Islamic Finance in the Global Economy

By Ibrahim Warde | Go to book overview

CONCLUSION: ISLAMIC FINANCE
AND THE GLOBAL FINANCIAL MELTDOWN

When it first appeared in the mid-1970s, Islamic finance was generally dismissed as an inconsequential epiphenomenon of the oil boom. Introducing the religious factor in what was perceived as a quintessentially secular area struck many as bizarre, and many critics asserted that the growth of Islamic banks was bound to remain stunted.1 In reality, for most of its existence, Islamic finance experienced growth rates in the double digits. In fact, the rate of growth accelerated from an average of 14 per cent a year in 1994–2002 to 26 per cent a year in 2003–2009.2

The overall record is nevertheless mixed. On the one hand, Islamic finance by becoming a permanent feature of the global financial system has proven its viability. It did not, however, quite live up to its original billing. Rather than being a different financial system, based on partnership finance, which would bring social and economic development to the Islamic world, Islamic banks have generally mirrored conventional finance and concentrated on short-term financial transactions.

Islamic institutions thus raise the inevitable question: is Islamic finance necessary? Stated differently, does it add anything of value to the conventional banking system? Before discussing the issue, two points should be stressed. One is that the gap between promise and performance could be attributed to the youth of the industry. Modern Islamic finance started in earnest only in the mid-1970s. Its evolution has been marked by a constant process of trial and error, and its shortcomings may be unavoidable growing pains. The second point is that it would be unfair to judge Islamic institutions too harshly, considering that the world’s most prominent conventional institutions have not proven to be exemplars of either probity or strategic acumen. Although it could be argued that Islamic finance could still fulfill its original objectives, the argument of this concluding chapter is that the recent financial meltdown has recast the debate about the role and contributions of the Islamic sector.

The near-collapse of global finance brought to light the consequences of nearly three decades of unbridled deregulation and the unprecedented “financialization” of the economy and society.3 Financiers were the main actors and beneficiaries of the new “gilded age” that preceded the meltdown. In the words of Sanford I. Weill, who had assembled the Citigroup conglomerate, “People can look at the last 25 years and say this is an incredibly unique period of time.

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