Loretta Napoleoni on why Islamic Finance Matters

A frequent question I'm asked is why Islamic finance is growing so quickly? The obvious explanation is the link to the rise in oil prices. Yet a little known explanation is found in Loretta Napoleoni's new book "Rogue Economics". Napoleoni is looking at the dark side of capitalism and the forces that link sex slavery, the sub-prime crisis and climate change. One of the counter-forces to the list of negatives that she recounts is the rise of Islamic finance since the 1997 Asian financial crisis. In 1997 global capital that had amounted to an inflow of $100 billion in 1996 abruptly became at outflow of $12 billion resulting in a 10% decline in GDP for South Korea, Indonesia, Thailand and Malaysia. The Asian economic miracle became a nightmare literally overnight fueling profound distrust and skepticism of Western economic thought and practices. While the World Bank and IMF sought to put together a $112 billion rescue program in the form of a forex loan that ultimately failed, the Prime Minister of Malaysia, Mohamed Mahathir, attacked the Western speculators whom he held responsible for the crisis. Islam, he stated, forbids gharar, or speculation, therefore the Muslim umma should respond to address the crisis founded created by financial practices considered haram to Muslims.

Muslim investors and the Islamic Development Bank promptly heeded Mahathir's call. After all, one of the most important tenets of Islamic economics and finance is the concept of "partnership". Despite an investment climate that those espousing a Western financial ethos would certainly avoid, sufficient investment in the Malaysian economy was generated to avert the downturn that other Asian nations unable to draw upon Islamic partners experienced, according to Napoleoni. Malaysia had been pursuing a strategy of Islamicization of the financial sectors since 1992 and created a decent sized market for "Islamic capital" in the preceding five years, as well as a reputation for being one of the most innovative Islamic banking sectors. Napoleoni does not discuss the controversies over "innovation" and adherence to the different schools of Islamic law that sometimes are raised when evaluating the Malaysian Islamic financial services sector. She goes on to discuss the debates over the creation of the "gold dinar", a recurrent ambition of many involved in Islamic finance, including Osama bin Laden.

In the aftermath of 9/11 Islamic banking has received even greater support from Muslims around the world fearful of the US government's over reaction to the terrorism threat. Many have pulled their money out of US banks and are investing in sharia compliant products and services. In regards to the "gold dinar", many Muslims are suspicious of paper money given the Qu'ran's injunction of, "gold for gold, silver for silver....". As the US dollar continues to slide and ceases to be the hegemonic currency in the global financial order, and oil money seeks to move away from the dollar we may see an even stronger call for the "gold dinar". As the growing sub-prime crisis infects other pieces of the financial system the ethics of Islamic economics and finance may become increasingly attractive, even to non-Muslims. As oil prices climb, Islamic capital will continue to exert a growing influence on international political economy. Just take a quick glance at the economic power of the Gulf Cooperation Council that includes the United Arab Emirates, Saudi Arabia, Qatar, Bahrain, Kuwait and Oman. In 2006 the per capita income was close to $20,000, nearly 3 times that of China and more than 5 times that of India (see Aamir Rehman (2008), Dubai & Co., Global Strategies for Doing Business in the Gulf States, McGraw Hill). Given these numbers and the role that Gulf investors have played in supporting failing Western financial institutions, Islamic banking and business are becoming too important to overlook. The next few years will be interesting to watch as the dollar's place in the global economy slides and Islamic capital's influence grows.