Could Islamic finance save capitalism?

Could Islamic finance save capitalism?

Haris Irfan Available at:

Islamic finance is widely misunderstood but its core principles could provide a blueprint for a sustainable global economy. The ideals of Islamic finance link money as a medium of exchange to hard assets in the real economy.

Is there a place for ethics and morality in the global economy? Should we continue to rely on governments to tweak at the margins of financial regulation, or is there a credible argument that a root and branch reformation is required – a revolution in capitalism?

Anthropologist and co-founder of the Occupy Wall Street movement David Graeber believes – along with an increasing number of leading intellectuals – that the world’s reliance on our current banking system has had a catastrophic impact on society, leading to an increasing divide between rich and poor, an increase in contemporary versions of debt bondage, and perpetuating the idea that credit creation is a mark of human progress.

Other academics support the notion that mainstream economists, bankers and politicians focus on symptoms without questioning the monetary system itself. If banks are given the power to create money and grant credit, then unfettered credit expansion can lead to bad investments, as the last few years have demonstrated. In addition, money creation by central banks to bail out the financial services industry only encourages those banks to take ever greater risks. This is the concept of moral hazard: profits are privatised but losses are socialised.

Even our measure of human progress seems fundamentally flawed. Gross domestic product – the universal measure of economic output – does not measure rates of literacy, divorce or suicide. GDP does not account for our impact on the environment. In short, it reflects the culture of the modern corporation: a vehicle designed to eliminate all moral imperatives except for profit.

Logically it is impossible to maintain an engine of perpetual motion on a planet with finite resources. Intellectuals such as Mufti Taqi Usmani, a renowned scholar of Islamic jurisprudence, contend that Islamic economic theory may have some answers to the thorny dilemma of balancing the free market with protection of the vulnerable. Indeed, the Prophet Muhammad in his last sermon before he died emphasised human and property rights to his followers, leaving them to codify the ethical principles he had bequeathed through the word of God and the documented precedent of his own life. This codified law is known as sharia and is perhaps more misunderstood today than at any time in its history.

Where once sharia was an organic and evolving body of law, emphasising mercy, tolerance and inclusiveness, it is now characterised as an instrument of control by post-colonial Muslim rulers searching for identity. When Europe’s barbarous principalities once slumbered through their Dark Ages, the Islamic world experienced an age of scientific, literary and philosophical enlightenment, borrowing whatever was good from the cultures around them and building on it. Islamic scholars in medieval Baghdad and Cordoba developed rules and mechanisms to encourage entrepreneurship, leading to the dissemination of financial innovations along the Silk Route and into southern Europe. These were the roots of modern capitalism, but somehow along the way the protection of the weak became forgotten.

Today, as the Islamic world experiences a crisis of identity, Islamic finance remains a rare bridge between two cultures. David Cameron announced last year that London would become one of the global capitals of Islamic finance and, soon after, a UK sovereign Islamic bond was issued in the capital markets. Mufti Taqi has spoken at Davos on reforming the world’s post-crisis financial landscape through the lens of faith.

Conventional commentators describe the industry as “banking without interest” but the fundamental differentiator is the nature of money itself: in Islamic economic theory, money is merely a medium of exchange, not a commodity to be traded. It has no intrinsic value. Financial transactions must have an underlying attachment to the “real economy”. Real assets must be bought and sold as opposed to the trading of intangible pieces of paper, like the infamous derivatives that brought down Northern Rock and Lehman Brothers. And (in theory at least) because money itself should have an asset backing, it cannot be created out of thin air. A blueprint for a stable global economy and one which can bring long-term societal benefits, according even to some non-Muslim academics.

But are the ideals of Islamic finance reflected in the industry? Not for me they’re not. An industry dominated by conventional bankers addicted to cheap credit and exotic derivatives has focused on “reverse engineering” of conventional financial products into their sharia-compliant counterparts. An emphasis on the letter of the law over the spirit of the law has left the layman confused. With a global Muslim population of 1.6 billion, much of it under penetrated by financial services, surely the time has come to emphasise broader ethical principles over adherence to arcane contractual mechanisms? Just as Christian financiers in the Middle Ages created elaborate contractual structures to circumvent the Church’s ban on usury, is Islamic finance not guilty of the very same today?

The industry balances on a turning point. The next few years will determine whether the history of Islamic finance blindly follows that of medieval European finance, or whether its revolutionary ideals can bring something of benefit to the whole world.

Harris Irfan is author of Heaven’s Bankers: Inside the Hidden World of Islamic Finance and managing director at EIIB-Rasmala, a boutique investment bank

Zulkifli Hasan

Indonesia eyes consolidation, new laws in roadmap for Islamic finance

Indonesia eyes consolidation, new laws in roadmap for Islamic finance


(Reuters) – Authorities in Indonesia want to reshape the country’s Islamic finance industry by encouraging consolidation and building a new regulatory system, as the sector plays catch-up to more mature markets in Malaysia and the Middle East.

Regulators are finalizing a five-year roadmap to be presented this month to industry players, who have repeatedly called for clearer laws.

“This is quite a deep review and I’m not surprised if the roadmap we have in the end is a full-fledged revision of what we have had,” Halim Alamsyah, deputy governor of Bank Indonesia, the country’s central bank, told Reuters.

Indonesia has the world’s biggest Muslim population but its Islamic finance market lags well behind that of neighbor Malaysia: Indonesia’s Islamic banks held 4.9 percent of total banking assets in the country last year compared with more than 20 percent for their Malaysian counterparts.

The central bank and the country’s financial services authority, Otoritas Jasa Keuangan (OJK), are looking at ways to give regulatory support for Islamic banks to hold at least 15 percent of the market by 2023. By that year, Islamic windows of conventional banks must be spun off into standalone entities.

The country is also looking at the idea of creating a large, standalone Islamic bank that could spur consolidation in the industry.

Such entities would have an ideal size of around 200 trillion rupiah ($16.5 billion), said Edy Setiadi, executive director for sharia banking at OJK. That is three times as large as the 65 trillion rupiah held by Indonesia’s largest Islamic bank at present, PT Bank Syariah Mandiri.

The country’s ministry of state-owned enterprises first proposed the idea together with the central bank and OJK. Three options are being considered: the merging of several existing Islamic banks, the conversion of an existing conventional bank into an Islamic one, and creating an altogether new Islamic bank.

A bigger institution would have the scale to reduce operating costs and provide services at more competitive rates, the central bank’s Alamsyah said.

There were 11 full-fledged Islamic banks and 23 Islamic windows in Indonesia with combined assets of 242 trillion rupiah last year, central bank data showed.


The new roadmap seeks to establish separate legal policies and infrastructure for the Islamic banking sector.

“The Islamic economy can go hand in hand with the conventional side until a certain point. As it becomes bigger, this may be the right time to have a separate way forward,” said Alamsyah.

Regulators are considering ways to channel more government-related transactions to Islamic banks. “If that can happen, that would increase quite significantly the supply of Islamic funds,” Alamsyah added.

New incentives would seek to make it easier for banks to sell their Islamic products. Under existing rules, banks can sell Islamic products throughout their network in a province as long as there is one standalone Islamic branch in that province. There are 34 provinces in Indonesia.

The rule could be changed to match the country’s regions, of which there are only five, said OJK’s Setiadi.

Regulators are also looking at laws with a view toward giving regulatory approval to more Islamic banking products, allowing for a wider product range to help sharia-compliant banks grab a bigger share of the market, Setiadi added without elaborating.

About 51 percent of Indonesia’s population now owns bank accounts, latest statistics show, up from 40 percent in 2008.

Zulkifli Hasan

Harvard Law School Library

Muslim world needs to develop method in Islamic finance

Muslim world needs to develop method in Islamic finance

Available at:

KUALA LUMPUR: The Muslim world needs to develop a revolutionary method in Islamic finance to allow entrepreneurs and financiers to leverage each other to contribute to the nation’s economic growth sustainability, Datuk Seri Najib Abdul Razak said.

The prime minister said Islamic countries had made remarkable progress and became a significant group in the global economy as the total gross domestic products of the Organisation of Islamic Cooperation (OIC) countries had grown to US$9.4 trillion in 2012 from US$7.5 trillion.

The numbers showed that the Muslim world has limitless potential, he said in a keynote address at the Association of National Development Finance Institutions in Member Countries of the Islamic Development Bank (ADFIMI) – SME Bank International Forum 2014 here today.

“The Muslim world through organisations, such as ADFIMI, must continue to emphasise that Islamic nations are peaceful sovereigns and a source of prosperity for the world.

“Our potential is enormous if we are organised and get our act together,” he said.

The prime minister said as an Islamic finance pioneer, Malaysia could and must play an influential role in ensuring the sector’s future development.

“Ten years ago, Malaysia issued the world’s sovereign sukuk.

Today, Islamic finance is a US$1.2 trillion market; this is expected to rise to US$2.6 trillion by 2017. Islamic finance is now growing at 50 per cent faster than conventional banking,” he said.

Hence, Najib called on small medium enterprises (SMEs) to make greater inroads in Islamic finance as one of the fastest growing sectors in a crowded financial marketplace.

Najib drove home the point that there were some issues that needed to be rectified by the industry, such as regulatory hurdles, lack of consumer education and the need for more business-friendly policies.

In Malaysian context, he said, the government aimed to increase the SME macroeconomic contribution to 41% of the GDP, 62% of employment and 25% of exports by 2020.

“This is a tall order, but I believe this is achievable and attainable,” he said.

Najib noted that RM12 billion was spent for 157 SME development programmes last year that supported nearly 890,000 projects across all economic sectors.

He said that this year the spending rose to RM13 billion and almost half of the funds came from the private sector.

Present were Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz, Khazanah Nasional Bhd Deputy Chairman Tan Sri Nor Mohamed Yakcop, SME Bank Group Managing Director Datuk Mohd Radzif Mohd Yunus, and ADFIMI Chairman Mehmet Emin Ozcan. – Bernama


Zulkifli Hasan