Dispelling misperceptions about Islamic finance

Dispelling misperceptions about Islamic finance

By Rushdi Siddiqui Available at: http://www.theedgemalaysia.com/highlights/227766-dispelling-misperceptions-about-islamic-finance.html

IF we were given an opportunity to pitch Islamic finance to US President Barack Obama as a potential item on the agenda for addressing the financial meltdown at the next world leaders’ summit, how would the conversation flow?
He, being a cerebral and poll-conscious president, would probably ask the tough questions, primarily political with public-sensitivity implications. Perhaps, the question and answer session would go like this:
Obama: The US is a secular democracy with separation between church and state by the Constitution. How can faith-based finance work here?

Rushdi: On every US dollar bill, there are the words, ‘In God We Trust’. We in the industry have taken that maxim literally and turned it into rules-based finance. Let’s remove the word ‘Islamic’ and call it what it really is — ‘risk sharing participation finance’. The credit, subprime and eurozone debt crises were a combination of excessive leverage, Mount Everest-sized over-the-counter derivatives, unbridled speculation in toxic asset classes and so on with no real connection to the real economy. That imposed a real systemic risk on the global economy.

Participation banking — as it is called in one of America’s closest allies, Turkey — is about asset-backed financing. Hence, it is a link to the real economy and the amount of money raised is proportionate to the underlying asset. It has been called ‘boring finance’ as it is about leasing, trading and investing. However, that is the vogue now. For example, at the peak of the US subprime crisis, Fortune 500 company GE raised money via an Islamic bond called sukuk.

There is a small but vocal anti-syariah movement in the US and it alleges a link between Islamic finance and terrorism. If allowed in the US, it is a slippery slope to undoing the Constitution.

Where is their evidence of a link? The UK, a close ally of the US in war against terror, has five Financial Services Authority-approved Islamic banks and has been involved in Islamic finance since the early 1980s. And it is still a secular democracy with a robust parliament.

This is about a ‘clash of misperceptions’, not civilisations. It is well known that the longest lines are at the US embassy to get a visa, be it tourist, education or work, and many people have left repressive societies to start new lives in America. They are not interested in bringing the Trojan horse of repressive policies to US shores.

Let’s take what I call the ‘podium test’, whereby we have a conference, under the patronage of the leader, in cosmopolitan Muslim countries with reasonable entry visa policies — say, Kuala Lumpur and Dubai — and home to a variety of conferences. Let’s invite these ‘dedicated’ people to present their evidence and links and let the stakeholders of participation finance rebut, redress and remove these allegations.

So what Muslim country has Islamised its economy and is it exportable to the US and elsewhere?

First, Islamic finance exists in various forms in 11 of the G20 countries, including the US, where a Jewish-owned community bank, Devon Bank, offers Islamic finance products.

Second, the US Treasury, under your predecessor George Bush, had a resident Islamic scholar educating the staff and the day after you were elected in November 2008, there was an Islamic Finance 101 programme at the Treasury in which my colleagues and I participated.
Malaysia, a multi-ethnic and multi-religious country, embarked on Islamic finance in 1983 and now about 20% of its banking is aligned to such principles. The methodical approach is both top-down and bottom-up, supported by successive prime ministers, central bank governors, Securities Commission and industry bodies. Hence, there is a robust regulatory, legal and tax infrastructure with certain needed [initial] subsidies.

However, Malaysia’s 2012 Islamic finance is not wholesale exportable to many countries that still lack the infrastructure. Thus, it will not happen overnight in the US or elsewhere, and if one tries to fast-track it to capture the surplus liquidity of the Gulf Cooperation Council countries, the law of unintended consequences will probably kick in, causing more challenges than providing financial solutions.

In other words, today, participation finance is really a domestic phenomenon, and to export it, five major considerations need to be addressed: syariah, tax, accounting, regulations and standardisation.

Does this mean special and separate rules, legislation and tax need to be written? No, the UK provides a good example of ‘refining’ legislation, like the removal of double stamp duty on Islamic mortgages.

So, Islamic finance seems to be about disinformation mediation [by one group] and inadequate information by your industry?
Yes, in both instances. The most valuable commodity in the world is not oil, gold or even the greenback, but information. Most credible jurisdictions have laws against, say, inside information.

The industry needs to establish a ‘professionally run and well-financed’ Islamic information industry body to dispel myths, warehouse information, undertake global marketing, provide crisis management and so on, and it would be ideal to house it in Washington, DC. This way, you and your successors have immediate access to what Islamic financing is all about.

Zulkifli Hasan
The Louvre Museum, Paris


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