Business | Analysis

Islamic finance, Occupy protests and public good

Calling for a transparent and fair system

  • BY Rushdi Siddiqui, Special to Gulf News
  • Published: 00:00 February 5, 2012
  • Gulf News

There are only two ways to conquer and enslave a nation, one is by sword, the other is by debt," said John Adams, the second president of the United States.

If we expand the quote, it could include debt without collateral asset, trading of such debt, and enhancing it with leverage. There are consequences as there are market cycles.

Can Occupy Wall Street (OWS), public good and Islamic finance converge? Yes, through the lofty principals of economic justice.

The essence of Islamic finance is about "risk sharing over risk transfer", as it implies a financial and economic system of checks and balances. It implies an "ethical" financial intermediation linked to the real economy for "moral" value-added output. It implies modalities of contracts whose foundations are based on transparency, where asymmetric information is minimised to prevent abuses against the weaker counter-party.

Furthermore, Islamic finance is about financial inclusion paving the path for distributive wealth and income, and ensuing economic opportunities. Finally, it's all about business and not religion, and it about profits but against profiteering.

OWS

According to commonly used information website Wikipedia, Occupy Wall Street is a protest movement which began last September 17… against social and economic inequality, high unemployment, greed, as well as corruption, and the undue influence of corporations — particularly from the financial services sector — on government. The protesters' slogan ‘We are the 99 per cent' refers to the growing income and wealth inequality in the US between the wealthiest 1 per cent and the rest of the population.

It would seem many of the concerns raised by the OWS movement were similar to its predecessor spark, the Arab Spring phenomenon, except replacing "corporations" with "corrupt and repressive governments". As of now, the Arab Spring has had more impressive results than OWS after helping bring new governments in Tunisia, Egypt, and Libya, new governments in the "wait" in Yemen and Syria, and "new governance" in other regional countries.

The question becomes, how would the OWS movement react to Islamic finance? During a London demonstration along the OWS lines in 2011, a protester held up a sign, "Let's bank the Muslim way". Obviously, the reference is to Islamic banking, but the jury is still out if the industry will receive OWS' endorsement as many of the financial institutions, such as HSBC and Citi, protested against have a presence in Islamic finance.

Public good

In March last year, the Securities Commission Malaysia (SC) and the Oxford Centre for Islamic Studies (OCIS) held a two-day closed roundtable on Islamic Finance and the Public Good.

Dr Raja Nazrin Shah, Crown Prince of Perak and Financial Ambassador to the Malaysia International Islamic Financial Centre (MIFC), who officiated the roundtable, said, "public good is one concept that is common to both conventional and Islamic finance.

The values advocated by Sharia are not only confined to the detailed technical aspects of transactions, but also in the extent to which the objectives of Sharia are achieved. If every aspect of Islamic finance were to be subject to a public good test, arguably no negative repercussion could ever arise.

Likewise, if all conventional financial products were subjected to a public good test, the catastrophic effects of the recent crisis could have been avoided; and finance would serve its rightful purpose — as an engine that drives and supports the real economy."

At the same roundtable, the Chairman of SC, Tan Sri Zarinah Anwar, said, "… the virtues of Islamic fin-ance need to be unlocked further. Public good, ethics, shared values, governance, and real and tangible contributions to the economy hold the key to innovation and growth. Profits involving a higher social purpose and objective represent values that will create not just economic returns, but also comply with universal ethical standards. Putting all these in place will strengthen the universality and acceptability of Islamic finance, enabling it to offer a distinctive value proposition."

Thus, Islamic finance is not about privatisation of profits and socialisation of losses by the financial sector. It's about accountability rate of returns, via due diligence, as pre-determined rates of returns do not exist in Islamic finance.

Conclusion

When Islamic financial institutions, such as banks and takaful operators, are allowed to reach the point of presenting a systemic risk to the industry, that is, being too large to fail, then we have become conventionally inefficient. If bailouts and bankruptcies, combined with capital protected bonuses, become a common place in Islamic finance, then we will have our own Occupy Salaam Street (OSS) movement in the Islamic finance hubs.

However, today the aspirations and inspiration of OWS — the principals of economic justice — are aligned to the objectives of Islamic finance. It is about building a dynamic financial eco-system based on humanitarian beliefs, avoiding unjust enrichment and profiteering, and allowing for financial inclusion of the 99 per cent to achieve a basic necessity: human dignity.

 

The writer is Global Head, Islamic Finance and OIC Countries at Thomson Reuters. Opinions expressed here are the writer's own and do not reflect those of his own organisation or those of Gulf News.

Gulf News
Retail Gold Rate
Business Editor's choice