Dear Ali Sakti,
One school of thought is that Islamic finance should primarily be for the 1.6 billion Muslims. Islamic finance, it has been said, should be regarded as an ambassador of Muslim modernization and a vehicle for economic and social development, in line with the aspirations of the Organization of Islamic Conference and the World Islamic Economic Forum. That’s an idealistic prospect.
However, in previous decades, when Islamic finance was largely confined to the Muslim community, it had made little contribution to their development; most of the projects used conventional financing. Even much of the wealth of the Muslims was in the conventional financial centers in the west.
It was only when the concept and practice permeated to the rest of society that Islamic finance really began to gain ground. This confirms the contention that diverse beliefs and cultures do not hinder the Islamic finance industry around the world. It also shows, yet again, that clients, regardless of their beliefs or origins, tend to deal with the bank — conventional or Islamic — that they trust and which practices professionalism.
Developments over recent years is evidence that globalization is the best, and perhaps only, direction for Shariah compliant financial practices. And for Islamic finance to grow, it needs four strong pillars, according to Muliaman D Hadad, deputy governor of Indonesia’s central bank. These are a broad individual customer base including on-lending to small lenders; expansion of corporate lending in high growth and labor-intensive sectors; private sector bonds for company expansion and small infrastructure; and large volume Sukuk to finance state budget deficits and large infrastructure.
Indeed, Islamic finance must break out of its over-reliance on the retail market and make more serious headway in taking on board large corporations as clients if it is to really make its mark on the global financial scene. Muliaman also noted that to move in this direction would require large increases in capital as well as capacity to handle clients, corporates, public-private partnerships and projects.
Conventional banking has several posers to ponder. How was a debt of US$11 trillion in subprime mortgages created when there is only US$1.3 trillion of currency notes available? In the UK, 97% of all the money supply is in the form of debt created as book entries by the banking system. Aberrations in the conventional financial system prompt the question: Shouldn’t the entry of Islamic banking be welcomed with open arms, as it is completely asset backed and shares profit as well as loss?
This is where perception management and promotional work kick in. The common ground that Islamic finance shares with other forms of ethical and religion-based finance should be made widely known. Innovation shouldn’t be focused only on products but also on forms of marketing that shatter the misperceptions about Islamic finance. The fact that a huge number of non-Muslims are satisfied clients must be well publicized. It’s not enough to keep saying over and over again how wonderful Islamic finance is — it must be shown to work, and work for all.