Although Islamic banking and finance (IBF) is definitely not an innovation in the strict sense of the word (its roots reach VII century), it is only relatively recently that bankers and financiers around the world – also in non-predominantly Muslim countries – started appreciating the opportunities it offers. As stressed by CASE President, Christopher Hartwell, in his opening speech, this interest grew stronger after the global financial crisis of 2007-2008, when Islamic banks proved to be more resistant to financial turbulences than their traditional interest-based counterparts.
Money cannot create money – main features of Islamic Finance
The most important aspect that distinguishes Islamic finance from traditional one concerns the nature of money. As the first keynote speaker during the ‚Innovative approaches to finance: The Islamic experience in Europe’ seminar, which took place on February 9th 2016 in Warsaw, Katarzyna Sidło from CASE, explained, according to shariʿa principles, money does not carry any value in itself, as so cannot create new money; only labor can. Furthermore, Islam prohibits charging interest (riba) and speculation. What is more, each part of a financial contract should be precisely described and understandable for every person involved in the transaction, so as to avoid information asymmetry and excessive uncertainty (gharar). As a result, traditional Islamic contracts (such as mudarabah and musharakah) are based on the profit and loss sharing (PLS) schemes. Additionally, all financial transactions have to be asset-based. As Katarzyna Sidło emphasized, Islamc financial contracts are often very similar to the conventional ones, only terminology is different. Mudarabah is akin to limited partnership, while musharakah resembles general partnership. Islamic finance offers also bonds which are called sukuk and lease services (in Arabic ijara). Given the fact that there are differen schools of interpretation of Islam, also financial instruments differ. This cause some problems in transacitions where different variations of the same products are used. Standardisation comes as the only solution, but the process is very slow.
Islamic finance is not just for Muslims
In the last few years Islamic banking has become more and more popular in Europe. According to EY, between 2009 and 2013 an annual growth of value of the Islamic financial assets amounted to 17.6 per cent; in 2013 it reached 1.7 trillion dollars. There are many different models of implementation of IBF in Europe to exploit the potential of Islamic finance but two of them, used in Luxembourg and the UK, are especially interesting. As Zeeshan Ahmed from EY Luxemburg clarified, one of the alternative ways of investing is shariʿa-compliant asset management. Luxembourg has lately become one of the leading non-Muslim domiciles which offer favorable environment for the creation of Islamic investment vehicles and cross-border retail funds (those instruments are dedicated particularly for investors from the Gulf). It is also the 1st Eurozone country that issued a sovereign Sukuk in response to the recent surge in investor demand for Islamic finance instruments.
Another country that is positioning itself as a Islamic finance hub in Europe is the United Kingdom. According to Omar Shaikh, Islamic Finance Council United Kingdom, the UK is the leading western country and Europe’s premier center for Islamic finance. This is to a large extent a result a political will and support on behalf of the British government, including for example the removal of double tax on and extension of tax relief on Islamic mortgages. Development of Islamic finance has been promoted particulary by the two last Prime Ministers, namely Gordon Brown and David Cameron. In 2013 the United Kingdom hosted, as the first non-Muslim counry, the World Islamic Economic Forum. As a result, currently there are six fully shariʿa-compliant banks in the UK and in 2014 the UK government, as a first non-predominantly Muslim and a first European country issued a sovereign Sukuk. Islamic financial instrumens were used to finance construction of the Olympic Village, the Shard, Battersea Power Station regeneration, London Gateway.
As all the keynote speakers underlined, it is worth looking closer at and following examples of both Luxemburg and the UK – Islamic finance is the fastest growing segment of the financial industry, which potential reaches far beyond the Muslim world.
The seminar ‚Innovative approaches to finance: The Islamic experience in Europe’ was organized by CASE and Centre for International Initiatives in cooperation with Narodowy Bank Polski, and the Polish Economic Association as a part of an effort to broaden the understanding of Islamic finance in Poland. High attendance during the seminar confirms that there more and more people in our country become interested in Islamic banking.