2008-10-12 00:50:51 UTC
"The most despised of men before God is he who
sits and begs. ...
The best men are they that earn a livelihood by their
calling and spend upon themselves and upon their
kindred for the love of God, the Lord of all worlds."
"Islamic finance rides the storm"
The Age 11/10/2008
"A thriving financial sector sounds like an oxymoron
these days. Even Australia's banks - among the most
profitable in the world - kept a fifth of this week's
interest rate cut to cushion their margins. But there
is one sector that has tongues wagging in the hubs of
commerce: Islamic finance.
While the Western world's financial system has been
imploding, this small but rapidly growing share of
world capital has weathered the storm.
Sharemarkets in London and New York are a third off
their peaks. Dow Jones's Islamic financials index,
in contrast, rose 4.75 per cent in the most recent
September quarter and lost a modest 7 per cent in
the previous year.
Not only has the industry been resilient; it's also on
the cusp of serious expansion. It is growing faster
than any other subset of world banking, at 15 to 20 per
cent a year. The Economist estimates Islamic assets
under management are worth $US700 billion ($1000 billion).
This figure could hit $US1 trillion - about the
Australian sharemarket's current value - by 2010.
What's more, all this growth has come from a model of
lending that rejects interest payments and shuns
speculation and heavy borrowing."
Speculation has been ruinous in the West.
Greed has been the foundation of enormous disparities
in economic wellbeing, economic injustice, and instability.
"In short, Islamic finance bans some of the excess that
has brought the West's financial system to its knees,
and is looking wise indeed, or at least lucky.
Islamic finance takes its guidance from sharia.
The biggest markets are in the Middle East and Muslim
countries, but global banks have opened sharia-compliant
branches. Locally, the Muslim Community Co-operative
is one of a few lenders offering the service.
Justice, partnership and opposition to excessive risk
are the main principles guiding Islamic banks."
Say that again.
"Outright speculation and dealing with any party that
has a balance sheet more than a third of which is debt
are forbidden, as are investments deemed unethical by
Islamic scholars, such as casinos.
But if these rules sound tough, the biggest difference
is a ban on interest.
Charging interest is immoral because it does not take
into account how changes in the value of the loan's
security can affect the borrower, sharia says. Home
owners who bought near the peak are now experiencing
this harsh reality: interest gives banks a steady payment
from the borrower, regardless of the property market's state.
However, profit is fine, and Islamic banks have devised
ways to make money from lending. Instead of demanding
interest, they buy the asset outright on behalf of the
borrower. The borrower pays off the loan (the principle)
and a fee for using the asset (rent, for example) until
the amount is repaid and ownership transfers to the borrower.
Just like mortgage-backed securities, the rights to loan
repayments can be sold as an Islamic bond, or sukuk.
But instead of a yield, the bondholder receives repayments
on the loan, and some rent. As a result, Islamic lenders
have not had to venture into money markets that have
recently blown up.
For depositors, putting your money with an Islamic bank
is more like being a shareholder. Rather than interest,
depositors get a cut of any profits.
Understandably, Western governments are casting around for
ideas on how to run a more robust financial system. But
what could they possibly learn from such a different approach?
Islamic finance's more prudent rules on debt look attractive
in hindsight. But more fundamentally, proponents say it
provides a better way to link the financial system to
the "real" economy.
Because Islamic banks keep ownership of the asset until
the loan is repaid, they have a greater incentive to make
sure borrowers do not bite off more than they can chew.
The bank shares in the risks of the entrepreneur but also
its failures, the argument goes.
I am not suggesting we switch to a lending system without
interest payments. But a big gripe emerging in recent
weeks is that finance has become out of whack with the
needs of the rest of the economy.
In the most extreme cases, it seems investment bankers
devoted themselves to developing inventive ways to get
higher bonuses rather than facilitating productive
investment. Islamic finance shows one way of ensuring
savings are put to more useful ends.
Some even say banning short selling of shares reflects
sharia thinking, because it stops traders dealing with
assets they don't own. "Banning short selling is one
of the decisive elements in Islamic finance, so it
seems almost that the conventional markets are looking
at the Islamic techniques, which so far did not play
any role in conventional markets," a financial journalist
from Dubai, Gerard Al-Fil, told ABC radio last month.
Sceptics say Islamic finance just dresses up Western
finance with different titles. It is also worth noting
that the system is not immune from creating bubbles,
although the method of lending makes it harder for
investors to pile in through debt. A conflict between
its religious goals and the goal of turning a profit
is another tension, The Economist notes.
Nevertheless, it is booming. High oil prices have
filled the coffers of Gulf states, and the region
is crammed with capital works projects in need of
funding. Muslims account for 20 per cent of the
world's population, but Islamic finance makes up
less than 1 per cent of world capital, suggesting
huge room for growth.
The Islamic bond market has tapered off in the credit
crunch, but this appears to be a blip. About $US14
billion in Islamic bonds were issued in the eight
months to August, down from $US23 billion in the same
time last year, but Standard & Poor's expects issuance
to hit $US25 billion next year.
This potential has not crept past Western banks unnoticed,
and many have fast-growing sharia-compliant arms.
London is vying to capture the market and has changed
its laws to allow the different property transfers
required for the lending. British media report growing
interest even among non-Muslims because of perceptions
that it is a more ethical approach to finance.
So expect to see more Islamic banks in years ahead as
global banks try to cash in on this growing field.
Given the present financial mess, the industry's
resilience only makes it harder to ignore."
"Money is our god" - The First International Bank of the Golden Calf
"Money not morality is the principal of a commercial nation"
- Thomas Jefferson
"Ohhhhh Say can you see
By the dawns early light
The markets in panic
and Republicans take flight! "
"The Fundamentals of our Economy remain Strong" - John McSame,
Republican Candidate for the Presidency of the Derivative Ravaged,
Crisis torn, Economic Basket Case, The USSA!