Umer Chapra, a well-known Saudi economist and winner of the King Faisal International Prize for Islamic studies, has called upon Muslim countries to rally behind the Islamic financial system in order to fight poverty and strengthen financial stability in their countries.
Speaking to Arab News, Chapra said the Islamic financial system has now won international acceptance with the opening of many Islamic banks and financial institutions in non-Muslim countries including the United States, Britain, France, Italy, Australia and Singapore.
He said some Muslim countries were still reluctant in applying Islamic finance because of hesitation about the ultimate outcome. “The system is still new for this part of the world. Some fear that it would reduce the pace of economic growth and cause problems to the financial system,” he said.
However, Chapra pointed out that central banks in many Muslim countries have displayed enthusiasm to implement the system. Chapra, who has written 16 books and presented several research papers on Islamic banking and finance at international seminars and conferences, is optimistic about the system’s future.
He said Western economists have commended the solutions presented by the Islamic financial system in solving the global crisis. A leading economist in the US described Chapra’s anatomy of the crisis as the best he had seen.
Spelling out the solutions for the global crisis, Chapra said finance should be given for real goods and services and not for imaginary ones. “The proportion of equity in total finance needs to be increased while the proportion of debt reduced. The leverage should also be controlled so that credit could meet the ability of borrowers to repay,” he elaborated.
Islam prevents the sale of debts, which is one of the main causes of the present crisis, Chapra said. “When you sell debt you are actually passing the risk to the new purchaser. So you will have no incentive to evaluate the debt proposal. This leads to a rapid expansion of debts,” he said.
Chapra estimated the derivatives market at more than $600 trillion, 12 times more than the size of the world economy. “No wonder George Soros described derivatives as hydrogen bombs while Warren Buffett called them financial weapons of mass destruction,” he said.
The Saudi economist refuted suggestions that Japan was backing down from its plan to introduce Islamic finance. “After the boom and bust in the Japanese stock market in the 1990s, a great deal of effort has been made to reform the country’s financial system. There has been tremendous desire among the Japanese to know more about the Islamic system. They invited experts to explain to them how Islamic finance works. They have shown interest in applying certain aspects of the Islamic system in order to mitigate the effect of the global crisis.”
Chapra added: “Some of their bankers and officials have come to Saudi Arabia, to the Islamic Development Bank (IDB) and the Islamic Research and Training Institute (IRTI) in order to know more about Islamic finance. They have taken along with them a number of publications on the subject. This shows there is tremendous interest among the Japanese about Islamic finance.”
Asked why Japan was not introducing Islamic finance despite the change in the country’s banking law to accommodate the system, he said: “It will take time for countries to introduce a new system. Things will go slowly in the beginning but gradually achieve momentum.”
He said Islamic banks were not directly affected by the global crisis, as they were not indulged in any speculative business. “They have been giving finance for real goods and services,” he said. However, he pointed out that Islamic banks and financial institutions were indirectly affected as a result of the economic downturn. “All banks are intertwined. The businesses of some of their clients have gone down, and some clients have suffered losses and are unable to repay their loans. Such things will affect even genuine Islamic banks.”
Chapra, who is presently working as a research adviser at IRTI, spoke about the growing global interest in Islamic finance. “A large number of universities, even in the Western world, have started teaching the subject. Harvard Law School in the US and Durham University in the UK are among them. London and Singapore are competing with one another to become centers of Islamic finance. India is also making preparations to introduce the system.”
