Political Economy of the Emergence of Islamic Finance: A Grounded Theory Approach to Negotiating the Institutionalisation of Islamic Finance in Indonesia

Albeit of its recognised presence and admired development, the understanding on the nature and process leading to the emergence of Islamic banking and finance received limited interest. In the absence of such in-depth understanding, over-generalisation pattern in essentialising the presence of Islamic finance is often recorded. This situation reduced the initial value substantiation, disengaging the discussion from the earlier emergence of Islamic economics. Such view can potentially misread and dislocate the phenomena of Islamic finance from its original nature. This arising problem has greater adverse impact on the phenomenon of Islamic finance emergence, which portrayed a narrative of struggle in articulating value disposition of Islam in financial sphere, such as Indonesia, to accentuate its novel base. Misinterpretation of the nature of emergence of Indonesian Islamic finance, which reflect a bottom-up process of Islamic banking and financial industrial formation, causes ignorance to the authentic base of this initiative, resulting in mistreatment that not only hinder development but also rise existential question. This study, thus, aims to examine the nature and process leading to the emergence of Indonesian Islamic finance institutionalisation with the objective of providing a critical and theoretical approach to its novel essentialisation. In so doing, narrative and understanding of elites of Islamic economic activism is extracted through interview process to identify values-norms substantiation and its point of references, and to make sense of Islamic finance institutional emergence through the occurring negotiation and events of change. The information is assessed and analysed in grounded manner following social constructivist grounded theory analytical strategy of developing theory and methodological approach of emergence phenomenon. In responding to the challenge of locating and comprehending Islamic finance in its pre-supposed nature, this research embarks into a journey of searching for particular view in assessing the phenomenon within its true and natural setting. For this, the lens of ‘emergence’ is employed as a philosophical and theoretical position in deconstructing the form and the process of Islamic finance’s institutional emergence through the Islamic economics movement. In particular, it follows an emergence in the evolutionary context that emphasises novelty and irreducibility in the form of emergence. Being a theoretically discursive study, it attempts to reinstate the connection between Islamic finance institutional emergence and earlier Islamic economic emergence, informing that Islamic finance is a socially constructed product of negotiation through the articulation of the values-norms accentuation of Islamic economics theory and movement. This position is versatile in locating its original epitome and point of departure without disregarding that any realised formed in social reality realm is a contested one. Drawing on Indonesian Islamic economics experience with Islamic finance institutional emergence that pose an element of civility, activism, and heterogeneity in its articulative attempt, emergence reflection on the institutionalisation process of cultural element of Islamic economics suggest that it only fulfils an element of novelty in a reducible manner resulting into a distorted novelty. A close theoretical reading accounts such a situation to variables related to roles transformation and disappearance that trigger value displacement at the course of increasing interaction between cultural bearer of Islamic economic epitomes with elites of financial structure as well as due to the presence of dominant neoclassical logic and imposed effect of the capitalist structure toward othering finance. Over the course of its emergence, the trajectory of realisation aiming towards an authentic Islamic finance institution from its hybrid orientation has gradually shifted toward structurally fitted realisation of Islamic finance institutionalisation. This research, therefore, argues that emergence within the institutionalisation of finance is bounded by its existential condition set by the dominant logic of finance. In addition, imposed effect of the existing capitalist structure is increasingly relevant within the presence and expanding arena of financial structure, limiting the independency for any cause of othering ‘alternative’ financing structures and forms, such as Islamic finance. These two represent cultural hegemony of conventional financial structure towards a case of emergence in finance, which also distorts the original trajectory of Islamic economic activism in deriving value-based Islamic financial institutional setting and form. Unless continuous experimentation outside the existing conventional financial structure is reserved as its strategic action, Islamic economic activism pursuance for substance-oriented institution of Islamic finance, left along its authentic form, is deemed to pass pre-condition and structural filtering mechanism in order for its normative essentalisation to be considered for expanding the institution from within the substantivist Islamic economics theoretical and policy framework. The theoretical explorations in this study suggests that the emerging political economy in Indonesia favouring Islamic financial development may not contribute to the expected novelty as enunciated by Islamic economics movement in its essential aspiration