interview with Jaseem Ahmed, secretary-general of the Islamic Financial Services Board (IFSB). Although its history is not very long, there has been a veritable explosion of interest in shariah banking, especially given the renewed resurgence of Middle East oil exporters and dissatisfaction among a number Muslims about the state of conventional banking services. You also have fast-growing, mostly Islamic states elsewhere alike Indonesia and Malaysia which have significant demand for such services.
To be sure, many like myself think that shariah banking is not quite a novel practice. While charging riba (interest) is technically not permitted alongside other conventional practices, instruments offered by shariah banking concerns are often merely interest and so forth by other names. That is, the concepts remain the same even in practice even if they fall under different rubrics [1, 2].
But again, who am I to disagree when shariah banking obviously floats the boat of so many others? As the interviewee notes, shariah banking is now a mainstream activity with IFSB members including the BIS, IMF and the World Bank (which perhaps begs the question of just how different it is, but I digress):
How does Islamic finance differ from its conventional counterpart?
I would start with what it shares with conventional finance. The underlying values of Islamic finance are universal and common to Judeo-Christian beliefs, and are derived from the body of Islamic law – known as shariah. Islamic financial transactions must comply with shariah, and thus must be both lawful and ethical.
One way in which Islamic finance differs is that there is a ‘negative list’ of what is prohibited by shariah, and this includes contracts that involve selling things that are not owned by the counterparties (hence no short selling), gambling, hoarding and dealing with unlawful goods and services, which would include alcohol and pornography. A central difference is the prohibition on interest or usury, and this is linked to the idea that money cannot generate money – that there must be an underlying productive activity or real investment that generates a return.
Amongst the most significant differences in the two systems is the attitude towards debt and the burden it places on individuals and societies. Islamic finance does not prohibit debt, but it constrains debt and requires that it be encompassed by ethical considerations that impose obligations on both borrower and lender. Loans must be without interest; there is an obligation to return loans, but there is also an obligation on the part of the creditor to take the borrower’s circumstances into account. This is relevant for today’s post-crisis world in which the global economic recovery is weighed down by the huge burden of consumer debt.
What is the role of the IFSB? Where does its authority come from and which institutions are subject to it?
The principal role of the IFSB is to contribute to the soundness and stability of the Islamic financial services industry through the issuance of standards and guiding principles for prudential supervision and regulation of the industry.
In this sense, our role is essentially similar to the roles played by the three global standard-setters for conventional finance: the Basel Committee for Bank Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors. The difference is that we combine the roles of the three bodies into one organisation. At the same time, we have a mandate to promote cooperation in our member jurisdictions. We also have a major work programme to assist in the implementation of the standards we issue.
When the IFSB was established in 2002, it had nine founding members. Today, we have 189 members across 43 jurisdictions. One third of our members are regulators or supervisors, while two thirds are private sector institutions, so we capture the broad base of the global Islamic finance industry and help to provide a common frame of reference. However, we do not have formal authority over our members – implementation of our standards is voluntary.
The IFSB is headed by a council that comprises 21 members, of whom 20 are governors of central banks. This is similar to the structure of the Basel Committee and underscores the intent to put Islamic finance on a comparable footing in terms of its global financial architecture to conventional finance. I should add that the Bank for International Settlements is a member of the IFSB, as are the IMF, the World Bank and the Islamic Development Bank.
So in Western-speak, I suppose the emphasis on the "real economy" and productive activities would equate to avoidance of rentier capitalism or casino capitalism. Hmm...I too may be warming up to shariah banking if it really does deliver on those fronts. Given how "co-opted" Islamic banking has been by mainstream finance in a Gramscian sense, you have to wonder if it's all that different, though.