For progressives seeking a modern, reformist, progressive alternative to our failed banking system there is a system of finance that has proved so far to be a model of probity and transparency. It is a system of finance that happily avoids the extremes of right and left, preferring to marry the freedom and innovation of the market economy to the fairness and balance of social democracy. It is called-take a deep breath-"sharia-compliant" finance, but has nothing to do with the beheading, amputations and stonings that some of us here in the west automatically associated with Islamic sharia law.
Sharia-compliant, or Islamic, finance is committed to promoting goals any proud progressive would recognise: equity, moderation, social justice. It is system that revolves around prudent lending, the reduction of risk, the sharing of profits and an absolute ban on speculation and the short-selling of stocks. Debt is actively discouraged and so dealings with any organisation that has balance sheet more than a third of which is debt (which is to say, all banks!) are forbidden, as are investments in enterprises deemed unethical by Islamic scholars, such as casinos or weapons factories.
Perhaps the rearest feature, however, is the prohibition of interest-or making money out of money. As it is not permissible for banks to charge interest on their loans, sharia-complaint deals are usually structured so that the bank ends up leasing the property to the homeowner, who essentially ends up paying rent until ownership is transferred. Critics charge that the rent seems suspiciously similar to interest payments. They also point out that it ends up costing homeowners more to set up and pay off Islamic mortgages than conventional products, like with all other niche products and, in particular, ethical investments: the so-called "piety premium".
Islamic financiers disagree, stressing the joint-ownership and profit-sharing aspects of the sharia model. "The relationship between us and the customer is based on sharing risk and sharing the rewards from the financing and investments we make on their behalf," says Sultan Choudhury, commercial director at the Islamic Bank of Britain, this country's only stand-alone, sharia-compliant retail bank. "The returns are based on the amount of profit realised from each transaction."
Let me declare an interest here (in case you had not already noticed the name on the byline): I am a Muslim myself, a practising, believing Muslim. Yet, to my shame perhaps, I own not a single sharia-compliant financial product of asset. Until the recent implosion of the banking system, I had paid very little attention to the Islamic finance industry, assuming it was simply a niche activity at best, or a gimmick at worst. As a result, my own current account, pension, mortgage, loans and credit cards are all as traditional, conventional and mainstream as the next (non-Muslim) man.
Yet the reality is that Islamic finance is growing faster than any other subset of world banking, at an average annual rate of between 15 and 20 per cent. the IMF says the number and reach of sharia-compliant financial institutions worldwide has risen from one institution in one country in 1975 to more than 300 institutions operating in more than 75 countries today. Over the past year alone, sharia-compliant assets across the globe have grown by almost third to more than $639bn, according to the latest analysis of the industry from the Banker magazine. If the current trends continue, Islamic finance will have broken through the $1trn mark by 2010.
Here in Britain, the Financial Services Authority has licensed five stand-alone Islamic banks-including the Islamic Bank of Britain, which has been reporting as significant increase in the number of non-Muslim customers applying for accounts since the start of the financial crisis. Bank officials say the numbers are growing because Islamic finance offers a "safer option" for savers and investors, regardless of faith. According to the Islamic Bank of Britain's marketing director, Steven Amos: "Our core business will always be Muslims, but the numbers of non-Muslims are really picking up. We've had increased interest and it's one of the number of reasons why we're insulated from the credit crunch."
To get an Islamic bank account you don't have to go to the Islamic Bank of Britain only. So far, 20 major global banks have set up units to provide sharia-complaint financial services. HSBC began offering Islamic products and services to its customers in 2003; Lloyds TSB followed in 2005. The mainstream has gone Muslim.
Emile Abu-Shakra, spokesman for Lloyds TSB, explains. "We started offering Islamic financial products about three years ago and when we started out we were just in five branches around the country," he says. "Now we are in two thousand branches."
The bank has now expanded its range of products to include a current account, a mortgage, a student account, an investment fund and a business and corporate account. Its Islamic finance products are designed with Muslims in mind, but anyone can use them if they fulfil their needs.
Does Lloyds TSB believe further growth and diversification in the field are still possible? "The principles of Islamic finance could be applied to a number of different products, so there are possibilities for Islamic versions of credit cards, loans, saving accounts and asset finance as well," says Abu-Shakra. "It's just a matter of time."
The remarkable feature of Islamic financial institutions, products and assets is that, although they may have not produced fantastically high returns in any one year, they have produced consistent returns over the past decade-and continue to do so even now, in the wake of the credit crunch. This year, global markets are down by more than a third off their peak but the Dow Jones Islamic Financials Index, in comparison, has lost 7 per cent over the same period and actually rose 4.75 per cent in the most recent September quarter.
Such statistics make me truly wonder whether Islamic banking, with its antipathy towards excessive risk, debt and interest, and with its emphasis, underlying assets, could have saved us from the credit crunch.
"Had the Islamic financing principle of fairness and the concept of investing in partnership been slightly more prevalent in conventional banking of late, events may have turned out a little differently," says Dan Taylor, head of banking at the accountancy giant BDO Stoy Hayward. "The Islamic principle of requiring securities to be backed by assets means that the use of, say, collateralised debt obligations, or CDOs, would not have been allowed by sharia-compliant institutions."
Professor Rodney Wilson, who teaches Islamic finance at Durham University, agrees. He mentions that not a single sharia-compliant financial institution has failed since the start of the current crisis. Why? "Islamic banks follow a classical model of funding from their own deposits rather than borrowing form wholesale markets."
Excessive leverage is therefore not an option for a sharia complaint bank-as opposed to conventional banks, which in this country by 2008 were lending out roughtly [pounds sterling]7000bn more than they took in deposits, betting that the good times would go on for ever and tomorrow would never come.
Well, it did: the conventional banking sector is now on the verge of collapse. Meanwhile, Islamic institutions here in Britain continue to make money. The European Islamic Investment Bank, a UK AIM-listed sharia-compliant investment bank, reported revenues up 14 per cent in June 2008 interims. On the retail side, the Islamic Bank of Britain reported 5.5 per cent growth in customer numbers and 7.2 per cent growth in customer deposits in the six months to June.
So, it is no wonder that the British government-despite distancing itself from the Archbishop of Canterbury's tentative support for sharia law courts-has been proactively encouraging the proliferation of sharia-compliant financial institutions for several years now. When he was chancellor, Gordon Brown repeatedly urged the City of London to become the "gateway to Islamic finance".
Just late last month, the government announced the launch of the first sharia-compliant pension funds, and officials are now even considering using special interest-free, assetobacked Islamic bonds, or sukuks, to help fund the building of the athletes' village for the London 2012 Olympics.
In America early last month, the US treasury department hosted a course for policymakers called "Islamic Finance 101". This followed a visit to Saudi Arabia by the treasury deputy secretary Robert Kimmitt, during which he confirmed that sharia-compliant finance is now firmly on his country's agenda. "The US government is studying the salient features of Islamic banking to ascertain how far it could be useful in fighting the ongoing world economic crisis," he said.
The Islamic finance industry is entering a brave and surprisingly welcoming new world-but obstacles remain. Determining exactly what is or isn't sharia-compliant, for example, can be difficult. Banks such as HSBC and Lloyds TSB have their own sharia advisory boards, made up of senior Islamic scholars, but one board's interpretation of compliance with the sharia is not necessarily the same as another's. Standardisation of rules and regulations across the sector is vital, but could take some time.
It could also be a while before we even have enough scholars to carry our the standardising-right now, according to one survey, there are only about 260 Islamic scholars worldwide who have the requisite knowledge, business savvy and linguistic skills.
However, others, like Professor Wilson, are more sangune. "The shortage of qualified and experienced scholars should not be a problem in the longer run, as there are aspiring British Muslim scholars studying for higher degrees who have a good knowledge of both Islamic law and modern finance."
So Islamic banking is here to stay. It is a practical, viable and resilient alternative. To borrow a phrase from the Archbishop of Canterbury, the spread of sharia finance, if not sharia law, now "seems unavoidable".
I have even convinced myself: I now intend to invest in a sharia-friendly sukuk and to try to switch my interest-only conventional mortgage to interest-free Islamic version. In this era of financial crises and economic chaos, it may be time for all of us-Muslims and non-Muslims, investors and savers alike-to join the halal banking revolution.
It may be our only hope.
Mehdi Hasan is news and current affairs editor at Channel4
We are entitled to ask for decisions to be made in the public interest
Now that the government is a major shareholder in our high street banks, taxpayers have every right to challenge how they are run. Sir Philip Hampton and John Kingman, the chairman and chief executive of the body which manages our investments, UK Financial Investments, insist that their mandate is purely commercial and that they will ensure the banks act in the interests of all the shareholders.
This has not stopped the government pressuring the main lenders to reduce mortgage rates by the full amount of the Bank of England's interest-rate cuts. Not from stepping in to underwrite a [sterling pounds]1bn scheme with mortgage lenders to protect homeowners.
But a hands-off stance would be neither sustainable nor appropriate. After all, "commercial decision-taking" by the banks is why we got into this mess in the first place. The banks have destroyed value for shareholders. But then, shareholders are expected to take risks. Taxpayers are not. They will certainly expect a reasonable financial return from their multibillion-pound investment. However, as citizens and customers, they will want much more.
First, the banking system as a whole has to be stabilised, so that we never again find ourselves in a situation where the ordinary process of customers making payments comes as close to collapse as it did this autumn. But the cirsis has given us an opportunity to take a longer perspective. The recently announced government plan to fine banks that treat customers unfairly is a start, but not enough. It will be hard to enforce and do little to change how the banks operate. Banks must be willing to make less money from some groups of customers during the recession, including borrowers struggling to stay in their homes, and small businesses.
For the foreseeable future we are entitled to ask banks to take decisions in the interests of the public as well as those of shareholders.
The right kind of regulation can impose some change, but external regulators will never understand a business as well as its managers. What the executives of the more or less nationalised banks need is a framework that gives them incentives to operate in the wider public interest. Forcing specific devisions, such as how much to cut mortgage rates, will not work. Sensible decision-taking needs to be insulted form political pressure.
One way to combine taxpayer interest with banking independence could be through the public-value decision-taking framework used in other public organisations, from arts bodies and the BBC to police forces.
Such frameworks are designed for situations in which mangers have to deliver on several objectives that are not always easy to measure. For example, an arts group might have to balance audience numbers, including particular groups, with customer satisfaction, involvement with schools, or training programmes, and all subject to a value-for-money threshold.
UK Financial Investments needs its own public policy aims: for example, financial stability and consistent customer service, subject to a minimum return over a longer period (say, three years) than the usual quarterly assessment made by stock-market investors.
The banks now owned by you and me might, for example, include among their policy aims, particularly in the light of government ambitions, minimising home repossessions or business overdraft withdrawals in favour of payment renegotiations; measuring loans to target groups such as small businesses; customer satisfaction; and a system-wide assessment of risk (such as risks arising from sales commissions to staff, from large executive pay deals and from non-repayment of loans).
All would be subject to a hurdle of viability over a longer time frame than we have grown used to from our notroriously short-termist system.
Placing a requirement on our banks to make such assessments would reassure members of the public that their interests have been taken into account: it is part of the accountability we need from our banks.
We should then ask whether all banks and building societies in the UK should be required to consider the wider public interest in this way, as part of a new regulatory regime. After all, the responsibility for the near-collapse of the banking system is widely shared among banks, and occurred despite an extremely detailed and hands-on system of regulation. Forcing all banks, including foreign ones, to operate to a framework that considers society as well as shareholders might be the best way to prevent a future crisis.
This crisis, and this moment in the crisis right after the bailout by taxpayers, gives Britain an opportunity to shape a banking system that, for the fist time in decades, serves the long-term interests of the nation.
The author runs the consultancy Enlightenment Economics
Islamic finance marries the freedom of the market economy to the fairness of social democracy
Islamic banking is here to stay. It is practical, viable and resilient…