Financial crisis a chance for Islamic banking to shine

Wednesday November 12, 2008
PM: Financial crisis a chance for Islamic banking to shine


KUALA LUMPUR: The global financial meltdown stemming from the US subprime woes actually poses an opportunity for the Islamic finance system to demonstrate its uniqueness, said Prime Minister Datuk Seri Abdullah Ahmad Badawi.

He said that, following the crisis, observers were considering the Islamic system with envy and respect as it prohibited speculative excesses.

He said the financial meltdown showed the desperate need for a system like Islamic finance, which is based on the principle of profit-sharing where both parties are subjected to potential losses and returns.

“Thus, it is fair and equitable. Islamic banks do not buy or trade debt; rather they manage concrete assets which are tied to real economic activities,” he said, adding that prohibitions against high levels of debts, unsecured debt and speculation result in high financial prudence.

“These ethical and moral safeguards are missing in the conventional system,” Abdullah pointed out.

He said the financial crisis had its origin in the innovation of buying subprime mortgage loans, where pools of subprime loans were repackaged, and then sold as tradable securities.

“Very soon, financiers were actively trading bundles of subprime loans, most of which had risk profiles that no one truly understood.

“In reality, these repackaged subprime loans were nothing more than artful works of deception that fed the speculative excesses and hubris in the financial markets,” he said in his speech which was read out by Minister in the Prime Minister’s Department Datuk Seri Ahmad Zahid Hamidi at the launch of the International Shari’ah Research Academy (Isra).

Abdullah said that in making itself a competitive industry the Islamic finance sector must continue to clarify and resolve issues.

The issues includes the different interpretation of the syariah which had led to some Islamic banking and finance products being accepted in one Muslim country but deemed dubious in another.