Islamic Financing and the global economic crisis

Islamic financing is a unique development not only for Muslims but for global economics. It is a way of finance that marries Islamic faith with economics. The idea of linking finance to a moral, ethical or religious belief is not new. This is true for Islamic financing.

But the growth of Islamic financing as a part of global finance is a recent development. The first major Islamic financial organizations did not begin until the1960s’ and 1970s’.

And as they have developed, Islamic financial organizations have created new ways to adopt Islamic beliefs to modern day economic dealings.

The guiding rules for Islamic financing come from the core principles in Islam.

The role of Shariah in Islamic financing

Shariah or Islamic law prohibits interest. It bans uncertainty in contracts unless everyone involved in the business dealing clearly understand the conditions. It does not allow involvement in businesses that are prohibited by the religion. These would include businesses that deal in alcohol, pornography, gambling or pork-related products.

A mortgage or real estate dealing offers a good example of how Islamic financing differs. In most real estate agreements, the lender pays interest to the seller or the bank. But in Islamic financing, the banks own the property and the buyer pays rents until the cost of the property is covered.

Recent expansion

In the last few decades Islamic financing has grown markedly. It is estimated that this form of financing has increased by an average of 10 to 15 percent annually from the end of the 1990s’.

How large is Islamic financing?

Most estimates say that it represents between $700 and $800 billion in assets across the globe.

There are an estimated 300 Shariah-compliant organizations in 75 nations. A Shariah-compliant organization is one that uses the laws of Islams as its guiding principles.

The largest Islamic banks are located in Saudi Arabia, Kuwait, Dubai, Qatar, and Bahrain. The major organizations that issue Islamic bonds are located in the United Arab Emirates, Saudi Arabia and Kuwait.

But experts point out that the spread of Islamic financing is still quite limited. It is estimated that Islamic financing accounts for only 1 percent of the world’s financial assets.

Islamic financing exists mostly in the Gulf, Iran, and Southeast Asia.  Islamic financing has especially grown in Malaysia where, according to new reports, it accounts for 12 percent of the banking assets in the country.

There are also organizations based on Islamic financing in Europe, and United States.

Most of the money involved in Islamic financing is tied up in banking. A smaller share is committed to Islamic bonds, equity funds, and mutual funds.

How have Islamic financial organizations survived in the economic crisis?

To supporters of Islamic financing, the global economy crisis is proof that these organizations are an alternative to conventional financing. Why?

This is because they are barred from dealing in the kind of debt contracts that have led to the collapse of the world economy. It is also said that Islamic financial organizations are a safe haven for those frightened by the uncertainty of the conventional financial system.

But Islamic organizations are not immune from the collapse that began in depth in 2008. A study by Gulf One Investment Bank in 2008 said that Islamic financing has largely outperformed the traditional financial system in the last few years.

But it suffered a greater decline at the end of 2008 than conventional markets, the report said.

One of the problems of Islamic financing is that it heavily invests in real estate. This is a problem because it overly exposes the system and organizations to the weaknesses of the real estate market. Another concern is that the system is also heavily reliant on loans to consumers.

As a result of its reliance on real estate investments, Islamic financial organizations suffered marked loses as the economies of the Middle East began to weaken in 2008 and real estate values as well as construction suffered declines, according to news reports

Problems and Questions

Here are some of the criticisms and challenges facing Islamic financing:

Some of the newly created financial devices are too similar to those provided by conventional financing. This raises the question whether they are truly Islamic in nature.

Religious scholars have challenged some of the new financial instruments, forcing them to delay their work or to close down. Aand that has caused uncertainty for businesses and governments dependent on dealing with Islamic financial organizations.

There is a lack of Islamic scholars and experts versed in Islamic finance who can oversee a system that is growing very rapidly. This puts a strain on businesses trying to expand within the framework of Islamic financing.

Governments in some Muslim countries have not provided enough legal and financial support to make the system available to their citizens.

Scholars fear that Islamic financing can lose the it’s religious spirit and meaning by following the path of conventional financing.

Suggestions for reporters;

Can you identify the major Islamic financial organizations in your country?

What has been the impact of Islamic financing on your nation’s economy and ways of doing business? What have been the benefits? What have been the problems? How are these organizations regulated? Do they have the small level of openness of transparency to investors and regulators as in traditional financing?

Who are the major investors in Islamic financing and was the major borrowers?

What percent of all banking and loan applications in your country are controlled by Islamic financial groups?

Have Islamic financial organizations adopted new financial tools like Hedge funds in your country? Such tools would also involve stock derivatives, insurance and mutual funds.

Who are the leaders of these organizations, and who are their Islamic advisors? How do they guide their organizations differently from traditional ones?

Can you take examples of lenders or groups that rely on Islamic financing and show it has impacted their lives? Are loans easier to acquire? Is there a social benefit from the loans given out by the organization?

How much access do low-income borrowers and business and persons in rural areas have to Islamic financing?