Halal industry, as an asset class, is looking for compliant liquidity. Islamic finance, as a movement connected to the real economy, is looking for impactful intra-OIC (compliant) investment and financing opportunities.

The convergence is happening in real time, and one of the “leaders” in the reunification is a strong-willed pioneering woman, Jumaatun (Juju) Azmi, founder and managing director of KasheDia.

Question: Please explain the link between KasheDia, International Halal Alliance (IHI) and World Halal Forum (WHF).

Jumaatun: KasehDia is a private company formed by myself back in 1999 to offer contemporary communication solutions for Islamic concepts. One of our products is the World Halal Forum (WHF) whose inaugural event was in 2006. It was in that same year that the IHI was formed following a resolution passed by the delegates. As of 2011, the ownership of WHF has been transferred to IHI, so that it maintains a non-profit non-governmental organisation status.

Question: Prime Minister Datuk Seri Najib Razak has spoken about a halal economy, how is your group leading the efforts?

Jumaatun: KasehDia, in leveraging our in-depth knowledge of the global halal industry, was able to assist the government of Malaysia in formulating the chapter on halal industry in the Third Industrial Master Plan. In addition to promoting the halal products sector, the WHF has always sought to widen the realm of halal to include services and the ancillary industries, such as training, laboratory testing and logistics. A key component in a halal economy is Islamic finance and we started the convergence conversation and integration actions of halal products and services sector few years ago.

Question: In Islamic finance, there are international industry bodies, like AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions), IFSB (Islamic Financial Services Board), etc, halal industry does yet have one, what is your organisation doing?

Jumaatun: The WHF gave birth to the IHI Alliance, which is envisioned to be the global authority to fill the gap. Through its strategic partnership, IHI Alliance has already obtained a mandate from the OIC to develop a global comprehensive programme for the halal sector, which includes harmonising standards and certification practices. It is working closely with all stakeholders, especially the relevant importing authorities and industry players.

Question: What are the hot button issues in halal industry today?

Jumaatun: The recurring theme is need for standardisation in a fragmented market, much like in Islamic finance. Some of the issues include stunning, mechanical slaughter and use of animal-based gelatin. There are also the debates between activist groups, acting in the name of animal welfare, pitted against halal (and kosher) over the notion of what is known as “religious slaughter.” This essentially means slaughter without the prior use of a device or method to render the animal unconscious. This has become a hot issue in Europe and spilled over into the political area in Holland, France, etc.

Question: How has the WHF evolved since its inception event in 2006?

Jumaatun: During the early days of WHF, we managed to bring the concept of halal from the purely religious realm to the talk of industry, multinational corporations and seemingly unrelated sector players. We framed it in a different context and introduced new ideas and service sectors that are very much part of the whole halal ecosystem. We moved towards addressing the immediate issue of standardisation!

However, we soon became less idealistic and more realistic as the Ummah is a globally diverse community. We realised that a single standard cannot be imposed on 1.6 billion Muslims everywhere. Hence, we refined our approach to be more practical. Simply put, to establish a robust system where the halal certification industry adheres to internationally accepted standards of professionalism and transparency. This has been the task of IHI Alliance.

Question: The WHF 2012 just ended, what were the highlights of the event?

Jumaatun: In line with evolving themes, from perception of a business forum, WHF 2012 was focused more on the important stakeholder: the consumer. This year, we introduced creativity in the form of literary arts, visual arts, entertainment and media. We wanted to show a softer side of Islam that is inspiring, innovative and beautiful with universal appeal to both Muslims and non-Muslims. The topic of social justice was discussed in the light of the current financial impacting the “have nots”. It was encouraging to see solutions lie with Islamic instruments, such as zakat, waqf, gold dinar and so on.

Question: Why is there more emphasis on halal in Malaysia than in Gulf Cooperation Council (GCC) countries?

Jumaatun: Malaysia is very much a pluralistic society with a 60 per cent Muslim population and the Muslim community is conscious of the non-halal products in the food supply chain.

The era of industrialisation in Malaysia, 1980s and 1990s, had the effect of creating a Malay middle class with increased purchasing power. Therefore, businesses in the food and hospitality services sectors were compelled by market forces to provide a halal offering. The momentum of this development has been continuing from the tabling of a trade description act on halal in 1972 to the introduction of halal certification in 1994 to the first integrated halal conference and expo in 2006.

In the GCC and other Muslim countries, where more than 90 per cent of the population is Muslims, halal is taken for granted. The seeds of awareness have barely been planted in these countries. Today, 54 out of the 57 member states of the OIC have no form of legislation to regulate halal. Hence, they need to catch up with Malaysia and we are doing our part in assisting.

Question: Why do you think there is minimal Islamic financing in the halal industry?

Jumaatun: The halal industry was previously not identified as an asset class. Islamic finance providers would more likely view the firms’ underlying industry sector, e.g. food, agriculture, personal care, logistics etc as the determining profile. Conversely, those companies already involved in the halal sector are not compelled to adopt Islamic finance. Around 80 per cent of companies producing halal products are controlled by non-Muslims. There is no religious impetus. Even in Malaysia, which has one of the most mature Islamic finance industries, the penetration rate is less than 40 per cent. Conventional financing is well established and halal producing firms tend to be averse to switching unless there are substantial economic or monetary benefits.

Question: At the WHF 2011, the world’s first halal food index, SAMI Halal Food Index, was launched and witnessed by the former prime minister, Tun Abdullah Ahmad Badawi. Is it a beginning of convergence between halal industry and Islamic finance?

Jumaatun: The launch had an impact for both the halal industry and Islamic finance. We had always been talking about the convergence theory, but this was the first time that it materialised into something tangible – an index. WHF and others had been promoting the halal sector as a growth sector, even catching the attention of mainstream media including Forbes, Time and the Economist magazines. The tracking of the SAMI index’s stellar performance quantified and empirically proved what we had been saying all along.

Question: The SAMI index is about inward and intra-OIC investments as the companies are only from Muslim countries. How can Malaysia Inc lead halal as an asset class, like it has in Islamic finance?

Jumaatun: For starters, Malaysia can claim a fair amount of credibility as leader because Malaysian-listed companies constitute almost half the total market capitalisation of the SAMI index. Malaysia offers probably the most comprehensive range of Islamic financial products. When coupled with the slew of incentives that are further reinforced in the Second Capital Markets Masterplan, the “conversion” of the balance sheets, visa sukuk, of halal industry players to become syariah-compliant is facilitated. Malaysia already leads in Islamic finance as well as thought leadership in the halal sector, so naturally it can lead in propagating halal as an investment asset class.

Question: Finally, what have been your major accomplishments and what are the remaining major challenges for you?

Jumaatun: There is still so much to be done, but we have made some impact through our efforts. Through our various communication channels including guidebooks, magazines, TV shows, awards and events, we have managed to draw the world’s attention to halal as an industry.

The figure of US$580 billion (estimated annual value of the halal food sector in 2005) was first introduced at WHF 2006, and quoted in articles in mainstream media was a solid beginning. My favourite was seeing halal on the cover of Time magazine. It would be rather presumptuous for us to claim credit for all worldwide milestones, but the WHF was the catalyst for a series of events and achievements. For example, halal themed conferences and exhibitions have become global, from Brussels to Bangkok. Halal meat exporters from Australia and New Zealand have enacted new regulations to improve the integrity of their halal production. Greenfield countries fast-tracked to set up halal certification bodies to address demand from importing Muslim majority countries.

At the same time, IHI Alliance has worked tirelessly trying to bring some orders to the global industry. Eight modules of the ICCI-IHI Alliance halal standard have been published – each one providing sector specific requirements for every part of the halal supply chain. IHI’s membership now includes over 50 halal certification bodies in 36 countries covering six continents. The halal lead auditors training course, which has been rolled out over the last two years, seeks to harmonise halal certification practices.

Yet, there is so much more that needs to be achieved. We already talked about 45 out of the 57 OIC countries are still without a halal standards. In Europe, more than 20 million Muslim consumers have no legal recourse to ensure the integrity of their dietary requirements in the absence of even a basic labelling law. The general level of auditing and certification processes have yet to conform to internationally accepted norms.

We did not expect to be able to solve all the key issues in seven years and we cannot do it alone. For our efforts to be effective, we need the cooperation of all stakeholders, including the relevant importing authorities.

Rushdi Siddiqui is Thomson Reuters’ Global Head of Islamic Finance based in New York.

Read more: When ‘separated twins’ reunite http://www.btimes.com.my/Current_News/BTIMES/articles/KASEH/Article/#ixzz1vbQrSc1q

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By Rushdi Siddiqui

The New York Stock Exchange – Muslims working in non-Muslim countries do understand work is for work, even in Islamic finance, and informed non-Muslim colleagues understand basic tenets of Islam.

The New York Times recently interviewed several American Muslims, including me, working in the financial arena for the article, “Muslims on Wall Street, Bridging Two Traditions.” It explored two ‘conflicts’: Muslims working in conventional finance may encounter ‘interest’ against their faith, and challenges of abiding by Islamic ‘traditions’ in a secular workplace.

Today, it seems to an outsider, the burning issues for Muslims on Wall Street include prayer breaks, fasting and productivity, bonding after-office drinks, shaking a woman’s hand wearing a hijab, and structuring instruments dealing with (the prohibited) interest.

This cannot be what Muslims are about. Also, more credit must be given to working non-Muslim colleagues on understanding Muslim sensitivities.

Common Shared Values

Muslims, like other people with strong beliefs, do not see themselves exclusively focused on or defined by such  issues. Islam has spread throughout the world because of its dynamic nature, where it influences local customs and is ‘influenced’ by the older local culture.

Religion is a private matter and it’s looked upon as foundation for building inner discipline and external strength to address challenging situations. People of faith, like their secular colleagues, want to climb the corporate ladder and break the glass ceiling to get to the executive floor, if not the corner office. Muslims have been on Wall Street and High Street for many years, if not decades, and it’s only now they are being noticed. The difference between then and now is there are more Muslims in the financial sector and non-Muslim colleagues know more about Islam because of a combination of internet, 24-7 news, 9/11, documentaries, Dubai’s accomplishments, Islamic finance and personalities like His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.

It should be noted that many Muslims were involved in the Occupy Wall Street movement because of common shared values. In the New York Times article there are two quotes that best summarise how Muslims, residing in
a non-Muslim country such as the US, should think about and approach a place of work and perception of fellow workers. “I think Muslim professionals are too sensitive and underestimate our co-workers,” comments a consultant in the article.

“Seek the opportunities and firms that speak to their set of values, expertise and passion,” said Mohammad Al Arian, CEO of Pimco.

Just as an employer interviews a potential employee, the latter also needs to interview the former.

I have worked at two multinational companies in the US, heading their Islamic finance business, in New York. First at Dow Jones Indexes for 10 years and now at Thomson Reuters.

A common denominator for international companies is their diverse employee base due to extensive international presence, including many Muslim countries. The corporate culture in these companies reflects common shared values formalised in codes of ethics. Thus, these companies understand ‘sensitivities’, and have high expectations of all employees.

As Muslims working in the West we do have a tendency to initially “underestimate our co-workers” in understanding our rituals (prayers, fasting, etc.), and our prohibitions (alcohol). While it could be attributed to many things, such as prejudices, with time there is a mutual understanding and respect.

The New York Times article used examples of Muslims finding places for praying during working hours or Friday prayers, and fasting during Ramadan. The article should have taken this one step further, and asked the Muslim worker about non-Muslim colleagues fasting or visiting a mosque.

Most, if not all, of us have non-Muslim colleagues who have fasted, some partially (till lunch time) and others until sunset. One of the great attributes of Americans is they like challenges, and will push the envelope of endurance. Others have visited mosques, and made observations such as “nothing fancy inside”, “where are the stained glass windows, pews, gold crescent and star?”

Maybe the article should have interviewed non-Muslims working in senior positions in Islamic finance in Saudi Arabia, the UAE or Malaysia on drinking alcohol, shaking hands with conservative women, breaking meetings for prayer time and so on. As senior executives, they are deemed ambassadors of the Islamic financial institution, and it does imply abiding by a certain level of Islamic code of conduct in public places.

Bottomline

The bottomline is that there is understanding and respect for rituals as long as teamwork, quality and deliverables are not compromised.

Muslims working in non-Muslim countries do understand work is for work, even in Islamic finance, and informed non-Muslim colleagues understand basic tenets of Islam. Muslims need to continue taking a pragmatic,
over dogmatic, approach to finding the balance between faith and finance.

This article was originally published in Gulf News. Siddique is the Global Head of Islamic Finance and OIC Countries at Thomson Reuters.

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“They see this opportunity and want their companies to set up base here.

“Their chamber of commerce will identify 30 large companies which Malaysian companies can forge ties with,” he said.

Husni was recently on a two-day working visit to the republic, beginning May 14, which was part of the Member Country Partnership Strategy programme initiated between Malaysia and the Islamic Development Bank.

Under the programme, Tunisia and Malaysia exchange expertise and experience in the financial sector and Islamic banking.

“Tunisia is relevant to Islamic banking. There are five countries under the programme namely Tunisia, Libya, Mauritania, Morocco and Algeria.

“There is market of 90 million people and they find the halal industry relevant to them. These countries are a ready platform for us to export our halal products to Europe,” he said.

On another development, Husni said Malaysia was finalising an offer to cooperate, via Bank Negara Malaysia, to provide Islamic banking services in Europe which has a Muslim population of about 22 million people. — Bernama

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Given they are barred from charging interest and must abide by a strict religious code, Islamic financial institutions are often dismissed by sophisticated western bankers as living in the dark ages. However, according to a couple of recent major reports, shariah-compliant financial institutions are not only coming of age, but also have much to teach their western counterparts.

In a report, Empowering Risk Intelligence in Islamic Finance: Managing Risk in Uncertain times, Deloitte’s Islamic Finance Knowledge Center said that the approach to risk management used in Islamic finance has more in common with the western approach than is often assumed.

The report – based on a survey of 20 Islamic financial institutions located across the Middle East and South-East Asia, which have aggregate assets of $50 billion – suggested that Islamic finance, a cash-rich sector, has much to teach the west’s financial system, which has yet to fully recover from the near-death experiences of 2007-09.

The Empowering Risk Intelligence report found that Islamic financial institutions came late to adopting formal approaches to risk management. 79% of respondents had established their risk-management departments in the past five years, with only 5% having a risk management department prior to 2002. But things are changing, and fast. The report found that 83% of Islamic finance firms today have both a formal risk-management function and a risk committee responsible for overseeing all risks.

Yet Deloitte acknowledged there is room for improvement in the risk management area. Key risk-management and regulatory challenges facing the Islamic sector include that two-thirds of Islamic financial institutions don’t have any external credit rating, and that only 25% have considered or received an external rating from a specialist Islamic rating agency such the Bahrain-based Islamic International Rating Agency. The report said:

“This constitutes a real challenge posed to industry participants and standard-setters such as the [Kuala Lumpur-based] Islamic Financial Services Board, [Bahrain-based] Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI), [Bahrain-based] International Islamic Financial Market (IIFM) and the Islamic International Rating Agency (IIRA), to enforce best practices.”

The report suggested that the main causes of shariah-compliance risks include non-standardized practices, diverse interpretations of shariah law, and the fact shariah laws are unenforced in many jurisdictions. Dr Hatim El Tahir, director of Deloitte’s Middle East Islamic Finance Knowledge Center, said:

“One thing is certain – the traditional operations and management of Islamic finance will need to change. Institutions offering Islamic financial services around the globe will not only need to deal with risk management but will also need operational effectiveness and a skilled workforce to empower risk intelligence in Islamic finance.”

The Deloitte findings came as an op-ed published by Project Syndicate, The Challenge of Islamic Finance, sang the praises of Islamic finance and suggested it has an important role in counter-balancing the bonus-fuelled procyclicality and morally hazardous nature of western finance.

Authors Andrew Sheng, ex-chairman of the Hong Kong Securities &  Futures Commission (and one of the voices of sanity in the movie Inside Job) and Ajit Singh, emeritus professor of economics at Cambridge University, said there is growing convergence between Islamic and western finance.

“Despite skepticism regarding accommodation between Islamic and global finance, leading banks are buying Islamic bonds [also known as sukuk] and forming subsidiaries specifically to conduct Islamic finance. Special laws have been enacted in non-Muslim financial centers – London, Singapore, and Hong Kong – to facilitate the operation of Islamic banks and associated financial institutions.”

Sheng and Singh argued that Islamic finance, already a $3 trillion sector, has an important role to play in improving the ethical framework of western-style finance (which, as everyone other than bankers and financiers recognizes, seriously lost its way during the credit bubble of 1999-2007).

They suggested that if the ethical values in Islamic finance, rooted as they are in shariah religious law, could:

“further deter moral hazard and the abuse of fiduciary duties by financial institutions, Islamic finance could prove to be a serious alternative to current models of derivative finance.”

“The test of any alternative financial system depends ultimately on whether it is – or can be –
more efficient, ethical, stable, and adaptable than the prevailing system.”For now, there is no Islamic global reserve currency and no lender of last resort. But the Islamic world is the custodian of huge natural resources that back its trading and financial activities.”

If the scenario outlined by Sheng and Singh is correct, prepare for the centre of gravity of global finance to shift from London and New York to the Gulf and Kuala Lumpur.

Ian Fraser, a journalist since 1988, is working on programmes about the banking and financial crisis for the BBC. He writes about business and finance for the Financial Times, the Sunday Times, the Independent on Sunday, the Daily Mail, and the Mail on Sunday. He is a visiting lecturer in financial journalism at the University of Stirling (since October 2009). Previous roles include business editor of the Sunday Times Scotland, financial editor of the Sunday Herald, deputy editor of Director, assistant editor of EuroBusiness and editor of internal publications at Unilever. He previously worked in the advertising industry in Edinburgh, London, and Paris. Ian graduated MA honours in English from the University of St Andrews.

Further reading on Islamic finance:

• Procedures for Reporting Financial Risk in Islamic Finance by Daud Vicary Abdullah and Ramesh Pillai

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KUALA LUMPUR: Islamic finance officials will gather in Kuala Lumpur next week to debate the industry’s future path and craft crisis measures, as banks’ limited capital base and liquidity management ability render them vulnerable to a global slowdown.

Bankers, lawyers, asset managers and policy makers from Qatar to Indonesia will meet Monday through Wednesday to look for new markets while mapping out growth strategies for the $1 trillion industry.

Product diversification and deepening the secondary sukuk market will also be high on the agenda, after a tough year when political upheaval in the Middle East and legal uncertainties on sukuk structures weighed heavily on Islamic financial markets.

As the global economy teeters on the brink of a recession, the meeting will address the likely effects of Europe’s debt crisis and the US slowdown on the future of Islamic finance.

“To a certain extent, global investors’ appetite toward emerging markets may be impacted by the global uncertainty,” said Alhami Mohd Abdan, head of international finance and capital market at Islamic bank OCBC Al-Amin, a subsidiary of OCBC’s Malaysian unit.

Islamic banks escaped relatively unscathed during the 2008 global crisis as the religion prohibits subprime investing but are unlikely to be spared the prolonged economic pain ahead as bank lending drops and spending and investment fall.

The International Monetary Fund last month cut 2012 growth forecasts for developing Asian countries as well as for Japan, citing slower growth in the rest of the world. It also slashed its global growth projections.

An economic slowdown could also highlight Islamic finance’s long-standing challenge in liquidity management where bankers have fewer products to invest in than conventional lenders as the religion’s ban on interest rules out most interbank tools.

The Islamic Financial Services Board, a group of regulators in Muslim countries, has set up a global Shariah liquidity management body which will issue sukuk to help banks handle their cash.

“Hedging tools are now emerging especially for currencies but some others which are important for risk mitigation especially liquidity management, this is still a weakness area,” said Ijlal Ahmed Alvi, chief executive of Bahrain-based International Islamic Financial Market, a global standardization body backed by regulators and sharia banks.

At the meeting, regulators and bankers are also expected to seek ways to penetrate new markets to grow Islamic banking which accounts for less than 5 percent of total global banking assets.

With its core market in the Middle East roiled by the recent unrest and interest in France, Australia, South Korea and Hong Kong having largely ebbed, the case to find fresh sources of growth has taken on added urgency.

Some Islamic banks are now turning to Turkey, Oman and Kazakhstan as possible new centers of growth.

Islamic banking assets accounted for about 5 percent of Turkey’s assets as of end-2010 compared with 2.8 percent five years earlier, Standard & Poor’s has said.

Kazakhstan plans to sell a $500 million-plus debut sovereign sukuk issue.

A key challenge is “how to get the buy-in from others to subscribe to Islamic finance because we do not have a very wide range of instruments so the choice is still very limited,” said Mohamad Akram Laldin, a Malaysian central bank Shariah adviser.

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This high-profile event is co-organised by the Embassy of Malaysia and the Malaysia External Trade Development Co-operation (MATRADE) and will be graced by Ali bin Masoud al Sunaidy, Minister of Commerce and Industry. The event will feature exhibitions and seminars as well as business matchings on trade and investment opportunities between Malaysia and Oman, particularly in the area of Tourism, Healthcare, Halal Development, Property/Real Estate, Construction, ICT, Trade and Investments.

According to the Ambassador of Malaysia to the Sultanate of Oman, Dato Rustam Yahaya, “This will be a good opportunity for local businesses and entrepreneurs to network with their Malaysian counterparts and get insights and updates from the Honourable Minister himself about Malaysia and how it can co-operate with the Sultanate.”

From a country dependent on agriculture and primary commodities, Malaysia has today become an export-driven economy spurred by high technology, knowledge-based and capital-intensive industries. This is an ideal event to share knowledge and expertise as well as enhancing business and investment opportunities between the two countries.

Dato Rustam adds, “This is an event not to be missed. I would like to call upon everyone who is interested to explore various business opportunities with Malaysia in this single event. There are plenty to choose from Malaysia, especially when our products and services are well-known all around the globe for their superior quality and reliability. Malaysia is ranked as one of the leading exporters worldwide for semiconductors, medical devices, processed food, building materials, healthcare, education, information and communication technology (ICT) and engineering services.

“Malaysian services sector has grown from strength to strength and has achieved global recognition for several landmark projects. All these testify to the high level of confidence and trust that international businesses have in us.”

According to Nor Azmi Sulong, General Manager of the organising company of the event, Al Gaith International Exhibition Co LLC (GIE), “As a Malaysian, working here for the last seven years and managing an event management company in Oman, I can see many opportunities available for both countries.”

Key Malaysian government ministries and agencies will be represented at this event to give Omanis further insights on what Malaysia has to offer and answer any queries.

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Follow-up would enable Malaysia, which has Islamic financing expertise, to make a bigger contribution to implementation of the system in Kazakhstan, he said.

Kazakhstani President Nursultan Nazarbayev visited Malaysia last week and the two countries signed a number of MOUs linked to education, tourism and natural resources. Nazarbayev showed great interest in promoting Islamic financing in Kazakhstan, “probably because both countries have a similar background of government based on Islam,” Awang Adek told Bernama.

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From humble beginnings in the 1990’s, Islamic finance has become a trillion-dollar industry. And, despite scepticism regarding accommodation between Islamic and global finance, leading banks are buying Islamic bonds and forming subsidiaries specifically to conduct Islamic finance.

HONG KONG – With Britain now in talks to sell part of the government’s 82 percent stake in the Royal Bank of Scotland to Abu Dhabi sovereign-wealth funds, the Islamic world’s growing financial clout is once again on display. That clout also poses a systemic challenge to the dominant way that finance is now practiced around the world.

From humble beginnings in the 1990’s, Islamic finance has become a trillion-dollar industry. The market consensus is that Islamic finance has a bright future, owing to favourable demographics and rising incomes in Muslim communities.

Despite scepticism regarding accommodation between Islamic and global finance, leading banks are buying Islamic bonds and forming subsidiaries specifically to conduct Islamic finance. Special laws have been enacted in non-Muslim financial centres – London, Singapore, and Hong Kong – to facilitate the operation of Islamic banks and associated financial institutions.

How should these developments be viewed from the perspective of Western finance and mainstream economic analysis? Does Islamic finance really constitute a viable alternative financial system?

The very fact that such a question is asked nowadays is significant. Not so long ago, Islamic finance was superficially dubbed a zero-interest-rate system that would lead to inadequate and inefficient resource mobilization and utilization. Ironically, mainstream central bankers today routinely use precisely such policies when pursuing massive “quantitative easing.”

There are two central precepts of Islamic finance: absolute prohibition on charging interest on financial transactions, and high moral standards on the part of lenders and borrowers. Interestingly, the best economic rationale for a zero-interest-rate system is provided in John Maynard Keynes’s The General Theory:

Keynes suggested that only a very low or zero interest rate could ensure continuous full employment and distributional equity. Keynes’s endorsement of such a policy does not necessarily make it right, but his analysis does suggest that it should be regarded as a serious proposition.

Importantly, although interest is prohibited under Islamic finance, profit is not; the latter is derived from various arrangements that combine finance and enterprise. In essence, this is a profit-sharing and risk-sharing system that is based entirely on equity finance.

Islamic finance thus contrasts with the current dominant system based on interest-bearing debt, in which risks are theoretically transferred to debt holders, but in practice are socialized during crises. Other things being equal, most economists will agree that debt finance leads to greater instability than equity finance.

It follows from the second major tenet of Islamic finance that if people adhered strictly to its ethical requirements, there would be fewer moral-hazard problems in Islamic banking. Moral hazard exists in all systems in which the state ultimately absorbs the risks of private citizens.

But, whether any particular system is efficient in avoiding moral hazard is a matter of practice, rather than of theory. Many would agree that, historically, Christian morality played an important role in the rise of Western capitalism. Secular capitalism, however, has experienced an erosion of values, whereby the financial sector has put its own interests above those of the rest of society.  If the ethical values in Islamic finance – grounded in sharia religious law – can further deter moral hazard and the abuse of fiduciary duties by financial institutions, Islamic finance could prove to be a serious alternative to current models of derivative finance.

Moreover, the basic tenets of Islamic finance force us to re-think the ethical basis of modern monetary arrangements, which have evolved into a global reserve-currency system founded on fiat money. In the past, gold had been the anchor of monetary stability and financial discipline, even if it was deflationary.

Andrew Sheng, President of the Fung Global Institute in Hong Kong and Chief Adviser to the China Banking Regulatory Commission, is a former Chairman of the Securities and Futures Commission of Hong Kong. Ajit Singh is Emeritus Professor of Economics at Cambridge University.  This article is based on their forthcoming Cambridge Centre for Business Research Working Paper on Islamic finance.

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