One of the wisest maxims of life is: “If it isn’t broken, don’t fix it.” If the car is purring along nicely, resist the temptation to dismantle the engine. If the home entertainment system is providing hours of fun for the family, fight the urge to take it apart with a screwdriver.
The same applies to the financial and economic world. If a stock exchange is working well and efficiently as a market for raising capital, leave it alone. If a banking system is providing security and convenience for its customers, let it be. Interfering with it is only going to make things worse.
In the modern globalised economic world, one of the few sectors moving along very nicely indeed, even accelerating at impressive speed, is the Shariah financial market. Over the past decade, Islamic financial instruments have grown from being a little-understood sideline to traditional Western capitalism, to the situation in the world today, where Shariah finance is becoming a central part of the global economy.
So participants in the multi-billion dollar Shariah market must have been surprised and concerned by a recent statement from the Accounting and Auditing Organisation for Islamic Financial Institutions, the body of Muslim scholars that sets the standards for the industry. Focusing on sukuks – bonds that conform to the Islamic requirement that forbids interest in a financial system – the organisation, led by Sheikh Muhammad Taqi Usmani, said that as many as 85 per cent of sukuks in issue “may not fully conform to all precepts of Islamic law”. The Bahrain-based organisation, advised by 17 scholars in Islamic law, said that “blemishes” had crept into the system, and these had to be removed. If the present set-up was allowed to continue, it said, “Islamic banks will stumble and there is a danger that this virtuous movement will fail.” Serious words indeed.
There is no doubt that Shariah finance has been a “virtuous” system. It has satisfied the needs of the world’s 1.3 billion Muslims, who found that traditional Western banking structures and investment policies did not meet their needs, especially with regard to the concept of interest, and those industries, like alcohol production and gambling, which are forbidden to Islamic investors.
According to a recent survey by accounting firm Ernst & Young, Islamic investment is one of the fastest growing areas of global finance. It has shown annual growth of 20 per cent per year for the past five years, and in 2007 the total amount invested in Islamic instruments of all kinds is estimated at $900 billion (Dh3.3 trillion). This year, it is anticipated that there will be another $100bn of cash ploughed into Shariah-compliant financial instruments. The market potential is truly enormous. Ernst & Young calculates that by 2009 there will be $1.5trn of personal wealth in the Middle East alone, and that 70 per cent of this is likely to seek investment outlets compatible with Islamic precepts. That staggering sum is without including the huge capital reserves of the sovereign wealth funds of the region.
The rest of the world is catching on. Of course, the big Muslim communities in Asia and Africa will be natural customers for Islamic finance, but the growing Muslim communities in the West are increasingly seeking financial instruments, from credit cards to mortgages through to multi-billion dollar corporate bonds, that conform to their religious principles.
The financial establishments of Europe and North America have woken up to this enormous market potential, and are trying to gain access to it. Some of the best financial brains in the world, like Goldman Sachs and Deutsche Bank, are busy designing and marketing Shariah-compliant products to sell across the world. Just last week, Morgan Stanley, one of America’s biggest investment banks, said it was close to launching the first sukuk for a multinational corporate customer – a global “household name” – that could be the prompt for other big corporates to enter the sukuk markets. The urge to tap Middle East liquidity pools will be irresistible for other corporate borrowers, unable to finance their operations from the increasingly cash-strapped western banking system.
One banker told me recently: “So far all the attention has focused on what the sovereign wealth funds and other big Middle East investors will want to buy in the West, but it will be a two-way flow. We are only just starting to see a process whereby the West wants to come to the Middle Eastern markets, and they [Western corporates] are beginning to accept that a commitment to Islamic finance will get them to the table. It could be the quantum leap for Islamic finance.” In these circumstances, it is a fair question to ask whether this is the right time for Islamic experts to be questioning the basis of the system. Just as Western capitalism is beginning to understand the rules of Shariah-compliant finance, should those rules be changed?
One Dubai financial expert has voiced this opinion: “There may be an element of nervousness in issuers when faced with a structure they have not seen before.”
That is an understatement. If doubts creep in to the Islamic financial system now, just when it is on the verge of critical momentum, the result could be very damaging to the world financial structure, and to the Islamic financial industry itself.
It is right to clarify the rules, in particular the notion of “true ownership” essential to Shariah-compliant finances, and to remove worries there may be among the experts about risk-analysis in the current structures. But if that involves a structural change, as implied in the statement that 85 per cent of existing sukuks may not conform to all precepts of shariah, then it is too much change, and too radical.
With the global financial structure in such a delicate state at present, conventional capitalism needs robust and reliable Islamic alternatives more than ever.
