Academic journal article Journal of Finance, Accounting and Management

Islamic Finance in the Age of Black Swans and Complexities, for a Multipolar World

Academic journal article Journal of Finance, Accounting and Management

Islamic Finance in the Age of Black Swans and Complexities, for a Multipolar World

Article excerpt

1.Introduction

By 2025, Brazil, India, Indonesia, Korea, Russia are expected to join China as new growth poles in the global economy, according to a recent World Bank Global Development Horizon report, (2011). The size, dynamism and dominance in forward and backward linkages in trade and investment of an economy are the criteria for selection. However, the central rationale for this fast developing consensus is supported by the fact that the present unipolar regime- dominated by U.S., is under ever increasing debt stress; creating serious doubts about its sustainability. This has led to developments where (i) The balance of global growth is shifting from developed to emerging market economies leading to the emergence of a new global economic order; (ii) there will be a shift in the drivers and sources of global trade and investment flows; and, (iii) the international reserve currency structure will move from a unitary to multicurrency regime. The evidence for the premise includes the fact that: (i) the emerging markets are leading the global growth; (ii) these economies have been a major source of origination of cross-border mergers and acquisition with a significant increase from US$27 billion in 1997 to US$254 billion in 2011 and from 576 deals to 2,447 over the same period; (iii) emerging market economy corporates have increased the strength of their presence in the global financial markets as their borrowing increased from US$123 billion in 2000 to US$461 billion by the end of 2010; and (iv) their borrowing costs have reduced. It is for the first time that the emerging markets have gained the status from being plain borrowers to becoming plain creditors (sheng, 2009).

There are indications that the shift in the global economic growth drivers which began in the 1990s has accelerated. During the period of2000-2008, twenty-nine countries had achieved sustained growth rates of 7 percent or higher for 25 years or more, thus cushioning global growth performance. Eleven of the 29 countries were African. Among these, the Asian economies were the best performers. The United Nations Economic and Social Commission for Asia and Pacific 2011, considers the region as the most dynamic in the global economy, growing at 8.8 percent in 2010 and forecasted to grow at 7.3 percent in 2011. This compares well with the anemic growth performance of the countries at the center of the present unipolar system. One of the most important implications of the shift is the potential for the emergence of multiple international reserve currencies. The Global Development Horizon, 2011 suggests three possible scenarios for the future: (i) continued dominance of the US$ as the international reserve currency; (ii) possibility of the SDR as the international reserve currency; and (iii) emergence of at least three international reserve currencies. In the first scenario, evidence suggests that the US$ is being used less and less as official reserve in invoicing of international transactions, as an anchor for other exchange rates, and in denominating international claims. The SDR, while originally designed with the intention of serving as the international reserve currency, has never been allowed to serve that function and it is not likely now. What is more likely, according to the report, is that Chinese currency will emerge as the third international reserve currency alongside the US$ and the euro. China is now the largest exporter in the world. As Chinese corporates and banks increase their activities across the world, they are likely to settle their trade, track accounts, and book their profits in renminbi. Chinese sovereign wealth funds are now among the largest in the world, China has large international reserves, and debt and equities are being issued in renminbi. Consequently expectation of its emergence as an international reserve currency is well founded. However, there are few major obstacles which if not confronted, may not only threaten the emergence of a multipolar regime, but could lead to a failure in reaping the full benefits from such a development. …

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