Reforming Islamic Finance for Achieving Sustainable Development Goals

The paradigm of Islamic economics and finance is guided by the
motivation of comprehensive human development (CHD) and its preservation as
manifested in the objectives of Sharīʿah (maqāṣid al-Sharīʿah). However, the real
world free-market economies are driven by the linear economy paradigm under the
influence of Hotelling’s 1931 famous work concerning the economics of exploiting
natural resources, in which, the ecological environment is not recognized as a resource.
The global financial architecture is designed to protect and preserve the linear
economic paradigm. In practice, Islamic finance has also remained a ḥalāl sub-set of
this system. The resultant social, environmental, and governance imbalances have
recently led to different initiatives sponsored by the UN including the Sustainable
Development Goals (SDGs). Like the maqāṣid, the SDGs also aim at achieving and
preserving human development. In practice, for the first time, a real paradigm shift
from the linear to the ecological/circular economy is noticeably taking place, also
inducing the transformation of the financial architecture. In this paper, in a broader
perspective, we use the CHD and SDGs interchangeably, and discuss a number of
paradigmatic and regulatory reforms that will be required to enhance the actual
effectiveness of Islamic finance in achieving the ideals of CHD, and the SDGs at large.
The paper in fact outlines a wider scope of the potential reform initiatives.