Impact of Islamic Banking on International Lending

In mid-November of 2009, The Economist wrote an article dealing with France’s sudden interest in Islamic banking. The irony however of such an article is that France has been very intolerant of Muslim dress in public places in recent years as the country holds dearly to its secularist identity. Islamic banking is almost the term du jour for banks and financiers alike these days, especially since Islamic banks hold billions of dollars in liquid assets -and all the while the world’s banks are suffering from an acutely arduous financial crisis.

Moin Siddiqi estimated in the “The Islamic Dimension” that the Islamic Banking sector has expanded at a brisk pace of between 15% and 22% annually in the past decade. In fact, there are currently (as of 2006) 250 Islamic mutual funds with $300bm worth of assts under management and 300IFIs holding over $250bn deposits. Furthermore, $200bn in assets are managed by dedicated Muslim ‘windows’ or subsidiaries of conventional banks.

Based on the size of that sector many international funding and/or investing firms have made it a policy to not become involved in such investments. So the question is: Why?

There are two big arguments against Islamic banking: first, that it is interest-based in the end, or well-hidden; and secondly, that it has acted for decades as a front for funding terrorist organizations. Interest payments are how lending institutions make their money and not being able to collect interest due to religious beliefs or questioning the end use of that interest is an extra concern for investors to account for in the risk of the investment.

It has been written that “the money considered as interest in a typical bank transaction is instead designed into the contract agreement in another way. Some Muslims consider Islamic banks to be engaging in legal trickery to hide the fact that they charge and pay interest. Most economic analysts would probably agree”. (1)

This is certainly alluring to financial institutions of all kinds because of such legal exposure they face. Britain has been at the forefront of ‘narrowing of the gap’ which would make it easier for financial institutions outside the Muslim world to easily fund loans to such groups.

But others, such as France, have to take a real hard look at their own set of values and see if Islamic banking products and ‘accommodating of laws’ is reconcilable with that. France has eliminated the tax obstacles and improved the legal framework, certainly, but it has not prevented protests and serious public debate about the issue itself. Middle Eastern governments may now feel more empowered that they can rely on their own capabilities rather than borrowing Western banking systems. At the same time, it highlights the need for standardization and regulation of operations in any consulting firm, especially where scholar-review is concerned.

Islamic banking has been making inroads into Western markets. For instance, we at Capital Corp Merchant Banking have seen applications based on such funding terms increase almost two-fold. By that same token, there has even been non-Muslim demand for Islamic financing products as it allows a greater range of investment products, especially for portfolio management groups. Such personal examples are large requests for “interest free” loans.

But without education on cultural gaps and indeed the gaps between the Islamic and Western banking structures for all consulting firms, a constructive dialogue cannot start. In fact, without education (on both sides), Huntington’s Clash of Civilizations theory is all but inevitable.

And yet, as the Muslim world asserts itself economically and that the capitalist West sees the benefit of this new exotic form of banking, a hybrid international economic banking model, juxtaposing the two, may yet dawn. So, overall my advice would be to not become “stuck” in old ways of doing business and allow yourself to better understand how mutually beneficial relationships can come to fruition from our Islamic neighbors.

    (1) “Usury: The Principle Behind Islamic…”