Monday, April 28, 2008

Islamic Finance

By Loretta Napoleoni | Information Clearing House, April 4, 2008

Islamic finance has become the fastest-growing, most dynamic sector of global finance. Every Western-style financial product has its sharia, i.e. Islamic law, compliant instrument: microfinance, mortgages, oil and gas exploration, bridge building, even sponsorship of sporting events. Islamic finance is innovative, flexible, and potentially very profitable. “Operating in 70 countries with about $500bn in assets, it is poised to expand geometrically.” With more than one billion Muslims eager to support it, analysts project that this system will soon manage approximately 4 percent of the world economy, equivalent to $1 trillion in assets. Such figures explain the eagerness of Western banks to tap into sharia financial services. Citigroup, along with many other Western banking retailers, have opened Islamic branches in Muslim countries.

At the end of 2004, the Islamic Bank of Britain, the first bank catering to a European Muslim client base, floated its shares on the London Stock Exchange. Ironically, Western capitalism’s three major global economic crises - the 1970s oil shocks, the late 1990s Asian crisis, and 9/11 - paved the way to the ascent of Islamic finance. Unlike market economics, Islamic finance centers on the religious tenets of Islam and operates in a way to keep Muslims compliant with sharia, the religious law that comes directly from the Koran. Islamic activists, intellectuals, writers, and religious leaders have always upheld the prohibition of riba, the interest charged by moneylenders, and denounced gharar, which refers to any type of speculation. Under this belief, money must not become a commodity in itself to create more money. Islamic finance thus shuns hedge funds and private equities, because they simply multiply cash by stripping assets. Money serves as a means or instrument of productivity as originally envisioned by Adam Smith and David Ricardo. This principle is embodied in the sukuks, Islamic bonds. Sukuks always link to real investments - for example, to pay for the construction of a toll highway - and never for speculative purposes. This principle springs from the sharia’s ban on gambling as well as on the prohibition of any forms of debt and activities that trade risk.

Continued . . .

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