Honesty, integrity and transparency are the keys to the progress of Islamic finance, says Ahmed Balwafi, a researcher at the Islamic Economics Research Center (IERC) of King Abdulaziz University in Jeddah. "Don't hide anything from public. If you hide something today, it will be discovered tomorrow so be transparent and open. This will strengthen confidence in Islamic banking," Balwafi told Islamic financial institutions.
Speaking to Arab News after attending a seminar on asset management, he said Islamic finance had a bright future in the aftermath of the global financial crisis if it followed the right methodology and offered attractive products.
He said the seminar, which was organized by IERC, discussed the basics of asset management in relation to the current crisis. Speakers pointed out that the crisis had been caused by banking malpractice in asset management.
"Banks and other financial institutions should follow the necessary regulations and conditions such as capital adequacy and leverage rate ratio in order to minimize default and risk," one speaker said.
Balwafi said: "We cannot blame the executives of banks and insurance companies alone for the global crisis. The borrowers should also take part of the blame for their irrational behavior." He said the crisis affected not only subprime borrowers but also the real economy of the US.
Balwafi would not say that Islamic finance could solve the whole problem created by the global crisis. "But it can lessen the severity of the impact.” Islamic finance prohibits interest and short sales, which are the main reasons that triggered the crisis.
Islamic finance can contribute considerably to lessening the present crisis by relating finance to real economic activity and preventing short sales and gambling. "We believe that the entire Islamic finance system is based on the teachings of God."
However, Balwafi said the economic crisis posed a big challenge to Islamic banks and financial institutions. "Islamic banks should come out with innovative products without mimicking Western or conventional banks," he said and urged Muslim economists, Islamic finance practitioners at banks and Islamic scholars who issue rulings to work together to strengthen the system.
"They should make policies that are workable and applicable," he said.
Islamic finance was less affected by the crisis. "Although no one is spared in this financial tsunami, most Gulf banks were saved because they did not deal with derivatives and toxic assets," he explained.
Balwafi said the post-crisis asset management would be different from the previous one as financial institutions would be more cautious while giving loans. "The present financial system should be overhauled. The way risk is calculated should be changed and new methods should be adopted for risk management."
He said Islamic finance offered many opportunities for Muslims as well as non-Muslims. "Many non-Muslims in Britain, Singapore and Malaysia are now beneficiaries of Islamic banking and finance," he said. There are good prospects for introducing interest-free Islamic banking into India, especially to provide microfinance for small-scale projects.
Balwafi said Muslim countries should take the lead in implementing Islamic finance. "It's high time for them to introduce this system in order to strengthen their economies and protect their interests."
The credit crisis has given a potential momentum to Islamic finance, said Nagaoka Shinsuke, who has obtained a doctorate in Islamic economics from Japan's Kyoto University. Shinsuke developed an interest in Islamic economics being a critique of capitalism.
"Mudaraba and Musharaka are ideal instruments for Islamic finance," Shinsuke told Arab News. "The main feature of Islamic finance is that it is Shariah-based and most Muslims are happy dealing with it," he said.
He said Islamic financial products such as Musharaka and mudaraba could achieve social development, by providing microfinance. "It not only gives profit but also promotes social development. This is a significant feature," he added.
Last December, he said, the Japanese government amended the country's banking law to accommodate Islamic finance. "But so far no bank has started providing the service in Japan," he pointed out.
Abdullah Turkistani, director of IERC, presided over the seminar entitled "Asset Management with an Islamic Perspective." Andrew Broadley of Alkhabeer Company, Sami Al-Suwailem, deputy director of Islamic Research and Training Institute, Toby Birch of an asset management company in Britain and Ignacio de la Torre of IE University in Spain, also made presentations.
Turkistani said his center had published a book in English and Arabic on The Impact of Global Financial Crisis with an Islamic Perspective. "We have also conducted a number of scientific meetings and dialogue on the subject while our staff members have attended international seminars and conferences on the subject that were held in Britain, Spain, Morocco, Algeria and France."
He said the center was currently working on preparing a document on global financial crisis with the support of other institutions including the Islamic Development Bank. "It will be published in different languages."
