TEN YEARS HENCE
Globalization and Finance: The future of Islamic finance as an ethical investment
FEBRUARY 22, 2008
On Feb. 22, 2008, Karen Hunt-Ahmed, assistant professor of Finance at DePaul University, presented "Globalization and Finance: The Future of Islamic Finance as an Ethical Investment," which contained the following excerpts:
- Islamic finance is a way of structuring financial transactions and organizing business practices that is based on Islamic law, called Shariah law. Anyone – not just Muslims – can participate in Islamic finance. And not all Muslims participate in Islamic finance. At present, about 20 percent of the financial activity in the Persian Gulf region is Islamic finance.
- The dramatic growth in Islamic finance began in the 1970s, primarily due to a rise in Arab nationalism that resulted from the 1967 Six-Day War between Israel and Egypt, and the oil crisis, which delivered a large influx of cash into the Arabian Gulf states. Arab businessmen decided to begin investing money according to Islamic principles, resulting in the formation of the first two Islamic banks, the Dubai Islamic Bank in Dubai, and the Islamic Development Bank in Saudi Arabia. There are now more than 500 Islamic financial institutions worldwide.
- Currently, Shariah-compliant assets total about $800 billion worldwide, four times higher than just eight years ago. This number is expected to triple by 2015. Private wealth in the Gulf region is estimated to be more than $1.5 trillion presently.
- Probably the most defining characteristic of an Islamic financial institution is the presence of a Shariah Standard Board, which is comprised of three Shariah scholars who deliver fatwahs, or religious declarations, to the institution and approve transactions. The board is an extremely important presence because it lends credibility to the institute.
- Islamic financing has a number of prohibitions: riba, or interest charged on the use of money; azzah, meaning gambling or speculation; and trade in haram, or forbidden products such as alcohol, pork and weapons. It also requires transactions to have a purpose of social good for the larger community.
- Islamic commercial law de-couples the idea of interest that is charged on a loan and deals more with ownership and profit and loss sharing. This necessarily means that all debt financing must be secured by assets to be Shariah compliant.
- With oil prices surging over the $100 per barrel mark, oil-rich countries in the Gulf Cooperation Council (GCC) trade bloc – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates– w ill have a lot of cash available for investing. Increasingly, these countries are requesting Islamic financial institutions in the United States and Europe. The GCC alone today holds more than $300 billion in Shariah-compliant assets; its GDP growth is expected to be at about 7.5 percent each year for the next decade.
- The United Kingdom is very active in Islamic finance; in fact, London is probably the leader outside of Dubai and Bahrain.
- Right now, there are only very basic ways of debt and equity financing, but Islamic finance has a great potential for innovation, particularly regarding the use of securitized bonds called sukuks and Takaful insurance systems. Some also are trying to develop Islamic hedge funds, although there is debate about whether these would be acceptable or appropriate. Dow Jones, Standard & Poor's and Moody's all have Islamic fund indices. There are about 100 Islamic mutual funds currently.
- Formal education in Islamic finance is limited at present, so most people desiring to work in the industry attend conferences to learn how it is conducted. Conferences have been offered in the United States only in the past couple of years.