Especially since the banking crisis in 2008, Islamic-interest-free financial initiatives have enjoyed renewed interest.
However, despite significant inroads over 40 years, there are still a number of difficulties on the way, explains Rebecca Schönenbach, a German expert in ethical and Islamic financing in the German journal Materialdienst der EZW (September). The oil boom and money flowing to oil-producing Muslim countries opened the way to the founding of the first Islamic banks in 1975. Today, most of the Gulf States as well as Malaysia have implemented laws permitting Islamic banks to function according to their specific rules.
Islamic financial institutions need to receive religious-legal advising from Islamic scholars who certify conformity with Islamic principles. They strive to hire the most prestigious scholars, in order to provide the highest possible legitimacy to their dealings. Fundamentally, instead of receiving fixed interests, Islamic banks share in both the benefits and losses of businesses they invest in. Some activities are strictly forbidden, such as speculation, pornography, alcohol, etc.
Worldwide, Islamic financial products make today slightly less than 1 percent of all financial investments. While most investments are managed in Saudi Arabia, Iran and Malaysia, there is also a presence in other places around the world. The first wholly Islamic bank in the European Union, the Islamic Bank of Britain (IBB), was launched in 2004, but it has not encountered the expected success among Muslim emigrants.
In fact, the IBB has been a money-losing venture, with a constant need for outside help. Most recently, it was taken over by a bank from Qatar. It has only attracted 50,000 customers. Indeed, since a bank based on Islamic principles does not merely lend money, but becomes directly interested in businesses, this requires more efforts in order to minimize risks, and the diversification of portfolio is also limited by religious prohibition. Thus, costs are higher than for a conventional bank.
In Germany, there are 4.3 million Muslim residents, and studies have shown that no more than 5 percent of them prefer sharia-based transactions. But, even many of those are reluctant to give up the idea of a fixed remuneration for their money, which leads Islamic banks to develop products imitating conventional banking practices at the risk of losing their religious justification in the eyes of strong believers. Still, Islamic banking can benefit from a more widespread desire of individuals to be able to invest in accordance with their own views and beliefs. In a country such as Germany, this has given rise to a niche of ethical and ecological banks, besides some banks associated with Christian churches. Schönenbach writes that Islamic banking could follow that road, but it would mean a reorientation patterned on individual wishes rather than on decisions by scholars. Each customer would decide which financial product meets his or her expectations. There have already been isolated voices in the Islamic financial sector pleading for such a new approach.
Meanwhile, attempting to lure more Muslim investors as well as crossover to the non-Muslim market, financial products that both comply with sharia and are based on renewable energy and sustainable agriculture are emerging in Islamic finance, reports Reuters (Sept. 2). Islamic finance, following prohibitions from investing in products involved in gambling, tobacco and alcohol, has only recently added themes stressing greater social responsibility. But the concern to protect the environment marks many recent financial products.
Bernardo Vizcaino reports that in late August, Malaysia announced guidelines issuing Islamic bonds aimed at helping firms raise money for projects ranging from renewable energy to affordable housing. Last spring a Dubai government planning body signed an agreement with the World Bank to develop funding for the emerate’s green investment program, including “green” Islamic bonds. Firms in Britain, Canada and Hong Kong are offering sharia-compliant investments in sustainable farming ventures, which may attract in the Gulf and southeast Asia as well as from local investors.
Vizcaino writes that “The reasoning is that green investment products can tap a wider range of demand if they are made sharia-compliant to appeal to Muslims. At the same time, non-Muslims who might normally shy away from Islamic investments—because of concerns about pricing, complexity and lack of familiarity—may embrace them if they are green.” So far, it is not clear if these ventures will be successful. In past years, when Islamic mutual funds made forays into the market for socially responsible investments, they have struggled due to limited distribution channels. Vizcaino notes that the new “crossover” products are not mutual funds but “instruments tailored specifically to invest in a certain type of asset in a specific country or region. They combine Islamic screens—lists of criteria for sharia compliance—with other practices required by sustainable investment firms.”
(Materialdienst der EZW, Auguststrasse 80, 10117 Berlin, Germany – http://www.ekd.de/ezw/)