nep-isf New Economics Papers
on Islamic Finance
Issue of 2022‒08‒08
two papers chosen by

  1. Islamic economy and capitalism: Comparison using econophysics models of exchange and redistribution By Takeshi Kato
  2. Central Bank Digital Currencies, Internet of Things, and Islamic Finance: Blockchain Prospects and Challenges By Khalid Ahmed Al-Ansari; Ahmet Faruk Aysan

  1. By: Takeshi Kato
    Abstract: What are the fundamental differences between an Islamic economy and capitalism? The Islamic economy is characterized by the prohibition of Riba (interest) and the enforcement of Mudaraba (joint venture) and Waqf (donation). We propose new econophysics models of wealth exchange and redistribution to quantitatively compare these characteristics with the differences in capitalism, and evaluate wealth distribution and disparities by simulation. Specifically, we propose a loan interest model representing finance capitalism and Riba, a joint venture model representing shareholder capitalism and Mudaraba with respect to exchange, and a transfer model representing inheritance tax and Waqf with respect to redistribution. As exchanges are repeated from an initial uniform distribution of wealth, the distribution of wealth approaches a power-law distribution more quickly in the loan than in the joint, and the Gini index, which represents disparity, rapidly increases. The joint has a slower increase in the Gini index, but eventually the wealth distribution in both models becomes a delta distribution, and the Gini index gradually approaches 1. Next, when both models are combined with the transfer model to redistribute wealth every given period, the loan has a larger Gini index than the joint, but both models converge to a value with a Gini index less than 1. These results quantitatively reveal that in the Islamic economy, disparities are restrained by their characteristics. These correspond to the three economic modes Polanyi presented: reciprocity, redistribution, and exchange. The insights encourage an economy that embraces the morals of mutual aid as described in Mauss's theory of gifts, Kropotkin's theory of mutual aid, Graeber's theory of debt, Sarthou-Lajus's repayment to third parties, and Karatani's mode of exchange D, and provide guidelines for the next alternative to capitalism.
    Date: 2022–06
  2. By: Khalid Ahmed Al-Ansari (HBKU - Hamad Bin Khalifa University); Ahmet Faruk Aysan (HBKU - Hamad Bin Khalifa University)
    Abstract: This paper introduces the need for blockchain technology integration for Islamic financial institutions. The paper presents three main applications of blockchain technology. It explains how such technology can be used in the banking and financial sectors by providing examples for each application. Given its relevancy, the paper expands on Central Bank Digital Currencies (CBDCs) as one of the blockchain applications. The paper then discusses salient points on how the banking sector would be affected by what is described as the future of money. Subsequently, an analysis of the use of blockchain in financial services and, in particular, the use for Islamic financial services is provided by examining examples of past successful implementations. The paper then introduces the Internet of Things (IoT) and illustrates the possible technology implementation in financial institutions. The inherent security weakness of IoT is summarized with the potential elimination of that weakness if combined with blockchain (BIoT). The paper concludes by providing a handful of suggestions and recommendations on the urgency of considering CBDCs for future daily operations, integrating Distributed Ledger technology, and using BIoT to safeguard the financial and clients' transaction records.
    Keywords: Blockchain,CBDCs,Internet of Things,IoT
    Date: 2022–04–19

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