Islamic banking can be the ideal support system

There are mounting concerns currently being voiced by organisations such as the International Monetary Fund (IMF) and the Bank of International Settlements over the long-term impact of the slow growth rate reported across all major regions from the latter part of 2015 to early this year.

Significant losses in the global financial and commodity markets have been observed following crucial developments such as the slowdown of the Chinese economy, volatile oil prices, and currency weaknesses in emerging economies.

Although almost a decade behind us, the 2008 financial crisis — the worst economic disaster to hit the world since the one in the 1930s — still provides valuable lessons in times of economic uncertainty such as these. For one, it has taught us that springing into early and decisive action is essential to preventing huge and potentially unrecoverable losses.

It also opened the eyes of the world to the necessity of looking beyond conventional financial models and considering the efficacy of what used to be regarded as novelty paradigms such as Islamic banking.

Islamic finance has blossomed into one of the fastest-expanding segments of the global financial industry post the 2008 crisis. It has gained a firm foothold even in many non-Muslim markets as, with an estimated global worth ranging from $1.66 trillion to $2.1 trillion, it is a major economic force that is simply too influential to ignore.

It is important to note that, according to an IMF study comparing the performance of Islamic banks and conventional banks during the financial crisis, the former were actually performing better than their conventional peers on the run-up to the crisis. Findings also revealed Islamic banks, on average, exhibited more resilience during the crisis.

It would thus be very timely and greatly beneficial moving forward for the corporate world to revisit the value of Islamic banking as the world braces for a protracted economic slowdown and even a possible recession.

Given its inherent nature, then, Islamic banking circumvents investments into, or financing of, the types of instruments that triggered the 2008 crisis and consequently damaged conventional institutions — many irreversibly. Derivatives, conventional securities and toxic assets are automatically filtered out as options, thus shielding stakeholders from unnecessary risk.

Moreover, Islamic finance creates closer proximity to real economic activity, hence delivering greater value and stimulating more dynamic financial movement. Sharia-compliant products are also developed to maximise the fulfilment of customer objectives such as high returns and liquidity.

It makes sense for a company to embrace a banking model that is exceptionally protective and conservative given today’s unpredictable markets.

Amid today’s worldwide economic unrest and tightening financial conditions, companies have to make critical decisions to protect themselves from catastrophic events such as another worldwide recession. Leaning on Islamic banking and finance ensures that they can do business as usual with greater confidence, optimal security, and no regrets — regardless of whatever challenges a constantly evolving global economic order dispenses.

The writer is Managing Director of Orient Planet.