The earliest human writing, a finance expert told me the other night, was not about love or any epic social upheaval. Instead it was meant to serve as a record, literally writ in stone, of a debt.
Nataliya Mylenko, the Ukrainian senior financial sector specialist of the World Bank Group in the Philippines, swears she wasn’t making up the story about the prehistoric writing found in Mesopotamia.
If writing was invented originally as an IOU, Islamic finance, which is asset-based rather than debt-based and prohibits debt-interest schemes, is going against millennia of tradition and human nature that have shaped conventional international banking and finance.
Islamic finance, which injects ethical elements and spreads risks, also seems to go against the forces that drive the free market: fear and greed. (This was what we were taught in university, and I think it’s an accurate appreciation of the realities of human nature and the global economy.)
But there are people and not only Muslims who want to inject ethics and social responsibility into their financial transactions. They like the prohibition in Islamic finance on investing in criminal activities.
For these people, the Philippine government is preparing to provide a legal framework for Islamic financing.
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The other day, a House panel crafting an Islamic Finance Law, whose members include several of those deliberating on the proposed Bangsamoro Basic Law, were briefed on the intricacies of Islamic finance by the World Bank Group’s expert on the matter, Zamir Iqbal, and Mylenko.
Iqbal (no relation to our homegrown Islamic rebel) heads the World Bank Global Center for Islamic Finance, which was launched two years ago in Istanbul with support from the Turkish government.
The center was set up to provide technical assistance and advice as well as pursue the potentials of Islamic finance in eliminating extreme poverty.
Islamic finance can provide micro-lending facilities in the Autonomous Region in Muslim Mindanao, where banks currently accept deposits for savings and related accounts but do not provide loans.
The government, Mylenko told me, began discussing Islamic finance with the World Bank about three years ago around the same time that the peace process with the Moro Islamic Liberation Front was revived following that meeting in Tokyo between President Aquino and MILF chieftain Al-Haj Murad Ibrahim.
Mylenko, however, prefers to delink the crafting of the Islamic Finance Law with the peace process, emphasizing that its impact is national and can be felt only in the medium-term.
Iqbal shares the view. “Think of it not as a religious thing but structural,” he told me the other night. “Think of it as ethical finance.”
He believes Islamic finance can be more stable and resistant to shocks compared with conventional banking. There are no unsecured debts so leverage is discouraged.
Secular Turkey does not call the system Islamic finance but “participatory banking.” Morocco calls it “partnership finance.”
The Philippines can find Islamic finance useful as the country becomes part of the ASEAN Economic Community by the end of the year. At this point, Islamic finance is entrenched only in Malaysia, Indonesia and Brunei, with Singapore and Thailand exploring greater possibilities.
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Islam prohibits charging interest. The perception that Islamic finance frowns on profiting from someone’s debt and on excessive profits in general has created the impression that Islamic finance can stunt economic growth. “Excessive” is highly subjective there are people who believe one can never be too rich, too thin or too botoxed. “Moral market behavior” can be a spooky oxymoron in conventional markets.
This is disputed by experts in Islamic finance, who say that in aiming for profitability, Islam encourages investment, redistribution of wealth and risk sharing, all of which help stabilize economies.
Islamic financial assets have been growing steadily for the past two decades by 15 to 20 percent a year, with the value now placed at $1.3 trillion.
“There’s excess liquidity in the Middle East and they’re looking for places to invest,” Iqbal told me.
The World Bank sees potential in Islamic financing for greater Philippine access to halal markets, and in raising funds for badly needed infrastructure through the issuance of “sukuk” a financial instrument closest to bonds, compliant with sharia law.
Iqbal noted that when the UK announced it was issuing 200 million pounds worth of Islamic bonds, it received orders for 5.6 billion pounds. Hong Kong, Luxembourg, Senegal and South Africa followed with their own sukuk.
The World Bank-linked International Finance Facility for Immunization Co. has launched a $500-million, three-year sukuk. Malaysia plans to issue a sukuk of up to a billion ringgit (about $280 million) from its sovereign wealth fund to finance schools. Mexico is mulling an inaugural sukuk, Japan is considering allowing banks to provide Islamic financial products, and Russian lenders may tap Islamic funding sources.
Yesterday, Iqbal and Mylenko talked to Philippine bankers about the Islamic system. The government is initially eyeing the opening of “Islamic windows” in conventional banks already operating in the country, even as major new players want to come in.
There are details to be worked out, particularly in taxation of Islamic financing assets as well as insurance coverage. There is also the requirement that a group of sharia experts must vet “socially responsible” projects for financing. But the World Bank thinks obstacles are not insurmountable.
Even G20 members are interested, Iqbal said, with the grouping looking at the issue not as a religious scheme but as a more stable, asset-based banking system that can be used to boost infrastructure and support small and medium enterprises.
“It’s a good business proposition,” Iqbal said.
Ultimately, the goal is easing poverty. Perhaps there is an ethical way of mobilizing financial resources.