I t is a sound decision to hoard cash by many Islamic banks, especially when the global economy is in a recession. I believe it is a unique time for these Islamic banks to review their policies and make a paradigm shift towards investments in countries like Turkey. HH Sheikh Hamad Khalifa al-Thani, the Emir of Qatar, visited Istanbul last month to explore investment opportunities in agriculture and animal health, as the country’s leadership welcomes Arab investors. Indeed, Islamic banks can utilize their surplus funds effectively for the development of human capital in view of Turkey’s sound economic policies and strategic leadership, which looks to the East now.
DR SAAD AL-HARRAN:
I slamic banks have historically had excess liquidity, as they have been very successful in attracting deposits but less successful in identifying financing opportunities. Islamic bankers are risk averse, but this was just as well given how the global financial crisis evolved during 2008. Now that most countries are in the recovery phase, there is more justification for taking risks. However, clients should have sound business plans and realistic cash flow projections. The techniques for evaluating risks by Islamic banks are similar to those for conventional banks. While increased financing can help boost economic activity, Islamic banks also have to safeguard their own positions. Given continuing global economic uncertainties, caution is, in my view, justified. PROFESSOR RODNEY WILSON: Director of postgraduate studies, Durham University, UK
I t is of course not just Islamic banks who are hoarding cash, as completely useless quantitative easing has led to the hoarding of cash by conventional banks on a cosmic scale. The nature of Islamic banking, however, is such that they are more risk averse and conservative than conventional credit institutions. The answer to the questions is that there is nothing whatever that Islamic or conventional credit institutions can do to improve the situation, within a deficit-based monetary system at least, because the underlying problem is not a shortage of credit, but a shortage of creditworthy projects and people. Once again, wealth has become unsustainably concentrated in too few hands — as it has periodically for thousands of years — through the toxic combination of compounding interest on debt, and private property in land. There is no monetary solution; the only solution is systemic fiscal reform. The good news for Islamic banks is that they can play a key role as service providers in the reform process. CHRIS COOK: Principal, Partnerships Consulting
T he hoarding of cash by Islamic banks is not solely caused by their conservatism, but is also the result of an absence of alternative products in which to invest. This lack of alternative products, coupled with a reduction in availability of common Islamic financial instruments (Sukuk issuance dipped to an all-time low during the second half of 2008 and the first half of 2009), has not made the situation any better. The current economic climate is also a contributing factor, given that cash is typically seen as a defensive asset class. This has resulted in banks, institutions and individuals retaining higher levels of cash balances. Many companies with historically good credit ratings are currently seeking to establish new banking relationships, given that their current banks and many of the larger financial institutions are not in a position to lend. For Islamic banks with substantial available funds (a rarity in today’s market), this may provide significant opportunities to extend their client base and expand their investment options while assisting their local economy. DR NATALIE SCHOON: Head of product management, Bank of London and the Middle East
T he hoarding of cash by these Islamic banks is a temporary measure. In Islamic jurisprudence, if cash is held for a full calendar year, Zakat or compulsory charity of 2.5% will be due on Muslim-owned institutions. For the last 14 centuries, these requirements have enabled the flow of cash into society that has encouraged trade and commerce versus the hoarding of cash. The central government has encouraged this movement of cash by flooding the market with more capital, which will further stimulate it. As opportunities arise in the marketplace with supply and demand forces at play, the situation will resolve itself. OMAR KALAIR: President and CEO, UM Financial Canada
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