Islamic Finance

Recently the Ottawa Citizen reprinted published an article titled “Nobel winner Professor Yunus defies ouster call”. The article mentioned that supporters of Prof. Muhammad Yunus in the West were deeply concerned by what they saw as politicized attempt by the government of Bangladesh to remove him from Grameen Bank which he founded. 

Islamic finance is not a recent invention. In medieval times, interest taking and undue financial speculation were considered both sinful and illegal and were duly avoided. Before the advent of Islam and for centuries thereafter, Muslims in the Arabian peninsula did business without taking or receiving interest. When needed, traders employed partnership (musharaka and mudaraba) contracts to finance their commerce. The absence of interest was never an impediment to the economic progress of Muslims.

It is only during the period of European colonization that Islamic commercial practices were eclipsed by capitalism. But Islamic finance was reborn with the independence of Muslim countries.

The global financial crisis has exposed the failure of the laissez-faire, unregulated free market capitalism. Governments of a number of industrialised countries allocated an excess of $7 trillion in bailout and liquidity injections to revive their economies. Despite this “helicopter money”, capitalist market economies are not yet out of the woods. Sovereign debt is the latest episode.

“Imported” capitalism in the Muslim world has begun faltering. It now appears that the city of Dubai and the much-touted Grameen Bank experiment may not be as successful as they were initially made out to be. 

Islamic finance and banking have enjoyed success in common law jurisdictions such as England, New Zealand, Australia and India. In fact, Islamic banks willingly submit themselves to common law courts to enforce shariah-compliant commercial contracts.

Islamic banks in the UK have in their murabahah (Islamic financing) agreements a governing law clause that states: "Subject to the principles of the Glorious Shariah, this Agreement shall be governed by and construed in accordance with the laws of England".

Malaysia's International Shariah Research Academy for Islamic Finance is working with its Middle Eastern counterpart on guidelines to address the number of boards on which scholars can sit to reduce conflicts of interest.

From Ghana in the west, to Ethiopia in the east, to Mozambique in the south, Africa's economies are growing, and even faster than those in almost any other region of the world.

Although severe income disparities persist on the continent, a middle class is emerging. According to Standard Bank, which operates across Africa, 60 million African households have annual incomes greater than $3,000 at market exchange rates. African countries are shifting away from being aid-dependant to increasing trade and investment ties with the world. The Economist reports that trade between Africa and the world has increased by 200 per cent. China's trade with Africa reached $166.3 billion in 2011, according to Chinese statistics. The World Bank said in a report this year that “Africa could be on the brink of an economic take-off, much like China was 30 years ago and India 20 years ago”. With Africa's population set to double to 2 billion in 40 years, huge opportunity exists in Africa.

For immigrants in the Arab diaspora ”“ those who have left Arab countries for the West or other regions ”“ the tension between trying to stay connected to one's homeland and trying to integrate into a new culture is a challenge. But a new generation of savvy young entrepreneurs in the Arab diaspora are finding novel ways to address this. 

When Goldman Sachs announced last October that it planned to issue an Islamic bond, debate ignited over whether conventional banks in the West should be allowed to engage in Islamic finance.

The investment bank said it planned to issue a sukuk worth as much as $2 billion based on murabaha, a structure that instead of interest (which is banned by Islamic principles) uses a cost-plus-profit arrangement to pay investors. Some Islamic finance analysts however, questioned whether the underlying structure of the sukuk was really murabaha.

The Muslim world is in a difficult phase. Even though its people comprise more than a fifth of the world's population, and its regions are resource-rich, it produces only around eight per cent of the purchasing power adjusted gross national product of the world. It is plagued by illiteracy, poverty, unemployment, social sterility and macro-economic imbalances.

We know from history, that this was not always the situation in the Muslim world.  We know Muslims enjoyed a glorious past stretching over several centuries. They say history is our best teacher, and I believe very important lessons can be learnt and applied from the economic miracle that occurred in the reign of Caliph Harun al-Rashid from 786 to 809 (170 - 193 A.H.).

When Facebook went public on May 18, for the handful of venture capitalists, Accel Partners, Greylock Partners and Meritech Capital, who have been with the company since its early days, it was a massive financial payoff. With the IPO also came fame and reputation. At a closing price of $38.23, Facebook's market value is nearly $105 billion, creating huge paper gains for scores of early insiders and hundreds of employees.

Venture capitalist Accel Partners, which initially invested $12.7 million in Facebook at a $98 million valuation back in 2005, the year after it was founded, is clearly the big winner. With the IPO, the current stake of Accel and its affiliates will be worth $6.3 billion, assuming a mid-point stock price of $31.50.

Over the past year, the words “Wall Street” have become prevalent in the news, with coverage ranging from protests to investigative reporting on the lack of ethics and humanity being displayed by large conglomerates, such as financial companies like Goldman Sachs.

The Occupy Wall Street movement arose to create awareness about the inequity in the distribution of wealth amongst the American population. The movement has specifically been orientated in providing a voice for the 99 per cent of the population that lacks the bargaining power that the wealthy have in socio-economic related policies and legislation. The age-old idiom “money is power” has a whole new meaning these days, with the saying not only ringing true, but the powerless now becoming increasingly more aware of how little power they may or may not have. Protests and organizational efforts now span North America and have evolved to create a platform of proposed changes that need to be made by the US and Canadian governments.

Islamic banking and financial services have been enjoying a major resurgence in recent years. A survey released in 2009 by The Banker magazine found that assets held by Sharia-compliant banks rose 28.6 per cent in 2009 to $822 billion, while assets held by conventional banks grew only 6.8 per cent. However, Islamic finance still accounts for only about 1 per cent of the global financial-services market, according to the Organization for Economic Cooperation and Development.

Analysts predict that the Islamic mortgage market in the West will grow substantially over the next five years. In the United Kingdom, Islamic mortgages were identified as an important emerging niche sector. Two large multinational banks, United National Bank and HSBC, joined the Ahli United Bank in offering Islamic mortgage products.