Fed, BOJ Signal We Are All Islamic Bankers Now: William Pesek
Attending Islamic finance conferences these days, it’s hard not to notice how this investment class is catching on. The world’s roughly 1.5 billion Muslims need a way to bank and invest according to Islamic Sharia law, which bars receiving or paying interest on loans or deposits. A massive market infrastructure is being built to facilitate clients that include wildly rich Persian Gulf oil tycoons.
Yet isn’t this industry being pirated by the Bank of Japan, Federal Reserve and other central banks destined to offer interest-free loans? As U.S. President Richard Nixon, echoing Milton Friedman, famously quipped in 1971: “We are all Keynesians now.” By 2009, we may all be Islamic bankers, too. It’s an odd yet apt comparison. Islamic banking is more about the means by which a certain group of people obtains money. Zero interest rates are about getting as much money, in any way possible, to everyone.
There’s still something to be said about the spreading appeal of scrapping interest rates. It’s no longer a unique aspect of certain transactions or a banking novelty. It’s becoming the norm, and it’s quite disorienting.
Japan’s benchmark interest rate is 0.3 percent and headed to zero in the months ahead. The U.S. federal funds rate is 1 percent and headed lower, too. The U.K.’s rate is 2 percent, Canada’s is 2.25 percent and the euro zone’s is 2.5 percent. As the fallout from the global crisis worsens, these and many other benchmark rates will edge toward zero.
According to Islamic law, the charging of interest, or “riba” in Arabic, is unjust and exploitative. That concept bears little resemblance to Japan’s zero-interest-rate policies, or ZIRP. The BOJ never argued it was seeking to foster brotherhood or socio-economic justice. But that’s exactly what the BOJ did. By eliminating borrowing costs, and going further in recent years with “quantitative easing,” the BOJ was doing its bit for social fairness and stability. It was about protecting the Japanese way of doing business and maintaining the equalitarianism on which the nation’s 127 million people pride themselves.
Now the Fed is heading down a similar road for similar reasons. With an unprecedented array of emergency-loan programs aimed at easing the worst credit crisis in seven decades, the Fed is engaging in Japan-like quantitative easing. The level of rates is one thing. The more fascinating development is the Fed pushing waves of extra liquidity into the financial system.
It’s no wonder that economists such as Michael Feroli at JPMorgan Chase & Co. in New York are referring to Fed Chairman Ben Bernanke as “Bernanke-san” these days. Some worry the costs of all this will outweigh the benefits. “The concern is ZIRP encourages inefficiency, and an inefficient allocation of resources is likely to ensue, as occurred in Japan,” says Benjamin Pedley, Hong Kong-based managing director of LGT Investment Management Ltd.
Pedley thinks it’s more important to pursue the kind of fiscal pump-priming counseled by John Maynard Keynes. It’s also vital that central banks buy their domestic bonds, rather than rely solely on interest rates. “I don’t think zero percent makes a lot of difference to the real economy rather than, say, 1 percent or 2 percent,” Pedley says. “Better to halt rates near zero and rely on other policy avenues to get things back on track and then normalize rates as soon as possible.”
The BOJ never became sufficiently independent to move rates away from zero. The best it did was raise them to 0.5 percent. Politicians got used to easy money. In that sense, 3 percent growth in Japan isn’t as genuine as it is elsewhere. It’s the product of unhealthy and unsustainably easy monetary and fiscal policies. The Fed needs to avoid those pitfalls. The point here isn’t to downplay a fast-rising asset class. Globally, Islamic banking assets are estimated at $600 billion to $650 billion and have registered annual growth of 10 percent to 15 percent over the last decade, according to Celent, a Boston- based financial research and consulting firm.
That kind of growth means Islamic assets will top $1 trillion by 2010, Alexa Lam, deputy chief executive officer of the Hong Kong Securities and Futures Commission, said at a EuroMoney conference in Hong Kong last month. The reason why data from Boston and perspectives from Hong Kong are being highlighted here is to show just how anxious the world is to get a piece of Islamic finance. The figures and growth rates speak for themselves. Islamic bankers are looking to marry that potential with China’s rapid growth. “The pie is getting bigger and bigger,” says Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic, the Islamic banking arm of Malaysia’s second-largest bank. Only now, the pie is going to get really, really big as the world’s major central banks offer zero-percent loans.
Grand Mosque of Cordoba