Why did the Vatican suggest Islamic finance? by İsmail Özsoy*

Professor İsmail Özsoy is an instructor at Fatih University’s department of economics.

Just after the 2008 global financial crisis hit, the Vatican suggested using the Islamic finance and banking system as a solution. So then what does Islamic finance offer? To answer this question we had better first lend an ear to the saying of the Prophet Muhammad: “You should sell gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like, equal for equal, and hand-to-hand; if the classes differ, then you may sell as you wish, provided that the exchange is hand-to-hand.”

With this concise saying, the Prophet Muhammad expresses exactly 80 kinds of exchanges, which are the exchange of a commodity for another commodity or a currency for another currency on credit or on the spot and for matching or different quantities of goods. According to that Prophetic saying, out of these 80 kinds of exchanges, 46 sales bear a religiously forbidden “interest.” Interest is a value that is transferred from one party to another without a matching value given back. Interest is sometimes “unearned income” in a zero sum game and sometimes “unequally distributed income” in a positive sum game. Thus, interest is, in any case, a wrong done to one of the two parties in loans or exchanges. That is why it is condemned by all religions and criticized by most philosophers.

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Vatican Says Islamic Finance May Help Western Banks in Crisis

images20The Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis.

 

“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper Osservatore Romano said in an article in its latest issue.

The Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis.

“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper Osservatore Romano said in an article in its latest issue late yesterday.

Author Loretta Napoleoni and Abaxbank Spa fixed income strategist, Claudia Segre, say in the article that “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the “‘car industry or the next Olympic Games in London,” they say.

Pope Benedict XVI in an Oct. 7 speech reflected on crashing financial markets saying that “money vanishes, it is nothing” and concluded that “the only solid reality is the word of God.” The Vatican has been paying attention to the global financial meltdown and ran articles in its official newspaper that criticize the free-market model for having “grown too much and badly in the past two decades.”