For those of us involved in the space becoming more and more known as ‘Islamic’ Finance – the future remains unclear and murky. While assets under management and the nominal size of participation in this industry increases exponentially, we are discovering that less and less of the conventional financial system is changing. So what effect, if any, is Islamic Finance having? Since its humble beginnings in the 1960’s, what has changed? More importantly, what has not, even though we think it must?
The most important change perhaps has been that financial practitioners and professionals have become accepting of the idea that Islam has quite a bit to say about our economic lives. The notion that guidance from Above is not limited to the spiritual realm is, while obvious, deeply revolutionary. Having this idea accepted by staunchly secular institutions such as states, governments, banks, investment houses and other corporations is not an inconsequential change.
What has not changed though, is the substance of how capital is created or even how it is allocated. Money is primarily created as debt or credit by banks, and access to credit determines wealth to a great degree. This inflationary cycle has not changed, and is unlikely to change given our trajectory. Much of the impact of Islamic Finance has taken place at the microeconomic level – the macroeconomic and global financial systems remain unchanged and impervious. Our welfare is still subject to the vagaries and machinations of Central Bank musings on interest rates. More importantly, all mankind is subject to taxation through the inflation inherent in paper money.
The challenge before us then, is real, complex and demands hard work. In other words, it seems almost insurmountable. This has caused a variety of reactions. Some have redefined the challenge to make it something more manageable – elevating form over substance. Others have redefined the space within which they operate – lending vs. investing.
Let us however, make no mistake about what is ultimately required. There must be a genuine alternative to borrowing money on interest in order to finance purchases and operations. The system must reward risk-sharing between parties as opposed to the transfer of risk to borrowers. Only then can we say that Islamic Finance provides a credible choice. This is the challenge that lies before us, not the replication of conventional outcomes through apparently ‘Islamic’ means.