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Islamic finance can learn from west

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    Islamic finance has much to learn from the west By Muhammad Saleem January 18 2007 20:44 The Financial Times
    Message 1 of 1 , Feb 7, 2007
      Islamic finance has much to learn from the west
      By Muhammad Saleem
      January 18 2007 20:44
      The Financial Times

      Proponents of Islamic finance maintain that as the Koran prohibits
      interest all financing must be done on a profit and loss sharing
      basis. In spite of all the lofty rhetoric, in practice no more than 5
      per cent of Islamic financing is done this way.

      Instead, Islamic banks use a structure called murabaha, or cost plus
      pre-determined profit, for the vast majority of their finance deals.
      Remarkably, the "profit" for an Islamic bank in a murabaha transaction
      and the interest a conventional bank would have charged on the same
      transaction happen to be exactly the same. Indeed, Islamic banks in
      determining their "profit" even quote the rate as a margin over Libor
      or other similar indices.

      Murabaha was a crude trading practice designed for transactions
      between real sellers and real buyers involving physical goods. By
      structuring a financing transaction while disguising it as a trading
      transaction - and charging interest concealed in Islamic garb -
      Islamic banks turn the entire enterprise into a charade.

      Other modes of financing are just as dubious. Take Islamic house
      finance, structured as a lease: lease payments are equal to interest
      that a conventional bank would charge on a home mortgage loan. Sukuks,
      or Islamic bonds, are similar in many respects to murabaha and just as
      tainted. Brandishing a fatwa from a scholar of sharia law (who, like
      mercenaries, are sometimes for sale at the right price), blessing the
      structure does not absolve the bankers from the responsibility of
      meeting the spirit of the sharia.

      The real problem with the Islamic finance industry is that despite a
      30-year history and current assets of about $300bn they have yet to
      add any value. Islamic banks have not created any new jobs (employment
      at Islamic banks does not count), financed new inventions or
      innovations or made the Islamic communities more just and equitable.
      The smoke and mirrors Islamic finance industry appears to be all about
      creating financial structures to comply with the letter of the law,
      not the spirit and intent of the Koran.

      Islamic banks need to move away from the deceptive modes of financing
      they currently use and step towards the American style of venture
      capital. This has two advantages. First, the stated principles of
      Islamic banking - favouring profit and loss sharing over interest -
      are very similar to the financing techniques used by the venture
      capital industry, especially in the US. These private equity groups
      are the real Islamic finance, the genuine article. Second, by
      providing funds to entrepreneurs with bright ideas, the banks can
      assist in promoting innovation, invention and creation of new jobs and

      The ironic thing is that although the US is not an "Islamic country",
      more authentic and genuine sharia compliant financing is done in the
      US than in all the Islamic countries combined. That is because
      American venture capital groups annually provide about $25bn in
      capital financing to entrepreneurs, scientists and engineers with new
      ideas. As a consequence of the availability of this type of financing
      the venture capital industry in the US has given birth and nurtured
      scores of Silicon Valley companies, including modern day icons such as
      HP, Cisco, Intel, Sun Micro Systems, Apple, Netscape, Ebay, and
      Google. All were created in the past 30 years or so from ideas
      grounded in science and technology. Scientists and engineers came up
      with the ideas, innovations and inventions while the venture capital
      industry provided the capital on a partnership basis. Millions of new
      jobs have been created as a result.

      At one time - from AD750 to about AD1100 - it was the Muslim world
      that was making advances in science and technology, because of the
      availability of risk capital (from rich people or sponsorship from the
      rulers) and respect for education, scholarship, discovery and
      innovation. But nothing of consequence has been invented in the
      Islamic world for hundreds of years.

      The west's renaissance partly came as a result of learning from the
      Islamic world. Now it is the Islamic world that needs to learn from
      the west, especially borrowing those ideas that are both consistent
      with its own beliefs and able to contribute to economic and scientific
      development. Venture capital is clearly such an idea. By becoming more
      like venture capital groups, the Islamic banks can practice real
      Islamic finance while helping the Islamic community to rediscover its
      tradition of invention and innovation.

      The writer is a former international banker and the author of Islamic
      Banking: A $300 billion Deception



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