Does Islamic finance make any difference at all?
One of the latest additions to such urban legends as the Loch Ness monster, UFOs and environmentally friendly land reclamation is what is now known as Islamic Finance. It is a new scam that started in the second half of the twentieth century and has only really taken off in the last three decades. One could wonder why the Islamic world needed 1,400 years to invent such a system. One may also wonder why we never hear of such terms as Christian, Jewish or Hindu Finance?
How it works?
In a process known as Murabaha a person decides to purchase an asset (car, home) via an Islamic bank, which buys it in its own name and immediately resells it for a higher amount that ultimately works out to be equal or higher than conventional interest. In the meantime, the bank retains ownership of the asset until the client is able to pay back the entire amount plus the ﬁnance charges. Basically, Islamic banks make more money and take much less risk, the burden of which rests solely on the Shari’ah compliant client.
How it started?
The development of this fast growing industry that preys on the religious beliefs of 1.2 billion people is that a few terms were literally translated from English into fancy sounding Arabic words to appeal to the pious. Words such as Lease became Ijara, Bonds turned into Sukuk, Joint Venture changed to Musharaka and Insurance morphed into Takaful. Folks, the truth is, all the above words are literal translations from English to Arabic and have nothing to do with Islam.
For non-Arabic speakers, it is similar to saying ﬂat in British English and apartment in American English, which is very acceptable. What is not acceptable, however, is when one is expected to pay much more to buy the very same ﬂat should the seller decide to call it an apartment in the contract.
Also, for those who believe in Islamic banking, turning a regular bank into an Islamic one by changing its name or logo does not make it an “Islamic bank”. It is clearly set in Islamic principles that if money that was used to start a business was itself tainted, then everything that was built upon it is so and cannot be laundered or white-washed no matter how many fatwas are collected.
There are various reasons behind the emergence of this belief-ﬁnance system. In Malaysia, it was seen as a way to grab a share from the more developed hubs of Hong Kong and Singapore; in the Gulf, western banks wanted to offset any migration of long-established customers to ﬂedgling banks that have window-dressed their names, as well as capture a new slice of the US$1.5 trillion estimated wealth in the region.
Is it regulated?
Once again, as in the case of the Arab League, the GCC Customs Union and the Peace in the Middle East, it was decided to outsource the establishment of what makes up so called Shari’ah compliant regulations to the Western world. Even so, the current lack of standardisation of Islamic Finance came under attack in a recent McKinsey report that called it “an industry that is little more than a collection of national strongholds”. For an industry that claims it
has US$500 billion dollars under management, having “no common approach on regulatory frameworks” as a KPMG report found, coupled with a “lack of transparency in operations”, doesn’t bode well for its clients.
Did you ever wonder why in the Kingdom of Saudi Arabia, which is the cradle of Islam, there isn’t one openly Islamic bank? And yet the UAE, with 20 percent of the KSA’s population, has ﬁve such banks. In the KSA, when a client goes to open a deposit account, banks openly ask her if she wants a “riba account”, which means an account that pays interest. The majority of clients decline, as it is seen as “morally unacceptable”, which leaves the banks to rack in the proﬁts. With deposits approaching US$150 billion in 2006 and little interest charges to pay the clients, no wonder they are amongst the most proﬁtable banks in the world.
A professor from the Wharton School in the US argued that “it serves little purpose to extend ﬁnancing with interest charges using a set of tricks that disguise them as something else.” In today’s world, more and more people are looking for salvation, even if it was a trick; in this case, salvation got an Islamic disguise.
This article was originally published in MONEYworks on October 2007.