Islamic finance counter balances Rogue Economics

In her book “Rogue Economics” writer Loretta Napoleoni exposes how Islamic finance which is regulated by the Sharia Law is providing one of the few counter balancing financial structures to Rogue Economics. By prohibiting the use of funds for investments and activities that the Sharia prohibits, Islamic finance excludes many of the markets in which rogue entrepreneurs proliferate.

Islamic finance has become the fastest-growing, most dynamic sector of global finance. Every Western-style financial product has its sharia, i.e. Islamic law, compliant instrument: microfinance, mortgages, oil and gas exploration, bridge building, even sponsorship of sporting events. Islamic finance is innovative, flexible, and potentially very profitable. “Operating in 70 countries with about $500bn in assets, it is poised to expand geometrically.” With more than one billion Muslims eager to support it, analysts project that this system will soon manage approximately 4 percent of the world economy, equivalent to $1 trillion in assets. Such figures explain the eagerness of Western banks to tap into sharia financial services. Citigroup, along with many other Western banking retailers, have opened Islamic branches in Muslim countries.

At the core of sharia-compliant economics there is an exceptional joint venture. Indeed, this alliance emerged in the 1970s when rich Muslims and sharia scholars began working together. This unusual partnership is a phenomenon unique in modern economics, but one that cemented the foundation of a new economic system. A few visionary personalities, like Prince Mohammad al Faisal (son of the late Saudi King Faisal bin Abdul-Aziz), Saleh Kamel of Saudi Arabia, Ahmed al Yaseen of Kuwait, and Sami Hamoud of Jordan, channeled some of the new wealth produced by the first oil shock into the formation of a new breed of Islamic banks. Sharia scholars and clerics drew up the monetary structure of the new banks.

Partnership is the heartbeat of Islamic economics. “Underlying the system is the philosophy of risk sharing: the lender must share the borrower’s risk, making the two in effect partners, injecting a strong social component into the financial system. This concept separates Islamic Finance from Western Finance, which seeks to maximize profits and minimize loss through diversification and risk transfer.” Also, money must be put to work. Because Islamic finance prohibits interest, it seeks revenues from rents, royalties, business profits, or commodity trading; a mortgage, for example, represents a “rent to buy” arrangement. Thus, conceptually, Islamic economics is the opposite of Western finance, which revolves around the individual’s self-interest.

Above all, Islamic finance represents the sole global economic force that conceptually challenges rogue economics. It does not allow investment in pornography, prostitution, narcotics, tobacco, or gambling. Since the fall of the Berlin Wall, all these areas have blossomed thanks to globalization outlaws under the indifferent eyes of the market-state.

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