October 4, 2010

A new IMF study compares the performance of Islamic banks and conventional banks during the recent financial crisis, and finds that Islamic banks, on average, showed stronger resilience during the global financial crisis.

But the study also finds that Islamic banks faced larger losses than their conventional peers when the crisis hit the real economy.

In “The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study,” economists Jemma Dridi of the IMF’s Middle East and Central Asia Department and Maher Hasan of the IMF’s Monetary and Capital Market Department look at the effects of the crisis on bank profitability, credit, and asset growth in countries where both types of banks have a significant market share. The new working paper adds an empirical dimension to the debate on the relationship between Islamic banking and financial stability, a topic that has generated renewed interest since the global crisis.

Too big to ignore

Islamic finance is one of the fastest growing segments of the global financial industry. In some countries, it has become systemically important and, in many others, it is too big to be ignored. It is estimated that the size of the Islamic banking industry at the global level was close to $820 billion at end-2008. The largest Islamic banks are located in the countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates).

While Islamic banks play roles similar to conventional banks, fundamental differences exist between the two models. The main difference between Islamic and conventional banks is that the former operate in accordance with the rules of Shariah, the legal code of Islam. The central concept in Islamic banking and finance is justice, which is achieved mainly through the sharing of risk. Stakeholders are supposed to share profits and losses, and charging interest is prohibited.

There are also differences in terms of financial intermediation, the paper notes. While conventional intermediation is largely debt based, and allows for risk transfer, Islamic intermediation, by contrast, is asset based, and centers on risk sharing. One key difference between conventional banks and Islamic banks is that the latter’s model does not allow investing in or financing the kind of instruments that have adversely affected their conventional competitors and triggered the global financial crisis. These include toxic assets, derivatives, and conventional financial institution securities.

Crisis impact

To control for varying conditions across financial systems, the paper looks at the actual performance of Islamic banks and conventional banks in countries where both have significant market shares (see Chart 1). It uses bank-level data covering 2007−10 for about 120 Islamic banks and conventional banks in eight countries—Bahrain, Jordan, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates. These countries host most of the world’s Islamic banks (more than 80 percent of the industry, excluding Iran) but also have large conventional banking sectors. The key variables used to assess the impact are the changes in profitability, bank lending, bank assets, and external bank ratings (more..)

The CIBAFI has reposted the Wesleyan Argus article on Sh. Taha Abdul-Basser's Dec 2009 lecture at Weslyan University. In light of the current events, it seemed appropriate to post their repost.

In his lecture on Feb 16, 2009, Taha Abdul-Basser, chaplain of the Harvard Islamic Society and doctoral candidate in religion at Harvard, proposed a solution to the current economic crisis that is not often considered: follow Islamic law, known as Shariah.

The lecture, entitled “Islamic Finance: Islamic Solution to Global Financial Crisis,” was part of a series of events scheduled for “Islam in Conversation Week,” organized by the Muslim Students’ Association (MSA) and the chaplain’s office. The theme is “Living Shariah in the Contemporary World.”

“We want to show that Islam is not limited to spirituality or one’s relationship with God—even though that is an extremely important concept—but also, how our relationship with humanity is,” said Sister Marwa Aly, the Univerity’s Muslim Chaplain. “Islam is a way of life, so it has a stance on the environment, on economics, on politics, on social justice and even on entertainment.”

Shariah is a frequently used term, but is often employed without a full understanding of its meaning. Students in the MSA hope that the talks given throughout the week will encourage dialogue and help people more fully understand Shariah.

"Hopefully, organizing a lot of talks about Shariah will help people better understand what it means,” said MSA member Jourdan Hussein ’11.

Islamic finance is based on Shariah, which includes writings from the Qur’an and from Muhammad, and the scholarly teachings that inform Islamic law. Its underlying precept is the illegality of any usury—transactions that demand interest from a person receiving a loan.

It also states that all financial transactions must be done with caution, and prohibits directing the flow of money itself when no tangible assets are involved. Thus, under an Islamic system, the complicated packaging of mortgages partly responsible for the current financial crisis would never have occurred “The speaker was really informative and had a great background with which he supported many of his ideas of how Islamic financial policies and ideas could be beneficial to the falling economy today,” said Raghu Appasani ’12. “I am glad I [attended] because I did not even know that there was a whole separate Islamic financial sector that was so successful.”

Islamic banks use mechanisms that do not charge interest, which include “lease to own” agreements and diminishing equity balances, in which two partners would take out a mortgage with one eventually buying out the other. These financial systems exist in the Muslim world, such as Saudi Arabia and Malaysia, but also increasingly in the West, most notably in Great Britain.

Although Abdul-Basser conceded that the Islamic system is comparably smaller, these Islamic institutions have better withstood the financial crisis because they never undertook the risky mortgages and then resold them.

Abdul-Basser said that many financial systems in the world need structural changes, instead of continuing the practices that led to the crisis.

The reforms Abdul-Basser mentioned in his lecture had all been suggested by secular economists—Islamic reforms need not be necessarily religious. He cited Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University, and Nouriel Roubini, a professor at New York University who predicted many aspects of the financial crisis.

His suggestions, based on Stiglitz’ work, included creating incentives for executives that reward thinking beyond short-term gains to form financial product safety and financial system stability commissions to oversee financial companies and prevent excessively risky loans, along with other regulations to limit excessive borrowing. Abdul-Basser also suggested briefly nationalizing banks in order to reform their practices, before returning to privatization.

“I thought that if what the lecturer discussed could be somewhat secularized, it seems as though it could absolutely work.” said Phil Ross ’12, who attended the lecture. “The lecturer really got his opinion across that restructuring our system to encompass certain facets of Shariah-compliant banks would go a long way towards stopping the bleeding that was caused by excessive lending.”

Shaykh Taha recently answered a question about car leases on SeekersGuidance.com.

Question: Is leasing a car permissible? What about stipulations within the lease contract? 

Answer:

Wa ‘alaykum as salam,

Leasing vehicles (in the US) is in essence permissible (halal) as such contracts are contracts for the transfer of the use (usufruct, manfa’a) of the vehicle, from the owner-lessor to the lessee for the duration of the lease term, in consideration of rental payments.

Because leasing agreements may differ from make to make and–as the questioner indicated–many leasing agreements have stipulations that are void, those considering entering into them should have their contracts reviewed by a faqih prior to execution.

Such stipulations in general may be considered to have been voided (mulgha) and may be separated from the lease, which is still valid. This is the preponderant position (qawl rajih) according to the Hanabila as Imam al-Hijjawi states in Zad al-Mustaqni’.

Benefit (fa’ida): The lessor’s use of terms and techniques from the world of interest-bearing lending in order to set rental payment amounts does not invalidate the lease or make it impermissible to enter into the lease.

Wa s-salam
Taha Abdul-Basser

Registration is open for the summer courses!  Browse the Course Catalog and Enroll here: http://straightwayethical.com/catalog.php

Instructor: Taha Abdul-Basser
Assistant Instructor: Faraz Rabbani

Description: In these 3 audience-specific short courses (for finance professionals, lawyers, and emerging Shari`ah scholars respectively), participants will be introduced to basic and intermediate-level concepts in Islamic financial ethics and law through a survey of several of the AAOIFI Shari`ah Standards. Specifically, we will review key precepts (mabadi`), principles (qawa`id) and ethico-legal values (ahkam), that are relevant to the application of the Islamic financial ethico-legal tradition (fiqh al-mu`amalat) to the domain of modern finance.

Location: Short courses are offered via Straightway Ethical's web-based training platform.

Duration: Summer Session (Jul 1-Aug 1). The first lecture will be available for download on July 1.