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— By Brevy Cannon and Mary Summers Whittle
Islamic law prohibits the charging of interest by lenders, requiring banks to directly invest in actual assets or services. This leads to the sharing of both risk and reward, profit and loss between the borrower and lender, which would have prevented the recent global financial meltdown.
“Everyone is suddenly becoming more aware that we should question our current financial system, and there should be other ways to better serve people,” explained Alejandro Alcala, a second-year anthropology major in the College of Arts & Sciences and a leader of the association.
Islamic finance provides an alternative view of what a financial system can and should be, which encourages students to question whether the conventional Western financial system is providing certain social goods and how the system could be improved, explained the group’s founder and president, Haroon Masood, who lived most of life in Saudi Arabia and whose father spent 20 years working for Citibank in the Middle East.
“There are very few places where students get to question fundamental assumptions and come up with new ideas and solutions,” said Masood, a second-year student who hopes to attend U.Va.’s McIntire School of Commerce.
A handful of universities, including Harvard and the University of Pennsylvania, offer courses on Islamic finance, “but none of them have student organizations that aim to place students at the forefront of this field,” Masood said. “We want our organization to become the hub for learning and innovation in Islamic finance in North America.”
The association recently took its first major step toward that end, hosting U.Va.’s first Islamic Finance Forum Nov. 21 at the McIntire School. The forum, sponsored by the McIntire Center for Financial Innovation, was headlined by two leading experts in Islamic finance: Zamir Iqbal, the lead investment officer in the Quantitative Strategies, Risk, and Analytics Department in the Treasury of the World Bank; and Michael J.T. McMillen, a managing director at the private equity firm Riverstone Capital, who twice has received Euromoney Magazine’s award as the best legal adviser in Islamic finance.
“If you pick up a popular journal or magazine article on Islamic finance, the primary message you’ll come away with is ‘no charging interest,'” Iqbal said during the forum. “But there’s more to it than that.”
Indeed, he explained, the rules governing Islamic financial practices are rooted in the Quran’s values, designed to promote economic justice, community unity and social harmony.
Flowing from those values, Islamic financial transactions are characterized by profit- and risk-sharing instead of usury; investments tied to tangible assets; and a ban on speculative contracts like conventional derivatives. Islamic banking also must comply with Islamic law, which precludes transactions supporting the production of alcohol, tobacco, pornography and the like.
The prohibition on charging interest, Iqbal said, seems to most flummox Westerners. In the early 1970s, as an Islamic financial sector began to emerge, “people laughed” at the notion of creating a debt-free financial system, he told the audience of about 60 people. “They said, ‘How can a financial system be designed without the use of interest?'”
The solution is actually extremely simple, Iqbal explained: risk- and reward-sharing, and the presence of tangible assets throughout the investment process.
McMillen, who has helped design scores of Islamic financial deals in such industries as electricity, petrochemicals and mining, gave a simple hypothetical example. An aspiring but undercapitalized merchant seeking to buy $100 worth of sesame seeds would get a $100 loan, at some interest rate, from a Western bank. In contrast, an Islamic bank might buy the seeds for the merchant, who would gradually repay the bank through a series of payments. With each payment, the merchant would gain an equity share of ownership of the seeds.
The prohibition on interest leaves Islamic financiers free to use a number of financial structures – including partnerships and leveraged leases – that are familiar to Westerners, Iqbal noted. “It’s not a matter of Islamic versus non-Islamic,” he told listeners. “It’s a matter of financial engineering.”
McMillen, too, stressed the deep commonalities between Islamic and Western methods of finance. In many ways, he said, Islamic financial practices are little different from those espoused by the West’s increasingly popular “ethical” investment funds.
“You know more about Islamic finance than you think you do,” he said. “There are more similarities to Western finance than there are differences.”
Student Alcala concurred.
“I don’t get caught up with the label of ‘Islamic finance,'” he said. “I think of everything as financial engineering, and we need some new financial engineering to address the problems of the global economic downturn.
“Today in finance we accept so many things as truth or just how things are. But Islamic finance presents some different solutions to some of these problems.”
source :UVA Today
At semiannual meetings of the International Monetary Fund and the World Bank in Istanbul last month, talk was largely dominated, inevitably, by the economic crisis and its aftermath. But suitably enough, given the location, another topic also came to the fore: the role of Islamic finance, a fast-developing sector of the global banking industry that has remained remarkably resilient through the slowdown.
With the value of assets in Islamic banks now close to $1 trillion and the industry growing at an estimated annual rate of 15 to 20 percent, business students are increasingly eager to cash in. Universities are increasingly offering new postgraduate programs in Islamic finance to help them do it.
Islamic financial products comply with Koranic prohibitions against charging interest and investing in morally dubious industries, such as alcohol and pornography, and lending is based on profit-sharing. At a time when Western banking and financial models have been thoroughly discredited, Islamic finance is enjoying an enviable reputation as a more reliable way to invest. HSBC in the United Kingdom is one of many Western institutions that now offer, among other products, Shariah-compliant mortgages and bank accounts.
“There is a substantial shortage of people familiar with Islamic financial principals in Western banks,” said Philip Molyneux, head of the business school at Bangor University in Wales, which introduced M.A. and M.S. programs in Islamic banking and finance last year. “And they’re all realizing that the Muslim population is a client base that it would be in their interest to cater to.”
The British government has said it is committed to turning London into a robust Islamic financial center and a paper published by the Treasury in December called for the pool of people with the necessary training to be expanded “to keep up with the rapid growth of the market.” British business schools have moved fast to meet the challenge.
Bangor University introduced its one-year degree courses in Islamic finance after receiving a flood of inquiry from prospective students. Participants finish the programs by submitting a dissertation on a topic related to Islamic banking — for instance the market in Islamic bonds, known as sukuk. Enrollment has risen for this academic year to 29 students from just over half that number last year. Ten of this year’s students are employees of the Faisal Islamic Bank in Sudan, sent to Bangor to gain academic accreditation and improve their English.
According to Mr. Molyneux, about a third of this year’s M.A and M.S. classes has a background in Koranic study and is interested in becoming Shariah scholars. “Every bank, insurance company and investment firm that offers Islamic products has to have a Shariah board that screens their business and decides whether it’s compliant with Islamic principles or not,” he said. “Finding people who can interpret the religious tracts and understand the financial technicalities isn’t easy.”
Next academic year, responding to high demand, the school intends to introduce an M.B.A. in Islamic finance. “I suspect that there will be quite a bit of migration from the M.A. and M.S. to the more management-oriented M.B.A.,” Mr. Molyneux said. “The commercial sector is much more attracted to the M.B.A. than it is to the other degrees, which it often views — rightly or wrongly — as being too academic.”
Thom Polson, a 28-year-old Seattle native, enrolled in the M.A. program at Bangor after completing a postgraduate degree at the Institute of Islamic Banking and Insurance in London. His interest in the sector began when, traveling extensively through the Middle East, he could see that “Islamic banking was growing almost as fast as the skyscrapers.”
“I saw for the first time economic success working hand in hand with law and religion,” Mr. Polson said. “And it fit with the way I think about community.” Upon graduation, he plans to move to Switzerland and work in Islamic wealth management. His aim is to contribute to the conversion of “the huge amount of capital that is already there from the Muslim world to Shariah-compliant accounts,” he said.
City University’s Cass Business School, based in London’s financial district, was the first Western institution to offer an M.B.A. with a specialization in Islamic finance. Introduced in 2007, the two-year executive M.B.A. program is delivered at the Dubai International Financial Center. “It was a natural thing for us to hold the program in Dubai,” said Roy Batchelor, director of the executive M.B.A. program. “Students come from all over the Gulf region, and most of them are already professionals working in banking and finance.” Online learning is complemented by lectures, held four days a month by local Islamic finance specialists and Cass professors who fly in for the purpose.
The executive M.B.A. in Islamic finance follows the same track as the M.B.A. offered by Cass in Britain but includes several Islamic finance-specific courses. This option is not yet available at home, but things may be about to change. “We’re beginning to think that some modules should be offered at Cass in London as well because we keep receiving inquiries from U.K.-based students and financial institutions,” said Humayon Dar, an Islamic economist and Shariah adviser responsible for initiating the degree in Dubai.
The International Capital Market Association Center, at Reading University, runs a similar program. Its M.S. in investment banking and Islamic finance is taught jointly with the International Center for Education in Islamic Finance in Kuala Lumpur, where participating students spend their third semester, with an option of interning at an Islamic bank. Durham University, Newcastle University and the British Institute of Technology and E-commerce — the last of which offers an M.B.A. that includes a comprehensive, compulsory Islamic finance module — have also jumped at the trend.
Outside Britain, Reims Management School in France introduced a three-week elective course in Islamic finance, taught as part of its Master in Management program, last June. Home to the largest Muslim population in Europe, France is well positioned to tap into the interest the sector is generating. The Reims course will be offered during two sessions this school year to accommodate demand; last year, 30 out of 80 applicants had to be turned away.
Islamic finance postgraduate programs and courses have been slower to take off in the United States and Canada. An oft-cited reason is a scarcity of faculty who have the background and training that would qualify them to teach such programs. “It’s a fairly technical niche,” said Ibrahim Warde, author of a soon-to-be-updated reference book, “Islamic Finance and the Global Economy.” Professors of Islamic finance require knowledge of the religious and political-economic components, besides financial and legal ones.
Such is the challenge before the University of Toronto, where Walid Hejazi, an associate professor at the Rotman School of Management, has been in slow-moving discussions with the heads of the M.B.A. program to introduce an Islamic finance elective. But talks may accelerate if Islamic banks begin to set up shop in Canada. Canadian Business magazine reported in July that the federal Department of Finance was handling applications from institutions hoping to open Islamic units. The government has declined to elaborate.
One in-demand class on the industry is offered by Mr. Warde at Tufts University’s Fletcher School of Law and Diplomacy, in Massachusetts. “Some of our students do go to work in the Islamic world, but the majority end up at Western banks that have Islamic operations,” Mr. Warde said. “So there is a growing Islamic financial sector in the U.S., but it’s still much smaller than that of the U.K..”
The Fletcher School offers cross-registration with Harvard — which does not yet run a class of its own — and Mr. Warde’s course is popular with Harvard business, law and divinity students hoping to improve their job prospects. Harvard’s Islamic Finance Project, I.F.P., meanwhile, coordinates seminars, research workshops and a biannual forum.
“It would be only natural for U.S. academic institutions to begin to explore this sector to maintain our country’s competitive edge and national graduate skill base,” said S. Nazim Ali, director of the I.F.P.. “The perception that this is just a Muslim field of study is entirely incorrect and something we are very keen to demystify.”
Source : tnyt