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Wednesday, 3 June 2009

Could Islamic Finance Model Have Prevented Banking Collapse?

In a world now in financial crisis, thought to be brought about by banking problems, a Russian writer states the world may have been better off if it had followed an Islamic model. But is that true and what might Islam teach the West about money?
The report maintains one of the reasons why Islamic countries have not been impacted in quite the same way as the West in terms of its banking industry has to do with the fact that it bans the interest rate. In the West, like the United Kingdom, Canada, France and the United States as examples, the interest rate is the foundation for the development of wealth. The writer goes on to say it is also the source of trouble in the world of money.

A financial system with an interest collection ban and complicated financial tools is said to have helped Islamic countries avoid the huge losses in default on loans. They are not, however, immune from the financial collapses in other countries due to the interactions in the international business world and the oil and gas markets.

One of the unique features of the Islamic system is an economy that isn't based on getting as much profit as possible. Furthermore, it excludes certain forms of financial speculations. Equality is an aspect of the religion that emphasizes a sharing of resources under a banner that underlines needs of the poor as an obligation.

I spoke with Dr. Khurshid Khan, one of the leaders in the Islamic community in Shreveport, Louisiana, about these matters. He and I talked about the financial systems in Islam. He prefaced his remarks by stating “there are those who do not practice Islam as they should, both in the social and in the financial areas. I am opposed to extreme thinking, and anyone who knows me, knows that is true.” Dr. Khan is originally from Pakistan, but has lived most of his life in the United States where he served more than 20 years as an officer in the military. He declares that he is therefore not biased against Western ways.

Dr. Khan explained the monetary system under Islam as having some key features that are helpful in preventing financial problems. He declared “Islam says that an individual should be prepared for the future. In other words there is an emphasis on saving. Islam says also that an individual should make personal policies and take responsibility so he or she is not poor. Banks are established in a way so that there are enough resources to cover financial responsibilities. One of the most important ideas of Islam is the idea that if you can't afford something you shouldn't get it. That would prevent someone with a limited income from purchasing a house outside that person’s income.”

Khan says that as for interest rates, there are various way so looking at these issue in Islam as opposed to saying the religion simply bans it. Instead, he explains, they have what is called profit sharing, which allows people to have a certain portion of the money deposits invested. This allows depositors then to share in the profits made by banks.

But will the West follow an Islamic model or will middle eastern countries follow the West? A narrative of Egypt's banking system explains how Egypt has undergone major reforms since the 1990s and now is developing a more liberalized and modernized system, supervised and regulated according to internationally accepted standards. These are some of the changes that have taken place or are in process:-

1. Introduction of laws giving more independence to the CBE, and an electronic signature law
2. Regulation of connected and related party lending
3. Management reforms of the four public sector banks, making clear the responsibilities of managers and boards of directors
4. Development of an automated credit risk information system (CRIS), from which participants would be able to gain online access to clients' credit profiles.

Dealing with mortgages remains a struggle, however, in Egypt, although a new mortgage law is being examined to open up markets. Perhaps, however, Egypt has learned a lesson from the West and will continue the practice of conservative savings and credit when these markets open.

(Digital Journal/by Carol Forsloff)

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