Indonesian President Susilo Bambang Yudhoyono has called on Islamic banks to take a leadership role in the global economy, amid the financial crisis.
He was speaking at the opening of the World Islamic Economic Forum in the Indonesian capital, Jakarta.
The forum has brought together political and business leaders from 38 countries to discuss the global economic slowdown.
They will also discuss ways to achieve energy and food security.
Mr Yudhoyono said it was time for Islamic banks to do some missionary work in the West.
Islamic financial institutions, he said, had not been hit as hard as their western counterparts because they did not invest in toxic assets.
Banks run in accordance with Muslims laws on interest payments and the sharing of credit risks are seen by many as fairer than traditional banks, less focused on profit and kinder to the communities they work in.
Demand for Islamic financial products has been growing in the Muslim world for years but Mr Yudhoyono said that many in the West were now ready to learn from them.
Islamic law prohibits the payment and collection of interest, which is seen as a form of gambling.
Transactions must be backed by real assets, and because risk is shared between the bank and the depositor, there is added incentive for the institutions to ensure deals are sound.
PM Calls On Muslim Countries To Invest In Agriculture
JAKARTA, March 2 (Bernama) -- Datuk Seri Abdullah Ahmad Badawi, noting that the largest number among the 15 per cent of the world's undernourished population are Muslims, has urged Muslim countries to invest in the development of agriculture and food industry.
The Malaysian prime minister told public and private sector leaders at the World Islamic Economic Forum (WIEF) here on Monday that the growing number of undernourished people could no longer be ignored.
Quoting statistics, he said, the number of undernourished people had increased from 842 million in 1990 to 963 million in 2008, with 160 million were living on an income of less than 50 cents a day.
"The financial crisis has further eroded the purchasing power of the poor who spend 50 per cent to 70 per cent of their income on food," he said.
He noted that growth in agricultural productivity had been stagnating due to under investment in agricultural technology and rural development, and that global cereal production had plummeted since 2000, jeopardised further by the increasing volatility in climate.
He warned that if the trend continued, the Muslim world would not be able to feed its growing population in the near future.
The West’s bankers may learn from their Islamic brothers
Frank Kane
If the former chief executive of the Royal Bank of Scotland had been a Muslim and had run his bank on Sharia-compliant principles, would it have prevented the disaster that has befallen RBS?
It sounds hypothetical in the extreme. Sir Fred is a Scots Presbyterian, and RBS was the epitome of gung-ho western capitalism before it came crashing down.
But the question came to me as I sat at a dinner in Dubai’s Grand Hyatt hotel this week, where 300 or so bankers and financiers had gathered to slap each other on the back at the Islamic Finance News Awards ceremony. If the financial world was run on Sharia lines, the backslappers concurred, we would not be in the middle of economic meltdown.
That opinion came not just from Dubai. In Jakarta, president Susilo Bambang Yudhoyono of Indonesia told the World Islamic Economic Forum much the same thing, adding that Islamic financiers should “do some missionary work in the West” to teach the former masters of the universe how to run a proper banking system.
Incongruously, the sentiment was echoed in Rome, where the Vatican newspaper L’Osservatore Romano said: “The ethical principles on which Islam is based may bring banks closer to their clients and to the true spirit which should mark every financial service ... Western banks should use tools such as the Islamic bonds known as sukuk as collateral.”
From the Far East, to the Gulf, and on to the heart of Christendom, the belief has been gaining ground as quickly as the financial crisis has accelerated: if western bankers had applied the cautious, prudent methods of Islam, instead of the bonus-fuelled jiggery-pokery of the US and Europe, we would not be on the brink of financial disaster.
Islamic financial principles can show us a way out of the mess.
They have a point. Apart from banning investment in industries such as alcohol and gambling, Islam also bans financial interest and the so-called “products” that derive from them.
Collateralised debt obligations, the class of products largely responsible for our current disaster, are as un-Islamic as it gets.
Sharia-compliant personal and consumer finance, such as mortgages, leasing agreements and loans, are matched much more closely than their western counterparts to true asset value and are generally more conservatively rated. That does not mean Islamic finance has been unaffected by the crisis caused by the West. There are credit crunches and liquidity shortages aplenty in the Gulf, and the rest of the Muslim world – the direct result of western contagion.
My host at the Dubai dinner, Dr Humayon Dar, the chief executive officer of the BMB Islamic group controlled by the Sultan of Brunei and several Middle East royal families, put it neatly: “Western institutions are sick and hospitalised; Islamic financials are hospitalised alongside them, but not that sick. We can be back on our feet more quickly.”
But if so, will they pull the West out of its predicament? And will the western financials pay any more attention to Islamic banking once they get out of the current predicament?
Within the global economy, Islamic finance is still minuscule. According to London Business School, the total value of Islamic financial business in 2007 was something like US$729 billion (Dh2.6 trillion).
That sounds big, roughly the same magnitude as the US government’s current bailout programme of its toxic assets, but it is still a mere 1 per cent of the total value of the world economy.
With 1.6 billion Muslims out of the world population of 6.6 billion, you could argue that Muslims are hugely underserved by their financial providers. So there is plenty of potential.
Some western bankers saw that several years ago, and there was a rush to hire Muslim staff and initiate Sharia-compliant operations. These focused on the big Muslim communities in the Middle East, Indonesia and Malaysia, but also began to fish in the big pools of Islamic communities in Europe and North America.
Whether this represents “conversion” to Islamic financial methods on the part of westerners is another matter. They were after business, of course, and particularly the big pools of liquidity held by governments and wealthy individuals in the Gulf, and the mass markets of the Far East. Their motive was profit, not a more secure global financial system, and they were ready to bolt on Sharia-compliant procedures to the most hair-raising and risk-taking aspects of casino capitalism.
They also did it grudgingly and with many reservations. There was much complaint in western banking circles about lack of regulation in Islamic finance, the high fees needed to lure the comparatively small number of Sharia-qualified financiers in the world, and the cost of “fatwa-shopping”, the process by which western-originated financial products were issued with Sharia-compliant authorisation.
“It’s a con. They know it and we know it. But it’s the price we have to pay for access to the Islamic markets,” said one western banker at the Hyatt last week.
There is no real conversion to Islamic principles there; merely a typical western business imperative to get a slice of some action when conventional markets are locked in financial paralysis.
HSBC, one of the better-run global banks that has so far stayed out of the spiral of government bailout, has decided Islamic finance is a top priority.
“It will be one of the few areas of world finance where there is any growth this year. We think the market for sukuks will revive and there is huge potential in consumer retail banking products. The demographics are all-important: Islam is young and growing, Christendom is old and dying,” said a Dubai HSBC executive.
But what about Sir Fred, and his bonus – would a multimillion-dollar compensation package for wrecking RBS have been acceptable under Sharia principles?
Dr Dar said: “It would not have been ‘haram’ (forbidden) – that is a very strong phrase in Islamic finance. But it would have been objectionable.”
That is roughly the predicament of the British politicians are trying to get him to pay it back. It seems the two systems have plenty in common already.
The World Islamic Economic Forum provides a vital opportunity for innovative thinking to get us out of the global recession.
This week saw the meeting of the World Islamic Economic Forum (WIEF), the equivalent of the Muslim world's Davos, held this year in Jakarta. In attendance were heads of states and senior government figures from across the Muslim world, including Indonesia, Malaysia, Morocco, UAE and Qatar, with delegates from 38 countries.
The purpose of the WIEF is to increase trade and business activity among Muslim countries and beyond. I had the privilege of chairing one of the sessions. Fazil Irwan, director at the WIEF Foundation explained to me that WIEF's central pillar is to develop itself as a networking conduit between the Muslim and non-Muslim world, as they believe business collaboration can generate greater prosperity and mutual understanding. Established in 2004, WIEF gives particular focus on investing in women and the young; understandable given the high levels of unemployment among these two categories in Muslim countries.
The Muslim world's economic performance is generally dire. Despite making up one-fifth of the world's population, it produces a measly 7% of its output. Much of the discussion at the WIEF revolved around the global economic meltdown and its impact on Muslim countries that are now facing economic contraction, job losses and greater poverty due to the reckless model of unfettered market liberalism. With the interconnectivity that comes with globalisation, no state is immune. The systemic failure of the current banking model has generated much more official interest in Islamic finance. Shariah-compliant finance is based on financing secured against underlying tangible assets and involves risk-sharing between the parties in the pursuit of genuine commercial activities, rather than profiteering from paper instruments whose trail often led back to highly leveraged low-quality debt (better known now as toxic debt). There was a widespread view among those attending (including non-Muslims) that Islamic finance could provide one possible way out of the current malaise and become an important foundation in a new, more stable world economic order.
One official pointed out that it is not the labeling of products as "Islamic" that is the solution, as it is perfectly possible for a shariah-compliant bank to create sophisticated financial products that end up mirroring the conventional system. What is needed is ethical standards for the financial system based on transparent risk assessments and controlled debt levels. Whether such a model of greater fairness and integrity should be necessarily labelled with the exclusive term "Islamic" is a separate debate. Gordon Brown yesterday, in his speech to Congress, spoke in similar terms when he said that "markets should be free but never values-free, that the risks people take should never be separated from the responsibilities they meet".
The conference showed the efforts the Muslim world is making to help pull the world out of recession. Indonesia itself is home to the world's largest Muslim population, the third largest democracy and the fourth largest population, at 230 million. It is also a member of the G20. Its stable democracy and impressive economic growth over the last decade has marked Indonesia out as a front-line state in the west's greater desire for a more respectful engagement with the Muslim world after the Bush years.
Indonesia is seen as a possible template of how to deal with Muslim democracies and markets, new and old. In her recent visit to Jakarta in February, Hillary Clinton asked colleagues whether Indonesia held lessons for Pakistan, a state with the sixth largest population but far less stable. Given the different role Islam plays in Pakistani and Javanese culture and public life it is not immediately clear what those lessons might be. Indonesia is also strategically important given its commanding presence over the narrow Strait of Malacca, through which supertankers transport Middle Eastern oil to the Pacific Rim. There is great excitement here that President Obama may choose Jakarta to deliver his promised address to the Muslim world from a Muslim capital, the home of his childhood school.
The way out of the current economic crisis will require innovative thinking and a meeting of minds. The WIEF provides one such forum.
Asim Siddiqui is a founding trustee of the City Circle, a grassroots network of professionals established in 1999 which runs, in addition to educational and welfare projects, weekly public events providing an outlet for debate on issues of concern for British Muslim communities and wider society.
"I spent thirty years learning manners, and I spent twenty years learning knowledge."
I'm guessing you're right. Of course, with Islamic banking, the emphasis is more on ethics than on profits.
Yep, but it goes too far.
WEe need a mix of both. A profitable yet not greedy, cautious yet not overly conservative. Several such banks exist, but they don't make it to grand corporations.
and it is still not competitive for the businessman to use islamic banking compared to other banks.
And in Malaysia we called them ah long (loan shark), as they give a higher interest than others (i don't want to say is riba coz i'm not knowledgeable in this area) and when time to ask payment they'll chase u everywhere.
I used islamic banking to buy a house...and it is expensive! and some even said that...they have hidden riba.
I really hope they do more research in this and give it a competitive edge and a better option for others to choose from.
Last edited by syilla; 03-07-2009 at 03:33 PM.
25:36 And the true servants of the Most Merciful are those who walk the earth with humility and when the ignorant address them, they respond with words of peace.
Yep, but it goes too far.
WEe need a mix of both. A profitable yet not greedy, cautious yet not overly conservative. Several such banks exist, but they don't make it to grand corporations.
Islamic banks are still profitable though, aren't they?
I understand how they could seem excessive to Non-Muslims, and that is why I think they are probably more suited to Muslims themselves. In a Muslim society, banks would probably be more concerned with serving the needs of the people than with making lots of money. It's prosperity in the hereafter that's the goal, not in this world...
"I spent thirty years learning manners, and I spent twenty years learning knowledge."
I used islamic banking to buy a house...and it is expensive! and some even said that...they have hidden riba.
I think it's true that many Islamic banks are managing to trick Muslim customers into thinking that they are banking with Islamic guidelines, when really there is still riba going on under a different disguise.
Last edited by Uthman; 03-07-2009 at 05:06 PM.
Reason: Grammar
"I spent thirty years learning manners, and I spent twenty years learning knowledge."
I think it's true that many Islamic banks are managing to trick Muslim customers into thinking that they are banking with Islamic guidelines, when really they is still riba going on under a different disguise.
Don't know about all the banks but the Islamic Bank of Britain gives you profit from halal investment in savers accounts, that way you're not getting haraam interest.
I don't think they disguise riba, because they say you can get up 3% profit when in actual fact you hardly get like 0.4% this shows that they are investing and aren't getting very good returns. Also you don't get any 'profit' in normal accounts. So nothings really hidden
and it is still not competitive for the businessman to use islamic banking compared to other banks.
And in Malaysia we called them ah long (loan shark), as they give a higher interest than others (i don't want to say is riba coz i'm not knowledgeable in this area) and when time to ask payment they'll chase u everywhere.
I used islamic banking to buy a house...and it is expensive! and some even said that...they have hidden riba.
I really hope they do more research in this and give it a competitive edge and a better option for others to choose from.
many people criticising BIMB for their BBA loans... some religious peeps calling those loans as hidden riba
Al Rajhi is the best Islamic bank in Malaysia... try that bank...
Islamic banks are still profitable though, aren't they?
I understand how they could seem excessive to Non-Muslims, and that is why I think they are probably more suited to Muslims themselves. In a Muslim society, banks would probably be more concerned with serving the needs of the people than with making lots of money. It's prosperity in the hereafter that's the goal, not in this world...
I understand you completely, it's just that all these articles are saying our banks should learn from theirs, without really seeing the bigger picture.
Banks can certainly learn something from Islamic banking.
But in the end I wouldn't trust a bank that would be so dogmatic and driven by ideology rather than what makes business sense. I mean, it makes sense for Muslims, since it avoids sin, but thats not a valid argument for non-Muslims. There are too many other strings attached that would make them unattractive for people who don't believe interest is a sin.
Could Sharia-compliant banking be the answer to UK money woes?
Among the ruined reputations of the financial world, there is one banking system that has emerged claiming the moral high ground.
Islamic finance - which rules out the payment of interest - largely avoided the risky investments and trading of debt that prompted the credit crunch.
Banks offering Sharia-compliant accounts and selling Islamic mortgages say they are reaping the benefits.
Institutions such as the Islamic Bank of Britain say they were attracting more customers and business - by no means all of them Muslim - even before the credit crunch.
Encouraged by their new reputation, a group of such institutions are taking their show on the road this week - first stop Leicester - offering a range of services.
They include, for the first time, Sharia-compliant car insurance - which works by insurers paying their "premiums" into a shared pot, out of which claims are taken.
Whatever is left at the end of the year is shared out among the contributors.
It's Islamic, says the company, because it avoids the element of gambling inherent in ordinary insurance.
Its advocates insist that Sharia-compliant funds could go some way to rescuing UK plc from its own credit crunch.
The argument goes like this. There are hundreds of billions of dollars - much of it income from oil - dammed up in the Middle East. Much of it is available to borrowers, but only in Sharia-compliant loans. We have a dearth of credit, so should issue Sharia-compliant bonds.
No interest can be paid on the loan, but rent can be paid. The government could, for example, back the bonds with assets such as civil service buildings.
Fly in the ointment
It would pay rent on the buildings and then "buy" them back at the end of the agreement.
There is a fly in this soothing ointment however - there's disagreement about the means of deciding what is and is not truly Sharia among the array of Islamic financial products on offer.
Normally, the definition is set by committees of Muslim scholars, some of whom train and specialise in this lucrative work.
The trouble is that they are often paid by the very financial institutions seeking approval for their products.
My feeling is that Islamic banks are Islamic only in name and form. Riba is making profit on money, yet supposedly riba-free mortgages cost more than riba mortgages. How does that make sense? Only if Islamic banks are charging us more than what a non-Islamic bank is willing to charge us. I remember listening to a radio interview with one of the heads of an Islamic bank (I can't remember which bank) and when he was asked why Muslim banks charge so much more than non-Muslim banks, his response was "It's difficult to be a good Muslim." In other words, they're abusing our wish to live in a halal way to make more money out of us than if we were willing to do something haram. But the reason why riba was prohibited was precisely to make it easier for non-rich Muslims to be able to borrow money without being exploited. Now we are told that being a good Muslim means to be exploited more than other people. How does that make sense?
But there is one sense in which Islamic finance can teach non-Muslims economists it's this: if you can convince people that getting exploited by banks is a righteous act then you're far less likely to suffer during a recession.
And as for it being halal, I'll just mention two experiences: the first when I phoned up about halal mortgages and was told that the rent I would pay on the property would vary depending on interest rates. The second is a friend who has been working in Islamic banking for years now, and he says it's as capitalist all other forms of banking. Which isn't exactly ethical.
May Allah protect us from thinking that an Islamic label makes something Islamic halal.
But realistically, how would anyone ever be able to buy a home if even Islamic banking is haram? Basically this would mean that only non-profit banking would be allowed? But who is ever going to set that up?
I remember taking out a loan about forty years ago the interest rate was low, but they charged a very high arrangement fee. When I worked it out later it amounted to about 40% interest overall, even though they called it an arrangement fee.
Charging interest is the most transparent way for a consumer to compare costs for borrowing money from various institutions, in Britain all the lending companies have to calculate interest using the same formula.
Islamic banks might charge fees, or rent or call it something else to borrow money, but the bottom line is you can still compare the cost of borrowing money Islamicaly, and say it is equivalent to X percent interest.
So how does all this change in names make it ok, is there something else I am missing?
We pay taxes. I wouldn't mind paying a few more taxes if it meant that I could get an interest free loan from the government. Rather than give it to a bank. And to make sure the government doesn't lose money by the value of money going down in relation to the house, they could lend me gold which I would have to pay back. There are solutions. The world shouldn't revolve around profit (i.e. greed). Greed was seen as a sin in all societies until capitalism, when all of a sudden it became good.
The problem lies with the economic system we live under. We had a brief heyday under capitalism in the 60s and 70s when capitalist governments had to treat us well because they were scared we'd kick them out and become communists. Now that there's no alternative, capitalism's real colours are starting to show, and it ain't pretty. Expect things to get worse as we slowly become more like 3rd world countries in terms of distribution of wealth.
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