Islamic Banking & Sustainability in the Gulf

The UAE claims it has taken the lead in Gulf banking from Bahrain, in part on the back of growth of Islamic institutions like DIB (referred to as the first 'fully-fledged' Islamic bank, established in the 1970s), SIB (Sharjah) and Emirates Islamic Bank. Like the skyscrapers of the Gulf capitals, every year that passes brings a new superlative: Gulf Holding Company (GHC) recently listed on DIFX the most innovative Islamic banking product in the MENA region: $190 million worth of five year, floating rate sukuk al musharaka certificates (Ironically, GHC used this sukuk to finance a mixed use development in Bahrain).

While the mechanics Islamic banking strike Westerners as arcane (even if its profitability can no longer be denied), the scale and geographic breadth of demand makes it far more than a fad. Many of the instruments that form the core of the field –sukuk, takaful, etc.— based on the avoidance of riba and gharar (interest and excessive risk), and the sale of what one doesn’t have, are by design ‘bubble-fighting’. In an environment where so many are concerned with “over-exuberance” and the potential for indebtedness on a spectacular scale, widespread practice of Islamic banking and finance can serve as a reality check, instilling confidence, helping to grow a middle class, alleviating suffering and creating a moral export. Additionally, widespread use of, and access to Islamic finance addresses speaks to fears on the part of minority native populations that they are losing their Gulf-Arab-Muslim identity, this in a society where more than 85% of the population is from somewhere else.

Here we have an example of an area in which Dubai’s vast talent at turning everything it touches into a spectacle could either work to great benefit, or be self-defeating. At some point soon as various commentators have argued, Islamic banking as a profession will have to re-center itself, or face discrediting by its Muslim –and Western—adherents as either a perversion of the Shari’a or an impediment to the free market. If Gulf governments manage to work actively with Islamic banking professionals to apply its principles not just to the richest segments of societies but the poorest [see below post]; if more attention is paid to creating a robust set of standards governing the operation of Islamic banks and financial institutions, Islamic Banking will have delivered a major blow to its naysayers. It will also have helped create a more sustainable Gulf.