Date: April 21st, 2003

Title: The implications of globalisation for Islamic finance

Author: Professor Rodney Wilson, University of Durham, UK

Within international financial organisations there is considerable interest in Islamic banking, and it would be wrong to see those organisations associated with the “Washington consensus”, notably the IMF and World Bank, as being antagonistic to Islamic economic ideas. Indeed the IMF sponsored a study back in the 1980s on Islamic banking that was seen by many as an important

contribution to the growing literature at that time, and a work that helped bring Islamic finance to the attention of a wider non-Muslim readership. Since then there have been further major studies undertaken by research economists working at the IMF, notably the working paper by Luca Errico and Mitra Farahbaksh on the regulation and supervision of Islamic banks, a summary of which appeared in the IMF Survey. At the macroeconomic level there has also been a willingness by the IMF to encourage investigation of how monetary policy can operate and debt management handled in compliance with Islamic principles. This has resulted in a useful exploration of the issues by V. Sundararajan, David Marston and Ghiath Shabsigh, all of whom are researchers at the IMF.

The World Bank has long had close relations with the Islamic Development Bank and both organisations have co-funded projects in a number of Muslim countries. There are also a number of Muslims working for the World Bank who are enthusiastic about Islamic finance, and keen to point out the merits of such a system. Zamir Iqbal in a widely read article emphasised that Islamic banking not simply about interest free financing, a source of confusion in the West, but rather has to be understood “in the context of Islam’s teaching on the work ethic, wealth distribution, social and economic justice, and the role of the state”. Iqbal points out the virtues of Islamic finance as it “encourages risk-sharing, promotes entrepreneurship, discourages speculative behaviour and emphasises the sanctity of contracts”. This positive stance on Islamic finance by IMF and World Bank researchers has undoubtedly helped to break down barriers to the acceptance of Islamic banking in the Muslim world itself.

GATS and the opening up of domestic retail and investment banking markets Although Nabil Hashad has written about the implications of GATS from an Arab banking perspective, within the Islamic financial community only limited attention has been paid to the issues of international banking competition. Yet the majority of middle and high-income Muslim states are WTO members, including Malaysia, Turkey, Egypt, Jordan, Tunisia, Morocco and five of the six GCC states. This membership not only has implications for trade, but for financial services through the GATS provisions for the opening up of markets for banking and insurance. In some Muslim states such as Egypt and Syria the banking system is largely state owned, while in other states, notably Kuwait and Saudi Arabia, there are limitations on the share that foreign

institutions can hold in the ownership of local banks. Privatisation of the state owned banks, and the removal of ownership restrictions is likely to result in the take-over of local banks by multinationals.

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Zubair Iqbal and Abbas Mirakhor, Islamic Banking, IMF Occasional Paper No. 49, Washington, 1987.
Luca Errico and Mitra Farabaksh, Islamic Banking: Issues in Prudential Regulation and Supervision, IMF Working Paper 98/30, Washington, March 1998.
Luca Errico and Mitra Farabaksh, “Unprecedented recent growth of Islamic banking calls for specialised regulatory framework”, IMF Survey, May 11th 1998, pp. 151-153.
V. Sundararajan, David Marston and Ghiath Shabsigh, “Monetary operations and government debt management under Islamic banking”, in Zubair Iqbal, (ed.), Macroeconomic Issues and Policies in the Middle East and North Africa, IMF, Washington, 2001.
Zamir Iqbal, “Islamic financial systems”, Finance and Development, June 1997, pp. 42-45.
Ibid.
Nabil Hashad, “Financial globalisation and GATS: implications for the Arab financial sector”, Finance and Industry, No. 16, 1998, pp. 7-47.