October 18, 2013
Islamic finance has been a significant global force for the past few decades, but in recent years sharia-compliant saving and investing have become more common. For example, in June, Goldman Sachs provided a loan to Arcapita Bank, an Islamic investment company, that in compliance with sharia law did not charge interest. In July, a US-based trade association, the World Council of Credit Unions, published a manual explaining to would-be community financiers in developing countries how to operate sharia-compliant credit unions.
Western discussions of sharia law often focus on extremist groups imposing brutal interpretations of these legal codes on unwilling populations. But sharia law, which derives from the Qur’an and the religious teaching of Islam, can also be applied to the finance sector. Importantly, Islamic finance can be seen as part of a wider movement towards the promotion of sustainability as a key element of economic life.
The basic premise under sharia law that no one should profit purely from money leads to a shift in both parties’ perspective away from the short-term transaction and towards the longer-term relationship and its consequences.
In short, the structures that have evolved do away with classic debt – and the banks that provide such financing – in exchange for direct participations in risk and reward. For example, an ijara can be used to purchase real estate for the purpose of leasing it out to tenants and the rental income is distributed pro rata to subscribers. A sukuk is a fully negotiable certificate that can be bought and sold on the secondary market, and allows the new owner to “step into the shoes” of the original holder, taking all the rights, obligations and liabilities relating to the underlying assets that accompany the certificate.
Importantly, participants in an ijara and holders of a sukuk have no guaranteed return and are all economically aligned in the long-term success of the project. If the project fails, they cannot simply take their profits to date and sell of the loan collateral to make themselves whole. As a result, Islamic finance encourages the creation of social value alongside economic value.
But Islamic finance is a legitimate expression of an economic philosophy of the use of money. This shouldn’t be stigmatised or criminalised – especially in light of the excesses and abuses that preceded the recent global financial crisis.
Islamic finance is becoming an important part of important emerging economies in the Middle East and Asia – high-growth markets where businesses will want to compete and succeed. And the Muslim population is continuing to grow and can be an engine for further growth.