Islamic Banking: An Innovative Approach to Prevent Crises?

Interest: of the devil. Speculation: a sin. Exorbitant profits: amoral. It sounds like a bailout package at the height of the crisis. In reality these are the ground rules of Islamic banking, based on Sharia law and stemming from the Quran and the traditions of the Prophet Mohammad in the 7th century but offering just about any banking solution of conventional banking, from currency swaps to structured products. What can Islam teach us at a time of greed, growth at all costs, and white-collar financial crime? Is Islamic banking viable for the 21st century? or is it an irrelevant, dogmatic ideology not suited to today's needs? The answer is not trivial: the sector is estimated at $400 billion to $1 trillion that analysts say is growing at 25% annually. 

Last night I sat in the lounge at Bangkok airport late at night, en route from Sydney to Zurich, surrounded by countless other passengers, many of whom from countries like Indonesia, Malaysia, the Gulf, Singapore.

As I sat in their midst, working on a strategy project for a client at a Swiss global bank, I couldn't help thinking:about Islamic finance.

Let me be clear: I am not, by any stretch of the imagination, a banking expert or even a banker (although my mother would have liked that when I was younger -- at least until the world financial crisis hit of 2008).

But as both a consultant to financial services companies and as a banking client, I ask myself: what can we learn from Islamic banking? Does this time-honored approach, in its modern guise, hold the promise of innovation?

I am not the first one to ask this question (see the CNBC video below). Especially since the 2008 economic crisis, economists have asked themselves if Islamic banking might be less crisis-prone than Western banking.



There are conventional financial solutions that don't work under Islamic law, for example a mortgage for buying a house. Mortgages entirely permissible under Swiss law are a precarious matter under islamic law.

But other products are entirely suited for the market. Sukuks, for example, are Islamic bonds of sorts that are in high demand by investors, corporations and governments alike. Sukuks are useful if you are an airline that wants to build its fleet, or a gulf state in need of new infrastructure.

In 2002 the first sukuk was issued in Malaysia. By last year sukuks had reached a volume of $100 billion.

Another product are Murabahas, which come into play if a company needs money for new machinery, say, and cannot get the investment directly from a bank because Sharia stipulates that any money transaction has to b be tied to real goods.

So the bank buys the machinery instead and then sells it to the company at a markup mutually agreed upon in advance. Finally the customer pays that fixed price in installments.

To be clear, the total estimated value of all assets under management by Islamic banks is $1.7 trillion, only a small fraction of all assets under management worldwide. But they have doubled over the last 5 years.

Fares Mourad has seen the ups and downs of Islamic finance in Switzerland, that's why bankers call him "Mr. Islamic Banking Switzerland." He began in 1999 to launch Islamic funds at UBS, then changed to Credit Suisse to introduce Islamic portfolio management, then he built Islamic banking at Bank Sarasin, now J. Safra Sarasin. Now Mourad is indepeendent.

"Both worlds can benefit from each other," Mourad says.to the Neue Zürcher Zeitung. He says the real difference between Western and Islamic banking is not the interest, vs. no interest which he calls just an instrument. To him the central feature is social justice.

For example, "If someone cannot pay back a loan on time, his debt burden does not grow further -- in contrast to conventional loans."

In those cases the bank is protected by a sort of punitive interest that has been fixed in advance. But the bank cannot use that money itself. Instead it goes to charity.

What do you say? Is Islamic banking relevant to today's financial services and products? Is it less prone to crisis than other banking systems? I look forward to reading you on my blog:http://thomaszweifel.blogspot.com/.

Dr. Thomas D. Zweifel is a strategy & performance expert and coach for leaders of Global 1000 companies. His book The Rabbi and the CEO (with Aaron L. Raskin), a finalist for the National Jewish Book Award and the Foreword Book Award, explores business strategies for 21st-century leaders based on the Ten Commandments.