Sydney: Islamic Finance is being challenged by the prevailing Islamophobia in the world which has hindered the progress of the industry and hence the progress of the industry is very slow. These views were shared by the Professor of Finance at Australia’s Bond University, Mohamed Ariff.
Ariff said in an interview that three major principles of Islamic banking can save the world from the devastating economic crisis which causes the GDP of 60 countries, mostly developed, to drop by 780 billion dollars, while reducing the world economy’s growth momentum by half since April 2007.
He stated, “The West developed a poisoned product which is collateralized debt obligation (CDO), and spread it to whole world. However in Islamic banking, you can’t engage in what is called dangerous derivative, a dangerous financial instrument which has high risk of failure to be licensed, under Islamic Shariah financial law.”
For example Islamic Shariah does not permit the licensing of such products as those used by the conventional banks, said Ariff while adding, “If this kind of strict discipline applied by conventional banks, the financial crisis would not have been so severe, you would not have such a catastrophe.”
Ariff also explained that according to Shariah, “If you don’t own an asset, you can’t borrow it.”
“Under Islamic loan contracting, you can’t have more than 100 percent of your assets,” added Ariff, presenting Australian Volcom Clothing as an example, “Volcom was borrowing hundreds and tens of billions of dollars, but their total assets were only 43 billion. So, Volcom and all those Western companies would have been prevented from bankruptcy.”
He also explained that the third principle in Islamic banking is the prohibition of excessive interest rates, emphasizing that if the entire world has abided by these three principles, such a severe economic crisis would not have occurred.
Ariff also said that Islamic banking is expanding slowly in the world because of Islamaphobia.
“It may take 50 years. We started in 1963 with opening the first bank, now we have around 500 institutions with 2-3 trillion dollars of assets. We will make this grow, but slowly,” he added.
He noted that Muslim countries like Turkey, Indonesia and Saudi Arabia as members of G-20 are pushing for some Islamic banking principles, and thus several Western countries have started to say that the derivative should not be traded orx if tradedx must be brought to transparent platform.
He said, “During Wall Street demonstration, one group said: ‘Do what the Muslims are doing for financial transaction’, so people are becoming aware.”
Asked about Turkey’s economic performance, Ariff said that since Turkey signed the Customs Union in 1996, Turkey is doing very well in terms of its economic performance and democratic institutions.
“I do not think that Turkey was affected less by the global crisis thanks to the Islamic capital. Islamic banks have just started in Turkey,” Ariff concluded.