354 AN INTRODUCTION TO ISLAMIC FINANCE
comprehensive, and systematic economic hermeneutics as a foundational
structure that supports research, dialogue, and debate in Islamic economics,
as well as in building the future edifi ce of theoretical, empirical, and policy
structure of this discipline. The present generation of researchers is in a posi-
tion to make an important contribution by focusing on activities that can draw
economic meanings and inferences from terms, ideas, and concepts expounded
in the sources of Islam. The hope is that at some point a collection similar to
Palgrave’s Dictionary of Economics is developed for Islamic economics. The
momentum of these efforts will be greatly accelerated if fi nancial resources,
similar to those provided to investigations in traditional economics by major
foundations, could be mobilized in Muslim societies to support such activities.
Trust, Institutions and Economic Development
Recent cross - country research indicates that the best - performing countries
are those with relatively high trust levels and strong institutions. In poor -
performing economies the level of trust is low, and institutions are either
absent or weak. If trust is low, strong institutions should be established
to protect property and investors’ rights as well as to enforce contracts.
While current Muslim societies have low levels of trust, they are adopting
best practice and international standards of policy formulation and imple-
mentation, as well as legal institutions and practices that compensate for
this weakness. Therefore, it is expected that risk - sharing methods of Islamic
fi nance will expand rapidly in these countries.
As mentioned earlier, an important reason for the dominance of risk -
sharing fi nance during the Middle Ages was mutual trust. It is possible that
the breakdown in the general level of trust relationships may have led to the
dominance of debt contracts beginning at the end of the Middle Ages.
Economists, however, have been empirically investigating trust only recently
after Fukuyama (1996) raised the possibility that it may be an important
factor in explaining cross - country economic performance. Specifi cally, he
asserted that the general level of trust, an important component of social
capital, was a strong explanatory factor in the economic performance of
industrial countries. Moreover, he indicated that a high level of general trust
was reinforced in these societies by strong institutions. The last decade of
the twentieth century had already witnessed a large volume of empirical
research that focused on the existence (or the lack) of strong institutions
explaining cross - country differences in economic performance. This litera-
ture isolated two specifi c institutions — those that protect property rights
and those that enforce contracts — as the most important in explaining why
some economies performed well and others did not.
As we saw in the previous chapter, the last decade has witnessed a grow-
ing literature on the importance of trust to the development of the fi nan-
cial system. There is growing evidence to suggest that low trust is a crucial
factor in explaining the low level of stock market participation. If such
research proves robust, trust may well become the long - awaited solution
to the Equity Premium Puzzle (see following section). Trust may be defi ned