Islamic Finance: Banking on a Stable Future

EXECUTIVE EDUCATION: Confirming Islamic finance to be firmly on the radar of the global business community, Judge Business School in Cambridge is launching a new program to explain to western executives the essential dynamics of competing in the Islamic finance environment.

Islamic finance came to the attention of the global business community in the wake of the 2008/9 banking crisis. Islamic economists argued that the root cause of the crisis was the western system of interest rates, allied to the fact that financial markets had become so divorced from the real economy that investors no longer sought dividends, but rather bet on fluctuating prices even speculating on the collapse of companies and economies.

The value of the ‘real economy’, which dealt in land, property, manufactured products and tangible goods, was overtaken by the late 1990s by a ‘financial economy’ consisting of tradable paper with values that rise and fall based upon the instincts of City and Wall Street traders, often without being linked to any real identifiable assets. Before the crisis the combined value of the worldwide bond market, the world’s stock markets, and the vast global derivatives market far exceeded the value of the world’s real economy, leading to excessive monetary expansion, large balance of payments deficits, and the near total meltdown of the international banking system.

Five years on as the world struggles to recover from the trauma of the crash, politicians, economists, and central bankers have yet to come up with a credible answer as to why and how a similar crisis may not hit the world economy again. For this reason the conservative and stable Islamic system of banking and finance remains highly relevant and something all finance professional, senior corporate executives, and bankers need to understand.

In essence, the Islamic finance system operates as a partnership between the client and the financial institution based around a specific and tangible asset. Islamic finance does not offer interest, rather Islamic banks act in a similar way to venture capital firms, becoming part owners of the business or asset, and only realizing their original capital and making a profit by selling their share of the asset at the prevailing market value. Unlike western banks, Islamic banks stand to profit but also to share the risk inherent in any business venture.

Western finance professionals and senior corporate executives need to understand the Islamic system, not only to benefit from its services, but also to operate effectively in a global context where a growing number of investors and credit seekers in Malaysia, the Middle East and many other parts of the world increasingly use Islamic financial services.

The problem for those used to the traditional western interest driven system, is that the Islamic system can appear complex, often made unnecessarily opaque by Islamic scholars and economists. For this reason the new program at Judge Business School is welcome, claiming as it does “…to expose participants to the essential dynamics of competing in the Islamic finance environment.” And saying “…participants will learn how to take a structured and strategic approach to understanding competitive dynamics in Islamic finance and banking, and identify the myriad business opportunities and challenges that lie in this field.”

The alumni of Cambridge University include many past and current luminaries of the western economic system from economists John Maynard Keynes and Milton Friedman, to central bankers Eddie George and Mervyn King. So it is timely and appropriate that the University’s Judge Business School is now offering a program on the fast growing Islamic finance system. The program will be run in Cambridge, London and Dubai and be delivered by Dr Kamal Munir and Dr Khaled Soufani.