Bellerbys Economics - Mr Stephenson

Tuesday, March 11, 2008

Islamic Finance May Save the World

All economics students will know by now that the credit crunch in the US last summer has created a great meltdown in the world's financial markets - a meltdown caused by too much easy credit being issued at high interest rates and then that debt being packaged and repackaged by various financial instruments and sold from bank-to-bank at increasing profit margins around the western world - a house of international finance built on spreading quicksand.

It's the USA that has suffered the most, although other countries have also suffered such as the UK with the Northern Rock disaster. Observing the economic wreckage of the US, many countries have taken steps to protect themselves from a crashing dollar - not the least of which are the Arabic oil nations who met in Bahrain in February, reaching the decision to sell more of their oil for more stable Euros.

The Arab oil nations have come out of the situation in the best possible light. Firstly, oil prices continue to rise as demand increases and supply remains fixed (now $107 a barrel) so their coffers are full. In fact, they have about one trillion dollars to play with (that's twelve zeros). Also, Islamic law has prevented the sovereign wealth funds of the Arabian peninsula from investing in the kinds of financial chicanery that the western world indulges in. The concept of sukuk says that investment must be transparent (roads, railways, products etc) and therefore hedge funds, equity houses and so on find it very difficult to attract money from the gulf. In addition, by the way, the concept of haram prevents Islamic firms from investing in alcohol, tobacco, arms trading, pornography and gambling - which can also be applied to hedge funds. Islamic funds can only invest in things that provide social benefit.

The concepts of mudaraba and musharaka promote the idea of investment leading to mutual ownership and cooperation. So, an Islamic bank will invest in a business in order to gain a share of that business rather than taking interest on a loan. Also, Islamic investment is more concerned with functionality than strict profit-and-loss in a financial sense. So, an Islamic company would see nothing strange in building a college in order for a British educational company to come and use it to educate the citizens in their country. Money is seen only as a tool to an end, not an end in itself.

And now, the big investment funds such as DIC in Dubai are looking for such investments in the west - such an influx of money may provide the stability that the world economy needs in order to see it through the current crisis.


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