Business | Banking
Old idea and new practices
Addressing a conference in London recently, Britain's Chancellor of the Exchequer Gordon Brown said he wanted London to become the global centre of Islamic finance. The statement assumes special significance considering that several UK banks are now offering Sharia-compliant products and services.
- By Shahli Akram, Special to Gulf News
- Published: 00:00 September 23, 2006
Addressing a conference in London recently, Britain's Chancellor of the Exchequer Gordon Brown said he wanted London to become the global centre of Islamic finance. The statement assumes special significance considering that several UK banks are now offering Sharia-compliant products and services.
What is it that draws so much attention to Islamic finance these days? It is not an exaggeration to say that the one aspect of Islam that wins universal admiration and attention these days is the Islamic vision of finance and economy.
Islamic finance is a nascent model, in the sense that it began operating as a system parallel, but not strictly counter to, conventional banking only recently. However, the giant strides it has made in a matter of two decades have been phenomenal. Although it is nowhere near posing a threat to the dominance of conventional banking, more and more people are being attracted to it, Muslims and non-Muslims alike.
Despite growing at a much faster pace than conventional banking, at up to 35 per cent in some countries, its volume is comparatively negligible at the global level. Yet economic pundits these days seem to lavish attention on the Islamic model of finance. At least, none is neutral on the subject.
What are the distinctive features of Islamic finance? One primary characteristic that distinguishes Islamic finance is the conditional linkage between real economy and finance. It leaves absolutely no room for the proliferation of speculative economic projections which render the whole economic domain vulnerable to sinister manipulations.
Islamic finance is rooted in the ground realities and is guided by a sense of 'here and now' coupled with certain strong ethical foundations. It is by principle asset-based, in the sense that it does not grant any intrinsic value to money. Money, Islamic finance maintains, cannot create profit, but only usury, except when it is converted into real assets. Besides, Islamic finance puts the pre-condition on some element of risk on both parties involved in a transaction.
In providing finance, for instance, it is the productivity of a project under consideration that concerns an Islamic financial institution rather than the creditworthiness of the borrower. This is because any financial transaction in an Islamic framework is a partnership, based on a combination of trust and viability, unlike conventional systems in which one-sided profit motives determine the whole deal. The solid linkage between the borrower's payment obligation and the actual revenue accrual turns a transaction in the Islamic framework into a concrete and transparent partnership which is entirely devoid of exploitation.
The psycho-social factors that constitute econ-omic behaviour in the Islamic construct are strikingly different from conventional ones. They stipulate that human beings must care for others, without necessarily putting self-interest in jeopardy. This in turn means that any financial transaction is morally inspired and transcendentally conceived. It is not a move to take advantage of the needy by vested interests for self-aggrandisement, rather it aims at serving a commendable social function within the structural framework of business, not that of charity. Let us examine it in more detail: An Islamic financial transaction results from an agreement between two parties for instance, between a financier and an entrepre-neur that an opportunity for generating additional value exists. They come together to explore that opportunity and share the gains. Needless to say, they ought to share the losses too. The accent is on ensuring that the relationship between both parties is far from that between a predator and its prey.
Of course, there are non-sharing modes of Islamic finance too. But in those as in other Islamic transactions, the linkage with real economic activities aimed at the generation of additional wealth is the underlying factor. For example, in Islamic modes of finance such as murabaha (cost-plus), salam and istithna (prepaid orders) and ijara (leasing), which involve pre-determined returns on investments, real economic activity is at the core of the transaction.
As Mohammad Nejatullah Seddiqi, an eminent scholar of Islamic economics, has rightly noted, the demand and supply of goods and services whose exchange is financed through the above-mentioned contracts ensure that financial activity is the servant, not the master, of real economic activity.
Islamic financial institutions have shown that all market activities can be financed by using the various Islamic modes such as musharaka, mudaraba, murabaha, salam, istithna and ijara, without resorting to any stratagems.
It has also been established beyond any shadow of doubt that Islamic financial transactions are of immense comparative advantages to their beneficiaries while making good business sense for the financiers. In short, it is a non-exploitative, additional value-generating business marked by transparency, integrity and efficiency.
While acknowledging that the excessive reliance on non-sharing modes of finance in the current practice of Islamic banking is bringing a good deal of criticism to the system, I would like to affirm that it is too new to be subjected to any kind of conclusive judgment.
Islamic finance continues to evolve and, as it evolves, it demonstrates much more flexibility and resilience than conventional systems of banking and finance. Therefore, Islamic financial institutions are able to better tailor their products in consonance with the requirements of the customers and the changing rhythms of the different markets.
Last, let me state the obvious by way of conclusion: Islamic finance is opposed to the system of interest that defines conventional banking.
Many reasons are attributed to Islam's uncompromising rejection of interest and usury, but in my view the most important of them is that Islam aims at confining and restoring money to its essential functions. In the absence of hard economic activity, money ceases to be money and becomes a source of economic tyranny and misery, precisely the villains that money is supposed to eradicate.
The writer (above) is the deputy CEO of Amlak Finance.
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