The application of even just one Islamic finance principle — materiality/economic purpose — for the motive of achieving economic development of the respective country or state, can be argued for the necessity of development Islamic banking sector in the western world.
The application of Islamic finance principle, materiality/economic purpose assures backing of assets/goods for each monetary unit circulated in the economy. This principle will assist governments in planning according to what assets/goods are essentially needed by the people of the country or state. Issuance of Shariah compliant substitute for treasury bills will make sure that money market funds channelled through Islamic banking institutions are utilized only to finance government controlled imports. Thus through a series of Shariah compliant substitutes for treasury bills auctions, money market funds deployment by Islamic banking institutions can guarantee that each monetary unit is converted into assets/goods. This will witness that this Shariah compliant substitute is used to produce fresh assets/goods in the economy which will gradually replace deficit financing and will stop printing of money in excess of assets/goods. Thus the end result would be the elimination of recession from the economy.
Based on the same principle, Islamic banking funds can be channeled to finance only fresh capital projects, capital expenditure and consumable goods needed by the manufacturers or traders of the country or state. Thus every monetary unit will only be utilized to finance some assets/goods. The money market funds so used by Islamic banking institutions will make sure that every monetary unit is backed by assets/goods. Thus savings of the common people channelled in the economy through Islamic banking institutions will lead to overcome fiscal deficit due to control over deficit financing.
The above-mentioned positive effect of even just one principle of Islamic finance can lead to understand how positive will be the effects of Islamic finance in the overall economic growth of the respective country or state if Islamic banking sector is allowed to develop in the western world.
Senior vice-president — head of product development & research, MCB Islamic Banking Group
Most Islamic banks are market-listed or privately-owned rather than being mutuals. Hence the applicability of ethical banking experiences is limited. By stressing their ethical credentials Islamic banks can extend their business marginally, but their main selling point is that they embrace religious values. Ethical banks remain secular, and their values change with social evolution. Their appeal to Muslim clients is therefore minimal.
Emeritus Professor, Durham University, UK; Visiting Professor, INCEIF
DR NATALIE SCHOON
Principal consultant, Formabb