The poster carried by a smiling woman near the London Stock Exchange last week as part of a wave of protests by ordinary people in tens of cities the world over campaigning against the excesses and perceived greed of bankers and the collusion and inefficacy of politicians in dealing with the financial and economic crisis, simply read “Let’s Bank the Muslim Way?”.
The woman, who one assumes was not a Muslim, was obviously referring to Islamic banking, whose potential role as an alternative financial system which connects banking and finance to real economy activities and which proscribes the receiving and paying of interest (Riba) and therefore speculative activities based on gambling, has come to the fore ever since the global financial crisis surfaced in 2008.
But whether the Muslim countries and the Islamic banking industry are rising or even capable of rising to the challenge remain a moot point.
Whether it is at the Annual meetings of the World Bank/International Monetary Fund or the G20 meeting, whose members include three important Muslim countries in Saudi Arabia, Turkey and Indonesia, any talk of a potential role for Islamic finance, especially raising finance through a proven and increasingly popular off balance sheet mechanism such as sukuk issuance, is conspicuously absent.
Muslim countries, it appears are either embarrassed by the attention Islamic finance is receiving or are living in denial because it may not be perceived as cool in the bastions of the Dar Al-Riba.
Contrast the utterings of two leaders at meetings last week – one Luc Frieden, the finance minister of Luxembourg, a Christian country which is trying to eke out a role as a European hub for Islamic finance especially as a domicile for funds and for sukuk listing, and the other King Hussein of Jordan, the ruler of a Muslim kingdom faced with dire economic and youth employment problems.
Frieden, leading a Luxembourg financial delegation to Singapore, Malaysia and China on Oct. 17 to Oct. 20 to promote the Duchy as a major international financial centre, was unashamedly unequivocal about the value and the potential contribution Islamic finance can make to economic growth and financial stability.
Speaking at a financial forum in Kuala Lumpur, Finance Minister Frieden declared that “Europe can indeed learn a lot from Islamic finance through its principles of financial partnership between the creditor and the debtor; the absence of speculation and respect for ethical principles.
The provisions against speculation and gambling which is prohibited in Islamic finance, is what we can concentrate on. The elements of ethical principles should not be limited to Islamic finance alone,” he explained.
He reiterated the willingness and the policy of the Luxembourg government to develop Islamic finance in the context of the strategy of diversification and internationalization of the Duchy as a major global financial center.
“Islamic finance has a growing interest in the international financial community, mainly because of the stability it has shown throughout the financial crisis. Islamic finance is now a component of more and more important in a diversified portfolio of assets.
Working together we enrich our cultures and use our various financial products to contribute to the prosperity of all humanity,” he added.
On the other hand, the words Islamic finance was nigh absent from the agenda and the speech of Jordan’s King Abdallah when he opened the World Economic Forum’s special meeting on “Economic Growth and Job Creation in the Arab World” which took place on Oct. 21-23 at the Dead Sea in Jordan.
“Our region stands today at the gates to the future,” said the King, noting that there are “four gates or crucial areas for consideration: Dignity, opportunity, democracy, and peace and justice.
” King Abdallah emphasized that the region urgently needed economic growth, and that it has one of the world’s highest youth unemployment rates, which is estimated between 25 percent to 40 percent.
The region, he maintained, required entrepreneurs, innovators, educators and policy-makers to create in excess of 85 million new jobs that are needed especially for the youth, who make up to 65 percent of the Arab population.
Corporate participants were equally disappointing in their perception and appreciation of the role Islamic finance industry can contribute to employment generation.
In Malaysia for instance, the Islamic finance industry accounts for a 22 percent market share of the total banking sector, but provides over 35 percent of employment in the financial sector. Similarly, the financing and credit the sector extends to the general economy has a multiplier effect on employment in general.
Even Mohamed Al-Mady, vice-chairman and chief executive officer, Saudi Basic Industries Corp. (SABIC), which has already issued three major sukuk issuances, failed to note the growing role Islamic finance is playing as a diversification tool of sources of funding for global and local corporations.
The plenary sessions once again highlighted the increasing lack of efficacy of the WEF as a global platform to discuss the pressing issues faced by the world economies.
Even in the “New models for economic governance, and other sessions, Islamic finance was hardly on the agenda, even though topics such as enhancing institutions; addressing social and economic inequities; and building an inclusive private sector were addressed.
The only fleeting reference to an Islamic financial concept was the institution of Waqf (endowments). “Arabs,” stressed a WEF communiqué, “should identify whatever is valuable in their own heritage and useful to solving today’s problems.
One suggestion was to revive the status and role of the Waqf system, an endowment that not only supports and finances religious services, but also non-religious, charitable services, and which encourages the wealthy to give back to society through donations to the Waqf.”
The WEF has had the odd session on Islamic finance at its forum in Davos in the past. But judging by the transcripts, the level of debate has been woefully superficial and parochial, with the implication that Islamic finance has only got something limited to offer the Muslim countries and not beyond.
This is because the phenomenon has grown rapidly in the Muslim world overt the last decade or so and that it is now getting into the mainstream banking sector in these countries. However, its scope is limited because of various legal, regulatory and market constraints and because its market share of banking system assets is still low compared to the conventional banking sector.