JEDDAH: In the face of the current global financial meltdown, the Islamic financial industry should set up international investment banks to implement the mission of the Islamic economic system and present the world with a new vision and different methods of asset management and financial investment inventing products with value added economy, Ahmed Muhammed Ali, president of the Islamic Development Bank (IDB), said
“Such institutions are needed now more than anytime before,” Ali said opening the Forum on Global Financial Crisis and its Impact on the Islamic Financial Industry at the IDB headquarters here on Saturday.
The forum also called for activation of non-profit Islamic organizations such as the Zakat and Endowment Establishments to play their social and economic roles while conventional institutions are abstaining from their duties because of credit crisis and liquidity shortage.
“The Islamic establishments have the potential to take their primary roles of mitigating the economic upheavals by extending support to the repayment of people’s loans,” Ali said, adding, “This role makes it clear how the Islamic economy can succeed in bringing together profit and non-profit activities and guarantee balance and stability to the economic system.”
Ali also stressed the need for implementing professional standards in monitoring Islamic institutions and linking local and international systems for ensuring transparency.
The whole world is now in the grip of a financial crisis. In spite of billions of dollars of bailout and liquidity injections by a number of industrial countries the crisis is showing no signs of abating. Hence, Umer Chapra, research adviser at IDB, called for a new architecture that would help minimize the frequency and severity of such crises in the future. He said it is not possible to design a new architecture without first determining the primary cause of the crises. The generally recognized most important cause is excessive and imprudent lending by banks.
This raises the question of what makes it possible for banks to resort to such an unhealthy practice.
Chapra said there are three factors that make this possible: The inadequate market discipline in the financial system resulting from the absence of profit and loss sharing; the mind-boggling expansion in the size of derivatives, particularly credit default swaps; and the “too big to fail” concept which tends to give an assurance to big banks that the central bank will definitely come to their rescue and not allow them to fail.
“The false sense of immunity from losses introduces a fault line in the system. Banks do not, therefore, undertake a careful evaluation of the loan projects. This leads to an unhealthy expansion in the overall volume of credit, to excessive leverage, and to an unsustainable rise in asset prices, living beyond means, and speculative investment,” Chapra said. The forum also reviewed the impact of the financial crisis on the Takaful industry.
Chakib Abouzaid, chief executive officer of Takaful Re Ltd., said: “The current market crash demands international insurance companies to review their strategies and fall back to their core business of underwriting risks instead of investments and speculation. This would apparently lead to an underwriting discipline which would in turn raise the insurance rates and consequently make Takaful system more in demand in Muslim countries.”
He added, “As we look at the map of Takaful in general it is mostly outside the scope of the danger zone of the present crisis. About 140 Takaful companies in the Muslim countries, to a great extent, protect the customers from the consequences of the crisis. And therefore the current Takaful growth rate of 28 percent is likely to continue in future. My optimism is based on the fact that the Takaful companies are still young and have not grown to their full size and their ability to stand against challenges is strong.”
Abdel Rahman Taha, general manager of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), said: “The present crisis may prove to be a blessing for FDI (foreign direct investment) as funds may escape from the turbulence of the international financial markets seeking refuge in the relative security of long-term investments in developing countries and emerging markets.”