global recession – spotlight on Islamic finance

Could this global financial crisis have been avoided if Western banks had been more open to incorporating Islamic principles in the first place ? according to experts the answer is yes.

Two Key principles in Islamic Banking :

1.Interest is Forbidden

2.Profits can only be made with tangible assets.

The global recession is said to have begun with sub prime lending which surfaced in the mortgage sector, where almost anyone was able to mortgage a house without having to prove that they can pay back the loans – in other words not being in possession of tangible assets, which could always have been there as something that can have been liquified if the need arose.

What happened in the subprime mortgage industry ? basically this was a large group of banks that allowed financing to people regardless of their credit and more often than not they could avoid proving income. They didn’t even have to bring money to closing (which inflated home values even more because people weren’t putting real money into buying these homes).

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4 responses to “global recession – spotlight on Islamic finance

  1. ”Tangible assets”Dude, what ur saying is to deprive the poor of an oppotunity to seek financing for investment, and a better life… sure you need to manage risk better so that less people would default…But ”Tangible assets”I would never have got my own education if this was the case.. i had to depend on the bank to trust me….Sri Lanka would never get any foreign help, financing and the world would seek to exist…Dude.. Pls do explain…..

  2. As far as I’m aware, in actual practice Islamic banking is no different from any other banking.The term “interest” is never used but the underlying structures are essentially the same.

  3. Conventional banking for me is merely a case of treating the symptoms of an underlying problem. It simply throws a plaster onto an economic wound which it knows will fester into a bigger wound at some point or the other. It is for this reason that economics speak of booms and troughs and the global economy has made provision for these variations in the financial world because it knows that at some point or the other the whole system would crash…………..at least temporarily. When Islamic Banking was introduced close to 30 years prior, the leaders in banking scoffed at the seemingly ludicrous idea of doing business with no interest. Ironically these same banks provide a portfolio for Islamic Banking not because it has anything to do with Islam, but because it had the knack of gaining the appeal of their valued customers. In the world of banking the customer is the king and the Banks had to shake the hand which it couldn’t swallow.I totally agree with Myprerogative that common folk see banking on interest as a lifeline to their economic woes. However, the repercussions felt when the system misfires outweighs the benefits obtained. This is evident when we see the ground situation in Sri Lanka and the world over. This means that the problems of liquidity in the Kothalawela Empire and the helpless cries of the investors could have been avoided and you and I would never have even known what job security actually means.Imagine you having to pay back a loan to the bank on a fixed interest rate or the bank provides an interest rate for your deposits. In both these cases the interest rate is fixed and both you and the bank remain committed to it regardless of the financial ups and downs that hit the global economy. When the pressure is too much upon either side they find solace in declaring bankruptcy which leaves one party dissatisfied with its failed investment.The sharing of profit and loss in Islamic Banking makes the global economy flexible and sensitive to the changes incurred in it. In short it’s a case of the bush surviving the winds and the oak tree folding on its bark. The same goes for tangible assets in Islamic banking where you know that investing on an egg will give you only a chick and not a Cow (when the economy is good) or a little insect (when the economy is bad). For all I care you may get little chicky twins which is another scenario on its own 🙂

  4. Apologies for the delay was travelling.@MyP : i must confess and you know that i have ventured way beyond my comfort zone and deep into a space which is beyond my area of expertise.nevertheless ill try to make a rationale.I understand your position, and you have genuine reason to make such expressions. What i have discussed is only the core principle of islamic finance, where the dis-use of interest is the fundamental principle. Hence, surely the core principles dont speak of the types of transactions made, they only speak of the essence that has to be maintained in day to day dealings.I am pretty certain that there will be some system within islamic banking that makes room for people with no tangible assets, but again i dont know how.With regards to the banes which you seem to speak about vis a vis Sri Lanka not getting foreign help, again that has to be analysed in a socio-economic-political context and it cant be addressed in isolation, nevertheless i must remind you that during the asian economic crisis of 1997 Mahathir Mohamed succesfully avoided aid from the IMF and world bank and still steered malaysia out of crisis and thereby protected malaysia from being held by the shackles of debt.Cheers for the comment!Jack Point : Islamic banking may have taken many forms, just like many principles use the word Islamic but dont subscribe to Islamic parameters whatsoever. If certain banks call what they use as Islamic banking, and in essence riba (usury) is used in their transactions (whatever other term is used)then i wont call that islamic banking inspite of the bank calling that islamic banking.But again, this is an area i have to read more in detail :)Bard : cheers for the comment mate, makes more sense of what i have said in a lighter vien 🙂

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