Dear Ali Sakti,
Financier Bernard Madoff’s alleged US$50 billion fraud raises the obvious question: How many more worms will emerge from the rapidly multiplying woes of the conventional financial system? The list of losers is headlined by stars of the system — HSBC, Banco Santander, Royal Bank of Scotland and Nomura.
One report said the affair has called into question the business model of hedge funds after many of the largest failed to spot warning signs. Some experts and Wall Street traders had raised concerns over the internal controls, business model and suspiciously consistent good performance of Madoff’s firm, but little attention was paid to this.
A prime concern is that most of the “victims” are also active in all other aspects of conventional finance, so are their decisions equally “faulty” in these areas as well? Is this why the financial crisis is so extensive?
Madoff was the darling of Wall Street. A former chairman of the Nasdaq stock exchange, the 70-year-old New Yorker ran one of the most exclusive, well-resourced and sought-after hedge funds in the world. He had claimed an “unblemished record of value, fair-dealing and high ethical standards”. He dealt with clients personally and only the wealthiest were allowed to join the rarefied atmosphere of his clique. He never outlined his trading methods or how he generated the healthy returns on his investors’ money. Anyone who queried him was shut out of his investors’ club.
For the best part of 50 years, he grew his business into one of the best-known, and most lucrative, investment vehicles in the world. In banking, reputation is everything. Little wonder, therefore, that hardly anyone questioned him. But the fact is that Madoff’s performance as an investment manager was too good to be true. That alone should have raised a red flag for the regulators. It was reported that his firm was inspected twice but nothing untoward was uncovered. How come?
This and other episodes show that conventional finance ought to adapt the practice in Islamic finance of having built-in parameters in terms of compulsory oversight (such as Shariah panels) and rigid limits on the scope of investments. The current weaker performance of the Islamic finance sector is only because of the fallout from the financial crisis in the conventional sector, such as a collapsing real estate market, squeeze on capital, a rapidly weakening real economy and dwindling world trade.
Even in these circumstances, things are looking up for Islamic finance. The Japanese government has amended financial regulations allowing bank subsidiaries to handle Islamic finance operations. This is in addition to its Asia Gateway Initiative, which includes the promotion of Islamic finance as a medium to develop the Asian bond market.
Singapore is striving to ride a new wave of interest in Islamic finance by global investors who have been badly burnt by the Western financial system. Recently, the republic has stepped up efforts to develop an Islamic finance industry by drawing on its existing strengths in wealth management, trade financing and capital markets.
Islamic finance can indeed bank on the silver lining in the dark clouds over conventional finance.
Our next issue will be on the 9th January 2009. Season’s greetings to everyone!