Can Islamic Finance Improve the Western Financial System?

With the proposed Tobin Tax and looming draconian clampdowns on risky financial practices, will the Western financial system model itself after the Islamic financial system to avert future crises?


By: Ringo Bones


As of late it looks like French president Nicolas Sarkozy is trying his best to push through his Tobin Tax proposal – a tax to penalize unnecessarily risky behavior in the financial trading world – to the Western financial centers. Quite odd, given the French President’s disdain against Islamic headscarves that he finally allowed legislation of a law against the wearing of such “overt religious symbols” in French government institutions now that he is now planning a financial reform that would transform the Western financial system into something that is closely modeled to the Islamic financial system. The question now is how closely – if ever – will the Western financial system be modeled after a financial system that was developed and established in the financial world?

Given that the Islamic world have always viewed gambling or “Maisir” as “Haram” or forbidden under religious grounds, established modern Islamic finance that resembles that of the established modern Western system has always been characterized by a somewhat low-risk trading schemes. Quite a contrast to it’s high-rolling Western counterpart that during the time when Ronald Reagan ruled the free world, Wall Street and other major Western financial trading centers could almost be mistaken as a gambling casino due to the risk and speculation that the traders routinely practiced. Not surprisingly, it seems that sizable financial crises are always around the corner waiting to strike at the expense of the “financially unwary”.

Western insurance companies – especially those dealing in subprime mortgage securitization and credit derivatives – are viewed as the worst offenders. Especially in the light of the subprime credit crisis of 2008 that eventually broke the back of Lehman Brothers on the 15th of September of that year. Even Persian Gulf region financial institutions were exposed to this subprime mortgage debacle to some extent - Which is quite a contrast to the Islamic finance’s Takaful scheme which is based on social solidarity, cooperation, and mutual indemnification of the losses of members. This is “probably” the history’s first multi-billion dollar cultural misunderstanding.

With the upcoming reforms and revisions of the Basel Accord – i.e. the minimum reserve capital requirements of major banks and other financial institutions. Not to mention the proposed clampdown on the “bonus culture” that rewards high-risk behavior and adventurism in the Western financial world (as long as they make tons of money?), will Western financial institutions be modeling themselves to that of the Islamic financial system? And does the West’s future prosperity dependent on it doing so?

Back in August 16, 2009, the credit rating agency Moody’s Investor Service became concerned about unused surplus liquidity being a risk factor for Islamic finance. Does this mean that Islamic finance is Basel Accord compliant if proposed revisions require an increase in minimum capital requirements? Maybe, but I don’t see it as a “risk factor”. Maybe it is the never-ending quest to avoid “Gharar” or uncertainty that makes Islamic finance to have it’s very own distinct “flavor” that is radically different in comparison to the Western financial system. The Islamic world had saved the Western finance back in the past via the zero to nine digits of the Hindu-Arabic numeral system, maybe it is time for another “bailout” this time around.