THE ISLAMIC ECONOMIC SYSTEM – THE CHALLENGE AHEAD
MUKARRAM ALI
There is increasing disillusionment in the West with the capitalist system. Its tendency to make the rich richer and the poor poorer has always aroused resentment. The popularity of Shakespeare’s The Merchant of Venice is a testimony to people’s dislike of the exploitative aspect of the system. Th e media and the Church increasingly speak out about many banks’ callous treatment of small businesses. Recently, the Bishop of Birmingham asked whether it was ethical to charge interest on loans, and criticism is also being levelled at investment in trades and industries which do harm to people, such as those concerned with tobacco, alcohol, gambling and pornography. All these businesses are forbidden by Islam.
Even in the industrialised societies, the excesses of the free market system, the relentless and unfettered pursuit of profit and the unduly materialistic approach, the socalled the “unacceptable faces of capitalism”, are causing widespread concern. Private individuals can become hostages to the fluctuations of interest rates and overdrafts. Small businesses especially have borne the brunt of harsh and callous treatment by their banks. A growing number of Church leaders have asked whether it is ethical to charge interest on a loan.
The Marxist system of economic management is little different from the capitalist system. In fact, the only difference is that in the latter, it is the individual who is paramount and in the former, the state. Marxism has no moral element and concentrates excessively on materialism. During its rule in the USSR, it aggravated, rather than solved, the economic problems and brought untold hardship to millions of people for over seventy years.
A third economic system, which has lain dormant for centuries, has been re-emerging and evolving over the last two decades – the Islamic economic system, which combines the profit motive with a welfare ethic and in which the individual is obliged not only to strive for his own betterment but to contribute to the good of society as a whole. This system is based on an interest-free profit-and-loss system (PLS), where risk is shared between banker and borrower and the bank’s profits are shared with its customers, concepts entirely alien to the conventional system.
But in the last few years, many people in the West have realised the viability of Islamic banking. Several traditional Western banks have set up units operating on the principles followed by Islamic banks. Th e idea that ethics should have a part in financial matters has taken root and, in London and elsewhere, there have emerged “ethical investment groups” of bankers and fund managers who invest their clients’ funds according to Christian, Jewish or Buddhist principles of equity.
This changing attitude is reflected in the numerous comments which have appeared in the international media in recent years. According to the International Herald Tribune, Kleinwort Benson’s Islamic equity investments, amounting to more than $4bn, have outperformed most stock market indices in the past few years. These products are of interest to non-Muslims as well as Muslims, because people respect the morality of the instruments. There is a growing demand all over the world for Islamic investments.
The Wall Street Journal, in December 1992, published an article saying that Islamic investments in the West were increasing and that estimates of Islamic funds were putting them at anything up to $50 billion. This support from the West, together with their experience that Western banks were hardly the fount of all wisdom, had given Muslim bankers a new confidence in their efforts to adapt traditional moral principles to modern finance.
The Islamic economic and financial system has rapidly expanded from those early days in 1976 when the Islamic Development Bank (IDE) was established, thanks to the inspiration of the late King Faisal of Saudi Arabia. Soon afterward, the movement towards an Islamic economic system was launched by Prince Mohammed Al-Faisal, whose vision, determination and commitment established the Dar al-Maal al-Islami Trust and Islamic banks began to appear all over the world. By February 1992, in Tripoli, the IDB’s Board of Governors were set to treble the bank’s capital to a staggering $6 billion and to launch the IDB’s much-awaited Export Credit Guarantees and Investment Insurance Scheme.
Over the last decade, the steps taken by the Government of Pakistan to bring the country’s economic system into conformity with Islam have been much appreciated as offering a model that will be invaluable to other Muslim countries. There is a desire among many to see the whole of Pakistan’s economic system Islamised as soon as possible. But this is a major undertaking, needing much research, the setting up of controls and the designing of new computer programmes, operating procedures and documentation. Undue haste could be disastrous and lead to chaos, which would surely be exploited by our critics to discredit the whole Islamic system. We must guard against this danger.
Iran and Sudan are also experimenting with the Islamisation of their economies and banking systems – thus far with mixed results. Any new system has to face up to the entrenched culture of the existing one – in this case the powerful interest-based banking and economic system. That is why, even in Muslim countries, there is resistance to Islamic banking, which is very often mischievously and deliberately linked with backwardness and with anti-scientific and ultra-conservative sentiments.
Many Muslims themselves still doubt that an Islamic economic order with its divine origin is capable of meeting contemporary financial needs. The reasons are easy to see. The long subjugation of the Muslims under colonial rule sapped their self- confidence and gradually they began to look at all issues through the eyes of their rulers.
It is only recently that Muslims have become aware of the weaknesses and failings of the two prevailing conventional systems and have started to realise that the Islamic alternative option might be capable of solving not only their own problems but those of the world at large.
Recently, an in-house IMF paper observed that in times of recession an Islamic economic and banking system seems to have a greater capacity to absorb shocks than its Western counterpart. During the Gulf Crisis, Islamic banks suffered far less than conventional banks. Indeed, whether it is in bank syndication, venture capital or trade finance, it is very often the Islamic financial institutions that show the way. The Albaraka Group from Saudi Arabia is the first foreign bank to open in Kazakhstan and has even ventured as far as South Africa. Albaraka and the Geneva-based Dar Al-Maal Al-Islami Trust (DMI) were among the first foreign-owned banks to get permission to open in Pakistan. Both also have outlets in China, Europe and Africa and, of course, in the Middle East.
Islamic banking is also generating great interest in Asia. There are Islamic banks in Indonesia, Brunei, Malaysia, Thailand, Bangladesh, India, Sri Lanka, Pakistan, Iran, Turkey and Azerbaijan, which are holding their own against the established conventional banking systems. There is every sign that more Islamic banks will soon be established in Asian countries. This, together with the spread of Islamic departments in Western banks, will soon mean that Islamic modes of banking will be accessible all over the world.
In London, a teaching institute, the Institute of Islamic Banking and Insurance (IIBI), has recently been set up to train people to become Islamic bankers. It holds seminars, conferences and lectures, and is running a Diploma course by distance learning, so that as many students as possible may benefit.
The IIBI has published several books on Islamic banking, including The Encyclopedia of Islamic Banking and Insurance. The IIBI also publishes a monthly journal called New Horizon, which focuses on developments in Islamic banking, trade and insurance and brings news of the latest trends, instruments and issues on all aspects of Islamic economics.
Altogether, the prospects for the Islamic banking system are promising for this decade. However, we should not have any illusions about the tasks and challenges that lie ahead. The Islamic economic and financial system is still evolving. It is inevitable that it will face more resistance before it starts making the impact that it so much deserves.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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