Following the debt crises, Europe must look to rebuild its financial systems. ANTEA BRUGNONI looks at how Islamic finance could help.
While the values fostered by Islamic finance make inroads across the globe and Shariah compliant transactions grow by leaps and bounds, the European conventional financial sector is affected by a systemic crisis that has spilled over the economy and its very social fabric. The reshaping of key structural relationships is underway and the focus is now on the creation of a more healthy and inclusive society that overcomes cultural and language divides and draws inspiration from models of credit brokerage that offer complementary solutions to the existing ways and means. In this perspective, Islamic finance has all the features needed to successfully address the several fallouts of the crisis and make a solid and sustainable contribution to the new European order that is slowly coming to light.
Had you attended the workshop themed ‘Business In Between Cultures – The Development of Islamic Finance’ held on the 15-16th November 2012 in Sarajevo, the historical capital city of Bosnia Herzegovina, you might have felt a special thrill in the air. Organized by the European Association for Banking and Financial History, the University of Sarajevo-School of Economics and Business and the Bosna Bank International Academy, this event epitomized the variety of ideas and richness of proposals that agitate today’s Islamic financial debate in Europe. Bosnia itself, a country at the periphery of Europe yet central to its history, embodies the current debate as it hosts a centuries-old large European Muslim population. The country is now trying to get closure to its recent dramatic past by becoming a bridge between cultures.
Practitioners, academicians, regulators, advisors and scholars gathered to delve into economic, legal and historical issues with a key question hanging in the air: has Islamic finance contributed to the dialogue between cultures? If not, why and will it? The presentations stressed how Shariah compliant finance offers an alternative version of economic relationships, premised on the ethics and value system of classical Islamic law. Indeed, despite of its seeming incongruity with modern financial markets, the consensus emerged that the intellectual and operational roots of Islamic finance have the capacity of breathing new life into the foundations of an economic system in search of its soul. The standardization of Islamic banking products, both at national and international level, with the view of protecting financial stability, encouraging innovation and maintaining public confidence, also came to light several times in the debate. Whether through the enforcement of a specific interpretation of the Shariah law, hence limiting the effects of other interpretations, or the empowerment of a regulatory body to enforce the decisions of the Shariah boards, regulatory standards are urgently needed. This would strengthen the case of Islamic banking in Europe and, in turn, ensure that credit expansion moves in step with the growth of real economy, help increase the ratio of equity in financing, make sure that liabilities do not exceed the repayment capacity of the borrower, and guarantee the full transparency of the financing processes.
Financial education, “essential with a view to setting up a single European market,” as stated by EU legislation, should include several areas of Islamic finance, and aim to improve the quality and scope of the debate, help research on regulatory issues and product offering and develop synergies with the many areas that Islamic finance shares with ethical finance. A better understanding of the correlation between the structures of the Islamic and the conventional financial instruments will help solving the issue of the so-called ‘convergence paradox’ by explaining differences and similarities between the two systems. And also make clear in which direction should the new regulations go, and which are the hurdles that need to be tackled more urgently. The analysis of the Islamic finance position towards the standard capital theory would, in turn, help researchers and experts to better understand the issues of property rights and economic development, again adding clarity to the structural characteristics of the Islamic finance system.
A number of common themes emerged during the two-day event and represent, in a way, its legacy. Where does Islamic finance stand in relation to other economical systems? Can it integrate with conventional instruments and if so, to which extent? Would Islamic finance profit from rewriting economic and financial regulations anew? And how would these new regulations differ from the ones in use at present? Positioning, reciprocity and quest for complementarity are emerging as keywords in the European economic integration agenda and Germany and France, the two countries with the largest Muslim minorities, certainly share with southern European countries, Italy in particular, the responsibility of putting Islamic finance high in this agenda.
These themes will be taken up and further discussed on the 27-29th June 2012 in Milan at the panel on ‘Rethinking Islamic Finance: Markets, Firms and Institutions’, organized by the Society for the Advancement of Socio-Economics.
Antea Brugnoni is the head of product development at ASSAIF. She can be contacted at
[email protected]
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