Assessing the Nature of Bargaining Powers and the Design of Islamic Banking Institutions Using the Framework by Calomiris and Haber

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The existence of these institutions and legislations were intended to provide a check and balance in the financial system in order to promote competition and stability but Calomiris and Haber opine that often these devices are subject to political bargaining which then weakens the effectiveness of their initial design[9].

Literature review

Studies conducted post the 2008 global financial crisis confirms the purported relationship between financial system development and economic growth. Gole and Sun (2013) examined the empirical evidence relating to the potential relationships between financial structures and economic outcomes. Using a data sample from 58 economies during 1998–2010, the paper found that a financial system which features a higher level of non-traditional bank intermediation (investment bank and other non-deposit funding structures of banks) appear to be more susceptible to financial instability and to poor economic outcomes. Prochniak and Wasiak (2016) studied financial data in the period 1993–2013 of 28 EU countries and 34 OECD economies and found sufficient evidence to support the hypothesis that the size and the performance of the financial system have a significant impact on economic growth.

On the other hand, literatures which discuss the significance of political arrangements on economic stability have produced varying conclusions regarding the supremacy of a liberal-democratic regime. Haggard (2000) in a study of the 1997 Asian Financial Crisis cited that certain features of the business-government relationship including government involvement in banking increased the vulnerability of the affected economies to external shocks (p.45). Chwieroth (2011) assessed the role of domestic politics on international financial regulatory change and observed that the private financial sector had the resources to petition the public office to adopt regulations that safeguard the interests of the financial market participants which effectively an example of regulatory capture. Crotty and Lee (2002) asserted that the IMF-led neoliberal restructuring program failed to rejuvenate Korea and suggested that Korea consider instead reforms to democratize and modernize their traditional state-guided growth model. Similarly, Kwon (2011) studied the response of the United States government to the 2008 crisis and the South Korea government to the 1997 crisis and concluded that in both cases neo-liberalism policies were inadequate and hence required a strong state intervention to address the increasing speculative high-risk activities of financial institutions and greedy behaviour which paralyzed the global economy (p.80-81). Crotty (2009) was equally critical of the US regulators of the financial markets whom he stated to have been ‘strongly influenced by efficient market ideology and corrupted by campaign contributions and other emoluments lavished on them by financial corporations’ and hence preferred deregulation which left the financial imbalances to go uncheck. O’Keefe (2014) also argued that ‘the primacy placed by successive Irish governments on the attraction of financial services to Ireland and an active policy to encourage greater competition in the Irish financial sector led to the establishment of a regulatory framework and supervisory approach that was weak and inadequate’ (p.46). In the same paper, with Alessio Terzi, they found that ‘both single-party and multi-party governments in presidential systems are associated with lower fiscal costs of crisis management’ (p.109).

In conclusion, although the literature agrees that financial sector development has a significant impact on economic growth, there is inconclusive evidence regarding the ideal democratic model as suggested by Calomiris and Haber which could foster stability.

Methodology

This paper will examine the nature of bargaining powers as theorised by Islamic scholars and Islamic economists. I make this distinction in order to illuminate further the possible differences in the models suggested by those Islamic thinkers who have had a more conventional education and training in contemporary economics and those who did not. This paper will mainly focus on the ideas of the following individuals and their main sources:

- Ibn Taimiyah (d.1328) and Economic Concepts of Ibn Taimiyah[10];

- Sayyid Abul A’la Mawdudi (d.1979) and First Principles of Islamic Economics[11];

- Muhammad Nejatullah Siddiqi and Some Aspects of the Islamic Economy[12] and The Economic Enterprise in Islam[13]; and

- Monzer Kahf and The Islamic Economy: Analytical Study of the Functioning of the Islamic Economic System[14].

The paper will then contrast and evaluate the proposed bargaining powers in an Islamic banking system against the taxonomy proposed by Calomiris and Haber. The paper will also attempt to identify the necessary parameters for an Islamic banking design and design a scorecard by which to evaluate the readiness of particular economies to establish an effective Islamic economic system. For the purpose of a case study, the paper will use the proposed Islamic banking design scorecard and the Calomiris and Haber’s framework to evaluate the economic system of one of the leading adopters of Islamic finance – Malaysia.

Bargaining powers in Islamic economic theory

This section of the paper will identify the main agents in the Islamic economy theorised by the selected Islamic scholars and economists and analyse the nature of the interaction and influence between those agents.

- Ibn Taimiyah

Ibn Taimiyah was a one of the most renowned Islamic jurists during the Abbasid caliphate. He was a remarkable intellectual and great reformer who brought about a revolution against un-Islamic practices and advocated for the return to the fundamental priorities of Islam and serving the public good through such state intervention in economic life which promotes justice and security and prevents exploitation and selfishness (Islahi, 1988: p.64)[15]. Ibn Taimiyah’s views on Islamic economics can be obtained in many of his legal rulings and he also discusses economic problems in his books Al-Hisbah fi’l Islam (The institution of Hisbah in Islam) and al-Siyasah al-Shar’iyah fi Islah al-Ra’I wal-Ra’iyah (Public and private laws in Islam)[16].

Property rights and bargaining powers

Ibn Taimiyah advocates for price fixing by the state in the case of monopoly and imperfections in the market[17].

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