The global economy has entered an era of deep and dire straits. All over the world, heads of states and officials are talking about lower economic growth rates than previously announced. Some are even predicting negative growth. Obviously, some dark days are ahead of us but at least there is still a system left! In fact, during the first days of the crisis, experts were questioning the possibility of the financial crash leading to a general collapse of the world economic order. The main priority of the responsible parties at that time was to avoid a complete financial meltdown. They evidently succeeded and now their main concern is to try and minimize the effects of the crisis and to make sure that a crisis of this nature will not occur again.
In pursuit of this objective, governments, central banks, regulating agencies and similar entities are trying to set the new rules of the game and put into place systems that will force players to abide by the new regulations. In this search for a way out, some specialists see the Islamic financial system as very appealing. It seems to be relatively shielded from the type of financial crisis the world is currently going through.
Islamic banks and funds are suffering from the international situation and although the stock markets of the countries using mainly Islamic financial techniques dropped like all their international counterparts, there are not yet any major Islamic financial institutions drifting and in need of an outside intervention to avoid bankruptcy. Some analysts are highlighting this situation and using it as an argument to affirm the eminence of the Islamic financial system. For them, the proper solution to the crisis rests in the implementation of the Islamic financial system — i.e. the rules of the sharia. They argue that the subprime crisis that triggered the financial debacle cannot possibly happen in a sharia-based system because the transactions that were involved broke almost all of sharia’s main prohibitions: the use of interest rate (riba), ignorance by one of the parties of some parameters of the situation (jahala) leading to incomplete information and ambiguity (gharar), speculation (qimar) and one party benefiting from the hardship of another (bay al-mudar).
Besides all the cultural obstacles, the main limit to the implementation of Islamic financial rules as an ultimate solution to the crisis resides in the effectiveness of such a measure. Following each major economic crisis, sets of rules and procedures were created and enforced to avoid the recurrence of such tragedies. Yet they have never been ultimate solutions. Each time, a new crisis would emerge a few years or even decades after the implementation of the new rules due to loopholes left by the legislators. In fact, the solution is not related to rules and laws per se, but to a change of mindset as regulations are the reification of philosophical beliefs. Hence, the stakes of the crises are not only financial, and this facet of the situation was highlighted last month by President George W. Bush who affirmed that the present turmoil should not be considered the result of a failure of the capitalist system.
The fact that a president feels the urge to make such a declaration tends to prove that an increasing number of people are linking the multiplication of economic and financial crises with the ethics of capitalism. The central tenet of the contemporary financial system is the absolute right of the individual to maximize his benefits. Under such a framework, the system of subprimes is logical and normal. But this cannot take place in a sharia-based system, as it uses as a benchmark the benefit (maslaha) of the financial and economic operations for all stakeholders. This principle stems out of the belief that God entrusted the world to man who must manage it for the best benefit of everyone (istikhlaf).
This very brief comparison between the roots of the two financial systems seems to support the thought that Islamic finance might be the path to a sounder financial system. The problem with this line of reasoning is its aspect, à la Huntington, that divides the world along cultural fronts; one party being ‘better’ than the other and meant to replace its ‘opponent’. Moreover, it blurs any possible perspective of dynamic relations between the two fields and it leaves submission and confrontation schemes as the only possible models of interaction between Islamic and Western finance. Yet some links seem obvious. Islamic finance is already using Western techniques, while part of the decisions taken recently by world regulators resembles some rules of Islamic finance. In fact, Western financial technical know-how is undeniable, while Islamic finance just proved that its ethics may shield the system from its own excesses. Hence, cooperation and cross- fertilization appears the most logical configuration between the two to ease the frequency and the consequences of financial crises.
ABDEL-MAOULA CHAAR is Islamic finance project manager at Ecole Supérieure des Affaires