During his official visit to Turkey in 2006, Pope Benedict XVI was pleasantly surprised by the words “Al-Kasid Habib-Allah ,“ or, “The trader is a beloved of God” etched next to the wall of the exit door. These words were stated by the Prophet Muhammad and demonstrate the importance of Islam’s position in the smooth functioning of a society’s economic well-being and order.
After that first taste of Islam’s economic contribution, the Pope—who sardonically began his Papal career at odds with the Muslim world—praised the scruples of Islamic finance. In an article from L’Osservatore Romano titled “Islamic finance proposals and ideas for the West in crisis,” the Holy See’s official newspaper suggested that the basic rules of Islamic finance could relieve suffering markets and international financial systems. Noting that Islam prohibits “riba,” or the usurious loaning of money, it stressed that sukuk bonds (Islamic law complaint securities) are always real investments and never speculative. Given the financial doldrums the world finds itself in, I believe the Papal observation makes great sense and gives us all food for thought to consider why Islamic finance should not be taken as a niche upstart.
In the aftermath of the Sept. 11 terrorist attacks, the term “Islamic finance” roused suspicion. However, a look into its modus operandi reveals otherwise. A key prong of its principles is ethical investing, meaning no investing in weapons, pornography, alcohol etc. On the technical side, Islamic finance allows asset managers to shift away from financial engineering and towards a much more viable risk and profit sharing model. Islamic banks can only lend what they have on deposit, bracing them from the types of unregulated lending seen during the financial crisis.
America was introduced to Islamic finance by Yusuf DeLorenzo, who brought it to Wall Street in the late 1990s. DeLorenzo, who was trained in both conventional finance and Islamic law, argued that financial instruments in New York that were Sharia compliant could fulfill the twin role of providing American Muslims with a purer alternative to investments as well as attracting considerable foreign investment from affluent Muslim investors from abroad.
Since those days of infancy, Sharia-based finance took off at lightening pace, shooting to assets of about $1 trillion in the past few years globally. While in the grander scheme of things, this is not nearly as towering as the Burj Khalifa skyscraper, despite the global economic slow-down Islamic finance has maintained very high growth rates and returns for investors. The reasons for this, its adherents and partisans claim, are due to its apathy toward excessive risks as well as investments in genuine assets.
Universities, institutions far more noble than those on Wall Street and Canary Wharf, jumped on the bandwagon of capitalizing on the Middle Eastern $150 per barrel bonanza. So, too, did banks that created the mechanism of Islamic banking windows. High-end banks such as Lloyds TSB and HSBC each opened these windows. This writer interned with one such window at the Royal Bank of Scotland in Pakistan. One criticism of operations is that they are running inefficient and will last only while black gold remains in the Arab oil wells. However that is not necessarily true, as the system has worked rather efficaciously in Malaysia, which has been trying to prop itself up as a major hub of Sharia finance in the past few years. Kuala Lumpur is in fact competing doggedly with Dubai, Manama, and London for this title (in London, Prime Minister Gordon Brown recently made changes in the Queen’s law to make this possible). This fact alone bears testimony to the enormous pull of Islamic finance.
Last week, Columbia hosted its first ever Islamic Finance Symposium, a unique event that brought together the industry’s most accomplished speakers, practitioners, and scholars, along with Barnard’s President Debora Spar at the Diana Center’s Oval Room. The panel was particularly poignant given the gargantuan length and breadth of the achievements of Islamic finance. Add to this the bevy of accomplished speakers, including Umar Moghul (a banking and finance lawyer), Aamir Rehman (a former BCG consultant and HSBC banker), and Islamic Scholar Taha Abdul-Basser (who is teaching a class on Islamic Finance at the Harvard Business School). All three are products of the American context of Islamic banking and finance. About 15 years ago, Harvard founded the Islamic Finance Project to better study what was then a truly microscopic phenomenon. The aim of last Thursday’s panel was to make sure that Columbia, too, remains at the cusp of cutting edge research and debate in all spheres, including Islamic finance.
Whether the idea of Islamic finance as a practical yet revolutionary model for a better, more efficient and judicious economic order will become a relic of history—like the sea cowry shell currency of early man—or whether it can reach its purported messianic potential, remains to be seen. What last week’s panel did demonstrate was that given the very messy financial crisis the world is dealing with, Islamic finance has raised itself as a beacon of hope. Its ethical principles as well as its prudent and non-exuberant investing strategies have made it a force to be reckoned with.
The author is a Columbia College junior majoring in Middle East, South Asian, and African Studies and concentrating in economics. He organized the Islamic Finance Symposium.