Wednesday, 22 October 2014  -  28 Thul-Hijjah 1435 H
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Towards full-fledged Islamic banking

THOUGH mainstream banking has been recognized as the malefactor of great wealth that developed hideous credit policies and took insane risks wrecking economies and hurting millions of families world over, and though Islamic banking has been recognized as the ideal solution by several jurisdictions, there is still no operational base for this institution.
Most of the existing Islamic financial institutions only deal with the administrative aspect of Islamic banking. The failure of mainstream banking necessitates the establishment of a full-fledged Islamic banking model based on the double-tier Mudarabah model. Such an establishment will not only promote the progress of Islamic banking but also encourage transformation of traditional banking into Islamic banking, which in turn will galvanize the establishment of an Islamic economic system.
Ruthless investments in speculative driven economic activity, persistent financial scandals and ongoing misconducts by major multinational firms recognize generally that we are in need of more financial discipline and ethics. However, it is increasingly recognized that ethical management has a value of its own – in terms of making safe investments and in contributing to the general well-being of society.
Financial ethics, which attempts to distinguish right from wrong, good from bad and what constitutes desirable conduct in a particular set of social circumstances, is increasingly becoming unfashionable. Today’s business model is about making money through tricks and traps. Giant lenders compete by talking about nominal interest rates and free gifts, but hiding other conditions that bring them money.
The credit crunch has hit Saudi Arabia as well and we have some regional conglomerates falling. According to a recent report, more than 128 local, regional and international institutions are involved in the debt crisis that will have an impact on the local banking sector and will also lead to secondary repercussions on local businesses because credit will be difficult to avail.
Analysts say family run businesses in the region lack transparency. Banks are also to be blamed for lending on the basis of goodwill and reputation.
US Treasury Secretary Timothy Geithner’s recent trip was to reassure Gulf states that the United States looks forward to their investments and that US dollar assets were safe. The US announced a $1.1 trillion budget deficit recently for the fiscal year that began Oct. 1. Geithner’s visit to Saudi Arabia and the United Arab Emirates comes as the US braces for a projected 2009 budget deficit of $1.8 trillion, more than four times the previous fiscal year’s $459 billion shortfall.
America is facing difficult multidimensional challenges. These challenges, I believe, are a never ending circle of problems. We need to break this circle through smart interventions. Introducing Shariah banking system is one of the ways to do so.
Therefore I believe, a Shariah banking system will add more values and the system will contribute to create a better environment of profitability. Proper utilization of natural resources will be affected if we diversify our economy to build a future that is less dependent on oil and natural gas, as suggested by Timothy Geithner.
Why should Gulf states lay the foundation for their own economic downturn for the future growth of the United States? Such a move will be characterized by low oil revenue, high composition of foreign loans and import dominated economic growth.
Saudi efforts to diversify its economy away from energy-related businesses to build a future has yet to fully appreciate the scale of ambition and investment we are seeing in the Kingdom and the Gulf region. To lay the foundation for future growth, by investing more in energy-related business it can meet the twin objectives of high level of Saudization and low-level of unemployment. The Shariah banking can again contribute tremendously by becoming the working capital provider to enlarge the nation’s capacity.
The private sector can play a vital role in the development of the Kingdom’s economy by installing industries of numerous petro-related products. Malaysia adopted similar strategy by shifting from crude rubber export to final rubber products registering a sustainable growth in its GDP. There is great hope that Islamic banking, supporting strategic alliance and cooperation, will strengthen the industrial structure of the country.
It is often the goal of financial institutions to see that the consumer is not well informed. Warren, a contract law professor, has disclosed in a study that current credit cards are designed in ways that obscure its meaning and trick the customers. The study further explains how mortgage and credit card practices threaten to sludge consumers in a credit trap and how banks sop huge profits from overdraft fees.
It will be a gross mistake if Islamic banking is directed only at Muslims. It is more appropriate to look at Islamic banking and finance as an additional item in the menu of choices available to consumers worldwide.
Certainly, finding solutions to the above mentioned problems is an obligation on the entire Muslim community. The task is heavy but if implemented with sincerity we will be able to create an idealism to manage such future challenges. – SG
The writer, a lecturer of economics in Baterjee Medical College, Jeddah, can be reached at: israrulh@gmail.com
 
   
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