Islamic Finance and Global Capitalism

An Alternative to the Market Economy

James Simon Watkins

• Publisher: Palgrave Macmillan
• Year: 2020
• ISBN:
  9783030598402
• Topic: Business
• Subtopic: Financial Services
• Index: Business

This book examines whether Islamic finance and Islamic economics is challenging the orthodoxy of the money markets. Can ethical finance combined with the prohibition on interest and speculation really work in the global economy? With a political economy approach, the book explores how the industry has grown in modern times – from a short-lived bank in an Egyptian city in the 1960s through to a global industry that is today valued at US$2.05 trillion. From the revelation as articulated by the Prophet Muhammed in the seventh century through to the gleaming 21 st century skyscrapers of Dubai and Kuala Lumpur, the book covers the end of European colonialism, the controversial utterances of self-styled religious leaders, the impact of Islamophobia, and the efforts to end poverty through Islamic microfinance. The book uncovers an industry that is both profitable and changing the face of contemporary capitalism.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2020

J. S. WatkinsIslamic Finance and Global Capitalismhttps://doi.org/10.1007/978-3-030-59840-2_1

Begin Abstract

1. Introduction: Is There an Alternative?

James Simon Watkins¹

(1)

Regent’s University London, London, UK

End Abstract

There is no alternative.

As the shock of the 2008 global financial crisis reverberated across continents, pundits stubbornly argued that the excesses of capitalism were something we all had to grin and bear.

Whether it was the seventeenth-century craze for tulip bulbs or the 2001 dot com bubble, finance ministers through to brokers patiently explained to shocked consumers that capitalism’s many upsides do come with occasional downside risks.

Even respected observers of the global markets—years after the 2008 financial crisis—felt that it was all too complicated to change how global capitalism works, including in the world’s number one economy:

Does the United States really know how to build a financial system that is the servant, not the master, of the economy? Sadly, the answer is probably no; at present it is hard to imagine what this would even look like.¹

The immediate responses, during the 2020 coronavirus crisis, as to the future of capitalism was far more mixed. Mariana Mazzucato argued that the 2020 crisis meant capitalism as we know it had to change:

We desperately need entrepreneurial states that will invest more in innovation – from artificial intelligence to public health to renewables. But as this crisis reminds us, we also need states that know how to negotiate, so that the benefits of public investment return to the public.²

Other commentators saw the impact on capitalism from the 2020 crisis very differently. Allister Heath argued, instead, that a more laissez-faire approach to the economy will have to be adopted once the crisis was over:

Hurting the rich for populist reasons is something that governments can afford to do in the good years, not when they are desperate to attract entrepreneurs, capital and talent.³

The well-rehearsed left/right paradigm as to the future of capitalism is playing itself out again.

However, there is an economic model that does not fit neatly within this dynamic and which may contain important lessons for the future of the global economy.

For there was one financial services sector that continued to grow through the 2008 financial crisis and beyond—Islamic finance. The sector had double digit growth during the crisis achieving a compound annual growth rate of 16.94% between 2009 to 2013.⁴

How was this possible?

The answer is that the very restrictions which govern the space in which Islamic finance operates within also help guide the sector’s success.

Monem Salam from the shari’a compliant investment firm, Saturna Capital, has argued that as it is forbidden to invest in key sectors such as conventional banking and gambling as well as avoiding investing in over-leveraged companies, the sector weathered the 2008 economic storm. Salam has argued that the Islamic finance industry is also performing well, as compared to conventional finance, during the 2020 COVID-19 crisis, for the very same reasons.⁵

But many free market thinkers did not take on board the strength of Islamic finance. Instead the focus has been on conventional forms of capitalism. Had not the race to economic and social recovery from the devastation of the Second World War through the Cold War and up to the final collapse of the Soviet Union clearly demonstrated the sclerotic growth of Communist states as compared to the dynamism of Western capitalist countries?

Divided Cold War Germany became the textbook example of how free market capitalism, despite its faults, was the greatest guarantor of liberty and success. Whilst people were trying to escape the poverty of East Germany’s state economy in order to live and thrive in capitalist West Berlin there was no such desire for people to risk their lives to escape the other way.

But when the employees of Lehman Brothers had to carry away their office belongings in boxes after the collapse of the bank in 2008—with markets and Governments going haywire in their efforts to avoid the default of the market economy, it seemed for a moment that Karl Marx’s prediction of the coming collapse of bourgeois capitalism may have been closer to the mark than we ever could have thought.

However, the assumptions that the capitalist system must remain with its ups and downs persisted into the 2010s. Even with the rise of populist politicians, from Marine Le Pen’s xenophobic messaging helping her party gain a third of the vote in the 2017 French Presidential election through to US President Donald Trump railing against international global financial institutions, for many contemporary thinkers it was assumed that there was not much that could really change in economic thinking to avoid such populist pitfalls.

In fact, a number of free market thinkers did not blame the decline of living standards and the impact this has had with the rise of populist politics with faults within capitalism. Instead, failures within the structure of the State were blamed:

The current weakness of much of the western world isn’t rooted in capitalism but in fundamental weaknesses of the State – including its structural fiscal deficits, complex and burdensome regulation, and world-trailing public services, where even some gains in public health are being reversed.⁶

Ayn Rand (1905–1982) was the supreme communicator for championing free markets whilst warning against the depredations of the State. Rand argued that each person is an end in and of her or himself. Each individual must exist for their own sake, neither sacrificing themselves to others nor sacrificing others for their own ends. The pursuit of rational self-interest and of individual happiness was described as the highest moral purpose of life:

Collectivism holds that man must be chained to a collective and collective thought for the sake of what is called ‘the common good’.⁷

But even arch adherents of Rand’s work eventually began to have their doubts. For example the former US Federal Reserve Chairman, Alan Greenspan said he found Rand’s arguments “compelling” but when the 2008 financial crisis finally occurred, his belief in a reduced role for the state and freedom of the markets collided with the facts that were presented before him:

I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.⁸

So, do existing financial models remain fit for purpose in a global economy or is there space for new financial structures which take account of wider ethical and investment needs?

Let’s take microfinance as one example. In developing countries, this form of finance is critical to achieving any kind of sustainable growth. However, conventional microfinance institutions can charge comparatively high interest rates on loans to poor people. These high rates are justified as an outcome of high transaction costs.

However, if you have virtually no assets or a bank account, can you really cope with these levels of interest or could it lead to an invidious cycle of debt?

As we will discuss later in this book, Islamic microfinance would operate on a very different basis as compared to conventional microfinance.

Another criticism of the capitalist model, particularly in countries such as the United States and the United Kingdom, is that the desire for short-term rewards negates the need for long-term “patient capital” to invest in technologies which can address systemic issues impacting societies such as the challenge of climate change. Even the cradle of innovation that is California’s Silicon Valley has not fully risen to the challenge of funding clean tech with the focus remaining, instead, on meeting short-term consumer demands.

Is this too negative a view as to the operation of the capitalist system? After all, as the old expression goes, money attracts money—but that is not necessarily good news for national economies. As Stephane Garelli has argued “the big tech companies in the US and China have a strategy to buy out all the very good start-ups” but:

If you look at the competitiveness of a nation like the UK or Switzerland, for example, then you have to ask yourself where the large companies of tomorrow in those countries are going to come from if all the start-ups are suddenly being bought out.⁹

This is where the need for long-term or patient capital comes in—but are traditional finance structures fixated on short-term growth—or are the long-term Islamic finance models part of the answer to end the patient capital gap?

To be fair, the model of ‘developmental capitalism’ does exist in the Asia-Pacific with the incorporation of long-term finance structures which has contributed to the transformation of economies across the region. Concerns remain, however, that there is no getting around the booms and busts of conventional economics as the 1997 Asian Financial Crisis clearly demonstrated.

But what if there is an economic model that does embrace the market economy—but also has a collectivist approach towards supporting society rather than the individual. Could there be a capitalist structure that embraces the profit motive—but encourages investment for the long term? Could there be an approach that supports entrepreneurs but has a strong ethical underpinning towards supporting society?

Maybe Islamic finance could be part of this answer.

Some would posit the view that Islamic finance is just a cover for continuing conventional finance by other means. Umar Ibrahim Vadillo, for instance, is connected to the relatively small Murabitun World Movement which argues, amongst other matters, that the regular practice of one of the five pillars of Islam, zakat (using discretionary income for charitable giving) is not in compliance with the faith. In respect of Islamic finance, Vadillo has been scathing about its very existence:

The so-called ‘Islamic bank’ is a usurious institution contrary to Islam. The ‘Islamic bank’ is an absurd attempt to resolve, as was done in the case of Christianity, the unswerving opposition of Islam to usury for fourteen centuries. Since its origins, the ‘Islamic bank’ has been patronised and promoted by usurers.¹⁰

By the time you finish reading this book, this claim should be effectively debunked. However, the vehemence of the language does reflect the debates which have occurred as to the future direction of Islam, particularly from the late nineteenth and early twentieth centuries.

The attraction of Islamic finance, for me, was down to the promise of a sustainable funding model which could meet the needs of societies whilst avoiding the depredations of the conventional money markets.

In truth, though, I came across Islamic finance completely by accident.

I had been on the centre left of politics for a very long time and was a former European Parliamentary candidate for the UK Labour Party. I recall seeing some of my contemporaries knocked for six when the communist model finally collapsed in the early 1990s. Was the collectivist approach of the left really a fantasy which could never operate in the real world of human needs and desires?

Later I led a regional business group in the West Midlands of the United Kingdom where the demand for patient ...

Table of contents

• Cover
• Front Matter
• 1. Introduction: Is There an Alternative?
• 2. The Emergence of Islamic Finance
• 3. In the Beginning …
• 4. The Beauty of Islamic Finance Contracts
• 5. Compliance
• 6. Faith and Capitalism
• 7. Ethical and Business Finance
• 8. Can There Be an Islamic Monetary Policy?
• 9. Varieties of Capitalism and Islamic Finance: A Comparative Study
• 10. Islamic Economics and Political Economy
• 11. Branding and Islamophobia
• 12. The Future of Islamic Finance
• Back Matter