†††††††††††††††††††††††††† mnsiddiqi@hotmail.com

††††† (Presented at the conference on: Leadership in Global Finance-the Emerging Islamic Horizon, organized by INCEIF, on August 30, 2007 at Kuala Lumpur)†††††††††††††††††††



To speculate on the future of Islamic finance one needs to speculate on the future, not only of global finance, the topic of the day, but also on the future of capitalism.


Capitalism in the technical sense of centrality of capital in production may have an unbeatable future, even though the growing importance of knowledge (soft capital?) maybe threatening that position. But the motivational aspect, the tyranny of self- interest, may not endure.† Will the economy of man continue to be dominated by the drive to maximize profits? Will growth in the sense of enlarging mankindís basket of possessions continue to remain the goal of economic development?

†††† There is a shift from individualistic, profit maximizing capitalism to socially conscious economic activity. Profit-maximizing economic agents and growth-oriented public policies give us the situation that we have today. Among the several note-worthy characteristics of the current situation I will pick a few relevant to my subject: Predominance of the financial sector in the economy and speculative nature of current financial markets, leading to increasing inequality within nations and between nations, environmental deteriorations that threaten the very survival of mankind and†† the increasing levels of anxiety in the public.

††††††† The point I wish to make is that capitalism in its motivational or human aspect cannot continue without getting transformed in a basic way. Neither pure self-interest, nor the exclusive pursuit of economic growth, has a future. We have learnt enough about the consequences of both these motivations to continue adhering to them.

†††††† It is speculation about the future, I admit. But if you at least consider this transformation of capitalism a possibility, then our problem changes to speculating on the future of finance and its role in an environment in which a desire for balanced living may replace the urge for rapid economic growth and economic agents--- consumers as well as producers--- may start worrying about social good. They may even consider consulting one another in this regard.


††††††††††††† For the present I offer the tip that the possibility of this transformation opens a door for Islamic finance too. You would appreciate that a religion-mandated, morally oriented way of life would never entertain self-centered profit seeking behavior or/and pursuit of limitless growth as public policy. As long as these behavioral norms and policy goals dominated, as they do under capitalism, Islamic finance had little chance. Now that humanity seems to be growing out of those self-destructive stances it may well give Islamic finance a hearing.


Before I proceed to talk about Islamic finance in some detail, I must caution against a possible misunderstanding. The shift from individualistic amoral capitalism towards a morally oriented, socially conscious and consulting approach to economic activity that I am envisaging would not and should not come at the cost of freedom. It is not to be imposed from above by the Social Authority. I am not for dirigisme. I envisage internalization of moral values leading to a quest for balance. I also believe the ground for such internalization is prepared by spirituality.




I perceive Islamic finance as a quest for balance in a ruthlessly competitive field. Whether it is Prophet Jesus chasing the (usurious) money-changers out from the temple or the Prophet Muhammad exclaiming: what makes (interest-free) loan superior to charitable giving, one cannot miss the point that interest is a stumbling block for virtuous living. Money allures. And nothing is more alluring than getting more money out of your money. It requires commitment to resist the temptation. And there needs to be a backup in regulation.


We begin with the most talked about feature of Islamic finance:† rejection of money now being exchanged for more money in future. This denial of immunity to money loan brings capital in the sense of money capital down from its heavenly pedestal to earth, with all its risks and uncertainties. It also relieves the economy from the compulsion to grow that the institution of interest enshrines. In one go rejection of interest strengthens the linkage between the real and financial sectors of the economy, possibly ending the current dominance of the financial over the real. Money must go through the real sector before it comes back as money, so what the financier gets depends on what happens to money capital during that risky journey. Whether it also dampens speculation in financial markets, and if it does (as I think), to what extent, I do not know. But it will be a different environment from the current one, in which some of our best brains are exclusively focused on the money game.


The drastic curtailment of debt financing that Islamic finance promises (its perversion into tawarruq and similar practices not withstanding), may usher in a new era in public policy too. But much would depend on how money is managed. Lately monetary management has been sort of subservient to financial markets, as if its main purpose is saving the society from possible harms emanating from that direction. Monetary management to become a facilitator for real transaction has to rid itself from debt-based maneuvers.


Talking of public policy brings me back to motivations and goals. Shared objectives are supposed to encourage cooperation and mutual consultation, values that provide the rationale for state in Islam. For the Monetary Authority it is a big jump from being an umpire in a game to a social agency working to protect and promote the common good. For society at large, it requires giving up any remaining illusions about the markets being capable of policing themselves in order to ensure public good. Along with this change of mind it also requires a change of heart. A motivational change away from uncaring self-interest, a reaching out to values for the commonality of people. Islamic finance draws its strength from the spiritual and moral transformation implied in such a change. Our best hope lies in free but socially responsible economic agents acting under supervision and regulation of a state manned by socially conscious representatives of the people. Our success in that quest may not be absolute. It never is. But the change of direction matters more than the level of success.



Is it advisable to mix morality with a discipline focused on wealth creation?† How do values mix with interests? There is solid empirical and historical evidence showing that man does not live by bread alone, that we do aspire to look beyond utilities and interests to values like justice and fairness, sincerity and compassion, truthfulness and honesty, as guides for our action. No doubt neo-classical economics had a remarkable success in purging this values- dimension of the discipline from explicit consideration. But that does not change the reality. It has always been a mix of material and ideal, worldliness and spiritualism, interests and values. The mix has been changing with time and place, even from person to person. It seems we are about to emerge from a phase of our history that was very low on value to a place where morality and values are as integral to economic activity as wealth creation and self-interest.


Financial Globalization


††††††††† Can locally minded, interest focused (nationalist?) men and women conduct global finance? I submit that beneficial globalization of finance requires a different mind-set on part of investors and other players. It requires financiers who have a better mix of interests and values, promoters of self-interest who have the intention as well as the ingenuity to guard and advance the public good that is imagined at the global scale and is not just defined in parochial terms.


†††††††† That, ladies and gentlemen, is a vision of global finance congenial for Islamic finance. As long as global finance is subservient to or collaborative with nationalistic hegemonic policies, Islamic finance can at best be on the defensive. That will remain true even if all the Islamic countries band together. However, if humanity makes a choice for socially conscious economic activity then Islamic finance will be seen as a suitable method for achieving the economic policy goals.† But it is ultimately a matter of peoplesí choice. Spiritual and moral movements have always prevailed because they won the hearts and minds of ordinary men and women. It is not the imperial armies that determine the destiny of mankind.†


Standardization and Certification


††††† As till date Islamic finance has made great strides in enlarging the menu of saving vehicles for the practicing Muslims and other ethically aware citizens. It has activated not only billions of investable funds but also brought legions of smart people to the financial sector. In an unrepressed financial environment like that in Malaysia the advent of Islamic finance has visibly contributed to the common weal. But the international Islamic finance industry remains focused on survival, which seems natural for an infant industry. How can it ignore compliance with Basel II? How can it ignore the pressure to compete? One wonders, however, if survival with dignity demands something more. Is it not in the infancy that a sense of identity is created? Is not dignity rooted in identity? Better try building an Islamic finance industry that is not deprived of all that is distinctively Islamic.



††††††††† The Islamic finance industry faces other challenges too. Not the least important among these is a need for standardization. The near chaotic situation that currently prevails, with the same product name meaning different characteristics with different institutions and in different regions, is not healthy for the industry. This lack of standard in itself is, partially at least, a result of the chaos and confusion in the matter of Shariah-advisement. The methods of earning credibility adopted in the beginning of modern Islamic finance era when people were not familiar with Islamic financial products and the industry was confined to a small region are now being perpetuated in a situation when the industry has gone global. In a market that is witnessing new Islamic finance ventures almost every week and new products very often, Islamic financial institutions are being forced to seek certification from a very small list of recognized names. The situation is untenable and the certifications are losing credibility.


†††††††† Unfortunately issues that require open discussion with wide participation of Shariah-scholars, economists, bankers, financiers, customers, regulators, etc. are being subjected to fatwas. Surely there can be better ways of proceeding further. If a section of investors must check on Shariah-compliance, opinion of independently operating Islamic-law firms or scholars would have more credibility than certification by advisors in the pay of the institutions whose products they certify. We should strive for completely transparent and standardized methods for classifying and certifying Islamic financial products.


Towards a brighter Future


†††† Last but not the least, time has come when innovation should trump imitation. From purification of current financial transactions from haram

(the prohibited) to designing financial ways and means that would serve the maqasid al- Shariah (objectives of Islam), that is the new direction Islamic financial community should aspire to take. With a sizeable market share in its base region, the Gulf, as well as in South-east Asia, it is now in a position to experiment and explore. Once it takes that direction Islamic finance is sure to find itself in good company. There has been a relative decline in bonds and a rise in equity as means of investment at the international as well as domestic levels. The financial community is now aware of the environmental and ethical considerations that must attend its choices. People want their money to make more money but with a difference not felt even a decade ago. That provides a window of opportunity for Islamic finance seeking to serve the Islamic goals of balanced growth, equitable distribution and mutuality--- goals that are universally acclaimed by contemporary humanity.