a “legal and financial embarrassment” that Islamic banks “mimic conventional banks” instead of being the profit-and-loss investment intermediaries that Islamic economic theory demands. They went on to suggest that genuine profit sharing through pooled funds could be the solution.

Such observations regarding Islamic finance are not confined to banking; one comes across them in capital markets and insurance, too. Observers may also find it puzzling that one could switch from conventional finance to Islamic finance but still be dealing with similar debt-based financial services and some of the same large financial institutions, such as HSBC, Citibank, and Goldman Sachs, which are seen as part of the problem by the OWS movement.

In response, Islamic finance practitioners tend to argue that the current legal, tax, and regulatory frameworks are meant for conventional finance but that Islamic finance is forced to fit into them, creating the gap between its theory and its practice. Some practitioners also contend that their customers are not looking for something different from conventional financial services in their risk-return profile. Others may say that they are doing what they can under the current circumstances and that it will take time and a different legal and economic framework to move toward alternatives that are more authentically Islamic and just.

The arguments offered by Islamic finance practitioners are not without merit. But the OWS protestors might ask: If the economic substance of Islamic banking is the same as that of supposedly unjust conventional banking after nearly 40 years, how would banking the Muslim way facilitate economic justice?

Perhaps the answer is that reducing economic injustice in practice can be even more difficult than debating the complexities of its theory. Be it conventional or Islamic finance, economic justice remains enticing but elusive.

About the Author(s)
Usman Hayat, CFA

Usman Hayat writes about sustainable, responsible, and impact investing and Islamic finance. He is the lead author of "Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals," and the literature review, "Islamic Finance: Ethics, Concepts, Practice." He is interested in online learning and has directed three e-courses for CFA Institute: "ESG-100," "Islamic Finance Quiz," and "Residual Income Equity Valuation." The other topics he writes about are macroeconomics and behavioral finance. Previously, he was a content director at CFA Institute. He is a former executive director at the Securities and Exchange Commission of Pakistan (SECP). He has experience working in securities regulation and as an independent consultant. His qualifications include the CFA charter, the FRM designation, an MBA, and an MA in Development Economics. His personal interests are reading and hiking.

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