REALITIES OF ISLAMIC FINANCE

The Fifth World Islamic Economic Forum (WIEF) was held last week in Jakarta, Indonesia, (2-4 March). The global Islamic financing industry has over US$1 trillion in assets. But the member states of WIEF account for 19 percent of the world´s population and only 6 percent of its income.

The Forum took place alongside a deepening Western banking crisis and recession. The more globalized and Westernized your economy, the more likely you will be hit hard. Many countries in Africa, Latin America, and Central Asia do not have the underlying economic strength and financial reserves of the Middle East and Asia and will go down with the West, without support.

This is the crisis of capitalism many predicted, bigger than the Wall Street crash of 1929-1933. It will lead to a New International Economic Order and the restructuring of global economic institutions (UN, World Bank, International Monetary Fund, World Trade Organization), which means there is global dependence on key Muslim-led economies to supply liquidity and demand. The G20 become more crucial than the G7 and three Muslim-led countries already reach the first rank : Turkey, Indonesia and Saudi Arabia.

Delegates to the Fifth World Islamic Economic Forum in Jakarta saw this could be the opportunity Islamic banking and finance has been waiting for, but many doubted it was yet strong enough to meet challenge.

It was claimed Islamic finance offered more reliable non-debt-based alternatives to the Western banking and financial system, which has been brought down by high leverage, greed and poor enforcement of inadequate regulatory systems.

But participants and commentators at the Jakarta Forum warned that Islamic banking and finance was a young industry and had not yet been truly tried and tested.

First, Islamic finance is highly institutionalized and capitalized in a small number of rich countries with small populations, notably in Saudi Arabia, the Gulf states and Malaysia, whilst it is least institutionalized and capitalized in countries with large Muslim populations, confronting large-scale poverty, notably Bangladesh, Egypt, India, Indonesia, Nigeria and Pakistan.

Second, in large population poorer Muslim countries where it is least developed, Islamic banking and finance is over reliant on basic banking services based on fixed-rate systems, (more similar to conventional Western finance), often with greater emphasis on saving than lending. Too many clients do not access loans, especially the innovative and attractive variable rate profit and loss sharing loans.

Finally the World Islamic Economic Forum needs to address more forcefully the weakness of South-South co-operation between Arab, Muslim and Southern economies. When the Organization of Islamic Conference helped set up the World Islamic Economic Forum in 2004, intra-trade between its members was only 4 percent. This has risen in four years to 7 or 8% but the target is 25 percent by 2011.