Date: April 21st, 2003

Title: The implications of globalisation for Islamic finance

Author: Professor Rodney Wilson, University of Durham, UK

Islamic finance has become a worldwide industry, with assets under management in accordance with the shariah law valued at over $200 billion. There are so many claims and numbers but we need to spend the effort to define exactly what the number is, where these funds are invested, in what instrument, and who manages these funds and what investment tools, models and goals are used? Within individual countries, especially in the Muslim world, Islamic finance plays a significant role, with the financial systems of countries such as Iran and the Sudan operating under the shariah law. We usually say that the investment and banking is under the “Shari’aa Law”, but what is that? Is it a mere replacement of the word interest with the words: “Profit”, “Service Charge” or “rent taken as the index of LIBOR or Prime Rate”. Are these efforts focused on sincere & real disengagement from the Riba /Interest (money renting). Other countries such as Pakistan are preparing to implement laws on riba free banking, while in the Gulf states Islamic banking is playing an increasingly significant role, accounting for over 20 percent of deposits in Kuwait and Qatar. Bahrain has become a major regional centre for Islamic finance. At the same time many major multinational banks including Citibank, HSBC, ABN-AMRO and Deutsche Bank are offering Islamic financial products, while in Malaysia a sophisticated market in Islamic securities has developed, and Bahrain is providing money management instruments that comply with the shariah law. We need to ask ourselves about the motivation of these major banks in offering the Islamic Products & the modes operandi used. It is in my opinion to meet market demand but without deviating away from the principles of the Riba System. So, nothing new and unique is offered to capture the imagination of the people & offer them products & services that they need.

In global terms Islamic finance is a limited niche activity- IS IT? There are others in the Islamic Banking Arena who wants to look at it as a movement not only for Muslims but also non-Muslims. However, while international financial markets are dominated by riba based activity. There are significant pressures from international organisations such as the IMF and the WTO for Muslim countries to open up their financial markets to multinational banks. International rating agencies such as Moodys and Standard and Poor classify Muslim government debt and rate commercial banks, and even some Islamic banks, which affects the terms on which they can conduct their business. The Basle based Bank for International Settlements has capital adequacy guidelines that pose significant challenges for Islamic banks and Islamic finance more generally.

How great a threat is globalisation to Islamic finance, and how should Islamic banks respond? This paper suggests that there are threats, but also opportunities. WE NEED TO DEFINE GLOBALIZATION, ITS IDEAL INTENT AND ITS REAL INTENT! Furthermore globalisation is not a new phenomenon, nor does it necessarily imply westernisation. The Muslim world was exploited in the 19th century and for much of the 20th century with the penetration of western capital, but in its early years, Islam itself promoted globalisation through the transmission of its value system, a process that has been reinvigorated in recent decades. Contemporary globalisation involves not merely freer trade and capital movements, but also the communication of ideas by new methods including the Internet. Indeed it is the advance in information and computer technologies that is one of the major forces driving globalisation, which makes it possible for market participants and regulatory bodies to collect and process the information they need to measure, monitor and manage financial risk and to price and trade complex new financial instruments. Islam, and Islamic finance in particular, has a message to spread, and global networks are arising for this purpose. It is the spread of ideas rather than mere money that is the greatest challenge, but one that presents hope for Muslims.

The paper will be organised into sections:

• A review of previous studies on Islam and globalisation and work on Islamic finance undertaken by international financial institutions
• GATS and the opening up of domestic retail and investment banking markets
• The Basel Accords, the rating of Islamic banks and FSAP financial monitoring
• Differentiating Islamic financial instruments by global product rather than national segmentation
• Creating a global market in Islamic securities
• Towards a pluralist international financial and trading system

Previous studies
There is an extensive literature on Islam and globalisation, usually adopting a political economy approach. Some authors, notably Ali Mohammadi, take a negative stance viewing globalisation as a type of economic re-colonisation. Others have taken a more positive view, notably the economists and finance specialists attending a conference in Malaysia the proceedings of which have been published in a book edited by Mustapha Nik Hassan and Mazilan Musa.

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Gerd Häusler, “The globalisation of finance”, Finance and Development, vol. 39, no. 1, pp. 10-12.
Ibrahim M. Abu-Rabi, “Globalisation: a contemporary Islamic response?” American Journal of Islamic Social Sciences, vol. 15, no. 3, 1998, pp. 15-44.
Ali Mohammadi, Islam Encountering Globalisation, Durham Modern Middle East and Islamic World Series, Volume 2, Curzon Publishing, Richmond, 2002; Ali Mohammadi and Ahsan Mohammad, Muslim World in the 21st Century: Globalisation or Re-Colonisation, Ta-Ha Books, London, 2002.
Mustapha Nik Hasan and Mazilan Musa, (eds), The Economic and Financial Imperatives of Globalisation: An Islamic Response, Institute of Islamic Understanding, Kuala Lumpur, 2000.