Thursday, November 06, 2008

America’s Introduction to Islamic Finance 101 – The Good, the Bad, and the Ugly

With the economic melt down engulfing the American financial markets, a new light has been seen as possibly offering hope. A new ideology in banking and finance has merged in America, or rather a very old system finding a new path in the modern world. With the disturbingly exploitative practices of the mortgage and loan industry America has seen a 57% increase in foreclosures coupled with unemployment rates hitting a 5 year high as well. In just over 20 years we have seen over a 700% increase in the American deficit, with no relief in sight.

One of the options currently being pursued as an avenue of lessening the economic hardships, and offering essential financial services for a growing community of Muslim investors, as well as an increasing segment of ethical/socially conscious investors is “Islamic Financing”. The demand for Islamic Finance has increased dramatically and now accounts for roughly 800 million in assets while growing at around 15% per year, making it a market aspect undeniably in need of closer examination. To this end the Department of Treasury recently scheduled an event to explain in more detail the concepts of Islamic Finance to the most important persons in regards to policy making. The event, entitled “Islamic Finance 101”, was designed to fulfill a specific need:

“To help inform the policy community about Islamic financial services, which are an increasingly important part of the global financial industry. The Department of the Treasury, working with Harvard University’s Islamic Finance Project, will host speakers from academia and industry to share information on the development of Islamic finance, both in the United States and globally. The primary audience of this seminar is comprised of staff from U.S. banking regulatory agencies, Congress, Department of Treasury and other parts of the Executive Branch.”
The Good

In theory, Islamic financial products are aimed at investors who want to comply with the Islamic laws (Sharia) that govern a Muslim's daily life. These laws forbid giving or receiving interest (because earning profit from an exchange of money for money is considered immoral); mandate that all financial transactions be based on real economic activity; and prohibit investment in sectors such as tobacco, alcohol, and gambling. Islamic finance seeks to promote social justice by banning exploitative and deceitful practices. This frees the consumers from such unfair practices like interest (riba) which can often effectively strangle the life out of many business owners, or other such borrowers. This partnership is essential to benefiting the community as a whole since the borrower has responsibilities himself and to the loaner for his success, and the originator of loan has a need to ensure the success of the borrower so that they will see a return on their investment. Together this shared accountability, creates a actual “Working” relationship between the two entities, rather then the traditional parasitic relationship in which the originator of the loan reaps the rewards and benefits of others hard work, while essentially offering very little if any support.

The Bad

While several entities such as the Islamic Development Bank are playing key roles in the development internationally acceptable standards and procedures while strengthening the sector's architecture in different countries, there are still rather large, complex challenges to developing a framework for governing, supervising, and regulating Islamic banks since there is no common approach among countries where Islamic banking exists. Two of the most common approaches are that Islamic banks should be subject to a supervisory and regulatory regime of central banks that is entirely different from that of conventional banks (currently practiced in Yemen and Malaysia). The second main view recognizes the uniqueness of Islamic banks' activities, but favors putting them under the same central bank supervision and regulatory regime as that for conventional banks, with slight modifications and special guidelines (as practiced in Bahrain and Qatar).

Other international institutions that are working to set Sharia-compliant standards include the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Islamic Finance Service Board (IFSB), the International Islamic Financial Market, the Liquidity Management Center, and the International Islamic Rating Agency. As reported by the International Monetary funds quarterly, Finance and Development a number of countries and institutions have adopted accounting standards developed by the AAOIFI, which complement the International Financial Reporting Standards. The IFSB aims to promote the development of a prudent and transparent Islamic financial services industry and provides guidance on the effective supervision and regulation of institutions offering Islamic financial products. The IFSB has recently finalized standards on capital adequacy and risk management, and has made progress in developing standards on corporate governance. Once developed and accepted, these international standards will assist supervisors in pursuing soundness, stability, and integrity in the world of Islamic finance. So while Islamic Banking and Finance are making strides, even breaking new grounds in America, there still remains an arduous task before numerous groups who are independently working on a collective goal.

The Ugly

The Islamic Finance 101 seminar has brought a considerable amount of negative criticism which claims to expose the seditious nature of the Shariah and thus the inherent inequity and contemptuous nature of all things associated with it. This round brings out such notable figures as the embodiment of the Anti-Islamic movement Robert Spencer, as well as his faithful supporters from such groups as Members of the Coalition include Concerned Women for America, ACT for America, Institute for the Study of Islam and Christianity, the Zionist Organization of America, Traditional Values Coalition, Center for Security Policy, Endowment for Middle East Truth, Unity Coalition for Israel, Let Freedom Ring, Christian Solidarity International, Tradition Family & Property Inc., Women United, Jewish Action Alliance, Florida Security Council, Society of Americans for National Existence and the Center for Security Policy.

Under the banner of “The Coalition to Stop Shariah” which claims to speak for peoples of all faiths and political affiliations who “do not want to submit to the jihadist doctrine of Shariah”. Let us take a moment to examine the nature of these peoples of all faiths and political affiliations:

Coalition include Concerned Women for America - The mission of CWA is to protect and promote Biblical values among all citizens - first through prayer, then education, and finally by influencing our society (excerpt from the official mission statement of the CWA)

ACT for America - Create a nationwide network of chapters in order to more effectively inform, educate and mobilize Americans regarding the multiple threats of Islamofascism, and what they can and must do to protect themselves and their country against this determined enemy (from the official mission statement of ACT)

The Institute for the Study of Islam and Christianity (ISIC) is an independent non-profit academic institute, on the cutting edge of the study of Islam, Christianity and Muslim-Christian relations. In the contemporary context of increasing tensions between Islam and the West, we aim to present an objective, robust and rigorous understanding of the relevant issues and their implications for Islamic and western societies. A rather politically safe introduction to ISIC, however if you look a bit further into their director, Dr Patrick Sookhdeo an Anglican priest, you will notice a stream of very anti-Islam themed articles and papers.

The Zionist Organization of America - Since its founding in 1897, the Zionist Organization of America has been fighting for the Jewish people and the Land of Israel. The ZOA is the only organization that documents and exposes Palestinian Arab violations of the Road Map plan. The ZOA leads the efforts on behalf of American victims of Palestinian Arab terrorism. The ZOA's campaigns have repeatedly led to the defeat of hostile critics of Israel who were nominated for important government positions.

Traditional Values Coalition is the largest non-denominational, grassroots church lobby in America TVC which speaks on behalf of over 43,000 churches. (Official introduction to the TVC)

Center for Security Policy founder - president and CEO Gaffney, Frank J. Jr. has produced a steady flow of anti-Islamic content in numerous publications.
Endowment for Middle East Truth - Israel has been on the front lines of the struggle to preserve both its very life and the values it embodies of democracy, human rights, tolerance and pluralism against the forces of radical Islam. We, at EMET, believe that in the perception of the radical Islamists who have waged war against our civilization and its democratic values, the United States and Israel sit in a common trench (official introduction of EMET)

Unity Coalition for Israel - The mission of Voices United for Israel is to focus the efforts of secular and religious organizations and individuals for whom the existence of the State of Israel is central and essential to the future of the free world. We educate these organizations and individuals on security issues and radical ideologies, including global Islamic terrorism, affecting not only Israel, but all of Western Civilization. (Official mission statement)

Christian Solidarity International - CSI is a Christian human rights organization for religious liberty helping victims of religious repression, victimized children and victims of disaster. Examination of their writings, in particularly under the human rights category reveals an anti-Islamic ideology.

The reason I took the time to actually identify these organizations and their basic principles is simply to help illustrate that their claim to speak for people of all faiths and political affiliations is nothing more then a farce. This coalition is nothing more then a gathering of anti-Islamic propagandists who oppose the United States own governmental plan on an introduction to Islamic financing based on nothing more then a biased view of Islam and Islamic Law (Shariah).

A fatal flaw in the principle beliefs of individuals and groups alike who are so compelled to hate everything about Islam is that they are blaming individual acts on the whole of the religion. They take the most sensational interpretations and opinions and use it as ammunition to discredit anything with Islam. Fortunately the reality of truth can not be extinguished by misguided interpretation and opinion, and there are some who are still able to see the benefits of something even if they can not accept its whole completely.

U.S. Treasury Department's sponsorship of a training seminar on managing U.S. financial assets in compliance with Shariah Law is a sign that despite the apprehension to promote anything Islamic that is so clearly visible, it is still possible to put these biases aside and take something that is clearly beneficial and apply it to a situation that is dire need of help. Following in the steps of several European countries, the US has seen the potential promise of Islamic Banking and Finance.

“Islam all too often resonates negatively in Europe, with a great part of non-Muslim public opinion uncomfortable with Islamic culture and values. Secular and Christian opinion is at best suspicious of shariah, Islamic law, and indeed often antagonistic. The notion of wanting to apply shariah principles to banking and finance is treated with scepticism if not outright hostility, especially as there is no concept of Christian or Jewish banking, even if there are some parallels between shariah financial principles and the teaching of the Old Testament. Yet Islamic finance is thriving in Europe, and many major European banks perceive it as a profitable opportunity to generate new business rather than as a threat to existing business. Although Islam is sometimes viewed as prescriptive and concerned with restricting choice, Islamic finance is about widening choice, and in particular about providing alternatives to interest based finance. The aim is to develop financial products that are seen as ethical and within the realm of socially responsible investment. The approach in this research is largely thematic and institutional rather than geographical, with the subject viewed from a European rather than an Islamic world perspective.” Islamic Finance in Europe, Rodney Wilson, 2007.


Anonymous said...

"A fatal flaw in the principle beliefs of individuals and groups alike who are so compelled to hate everything about Islam is that they are blaming individual acts on the whole of the religion."

Problem: Doesn't Islamic Finance (Sharia-compliant finance) serve to do exactly that? I.e., subordinate individual acts so they are not individual nor variant, but necessarily in singular accord, wholly defined by Islamic law.

You've got the letters and words down, Hamza, but no logic or truth. Self-deception may shape your life and thinking, but it will not pass to others.

Hamza Hashem said...


First I would like to thank you for your comment, however when you accuse me of having the letters and words down but not the logic or truth, let me ask for a bit of clarification:

"I.e., subordinate individual acts so they are not individual nor variant, but necessarily in singular accord, wholly defined by Islamic law."

Before criticism can ensue one must understand the basic principles of Islamic finance. This being said , what exactly do you mean that Islamic finance subordinates individual acts? Furthermore a singular accord based on Islamic law - What singular accord could you be referring to as the nature of finance is in general individualistic.

If you are referring to the whole of Islamic finance having to conform to Islamic Law, then I ask how is this any different then a government ensuring that finance in its country conform to national law.

Perhaps I have missed your point, and if I have I apologize. If you would leave the vague generalities, and speak on specific issues perhaps we can continue in a more productive manner.

Let me reiterate "These laws forbid giving or receiving interest (because earning profit from an exchange of money for money is considered immoral); mandate that all financial transactions be based on real economic activity; and prohibit investment in sectors such as tobacco, alcohol, and gambling. Islamic finance seeks to promote social justice by banning exploitative and deceitful practices.

It is your choice to decide if such actions are somehow inherently evil.

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