Expert opinions, FINANCE

Will Islamic finance save from crisis?

Facing global economic shocks, the authorities of many countries look for different ways to overcome emerging challenges. Habitual tools for overcoming crises, unfortunately, do not always work. Russia, which has come under unprecedented economic and political sanctions, is also in active search to attract capital to the country, looking for preservation and multiplication of available financial resources.
Experts point out that countries with prevailing Muslim populations often tolerate crises much more easily. And unsurprisingly, the Russian authorities and some financial organizations adopt some instruments from Eastern partners, in particular Islamic banking.

Islamic finance: what you can and can’t do

Islamic banking is based on the principles of sharia – a complex of prescriptions that define beliefs and moral values of Muslims. The Islamic financial system is focused on building and maintaining a fair social structure of society. Therefore, Islamic banking system prohibits speculation on other people’s difficulties. Also taboo is imposed on financial transactions related to gambling, lottery, casino activities, investments in the production of alcohol, tobacco, pork etc., all that falls under the category of “haram” (i.e., unpermitted). In addition, sharia prohibits the collection of interest (“riba” – usury) on loans and the use of derivative financial instruments do not comply with the norms of Islam.

It would seem that a lot of prohibitions need to be carefully monitored so that not a single penny could fall into the “haram” industry. However, as experience shows, countries with the Islamic economy are less susceptible to negative influences of crises. Thanks to the fact that the base Islamic funding is the presence of a tangible asset – a real product and demand for it – as well as thanks to lack of complex derivatives, such a model is less susceptible to risks and crises. So, in Islamic banking there are six main types of transactions, from each of them 5-6 more derivatives can be formed. That permits to structure various complex transactions.

In the Islamic finance system, it is not allowed to combine two products into one contract. For example, under the same contract you cannot buy an item via one type of transactions, and then lease it through another type of transactions. To do this, you need to conclude two different contracts.

In addition, the Islamic finance system contains procedures that determine and prohibit speculative instruments.

Islamic banks outpace traditional ones

Through its flexibility and loyalty, the Islamic funding model has become widespread not only in the countries of the Islamic world, but also in Europe. One of the leaders in this part of the world in terms of emissions of Islamic debt instruments is Ireland.

Gulf countries, improves credit growth prospects. And this is despite the increase in interest rates rates and reduction of sukuk emissions (Islamic debt instruments, bond equivalent) amid rising oil prices, the agency Moody’s Investors Service said.

This year, the growth of assets of Islamic banks in the world will also continue to outstrip the growth of traditional banks, the rating agency report says. Strong fundamentals are also expected to stimulate the expansion of assets under the management of the Islamic funds. At the same time, experts predict that the emission of sukuk will continue to decline in 2022.

Economic recovery in key Islamic finance markets will stimulate credit growth and demand for products corresponding to sharia. And we expect Islamic bank asset growth to continue outpacing the growth of their traditional banks,Ashraf Madani, vice-president of Moody’s, says.

The Islamic finance industry has been growing in recent years. Despite the coronavirus pandemic, which had a negative impact on almost all spheres of life, Islamic funding increased by an average of 10.5% in 2020-2021, while conventional lending showed growth of 3.4% only over the same period.

In Muslim-majority countries, Islamic banks succeed in attracting to financial activity the population, that otherwise, for ethical and religious reasons, would remain outside the banking system. This means that the reserve of their growth is higher compared to the usual banks,” Moody’s notes.

The international rating agency provides such data: in September 2021  market share of Islamic financial assets in markets of Islamic States, including the Gulf and Southeast Asian countries, increased to 34.6% of total financial assets, including conventional bank loans. In December 2020, their share was 33%, and a year earlier – in December 2019 – it was 31.3%.

By Zokir Ibragimov, an expert in Islamic finance

Previous ArticleNext Article