LONDON: As the world’s eyes turn to London over the next few days to see whether the G-20 leaders at their April 2 summit can indeed come up with measures to arrest the impact of the global financial crisis and the inevitable march into a pernicious recession, there have been growing calls for a greater role and involvement of Islamic finance in the global financial system and on the G-20 agenda. We have seen unemployment spiraling worldwide, credit being squeezed to both companies and households, and more people sliding into poverty.
In London following a meeting with the Lord Mayor of the City of London, Ian Luder, on Thursday, Ahmed Mohamed Ali, the President of the Islamic Development Bank (IDB) threw down the gauntlet to British Prime Minister Gordon Brown, stressing that should the UK Treasury decide to reverse its decision to postpone a UK debut sovereign Sukuk (Islamic bond) issuance, then the multilateral development bank of the Muslim world, which is flush with liquidity including callable capital of about $17 billion, would seriously consider underwriting such an issuance.
“We will be very happy to consider participation in such an issuance should the UK Treasury decide to do so. It is up to the UK authorities to approach the IDB and other Islamic financial organizations of course,” confirmed Ali.
The IDB president reiterated that it is time that the world considered mainstreaming Islamic financial services by according to institutions such as the IDB and Kuala Lumpur-based Islamic Financial Services Board (IFSB) “observer status” representation within the framework of the G-20 and the expanded Financial Stability Forum of the International Monetary fund (IMF). “The opportunities offered by Islamic finance in promoting global financial stability and financial inclusion are worth assessment by the leadership of the G-20 countries,” he added.
The G-20 summit will see the participation of three IDB-member countries in Saudi Arabia, Indonesia and Turkey. Indeed at the 5th World Islamic Economic Forum (WIEF) in Jakarata on March 2, Muslim leaders including Indonesian President Susilo Bambang Yudhoyono and Malaysian Prime Minister Abdullah Badawi, called on the Muslim world to leverage the global financial crisis by turning “adversity into opportunity.”
“The world is beginning to appreciate the need for alternative arrangements to the current international financial system. At the same time, Islamic finance is gaining credibility as an alternative,” said Badawi.
But he warned that lack of harmonization and product innovation could stifle the forward march of Islamic finance. “As long as our markets remain divided by different jurisdictions and interpretations of Shariah standards, Islamic finance is unlikely ever to grow beyond Muslim countries,” he said. Similarly, his host, Indonesian President Yudhoyono argued that “Islamic banking should now be able to take a leading position in the banking world. Islamic banks have been much less affected by the financial meltdown than conventional banks — for the obvious reason that Shariah banks do not indulge in investing toxic assets and leveraged funds. They are geared to supporting the real economy.”
But beyond the rhetoric, can Islamic finance play the role that its proponents wish, especially in a globalized world? In reality the sector at best is a niche market with a current estimated size of about $2.5 trillion (if one includes the $1.2 trillion commodity Murabaha market), with a potential of rising to $4 trillion over the next few years. GCC (Gulf Cooperation Council) private liquidity alone is estimated at $1.6 trillion.
If, however, the Muslim sovereign wealth funds (SWFs) are included and they turn their attention to Islamic finance instead of recapitalizing conventional banks, then the impact could be potentially important.
Currently, the only platform through which Islamic finance has a voice is the Sub-Group 4 of the G-20 structure which deals with reforming the international financial structures. Last year the IDB set up its own Islamic Finance & Global Financial Stability Task Force, headed by Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, the central bank, to report on the impact of the global financial crisis on the Islamic financial services industry and on the economies of IDB member countries. The task force is also compiling a report on the intrinsic strengths of Islamic financial services and its potential role in contributing to global financial stability and system, and this will be presented to the G-20 leaders and to the Financial Stability Forum for consideration and in support of getting the Islamic finance stakeholders a representation at the top table.
However, Zeti is also wary of this cross-system and globalized cooperation has to be navigated carefully because of the possible contagion risks. The governor recently called on Muslim and other countries to build linkages between them so as to strengthen the infrastructure and crisis management capabilities of the global Islamic finance industry.
“The global financial crisis has highlighted several structural weaknesses and imbalances in the international financial system. While Islamic finance is not insulated from the effects of the current environment, the Shariah principles and values that underlie Islamic finance provide an important underlying foundation. But, as it becomes part of the financial globalization process, Islamic finance has however become increasingly exposed to the systemic implications of external developments...its potential for sustaining financial stability and.. how robust is the industry to external shocks,” she added.
