Egypt May Sell Foreign-Currency Sukuk, Deposit Certificates

Jan. 18 (Bloomberg) — Egypt may issue an Islamic bond or alternatively certificates of deposit in foreign currency for Egyptians abroad, the finance minister said.

“We are studying issuing sukuk,” or Islamic bonds, Mumtaz el-Saeed said today by telephone in Cairo. “We are comparing the benefits of issuing certificates of deposit with those of sukuk for Egyptians abroad,” adding that his preference is for the certificates. The government hopes to issue one or the other during the current fiscal year ending June 30, he said.

Egypt is struggling to recover from a year of unrest in the wake of the uprising that ousted President Hosni Mubarak last February. The economy grew 1.8 percent in the last fiscal year, the slowest pace in at least a decade, as income from tourism and foreign investment dried up. Tourist arrivals fell 33 percent in 2011, while international reserves are at the lowest level since March 2005.

The government formally requested a $3.2 billion loan from the International Monetary Fund on Jan. 16. An agreement is expected “within weeks,” Fayza Aboulnaga, minister of planning and international cooperation, told reporters.

Egypt turned down a similar arrangement with the fund in June, with officials saying they didn’t want to burden future governments with debt. Foreign currency reserves dropped 32 percent in the following six months while yields on all treasury-bill maturities rose this quarter to the highest since Bloomberg started tracking the data in 2006.

‘Sound Fundamentals’

El-Saeed said today the government would prefer not to increase the amount it requested from the IMF.

The economy “despite its solid and sound fundamentals,” faces challenges that have to be addressed by an economic program that safeguards stability and “creates conditions for a strong recovery,” the IMF’s mission said in an e-mailed statement today.

A program drafted by the Egyptian authorities is being discussed “with emerging political parties to ensure broad political support,” the IMF said. The mission met with the economic committee of the Muslim Brotherhood’s Freedom and Justice Party, and also talked to members of other parties and with the civilian body advising the ruling military council, it said.

The Brotherhood’s party gained the most votes in elections for the lower house of parliament, which is due to convene on Jan. 23, two days before the anniversary of the start of the uprising that led to the ouster of Mubarak. It is still unclear what authority the assembly may have. Activists have called for mass rallies on Jan. 25 to call on the country’s ruling generals to hand over power to civilians immediately.

‘Historic Transition’

The IMF’s meetings this week “provided us with a cross- section of views about Egypt’s current economic and political situation, and possible avenues to address the challenges facing the economy,”the fund said. “It also gave us an opportunity to explain the role the IMF could play in support of Egypt’s historic transition.”

Crescent Wealth aims for $3bn pool by 2019

AUSTRALIA’S first Islamic fund manager Crescent Wealth is aiming high, but will it deliver?

The company “would be happy” with $3 billion under management by 2019, which represents nearly a quarter of the $13bn pool of funds expected to be allocated to Islamic fund managers by then.

That’s a big number given the Crescent Australian Equity Fund, which launched in October, had about $US5.5 million under management, but it isn’t insurmountable given Crescent is the first and only Australian wealth manager specialising in Islamic investing.

CAEF is its first of four planned funds, the others being an International Equity Fund, an Income Fund and a Diversified Property Fund.

All four will form Australia’s first Islamic superannuation option and will be open to both institutional and private investors and will target Muslim community organisations, high net worth individuals as well as institutions both in Australia and offshore.

The group’s recently announced advisory board members include former non-executive director of Citibank Emeritus Professor Dianne Yerbury, former Macquarie Group duo Ted Pretty and Moustafa Fahour, Aon Hewitt chief investment officer Janice Sengupta and deputy chair of WorkCover Nicholas Whitlam.

Aon Hewitt helped seed CAEF – which has a target size of $500m – with an initial investment from its $2 billion fund, the Aon Master Trust, which offers the option of ethical investing and screens out industries such as tobacco, alcohol and gambling.

But even with a growing demographic of Muslims in Australia, Islamic finance is expected to be slow taking off Down Under.

Bank Islam eyes M&As in Indonesia and Bangladesh

KUALA LUMPUR: Bank Islam Malaysia Bhd is eyeing opportunities for expansion in Indonesia and Bangladesh, which have sizeable Muslim populations and adequate Islamic banking regulatory policy and supporting infrastructure for syariah-based financing and banking operations.

Managing director Datuk Seri Zukri Samat said as mergers and acquisitions (M&As) were on Bank Islam’s agenda for growth, the bank was on the lookout for suitable candidates but had not initiated any discussions.

While the two countries had been identified as “very interesting” that fit into the bank’s expansion plan, Zukri, however, said that such plans would have to take into consideration the global economic situation and its effect on this region.

“Some economists believe that there could be a double dip with Europe going into recession and growth in Asia decelerating. We are monitoring the situation and because of that, we are adopting a cautious approach towards our agenda.

“Nonetheless, there are always opportunities in a crisis – acquisition may occur when a shareholder wants to exit – and as long as there are synergies and the pricing is right, the opportunity arises,” he told Bernama in an interview.

Zukri said both countries had sound economies which offered opportunities for Islamic banking, and the presence of many Indonesian and Bangladeshi workers in Malaysia also allowed the bank to tap the lucrative remittance business. — Bernama

What are the reasons India should legalize and encourage Islamic Banking and Finance?

Apart from all the ethical and theoretical reasons one may cite, the top three reasons are, according to me:

islamic banking,financial exclusion,muslim population,banking finance,muslim,islamic finance,islamic finance and banking,reasons encourage islamic finance

  • It will enable India to bring in much needed investment from middle-eastern countries at very reasonable terms
  •   A large portion of the unbanked Muslim population will hopefully be successfully targeted by banks who focus on Islamic banking. Hopefully the RBI will manage to make the banks look into the banking and finance needs of small retail customers in India
  •  If what happened in non-Muslim countries like UK or Sri Lanka is any indication, this can flourish into a significant economy, which means creation of a lot of new jobs – most of them well paid skilled jobs

According to some sources, with 150 million Muslim population, and a rapidly growing economy despite economic slow-down everywhere else, India will be a hot destination for Islamic investments and finance companies. These sources say that the potential of the Indian market is no less than 1 trillion in Islamic banking and finance. Continue reading

Muslim countries do not manage wealth properly – Mahathir Mohammed


Published: May 10, 2010 01:20 Updated: May 10, 2010 01:20

Former Malaysian Prime Minister Mahathir Mohammed is arguably the most popular politician in the Muslim street. Even in retirement he still exudes that “street cred” and “wow” factor because he speaks his mind. Not surprisingly, when he delivered the keynote speech at the Malaysia Islamic finance showcase dinner in Manama on the eve of the 7th Islamic Financial Services Board (IFSB) annual summit, he did not disappoint, albeit privately, his aides did suggest that he toned down some of his remarks.

The theme of his speech, “Islamic Finance – New Hope for the Future of the Muslim World,” may sound aspirational or even idealistic, but the former Malaysian leader was not bereft of any ideas or suggestions.

He rued the fact that Muslims and Muslim countries do not value or manage their wealth properly, which has created a culture on dependency and a lack of capacity building. “The very rich Muslims and Muslim countries,” he explained, “appear not to value their wealth or to care about the management of wealth. This has been taken advantage of by others. We may have unlimited sources of wealth but we can never assume that the resources will always yield wealth forever. Depending on others to extract and market our resources is dangerous. The Muslim economy are of course a part of the world’s economy but whether the Muslims get their fair share of the wealth of their countries depends on their ability to extract it themselves.”

For instance, in the West great businesses have failed because the companies and their executives failed to see the changes taking place around them. The same can apply to commodities or products. Rubber used to be the cash cow for Malaysia. But then came the synthetic variety and the bottom fell out of the rubber market. It is entirely possible that one day the same would happen to the oil market, when renewables and alternatives are developed.

It is only if the Islamic financial institutions (IFIs) are aware of the full extent of the role they can play and they are willing to look beyond merely making money available to those who need it will they be able to represent hope for a better future for the Muslim World.

Mahathir, who is responsible for developing and introducing Malaysia’s Islamic finance model and policy in the early 1980s, is also a pragmatist. Islamic finance, he agrees, in itself will not ensure a better future for the Muslim World. “But it will certainly help,” he advised, “if Muslims learn how to use these institutions to manage the wealth of Muslims to aggressively promote the services they can offer, to have a sense of responsibility for strengthening the Muslim community, and to make the government of Muslim countries aware of the potential contribution of banking and other financial institutions.”

Muslims and their countries have taken a long time to appreciate the role of banks in wealth creation, partly because of the injunction against usury, which prevents Muslims from simply adopting the Western banking system. Nevertheless, as their dealings with Western countries grew they were forced to use the usury-based banks of the West. In fact, many Muslim countries decided to set up their own usury-based banks despite the injunctions of Islam. This means that they were increasing profits and helping the growth of the usury-based banking.

Despite the fact that Islamic finance has grown tremendously with total Islamic assets worldwide exceeding $1 trillion and overall growth rate totaling 15-20 percent per annum, it has not impacted in the same positive way on development and economic progress as the conventional banks have had on industrialized economies. There is today not a single Muslim country that can be classified as developed.

However, Islamic finance is still very tiny compared to the conventional system. This is even more remarkable considering that so many Muslim countries have become extremely rich from the proceeds of the sale of their huge reserves of petroleum. “Can we say that it is the prohibition of usury which is stifling the growth of Islamic finance and prosperity and development in the Muslim world? I don’t think anyone can blame the teachings of Islam,” he asserted.

Mahathir, who used to attend Islamic finance promotion weeks in Malaysia during his watch as prime minister, berated ordinary Muslims too for not using Islamic finance fully. Furthermore, he attacked wealthy Muslim countries for their unwillingness to invest their money in a way that could improve the situation in the Muslim world.

“For many, all that had been done is to buy bonds, which – apart from being un-Islamic as the earnings are through interest – give only minute returns. Investing in this way denies the investor any say in the management of the money. In fact, as pointed out earlier the funds invested can be used by the borrowers for things totally forbidden by Islam. The funds could actually be earning interest for the borrower. It is bad enough to invest in interest-bearing bonds, but it is worse when the money lent through bonds go toward financing loans, which bear interest. Of course, there can be other uses for the money such as investment in non-Shariah compliant businesses and for the production of weapons to be used against Muslims.”

Mahathir called for a greater connect between Islamic finance and the real economy, especially in helping Muslim countries to industrialize; to create honest wealth not based on speculative activities but on products and services that create employment and wealth and that remain compatible with the teachings of Islam.

He warned Islamic banks of wantonly aping conventional Islamic financial products. Admittedly, it is not the Western system that has gone wrong. It is the abuses perpetrated by the market players, the speculators and the gamblers who have done this.

“We cannot ensure there are no rogues in the Islamic financial market or in the Islamic world. We hope that Islamic injunctions will restrain them. But we cannot be sure. Greed assails us all. When opportunities appear for making quick money, the rogues would not be deterred by mere religious prohibition,” he added.

In this respect, he called on Muslim countries to adopt the best practices in banking regulation and supervision to protect savers and customers “even if this stifles the performance and the role of the banks in ensuring a better future for the Muslim World.”

White House welcomes Shariah finance specialist

6.25.10 – The Obama administration has announced its appointment of 13 White House fellows – and the first person featured on its short list is a Muslim attorney who specializes in Shariah-compliant transactions.

Obama selects Muslim expert in Islamic transactions as fellow

“This year’s White House fellows are comprised of some of the best and brightest leaders in our country,” Michelle Obama said in the June 22 announcement. “I applaud their unyielding commitment to public service and dedication to serving their community.”

White House welcomes Shariah finance specialist

White House fellows spend a year as full-time, paid assistants to senior White House staff, the vice president, Cabinet secretaries and senior administration officials.

Samar Ali of Waverly, Tenn., is the first name appearing on the White House list. She is an associate with the law firm Hogan Lovells – a firm that claims to have advised on more than 200 Islamic finance transactions with an aggregate deal value in excess of $40 billion. Continue reading

I Have a Dream

I Have a Dream


By Lahem al-Nasser

Riyadh, Asharq Al-Awsat – Great accomplishments begin with a dream, but dreams can only come true if they are supported by the will and determination to turn them into a reality.

Dreams are the source of inspiration for humanity; I do not mean the dreams that we experience when we are asleep but those we have when we are awake and the ones we believe are difficult to achieve at the time either because of a lack of means or because of obstacles in the way of achieving them; but nothing is impossible.

When Martin Luther King delivered his famous ‘I Have a Dream’ speech in 1963 in the presence of an audience of 250,000 at Abraham Lincoln’s memorial, none of those present, including Martin Luther himself, ever thought that the African-Americans would one day see an African-American become president of the USA.

However, the reality today states that the dream that seemed impossible in 1963 came true in 2009 when the first African-American assumed presidency.

Some people might ask what this has got to do with Islamic finance. My aim is to provide evidence that nothing is impossible and that there is no harm in dreaming of there being a real Islamic financial system that seeks to fulfil genuine Sharia rulings.

It is certainly true that others and I, as well as the founding fathers of this industry, have a dream that one day real Islamic financial institutions will operate based on Islam’s view of finance and the way it is used within the framework of an integral Islamic economic theory aiming to promote society and develop the Islamic nation away from the theory of capitalism.

The present-day Islamic financial institutions are nothing more than capitalist institutions that have been restructured to appear to be Sharia compliant regardless of the reality.

I have a dream that one day Islamic financial institutions will operate based on the principle of partnership rather than debt in the sense that all parties would share both risk and profit.

I have a dream that Islamic financial institutions will not base profit on usury that will cause them to be weak and fragile.

I have a dream that one day Islamic financial institutions will have clear strategies to set up important development projects in their societies in a way that contributes to reducing unemployment, increasing productivity in society, improving technology and adopting and strengthening creative ideas.

I have a dream that Islamic financial institutions will create genuine products rather than alternative ones through which they could change the conventional view of the financial institution.

I have a dream that the joint Islamic financial market will be based on relying on its own tools away from imitating derivatives, bonds or other tools of Islamic banking.

I have a dream that a generation of Islamic financial leaderships that believe in real Islamic finance will seek to apply their rules as part of a set of specific strategies. I have a dream that one day Islamic financial institutions will allocate part of their budget to research aimed at developing their own financial tools and technology.

I have a dream that Islamic financial institutions will apply the principles of Islam in terms of frankness, transparency, justice and satisfaction, and will keep away from cheating and fraud.

I have a dream that Islamic financial institutions will not encourage high consumer patterns in Muslim societies; institutions that only seek to raise their profits despite being well aware that excessive consumption will harm society.

I have a dream that Islamic financial institutions will be capable of providing effective financial solutions to the global economy in accordance with a real and integrated Islamic vision.

I have a dream that Islamic financial corporations will be able to convey Islam’s civilized message to the world just as our merchant Muslim ancestors did.

I have a dream that one day Muslim businessmen will make this dream come true.

Kenya alters bank laws for Islamic financing

Kenya has made adjustments to its banking sector to let Islamic finance institutions set up and prosper in the east African nation, the governor of the Central Bank of Kenya (CBK) said yesterday.
Njuguna Ndung’u – whose statement was read to a conference in Nairobi – said Islamic finance had the “overwhelming support” of Kenya’s Muslims and non-Muslims, but as a regulator CBK faced challenges in encouraging the niche market.
Kenya has two Islamic banks and is seen playing a role in the African expansion of Islamic finance, which caters mainly to customers who follow Islamic rules on avoiding direct payment or earning interest, which are viewed as usury under Islam.
“The Banking Act prohibits wholesale trading and restricts holding land and buildings, while Shariah-compliant lending has an element of trading and land and building,” Ndung’u said.
“This challenge has been cured through granting exemptions to institutions concerned upon request.”
Ndung’u said they had adjusted the Banking Act, which requires all banks to pay interest on savings accounts as long as they maintain a minimum balance, giving leeway for banks to pay some form of return for Sharia compliant savings products.
He said Kenya’s two Shariah-compliant banks have 1,570 loan accounts and 58,548 deposit accounts and control 0.8% of the banking sector’s net assets after being in operation for less than two years.
The Islamic finance industry wants to grow outside its main centres in the Gulf region and Southeast Asia to tap into Muslim minorities in Western and African countries. Kenya is seen as a launching pad for the movement in the region.
“There is growing interest in Shariah-compliant banking in our neighbouring countries and Kenya has the potential to be a regional Islamic finance hub,” Ndung’u said.
One of Kenya’s Islamic banks, Gulf African Bank (GAB), turned profitable in the last quarter of 2009.
GAB chairman Suleiman Shahbal told the conference the Kenyan example shown the viability of Islamic banking in Africa.
“Islamic banking has proven its mettle as we were able to break even in our second year of operation,” Shahbal said.
“This has given us the impetus to move forward and become a regional bank in the near future. GAB plans to enter into Uganda and Tanzania,” he said.

Interest-free microfinance: Best tool for poverty eradication

By Abdul Aziz V. K for,

The interest-free microfinance can be defined as provision of financial services to those people who are denied access to the financial market; opens new perspectives, and empowers people who can pursue projects with their own resources, and who lack assistance, subsidies and dependence. Besides, it provides financial services to those, who are traditionally non bankable, mainly because they lack guarantees against a loss risk.

In the spirit of Islam that goes beyond mere profitability, this new financial system aims to maximize social benefits as opposed to profit maximization. This can be done through creation of healthier financial institutions that can provide effective financial services also at grassroots levels. Some authors (Al Harran, 1996) argue that Islamic finance, if inserted in a new paradigm, could be a viable alternative to the socio-economic crisis derived out of interest-based economic system.

Both Islamic finance and microfinance seem to be concepts surrounded by a “fashionable aura” in Muslim as well as other developing countries. Banks, financial institutions, MFIs, NGOs are taking keen interest and most of all in the relation between the two, especially when it comes to fighting poverty. Strange enough, even if the interest is high, there are very few examples of actual MFIs operating in the field of Islamic finance and Islamic banks involved in microfinance.

Microfinance is a very flexible tool, whose models can be replicated but require to be tailored on the local socio-economic and cultural characteristics; and secondly, the potential demand for tailored microfinance services is still largely unmet. Some surveys proved that there is a high demand for Islamic Micro-financing especially in low and middle income predominantly Muslim societies.

At a very basic level, the disbursement of collateral free loans in some cases constitutes an example of how Islamic banking and microfinance share common aims. Thus, the Islamic banking and microcredit programs may complement each other in both ideological and practical terms. Even if they both constitute fairly new trends in the financial environment, the inclusion of Islamic finance and microfinance in the activities of the traditional banking system evolved in a quite similar way.

Three main instruments of Islamic finance; mudaraba, musharaka and murabaha, are tools generally used to design successful microfinance program.

Islamic Microfinance is growing rapidly

The Banker (2007) estimated the total assets of Islamic financial products at US$500.5 billion and the Islamic finance industry’s 100 largest banks have posted an annual asset growth rate of 26.7 percent, outpacing the 19.3 percent growth rate of their conventional counterparts.

The global Islamic finance industry is rapidly growing. In the past 30 years, the industry has witnessed the development of over 500 Sharia-compliant institutions, whose reach now spans 75 countries (KPMG 2006). These institutions include 292 banks (fully Islamic institutions and those institutions with Islamic subsidiaries), 115 Islamic investment banks and finance companies, and 118 insurance companies.

Despite its origins in the Middle-East, the Sharia-compliant banking has proved popular with Muslims in other countries as well, leading to the development of new Islamic banks across North Africa and Asia. Of the total global Islamic finance market, 36 percent is located in the Gulf Cooperation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and UAE), 35 percent in non-GCC Southwest Asia and North Africa, and 23 percent in Asia (primarily Malaysia, Brunei, and Pakistan) (The Banker 2007).

Over time, Islamic financial services also have expanded well beyond the Muslim world and are offered not only by Islamic banks, but also by Islamic subsidiaries of international financial institutions. Islamic financial services are currently provided in countries such as India, China, Japan, Germany, Switzerland, Luxembourg, the United Kingdom, the United States, and Canada. The United Kingdom, which currently ranks tenth in The Banker’s listing of “Top 15 Countries by Sharia-compliant Assets” (2007), has recently announced its aim to make London a global center for financial markets in the Muslim world.

Government Promotion of Islamic Microfinance

In the case of larger Islamic banking industry, government regulations can play a significant role in the expansion of the Sharia-compliant microfinance.

Indonesia today provides a supportive regulatory framework and has licensed 35 new Islamic rural banks in the past five years. The State Bank of Pakistan, which already has a legal and regulatory framework in place for conventional MFIs, also developed guidelines in 2007 for the rapid expansion of Islamic microfinance.

Although there is ample evidence of demand for Islamic microfinance products, it however requires that low-income clients are comfortable that the products offered are authentically Islamic. Critics of Islamic finance products suggest that the pricing of some products offered as Sharia-compliant too closely parallels the pricing of conventional products. For example, some institutions offer murabaha where interest appears to be disguised as a cost markup or administration fee. Islamic finance sometimes suffers from the perception that it is simply a “rebranding” of conventional finance and not truly reflective of Islamic principles.

Consequently, low-income populations, who often rely on local religious leaders to address questions of religion, must be convinced of the authenticity of Islamic financial products if Islamic microfinance is to reach its full potential. Greater efforts should be explored to (i) increase collaboration between financial experts and Sharia experts on product authenticity, (ii) encourage exchange of experiences among religious leaders (particularly those serving poor populations at the local level) relating to Sharia compliance of microfinance products, and (iii) educate low-income populations, in collaboration with local religious leaders, on how financial products comply with Islamic law.

Throughout the Muslim world, microfinance (Islamic or otherwise) is still seen as a philanthropic activity rather than a business enterprise. Consequently, in the context of Islamic microfinance, there is a growing tendency to view zakat (funds donated pursuant to the Muslim obligation to pay alms) as a source of funding. Indeed, given the underlying principle of Islamic finance to promote the welfare of the community, zakat funds appear ideally suited to support Islamic microfinance. However, a heavy reliance on charity is not necessarily the best model for the development of a large and sustainable sector, and more reliable, commercially motivated streams of funding should be explored.
Mr. Abdul Aziz Valiyaveetil is an Indian national currently working as the Director of Al Hayat Int’l School, Jeddah. He has got vast experience in Conventional Banking (Federal Bank, India), for around 15 years and Islamic Banking (Al Rajhi Bank, Islamic Banking and Int’l Banking division, Head Office, Riyadh) for more than 10 years.

He is mainly focusing his activities in ‘Islamic Banking’ and ‘Positive Dialogue’ to establish a healthy and harmonious co-existence between the diverse religions globally and restore the ethical and moral values in humankind. He has recently initiated the establishment of a “Forum for Intellectual Dialogue”, in order to retrieve the harmony and co-operation between various Muslim religious groups (intra-faith dialogue) in the state of Kerala, India, and “International Interfaith Dialogue India”(for inter-faith dialogue), to positively interact between various religious groups. His contact mail: [email protected]

[Photo by]

Islamic finance – steady amid chaos


Reviewed by Robert E Looney

In 1936 in the depths of a world-wide economic depression, John Maynard Keynes described the decline of the world’s financial markets as a result of playing at a casino: “Short-term speculation with little regard to fundamentals.” A cursory examination of the current global financial crisis suggests little has changed since Keynes’ day – the conventional financial system, despite various patches and fixes over the years, is still prone to periods of extreme instability and abuse.

Unfortunately, the economics profession has provided little in the way of constructive input in re-designing a more stable financial architecture. Mainstream neo-classical equilibrium economic analysis has not systematically incorporated elements that would account for the conventional system’s instability, let alone provide a framework for predicting the occasional bouts of extreme instability.

Liberal-minded neo-Keynesians have done a bit better in identifying some important precursors of the crisis, in particular, the destabilizing role of huge private sector financial deficits in countries with large external deficits, such as the US. The Keynesian view certainly played a big part in the post-crisis response (fiscal stimulus) of many developed and emerging countries.

On the conservative side, monetarists certainly raised doubts about the Federal Reserve’s abnormally low interest rates and expansive monetary creation in the years preceding the crisis. Yet, at best, this line of analysis does not go very far beyond the warning of an impending bubble and likely bout of inflationary pressures.

No doubt a leading monetarist, Milton Friedman, if alive today, would reaffirm a firm belief in Say’s Law of the smooth functioning of unimpeded (free) markets. Those going down this road contend the current financial instability is wholly the fault of too much government. As Friedman often observed, “The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy”. Lax money and credit policy of US Federal Reserve under Alan Greenspan would be the focus of his ire today.

Monetarist offshoots such as the Rational Expectations School, while producing good explanations of the stagflation experience of the 1970s, have not been able to systematically incorporate irrational behavior into their models. The lemming or investor-herd mentalities observed in recent years remain well beyond their comprehension.

As Martin Wolf of the Financial Times has noted, of the Western interpretations of the global financial crisis, it appears those economists working in the Austrian tradition were more nearly right than anybody else. In particular, they have argued that: central bank inflation-targeting is inherently destabilizing; that fractional reserve banking creates unmanageable credit booms; and that the resulting pattern of investment, linked not to the marginal efficiency of capital but rather to financial returns, explains the subsequent financial crash.

The best non-Western explanation of the global financial crisis is presented in the book under review, The Stability of Islamic Finance: Creating a Resilient Financial Environment for a Secure Future by Hossein Askari, Zamir Iqbal, Noureddine Krichene and Abbas Mirakhor. However, this book is much more than just an alternative explanation of the current depressed state of the world economy – it is an elegant, sophisticated assessment of Islamic finance as a viable, realistic alternative to the current conventional system. Perhaps to the surprise of many, the author’s assessment finds a number of similarities between the core elements of Islamic finance and that of the Austrian School.

Certainly Islamic finance and banking institutions are thriving relative to conventional finance. The Banker’s 2009 survey of Islamic finance found the volume of sharia-compliant assets of the Top 500 grew by an extremely healthy 28.6%, rising to US$822 billion from $639 billion, in 2008 (forecasts are that this figure will top $1 trillion in 2010). At a time when asset growth in the Top 1,000 world banks slumped to 6.8% from 21.6% the previous year, Islamic institutions were able to maintain the 28% annual compound growth achieved in the past three years.

The industry also continued to expand, with 20 new entrants bringing the number of sharia-compliant institutions to 435, with a further 191 conventional banks having sharia windows. The Islamic banking geographies are stretching beyond the existing strongholds of Iran, Saudi Arabia, Bahrain, Malaysia and the UAE to Europe, South Africa, Kenya and Indonesia.

Advocates claim Islamic finance has been immune because sharia-compliant institutions are focused on the fundamentals, with simple products bearing robust mechanisms for risk mitigation. Market analysts have stressed the correlation between asset quality in Islamic institutions and their conservative approach to risk as an insulating factor. Many conventional bankers contend the success of Islamic finance in riding out the financial storm can be attributed to the fact it is underpinned by tangible assets such as real estate.

Askari et al incorporate all of these considerations into their demonstration of the advantages of the Islamic alternative, but they also go several steps further than most previous assessments. Prior examinations of Islamic finance have devoted most of their attention to its ethical side – prohibition of interest and the ban on lending for certain activities – gambling, alcohol production and so forth. As its title suggests, The Stability of Islamic Finance demonstrates, in addition to Islamic finance’s usual virtues, its relative stability with regard to the conventional system.

As the authors note (p 209), conventional banks fail to meet inherent stability conditions even in the presence of prudential regulations. First, credit losses from debt default to the depreciation of assets may create a large divergence in relation to the liabilities that remain fixed in nominal value. Second, bank credit has no fixed relation to real capital in the economy and bears no direct relation to the real rate of return. Unbaked credit expansion through the credit multiplier and further leveraging is a fundamental feature of conventional banks. Cash flow could fall short of expectations and force large income losses on banks, especially when the cost of funds is fixed through a predetermined interest rate.

Third, banks caught in a credit freeze, with a drying up of liquidity. may default on their payments. Fourth, banks are fully interconnected with each other through a complex debt structure; in particular, the assets of one bank instantaneously become liabilities of another, leading to fast credit multiplication. A credit crash causes a dramatic contagion and a domino effect that may impair even the soundest banks.

While their analysis is much too rich to detail here, suffice to say they demonstrate that an Islamic system overcomes many of these limitations. In particular, in an economy governed by the principles of Islamic finance, the rate of return on equities is determined by the marginal efficiency of capital and time preference, and is positive in a growing economy. This implies that Islamic banks are always profitable provided that real economic growth is positive. This establishes a basic difference between Islamic banking where profitability is fully secured by real economic growth and conventional banking where profitability is not driven primarily by the real sector.

A critical feature noted by the authors, and one consistent with the Austrian ideal for banking, is the fact that the Islamic system operates on a 100% reserve requirement. In this system, investment banking operates on a risk/profit sharing basis, with an overall rate of return that is positive and determined by the real economic growth rate.

Islamic banks do not create and destroy money; consequently, the money multiplier, defined by the savings rate in the economy, is much lower in the Islamic system than in the conventional system, providing a basis for strong financial stability, greater price stability and sustained economic growth.

In short, the requirements of Islamic finance – lower proportions of debt to equity, a condition that the lender share profits and losses with the borrower, and a focus on transactions based on tangible assets – mean that Islamic banks have not become entangled in the toxic-debt instruments that have laid waste to many of the conventional banking giants.

In sum, The Stability of Islamic Finance has many strengths. Perhaps the greatest one is the ability of the authors to bridge the gap between the conventional and increasingly sophisticated global financial system and that represented by Islamic finance. Previous attempts at contrasting the systems largely failed because authors were strong in one area but lacked the expertise to provide an in-depth critique of the other system. Professor Askari is an acknowledged world-class expert in both systems and combined with his three co-authors anchors an analytical team uniquely capable of integrating the workings of an Islamic system into the increasingly complex global context.

Still, there are many problems confronting a wider based adoption of Islamic financial systems. In addition to the usual West-Islamic differences over interest, ethical roles of business etc, a number of fundamental changes would have to take place in the way Western governments manage their economies. For one thing, the adoption of popular Keynesian stimuluses during recessions would be much more difficult than is currently the case. Central bank discretionary policy would have to be abandoned for strict rules on monetary expansion. Reserve requirements of 100% on banks would fundamentally alter the banking business – the list goes on.

Having shown its inherent advantages over the current system, hopefully the authors will collaborate on a follow-on book detailing how the Islamic financial system can transition outside of its current narrow confines to be a viable alternative to the conventional system.

The Stability of Islamic Finance: Creating a Resilient Financial Environment for a Secure Future by Hossein Askari, Zamir Iqbal, Noureddine Krichene and Abbas Mirakhor. John Wiley & Sons, Singapore (2010). ISBN: 978-0-470-82519-80. Price US$49.95, 256 pages.

Robert Looney is a professor of national security affairs, and associate chairman of instruction, Department of National Security Affairs, at the Naval Postgraduate School, California.