- The Washington Times - Monday, April 13, 2009

SINGAPORE | Backers of Shariah-compliant finance see an opportunity for expansion amid the global economic downturn, and some Western banks are welcoming this growing source of new business.

“Islamic bankers should do some missionary work in the Western world to promote the concept of Shariah banking, for which many in the West are more than ready now,” Indonesian President Susilo Bambang Yudhoyono said at the World Islamic Economic Forum last month in Jakarta.

Such statements have given rise to fears that Shariah finance is a stalking horse for hidden political or religious aims. Shariah finance is an extension of Islamic law, pushing a faith-based alternative to Western banking.

Key Islamists who advise Shariah financial houses have called for full Shariah law to be adopted in Western countries and, in some cases, have made statements supporting terrorist groups.

Shariah finance means institutions and norms that fit with Islamic law. Fully compliant Islamic financial institutions are prohibited from interest payments and require transactions to be backed by tangible assets.

Speculation and hedge funds are off limits — ditto for anything connected to porn, gambling, alcohol or pork. Shariah finance targets Muslims who want to avoid what are deemed “un-Islamic” Western banks or financial practices, and appeals to clients’ faith as well as their bottom line.

The practice has its detractors.

“A shift from present global economic practices [in which many Muslims participate] to Shariah-based practice” would mean “an unacceptable intrusion into Western culture,” said Stephen Schwartz, executive director of the Center for Islamic Pluralism.

Mr. Schwartz said the sector is arguably un-Islamic by contradicting the traditional Islamic teaching that “Muslims living in non-Muslim societies must accept the laws and customs of the countries to which they immigrate.”

Depending on the measurements used, the Shariah finance sector manages assets of $700 billion to $800 billion, according to the Islamic Financial Services Board, an industry body. Standard and Poor’s estimates that the sector could reach $4 trillion before long.

Shariah banks make up a small fraction of the global banking sector, and they may have suffered less than Western counterparts by being sheltered from the subprime crisis.

However, as Duncan McKenzie, director of economics at International Financial Services London (IFSL), told The Washington Times: “Islamic finance is one model but is by no means a panacea. The Islamic finance industry faces a number of challenges, including the need to standardize interpretation of Shariah law, harmonize tax and regulation of the industry, and develop the skills base.”

Christopher Holton, vice president of the Center for Security Policy and director of its Shariah Risk Due Diligence Project, told The Times: “It is a myth that Islamic finance has provided a hedge against crisis. The FTSE Islamic Index has fallen 41 percent, and the all-world index 44 percent, similar losses over the past six months.”

Shariah finance remains dominated by banking, but the sector is diversifying. A growing proportion — up to 20 percent according to some estimates — is taken up by sukuk, which is a Shariah-compliant bond issuance. Malaysia is a dominant base for this particular service. Bonds can play a key role in helping countries deal with the global economic crisis, but the global sukuk market has fallen for two years in a row, in step with the global downturn.

Despite the varying prohibitions, some Shariah banks find creative ways to make the equivalent of market interest rates by other means, such as by pegging debtor repayment rates to his or her future profits, or when a bank offers a “hibah,” or gift to those who open an account — in essence a way of attracting new customers in lieu of interest accruals on savings.

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