I recently had the opportunity to work with the Center of Islamic Economic and Finance (cief), a joint venture between Madrid’s IE Business School and King Abdulaziz University in Saudi Arabia. I was involved with the symposium held at IE on June 16th and 17th entitled “Beyond the Crisis: Islamic Finance in the New Financial Order”. The symposium assembled a highly distinguished group of academics from the worlds of Islamic finance and conventional, western finance to discuss the nature of Islamic economics, how those principles may be applied in the framework of conventional finance and the advantages that would represent.
My involvement in the symposium included an involvement in the transcription of the proceedings, which gave me the unique opportunity of hearing all of the speakers at all of the sessions. certainly there are some very interesting ideas in Islamic finance that attract much attention in the West, for instance the question of ethical financing, to which Islamic economics inherent moral obligation is naturally well suited. Furthermore, the requirement of Shari’ah Law that financing should be backed by assets and involve a element of risk sharing presents an interesting contrast to the excessive trading of derivatives that lead to the current crisis.
Some question were raised for me during these discussions, however. For instance, if all financing transactions must be backed by real assets, are there sufficient assets to actually generate the level of liquidity we have come to rely upon? It can be demonstrated that much of what is considered Islamic finance can already be achieved using the tools available in many Western economies, however it occasionally meets obstacles, such as legislation regarding bank deposit guarantee schemes, which break the Shari’ah compliance. Alternatively, an financing structure compliant with Islamic principles can be created, but it then encounters problems with issues like taxation, making those Shari’ah compliant vehicles relatively inefficient compared to other solutions.
Many of the Shari’ah scholars and Muslim academics champion their economic principles are the saviour of the global economy and seek special consideration to ease its introduction in the West. Unfortunately, Islamic economics is a new field, originating in the 1960s, and there is still a lack of uniformity, for instance scholars in the Gulf having very different attitudes to scholars in Malaysia and Indonesia. Moreover, the need for Shari’ah scholars to pass fatwah on the banks’ operations, the rulings of which can occasionally appear quite arbitrary, add layer of bureaucracy and complexity.
On the other hand, liquidity is a big problem in Western economies and the Islamic economies of the Gulf states, if nothing else, represent a great source of liquidity. Adopting Islamic financing principles purely as a way of gaining access to those “petro-dollars” does appear to be a cynical gesture, however I prefer the term pragmatic, since it can be the case, especially in the world of project financing, that the financing structure we create in West today require only the smallest modifications to become fully Shari’ah compliant, since there is an obvious physical asset, for example a power station or a toll road. With respect to the rest of Islamic finance, there are many advantageous things that we can adopt; greater dependence on assets, more onerous obligations on retaining debt to encourage responsible lending, higher reserve ratios, etc. On the other hand, we are not obliged, in our secular culture, to respect the teachings of Islam in order to implement those things. Furthermore, unless we are specifically entering into a contract with a Muslim business partner, we may “pick and choose” which elements of “Islamic finance” and “conventional finance” we wish to implement are agreeable to the parties concerned. Whether we should revise the established legislation and regulation of our secular society for the purpose of being more accommodating of those bound by a particular faith-based obligation is a larger question.