By Loretta
Napoleoni
26/04/08 "ICH"
-- --
Islamic finance
has become the
fastest-growing,
most dynamic
sector of global
finance. Every
Western-style
financial
product has its sharia, i.e.
Islamic law,
compliant
instrument:
microfinance,
mortgages, oil
and gas
exploration,
bridge building,
even sponsorship
of sporting
events. Islamic
finance is
innovative,
flexible, and
potentially very
profitable.
“Operating in 70
countries with
about $500bn in
assets, it is
poised to expand
geometrically.”
With more than
one billion
Muslims eager to
support it,
analysts project
that this system
will soon manage
approximately 4
percent of the
world economy,
equivalent to $1
trillion in
assets. Such
figures explain
the eagerness of
Western banks to
tap into sharia
financial
services.
Citigroup, along
with many other
Western banking
retailers, have
opened Islamic
branches in
Muslim
countries.
At the end of
2004, the
Islamic Bank of
Britain, the
first bank
catering to a
European Muslim
client base,
floated its
shares on the
London Stock
Exchange.
Ironically,
Western
capitalism’s
three major
global economic
crises - the
1970s oil
shocks, the late
1990s Asian
crisis, and 9/11
- paved the way
to the ascent of
Islamic finance.
Unlike market
economics,
Islamic finance
centers on the
religious tenets
of Islam and
operates in a
way to keep
Muslims
compliant with
sharia, the
religious law
that comes
directly from
the Koran.
Islamic
activists,
intellectuals,
writers, and
religious
leaders have
always upheld
the prohibition
of riba, the
interest charged
by moneylenders,
and denounced
gharar, which
refers to any
type of
speculation.
Under this
belief, money
must not become
a commodity in
itself to create
more money.
Islamic finance
thus shuns hedge
funds and
private
equities,
because they
simply multiply
cash by
stripping
assets. Money
serves as a
means or
instrument of
productivity as
originally
envisioned by
Adam Smith and
David Ricardo.
This principle
is embodied in
the sukuks,
Islamic bonds.
Sukuks always
link to real
investments -
for example, to
pay for the
construction of
a toll highway -
and never for
speculative
purposes. This
principle
springs from the
sharia’s ban on
gambling as well
as on the
prohibition of
any forms of
debt and
activities that
trade risk.
At the end of
the nineteenth
century,
supporters and
promoters of
Islamic finance
repeatedly
expressed
discontent with
the
Western-style
banks that had
penetrated
Muslim
countries.
Several fatwas,
or religious
decrees, were
issued to
reiterate the
tenet that the
interest-based
activities of
the colonizers’
banks proved
incompatible
with the sharia.
Yet, because
Western
financial
institutions
were the only
banks active in
the Muslim
world, the
faithful had to
use them even if
they performed
poisonous
practices based
on prohibited
activities.
From the
mid-1950s to the
mid-1970s,
economists,
financiers,
sharia scholars,
and
intellectuals
studied the
possibility of
scrapping
interest rates
and of creating
financial
institutions
centered on a
sharia-compatible
alternative to
the riba. In
their mind the
Islamic economic
system would
incorporate the
zakat -
obligatory
almsgiving to
help the poor -
and other
fundamental
elements of the
Muslim religion,
such as the
funding of the
haj, i.e. the
pilgrimage to
Mecca. The first
projects of
applied Islamic
economics came
into existence
concurrently in
the 1950s in the
countryside of
Lower Egypt and
in Kuala Lumpur,
Malaysia. The
Egyptian
project, located
in Meet Ghamr,
Egypt, supported
a housing plan
for the less
wealthy. The
Malaysian
government-sponsored
experiment was
promoted by the
Pilgrims’
Administration
and Fund of
Malaysia. It
supervised
financial
institutions
that collected
savings and
invested them in
accordance with
the sharia. It
aimed to finance
the haj, which,
together with
the zakat, is
one of the five
pillars of
Islam.
Until the early
1970s, Islamic
economics was
essentially
embryonic and
regarded with
deep skepticism.
“Back then, no
one really
thought Islamic
banking would
ever become
big,” recalls
Sheik Hussein
Hamid Hassan, an
Egyptian scholar
involved in the
creation of one
of the first
Islamic banks.
“People thought
it was a strange
idea - as
strange as
talking about
Islamic
whiskey!”
Western
skepticism
compounded daily
because of the
Muslim
countries’
chronic lack of
capital. They
had no money to
start an
alternative
banking system,
many thought
they never
would, therefore
people dismissed
the idea of
Islamic finance
as merely
utopian. This
scenario changed
with the
1973–1974 oil
shock, which
generated a
massive capital
inflow into Arab
oil-producing
countries from
Western
importers. The
quadrupled price
of oil generated
the capital
needed to put
into practice
what had
remained only an
idea debated for
decades. That
idea
materialized
with the
establishment of
an international
developmental
bank for the
Islamic region.
Such a bank
would enhance
the Organization
of the Islamic
Conference,
considered a
potential power
base for some of
the newly
enriched
countries,
especially Saudi
Arabia and
Algeria. At the
same time, the
bank would serve
as the
instrument for
distributing
financial help
from oil-rich
Muslim countries
to their
brethren in
Africa and Asia.
The first call
for the
establishment of
the Islamic
Development Bank
(IDB) came from
the heads of
state of Saudi
Arabia, Algeria,
and Somalia. In
1974, when the
articles of
agreement of the
IDB were
drafted, it
formally stated
that the bank’s
activities had
to be conducted
in accordance
with the sharia.
At the core of
sharia-compliant
economics there
is an
exceptional
joint venture.
Indeed, this
alliance emerged
in the 1970s
when richMuslims
and sharia
scholars began
working
together. This
unusual
partnership is a
phenomenon
unique in modern
economics, but
one that
cemented the
foundation of a
new economic
system. A few
visionary
personalities,
like
PrinceMohammad
al Faisal (son
of the late
Saudi King
Faisal bin
Abdul-Aziz),
Saleh Kamel of
Saudi Arabia,
Ahmed al Yaseen
of Kuwait, and
Sami Hamoud of
Jordan,
channeled some
of the new
wealth produced
by the first oil
shock into the
formation of a
new breed of
Islamic banks.
Sharia scholars
and clerics drew
up the monetary
structure of the
new banks.
Partnership
between leaders
and clerics,
therefore,
serves as the
root of Islamic
finance. This
concept springs
from the essence
of the Umma, the
body or
community of
believers,
central to the
spirit of Islam.
For Muslims, the
Umma represents
a single and
unified entity;
it breathes,
thinks, and
prays in unison.
It exudes the
soul of Islam.
Individualism
within
Islam does not
make sense
because Islam,
based on tribal
culture, does
not recognize
it. Traditional
tribal values,
such as the
strong sense of
belonging, the
obligation to
help friends in
need, and the
acceptance of
religious
leaders’
authority are
the pillars of
Muslim culture.
Sharia scholars
transplanted
these values
into Islamic
economics; these
same principles
allowed Arab
Bedouins to
withstand the
harshness of the
desert for
centuries.
Cooperation was
essential in
such a hostile
environment and
is still a must
in modern times.
Partnership is
the heartbeat of
Islamic
economics.
“Underlying the
system is the
philosophy of
risk sharing:
the lender must
share the
borrower’s risk,
making the two
in effect
partners,
injecting a
strong social
component into
the financial
system. This
concept
separates
Islamic Finance
from Western
Finance, which
seeks to
maximize profits
and minimize
loss through
diversification
and risk
transfer.” Also,
money must be
put to work.
Because Islamic
finance
prohibits
interest, it
seeks revenues
from rents,
royalties,
business
profits, or
commodity
trading; a
mortgage, for
example,
represents a
“rent to buy”
arrangement.
Thus,
conceptually,
Islamic
economics is the
opposite of
Western finance,
which revolves
around the
individual’s
self-interest.
Above all,
Islamic finance
represents the
sole global
economic force
that
conceptually
challenges rogue
economics. It
does not allow
investment in
pornography,
prostitution,
narcotics,
tobacco, or
gambling. As
discussed above,
since the fall
of the Berlin
Wall, all these
areas have
blossomed thanks
to globalization
outlaws under
the indifferent
eyes of the
market-state.
Loretta
Napoleoni: An
expert on
financing of
terrorism,
Loretta advises
several
governments on
counter-terrorism.
She is senior
partner of G
Risk, a London
based risk
agency. - She is
a Fulbright
scholar at Johns
Hopkins
University’s
Paul H. Nitze
School of
Advanced
International
Studies in
Washington DC.
and a Rotary
Scholar at the
London School of
Economics..
To review
further articles
and listen to
podcasts by
Loretta
Napoleoni, you
are invited to
visit her
website:
http://www.lorettanapoleoni.org
Islamic Finance
