By Raja Teh

The recent banking crisis in the West has thrust Islamic finance into the limelight as we seek alternative models that will be robust in the face of further credit onslaughts. Much has been written about how Islamic banks withstood the financial assault when compared to their conventional counterparts. If that is true, shouldn’t the world embrace the principles of Islamic finance? Wouldn’t it make the world a safer and better place?

Without trying to oversimplify the issues surrounding the 2008 financial crisis, I would say that had the world adopted the wisdom and philosophy of sharia (Islamic laws) governing finance, which promotes equity and justice, it is unlikely we would be experiencing same troubles today. Islamic finance disallows interest-based activities, gambling and speculation. Financing (or lending in the conventional term) is allowed only to fund real economic activity. An example would be the trading of derivatives. While Islamic finance recognises the use of derivates for hedging purposes (capital preservation/risk mitigation), it disallows naked trades of those instruments, as that is deemed a speculative act. Had we all known how the 2008 crisis would start, we would have been able to appreciate the wisdom guiding Islamic banks in such dealings. It is interesting to note that estimates have placed the face value of all derivatives at more than 14 times the entire world’s annual GDP. [Read more…]