Dear Ali Sakti,
Backing for greater use of Islamic finance to overcome the present financial woes has come from an unexpected source — the Vatican. An article in its newspaper says: “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service.”
Sukuk could be used to even fund the “car industry or the next Olympic Games in London”, it says. The newspaper had previously criticized the free market model for having “grown too much and badly in the past two decades”. The Vatican’s stand is that “the great religions have always had a common attention to the human dimension of the economy”.
This piece of news came just as the World Islamic Economic Forum (WIEF) wrapped up its meeting in Indonesia with a call for Islamic finance and banking to be developed as an alternative to the Wall Street model of doing business. The gathering of more than 1,550 delegates from 38 countries urged the Islamic Development Bank to take the lead in promoting Islamic finance.
Malaysian prime minister Abdullah Ahmad Badawi said the Islamic financial system’s ability to remain largely unscathed by the difficulties affecting the conventional international financial system is testament to its integrity and validity, and he expects to see Islamic finance play a more prominent role in the international financial system.
Hong Kong Monetary Authority chief executive Joseph Yam echoed Abdullah’s view on Islamic finance, saying it is being increasingly recognized as an alternative channel of financial intermediation not only within Islamic communities. “Islamic finance encourages business activities and generates legitimate profits and rests on principles of fairness, shared risk and ethical practices. There is much for us all to reflect on when considering how badly things have gone wrong recently in what might be called traditional finance.”
Efforts are indeed being stepped up to “internationalize” Islamic finance. Malaysia’s central bank recently signed a memorandum of understanding (MoU) with UK Trade and Investment to promote the mutual development of Islamic finance and business linkages. Islamic financial institutions in Malaysia are being encouraged to leverage on this MoU platform to build strategic partnerships with their counterparts to develop new value-added activities and to expand the market.
But even as it spreads its wings, Islamic finance should embrace the values of justice and fairness that benefit society and the system, says Bank Negara Malaysia governor Zeti Akhtar Aziz. “It is important for Islamic finance to transcend beyond just the pursuit of growth and monetary performance and emphasize ethical market conduct practices,” she stresses. These values, she points out, are similar to those found in ethical finance and socially responsible investment.
The close link between financial and productive flows shields the Islamic financial system from excessive leveraging, imprudent risk taking and speculative activities. This aspect ought to grab the attention of policy makers as they attempt to fashion a new and improved international financial system.
One of the essentials for Islamic finance to qualify is a well-functioning liquidity management framework in the form of a well-developed money market. Malaysia claims to have an efficient Islamic money market and now wants it to take on an international dimension and to allow for greater participation from a wider international financial community in this market.