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Islamic finance has become the fastest-growing, most dynamic sector of global finance. Every Western-style financial product has its sharia, i.e. Islamic law, compliant instrument: microfinance, mortgages, oil and gas exploration, bridge building, even sponsorship of sporting events. Islamic finance is innovative, flexible, and potentially very profitable. “Operating in 70 countries with about $500bn in assets, it is poised to expand geometrically.” With more than one billion Muslims eager to support it, analysts project that this system will soon manage approximately 4 percent of the world economy, equivalent to $1 trillion in assets. Such figures explain the eagerness of Western banks to tap into sharia financial services. Citigroup, along with many other Western banking retailers, have opened Islamic branches in Muslim countries.
Muslims compliant with sharia, the religious law that comes directly from the Koran. Islamic activists, intellectuals, writers, and religious leaders have always upheld the prohibition of riba, the interest charged by moneylenders, and denounced gharar, which refers to any type of speculation. Under this belief, money must not become a commodity in itself to create more money. Islamic finance thus shuns hedge funds and private equities, because they simply multiply cash by stripping assets. Money serves as a means or instrument of productivity as originally envisioned by Adam Smith and David Ricardo. This principle is embodied in the sukuks, Islamic bonds. Sukuks always link to real investments - for example, to pay for the construction of a toll highway - and never for speculative purposes. This principle springs from the sharia’s ban on gambling as well as on the prohibition of any forms of debt and activities that trade risk.
Partnership is the heartbeat of Islamic economics. “Underlying the system is the philosophy of risk sharing: the lender must share the borrower’s risk, making the two in effect partners, injecting a strong social component into the financial system. This concept separates Islamic Finance from Western Finance, which seeks to maximize profits and minimize loss through diversification and risk transfer.” Also, money must be put to work. Because Islamic finance prohibits interest, it seeks revenues from rents, royalties, business profits, or commodity trading; a mortgage, for example, represents a “rent to buy” arrangement. Thus, conceptually, Islamic economics is the opposite of Western finance, which revolves around the individual’s self-interest.
Last edited on Sun Apr 27th, 2008 12:51 pm by Joe Kelley