Bank Scandals Fuel Interest in Islamic Finance

Bank Scandals Fuel Interest in Islamic Finance

Recent bank scandals have fueled interest in Islamic banking 1 because it forbids interest or fees on loans.

Questions about ethics 2 in global finance could benefit the Islamic banking sector 3, experts say.

Supporters claim that Islamic finance is more ethical 4 than traditional finance. Islamic finance follows Sharia law and does not allow interest or fees for loans of money. Banks and businesses must be cleared to make sure they comply with Sharia law.

Raja Mohamad is secretary of the Gulf 5 Asia Sharia Compliant 6 Investment Association. 

“We have a very sweet spot, when conventional banking at the moment is suffering from scandals,” he said. He spoke 7 at a conference on Islamic finance in Singapore.

“We’re not selling Islam here. We’re selling accountability -- transparent 8, real economic activity,” he said.

Another factor driving Islamic finance globally is the rise of the Association of Southeast Asian Nations. ASEAN is a trading group of 10 nations in Southeast Asia with 635 million people.

Forty percent of these people are Muslim, said Awang Adek Hussin, Malaysian Ambassador to the U.S. He spoke at a conference in Washington, DC. Malaysia is chair of ASEAN this year. 

ASEAN is the seventh largest economy in the world, generating $2.53 trillion in 2014, said Ambassador Hussin. By 2050, the OECD predicts it will be the fourth largest economy in the world.

The OECD is the Organization for Economic Co-operation and Development. It helps governments deal with economic and social issues in a global economy.   

“Demand and growth for Islamic finance in ASEAN countries can only be on the increase,” said Ambassador Hussin. This year, ASEAN is integrating the economies of its member countries to spur trade and investment. That will also help spread Islamic finance, he added.

Islamic finance has its critics. Clement 9 Henry is visiting research professor at National University of Singapore. He said Islamic finance has “unfortunate connotations” that might be associated with “political Islam, possibly terrorism.”

Henry said his research, however, has found that people working in Islamic finance are not driven by politics.

The biggest challenge for Islamic finance is the ban on investors 10 collecting interest on loans. So Islamic banks have devised alternative structures. This could include financing a business or one of its projects, and then sharing the profit or loss.

Such techniques could improve financial ethics, say experts. Businesses must open their books so Islamic banks can verify their performance. This provides transparency. Businesses cannot downplay profits and give banks a smaller cut.

In addition, Islamic finance is viewed as being more realistic about making money. Sharia financing is tied to real economic activity. Other financing is based on abstract financial models.

Suhaimi Zainul-Abidin is founding member of the Gulf Asia Sharia Compliant Investments Association. He spoke at the conference in Singapore.

"You can't make money without economic activity, something that you're going to do that creates that justification 11 for profit," he said.  

“That’s a really good safeguard for [the] financial industry because you’re not creating money out of thin air, right?,” he said. “There’s always going to be a real link, and that really, really helps.”

Ghiyath Nakshbendi is an international business professor at American University in Washington, DC. Islamic finance provides equal treatment for men and women under Sharia law, he said. 

For example, when a man and a woman get married, Sharia law allows her to own property. Sharia law says she can make her own income and keep her salary, he said. 

But observers warn that Islamic finance is headed in a dangerous direction. Bankers are coming up with increasingly complex financial products.

“Really, most of these products are looking to mirror conventional finance,” said Habib Ullah, a partner for banking and finance in the Middle East at the law firm Taylor Wessing.

Islamic banks may go too far in copying conventional finance, warn experts. They may take the same risks and be Islamic in name only.     

Words in This Story

scandals – n. an occurrence in which people are shocked and upset because of behavior that is morally or legally wrong

ethics – n. rules of behavior based on ideas about what is morally good and bad

accountability- n.  required to be responsible for something

transparent – adj. honest and open : not secretive

integrating – v. to make (something) a part of another larger thing 

spur – v.  to cause (something) to happen or to happen more quickly

connotations – n. an idea or quality that a word makes you think about in addition to its meaning