Islam could help us avoid toxic assets -Nick Sherry Assistant Treasurer Australia

The Assistant Treasurer, Nick Sherry, says the growth of Islamic finance in Australia could help to shield the economy from damaging speculative activities that spread toxic assets during the global financial crisis.

Islamic finance forbids the payment of interest and forms of betting, taking its guidance from Islamic law, or sharia. The global industry has boomed in recent years on the back of rising oil prices and economic development in Muslim countries, and is worth about $1 trillion.

The federal government is reviewing tax law to ensure the sector is not disadvantaged against conventional banking, as Islamic finance is seen as a valuable source of funding for Australia.

Launching Demystifying Islamic Finance, a publication by the Malaysian law firm Zaid Ibrahim, Senator Sherry said that the industry could also help to shelter the economy from damage caused by complex financial instruments used by regular banks.

”The sharia prohibition of betting or gambling means that Islamic banks can use fewer risk-hedging techniques and instruments than conventional banks,” he said in Sydney. ”As the world learnt to its cost, the excessive use of risk-hedging instruments led to the growth of ‘toxic assets’ during the global financial crisis.”

For example, before the financial crisis banks sold complex debt securities called collateralised debt obligations, which received AAA credit ratings because they were thought to spread risk. These assets, bought by many councils and charities, have since collapsed in value. Under Islamic finance, which has attracted tentative interest from Westpac and NAB, lenders in effect take possession of the borrower’s tangible asset and are then entitled to a share of its returns, rather than interest payments.

Proponents say this also helps to direct savings towards the ”real” economy of production.

Senator Sherry said: ”The Sharia prohibition against highly speculative activities not only helps to protect the economy against abuses and distortions, but also forges a closer link between financial activity and the real economy. This maximises the efficient allocation of capital and resources, helping to create jobs and boost sustainable growth.”

source : smh