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| Dubai Ports and the future of International Finance |
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Many of the American investment banks are now expanding their Middle Eastern offices and are starting to develop their knowledge of the Islamic finance area, in order to begin offering their own rival products, a prospect viewed with some trepidation by the current regional competitors.
Even western governments are taking advantage of the potential of the Islamic investment market. In 2004, the state government of Saxony-Anhalt in Germany issued a €100m sukuk based on rent of government buildings, which were sold to a Dutch entity as part of the arrangements. While the sukuk market is still developing, it may be possible that future sovereign issues will follow from other governments eager to benefit from the large pool of Islamic investors, not to mention traditional investors looking for asset-backed securities. A number of Muslim countries have already issued sukuks but it remains to be seen how many more will follow. The rate at which such countries enter this market will be a key factor in determining whether the sukuk will help develop the wider investment climate in the Muslim world.
The second problem is the prevalence of western financial institutions in the formation of the Islamic market. While the development of the Islamic sector is supposed to be predicated on avoiding conventional finance, practically speaking the sector is simply extending the existing set-up. Some of the leading banks in the Islamic finance sector are subsidiaries of major western banks, such as Citigroup and HSBC. The distaste many Muslims have for the interest-based system has had little impact on the influence of conventional banking institutions on the field of Islamic finance. It is questionable how much of a change the new sector really represents. Firstly, the institutions providing the new products are themselves leaders in the conventional market. But, secondly, the advisory boards appointed to validate these products as ‘Shari’ah compliant’ are themselves hired by the banks. Regardless of the qualifications of the scholars involved, this basic conflict of interest must raise questions about the independence of such ‘Shari’ah’ judgements from commercial interests.
The development of this new market, therefore, is likely to conform to the established patterns of the conventional capitalist system and will be prone to producing the same imbalances in wealth distribution we witness in the existing set-up. This is far from the Islamic objectives relating to economics, which should underpin any discussion on Islamic finance. As the Qur’an states, “in order that it does not remain a circuit of the rich from among you”, both state and society have to act in concert to establish a circulation of wealth. From this point of view, one of the key concerns that should underpin the development of the Islamic banking system is how to ensure that funds go into ventures that actually create wealth, rather than merely investing in financial instruments. Investments products such as the sukuk are either corporate or sovereign, i.e. they are issued either by major corporations or by treasury departments. The nature of such products is that they aim for competitiveness when compared to the existing market products. For this reason, the wealth that investors provide will tend to go to existing successful enterprises rather than backing new untested ventures. Accordingly, it is unlikely that the development of the Islamic banking sector will contribute greatly to development in the Muslim world, which not only needs strong banking institutions but also a spirit of entrepreneurship that is supported by investment. The likely trend in the next few years therefore will be that the Islamic banking overall will still contribute to the outflow of funds from the developing world into western markets, a process that starves new enterprises in the Muslim world of the prospect of growth.
The sukuk may be an effective investment tool, but Islam has prioritised numerous objectives that economic life should fulfil and these cannot be fulfilled through focussing on investor needs alone. The Qur’an emphasises the need for wealth to circulate in society, not remaining merely a ‘circuit’ amongst the wealthy. While this doesn’t mean that investment and the use of wealth is impermissible (far from it), it does place an obligation on the society and the authorities to see that wealth moves in a way that creates opportunities for all members of society, rich and poor.
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