Last month, President Obama unveiled more details for financial regulation reform with a proposal for the Financial Crisis Responsibility Fee that will help pay back U.S. taxpayers for Wall Street's bailout. Before more reform proposals are submitted, the White House should incorporate a successfully proven idea into its future reform agenda that would establish an alternative framework for finance and help bring greater transparency and accountability to financial regulation: Islamic banking and finance.
Supporting the rise of Islamic banking and finance in the U.S. would prove advantageous on two levels. First, the domestic economy would be helped with the creation of new financial institutions that are not associated with our current failing financial giants. And second, such a move would demonstrate to the Muslim world that President Obama is indeed promoting a new era of equal economic prosperity and opportunity for Muslims here and abroad.
The evidence is unambiguous: despite a major economic downturn this past year, Islamic banks worldwide have remained resilient, continuing to grow at an annual rate of more than 20 percent. In fact, the financial crisis has created demand for a form of finance that is more conservative and ethical. In contrast, asset growth for conventional banks only expanded 6.8 percent, down from 21.6 percent the year before.
Certainly, the recent Dubai crisis has left many uneasy who follow Islamic finance. However, Dubai's Islamic bonds are linked to real assets and therefore will fare better over time than conventional bonds.
Overall, Islamic banking and finance is a booming global business and the U.S. needs to get on board if it desires to seek creative solutions to help our economy rise from ruin. More importantly, it is built on a principle that Wall Street firms could learn from: profit and loss sharing.
Like other mainstream religions, Islamic law states that charging interest is considered usury and not allowed. Whether a large corporation or private citizen, the bank shares the risk of any investment with the customer, and together they divide any profits or losses.
The notion of disallowing interest has a long historical and religious tradition that many Americans can relate to. For example, the Greek philosopher Aristotle excoriated charging interest and the Romans restricted its practice. The Bible also makes several references condemning high interest rates to lend money.
With no shortage of faith-based communities, not to mention an estimated five million Muslim-Americans, the U.S. possesses an unexploited niche market. Islamic banking is open to all faiths and provides an important outlet for those with a moral compass tired of our broken financial system. Moreover, Islamic finance is linked to real assets, a principle largely lost in the last decade of deregulation.
Since September 11th, illicit terrorism financing by Islamic banks has been exaggerated and should not be viewed with skepticism as an outlet for these shady financial networks. Rather, they should be viewed as safe and transparent financial alternatives for all types of ethnic and religious groups. Further, Islamic finance represents the most important global economic force designed to prevent investment in pornography, prostitution, narcotics, tobacco or gambling.
In the past few years, large banks, including Citigroup, HSBC, Lloyds, Barclays, and Deutsche Bank, as well as financial capitals like London, Tokyo, Singapore, and Hong Kong, have opened Islamic-compliant windows or branches. Non-financial hubs like Ireland and South Korea are also working on legislation to provide easier investment access for Islamic financial firms. Additionally, the Dow Jones created an Islamic Index that now tracks more than 600 companies whose operations and services adhere to Islamic financial practices.
In 2007, British Prime Minister Gordon Brown called on London banks and Parliament to make London "the global center of international Islamic banking," removing barriers to Islamic-compliant investing. Today, Great Britain's Islamic banking sector is bigger than Pakistan's.
President Obama needs to follow London's lead. The benefit goes beyond immediate financial windfall. It will demonstrate to the Muslim world that the U.S. is a safe and trusted gateway for global trade and business. Additionally, Islamic finance provides a potential cash infusion at a time when our dollar is depreciating and loans to small business owners are at a standstill. Certainly, such a move should not be seen as a compromise to the U.S. government's mission of hunting down terrorist financial networks.
The U.S. government should push harder in its financial regulation reform initiatives to promote the rise of this important sector that has proven its worth and stability throughout the financial crisis. Tax incentives, new banking legislation that equalizes the playing field between conventional and Islamic banks, and more training initiatives within government regulatory agencies that develop better expertise about Islamic finance are three easy ways to promote a major boost to the Islamic financial sector in the United States.
With the prospect of a prolonged recession, it is time the White House and investors instill faith into our financial system.
Ibrahim Warde is Adjunct Professor of International Business at the Fletcher School of Law and Diplomacy, Tufts University and author of Islamic Finance in the Global Economy.
Geoffrey F. Gresh is a Research Fellow and Ph.D. Candidate in the Program on Southwest Asia and Islamic Civilization at the Fletcher School.