Analysis Of The Reasons For The Contradiction Between Modern Islamic Financial Practice And Theory

As a new economic phenomenon after the Second World War,the modern Islamic finance has experienced the unique developmental process of theoretical construction and practice.It is a typical case of religious culture affecting economic development and a comprehensive product of the unique religious culture,ideology and economic development in the Islamic world.In 1940 s the subcontinent proposed the establishment of the Islamic financial system based on Riba Prohibition.In 1970 s Islamic finance practice has made substantial progress and showed a trend of rapid development.However,the specific operation of Islamic finance has deviated,to some extent,from the Islamic financial theory.There is an objective contradiction between practice and theory,which is worth paying attention to.The modern Islamic financial theory mainly includes two main contents,one is the comprehensive criticism of all forms of interest,and the other is the great promotion of the principle of "profit and loss sharing".However,in practice,PLS instruments,which are most in line with the modern Islamic financial theory,accounts for a very little,while those fixed-income instruments,which avoid interest only in the form,actually dominate the practice of modern Islamic finance,showing the objective contradiction between theory and practice.This paper analyzes the reasons for the contradiction between practice and theory.PLS instruments are faced with many problems,such as high inherent risk,poor liquidity,lack of tax offset effect,inapplicability to consumer financing,adverse selection in the choice of investment projects and moral hazard in project operation under information asymmetry,and high governance costs.All these problems lead to PLS instruments being shelved in practice.The paper points out that fixed-income instruments avoid the direct interest charged,while adopt the form of rent and cost-plus to conceal the substance of interest,which is the reapplication of the flexibility of Islamic law and the inevitable result of compromising the ideals of Islamic financial theory and the objective laws of economic operation.