Admit it. Some of you are thinking: Isn’t “Islamic financing” an oxymoron? Doesn’t Islamic religious doctrine forbid debt financing?
The answers are “no” and “no.” Though the Koran does forbid charging interest, there is more than one way to make lending money a remunerative activity — so much so that Islamic finance has grown into a trillion-dollar industry. There is so much money in sukuk (a bond-like fixed-income product) that it is issued by governments in Britain, Hong Kong, Luxembourg and South Africa, in addition to governments in Muslim countries. Private sector financiers are also involved.
A good deal of light has been shed on the subject by Harris Irfan, author of a new book titled Heaven’s Bankers. Irfan headed Islamic finance teams at Barclays and Deutsche Bank, and now he runs his own Islamic finance advisory group. He points out, for example, that the prophet Muhammad and his first wife, Khadijah, were successful traders.
Not only is financing and debt permissible in Islamic culture, there is some evidence that in recent years Islamic financing has outperformed Western financing, according to Irfan.
Also interesting is that Islamic financing is required to adhere to certain principles that Western societies would do well to embrace. For example, Islam forbids the making money from money. In other words, money must be earned from a tangible or real asset, not from the esoteric smoke-and-mirrors shell games we see Wall Street playing with such glee and reckless abandon.
“Many of these transactions are socially useless,” Irfan said during a recent radio interview.
In that regard, Islamic finance is about the real economy, about people who actually makes things or provide genuine services. It is not about people who confect derivatives and other complex and useless forms of salt-water taffy that have zero nutritional value for a national economy.
Islam also requires financing result in a real economic benefit to the economy and society. And risk is supposed to be shared by all parties engaged in the transaction.
My intent is not to promote the Islamic faith, of which I am not a member, but the principle that financial institutions can do well by doing good. And, at the same time, help safeguard our economy against the kind of calamities that derivatives and other monetary shell games can instigate.
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Mike Consol is editor of Real Assets Adviser.
