Islamic banking

May 22, 2009 Editorial

It is now widely conceded that it was the activities of the financial institutions of the west in their quest for ever-higher returns on their capital that led to the present global financial collapse.
In the inevitable soul-searching that accompanies such mega-disasters, some previously low-keyed alternative models of finance that are evidently riding out the storm in quite robust fashion have received increased interest.
We had previously mentioned the public banks of countries such as Germany, China and India, but these institutions are run on identical principles as the private ones now in trouble. It is now evident that the managers of the public banks, not privy to the mammoth bonuses etc., of the private financial institutions, were quite a bit more conservative than the latter in conjuring up “innovations” to “make money on money.
The other model is “Islamic Banking”, which takes a diametrically opposed position on the foundation on which both the western public and private financial institutions are built – interest.
Islamic banking attempts to guide its activities in accordance with Islamic law (Sharia) and guided by Islamic principles and economics. Most germanely, Islamic law prohibits the collection and payment of interest, known as riba and better translated by the term “usury”, which carries the unsavoury connotation that practising Muslims feel towards the practice.
The notion that “interest” might not be “proper” probably strikes those of us who live in the west as strange but it is salutary to remember that Europe held the same position under early Christianity.
Generally, Islamic law also prohibits trading in financial risk (which is seen as a form of gambling) and additionally prohibits investing in businesses that are considered unlawful, or haraam.
Under this scenario, the Islamic sharia-compliant finance emerged largely unscathed, primarily because Islamic banks in the Middle and Far East did not follow the low collateral/high borrowing regimes favoured by their conventional competitors at home and abroad. Islamic principles denied investors any real access to shares in the banking sector and thus any exposure to toxic debt.
While still a tiny fraction of global finances (which, let us not forget has shrunk dramatically in the past year) Islamic finance has become a major global industry, with more than 300 institutions currently involved in both Muslim countries and international markets. Globally, Islamic banking assets are estimated between US$650 billion and US$700 billion. What makes them worth following is that they have registered a growth rate of 10–15% per year over the last decade – and are expected to continue at this rate.
The first explicit Islamic bank was established only in 1975, and while most are in the middle eastern Islamic countries such as Saudi Arabia and Iran, the wide dispersion of Muslims across the globe, coupled with the development of countries such as Malaysia and Indonesia and their increasing insistence on living according to the tenets of their faith, have ensured that the concept is spreading.
Even non-Muslims have been repelled by the greed and avarice evinced in the quest for “paper” profits and while such persons might have once been seen as naïve, the fall of the “sophisticated” western financial masters of the universe have widened their appeal.
An example of an Islamic banking practice that has been introduced in the west is the British bank HSBC’s home-ownership scheme – Amanah, which means ‘trust’ in the moral and legal sense.
The scheme is based on an Islamic contract known as ‘diminishing musharaka’ which avoids the Sharia prohibition on not sharing risks equally between borrowers and lenders.
A would-be home-owner puts up a percentage of the cost price; the property is registered in a trust (amanah) as a jointly owned asset, with the bank’s majority ownership diminishing over an agreed period, as regular payments are made; the customer promises to buy the bank’s share, and the bank promises to sell it to the client.
We begin to look at assets and debt differently.
We wonder why Guyana has not been introduced to the world of Islamic banking, which evidently offers choices in the (treacherous) world of finances.

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Islamic banking

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