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The turmoil left in the wake of the global financial crisis presents an opportune time to rethink the government invention/free market dichotomy that has characterized the bulk of conventional wisdom regarding the international financial system. Islamic finance, with its emphasis on reducing risk and preventing harm before it occurs rather than minimizing harm after the fact, offers a compelling approach to finance that can thwart market failures and avert crises before they start. The unique character of Islamic finance flows naturally from the example of the Holy Quran, and as such there is an unmistakable moral component to it. Islamic finance is built on a foundation of socioeconomic justice for all and sustainable growth facilitated by prudent stewardship of natural resources so that future generations may also enjoy the fruits of economic development. Islamic finance’s requirement of shariahcompliance leads to a host of rules and regulations that distinguish it from conventional finance. Chief among them are the prohibition of usury (riba), gambling (maisir) and unjustified ambiguity (gharar), the prerequisite that income be derived from productive economic activities and profits be shared fairly, and the ban on investing in certain industries that are considered forbidden (haram) owing to their toxic effects on society. These idiosyncrasies of Islamic finance clearly help spread socioeconomic justice throughout society. The ban on interest protects the poor from falling victim to predatory lending which exacerbates the cycle of poverty. It also compels the wealthy to invest in projects that have actual value in the real economy rather than passively letting their money grow automatically without putting in any real effort or, worse yet, gambling with other people’s money in wild speculation schemes. The often exploitative relationship between borrower and lender is thus replaced by a more equitable arrangement governed by profitandloss sharing (PLS) contracts. Under the terms of a PLS contract, both parties have rights and responsibilities and share in any profits or losses that may accrue. By cultivating a more sensible relationship between risk and reward, PLS contracts bolster productive economic activity and entrepreneurship. Financiers do not view borrowers as pawns to be manipulated in their endless quest to maximize profits, but rather as partners. The admonition against gharar helps to ensure that one party to an economic transaction does not exploit the other party by withholding information or giving misleading information. Transparency is of paramount importance. This helps reduce fraud and alleviates the negative effects of information asymmetries, as all parties are apprised of the risks involved and can make informed decisions about their investment. As outlined above, Islamic finance is not merely concerned with maximizing profit. It is part of a larger moral and ethical code of behavior that permeates all facets of society. This code dictates that it is better to forgo the possibility of profit all together if doing

Introduction: empirical research on Islam and economic life