Islamic finance got an important airing at the 2011 annual meetings of the World Bank /International Monetary Fund (IMF) held in Washington last week when Ahmad Mohamed Ali, president of the Islamic Development Bank (IDB) was invited for the first time to address the influential 84th Development Committee meeting of the World Bank as an observer.
This year's meeting of the Development Committee, explained Ali, "is taking place at a period when the global economic recovery is threatened by multiple problems including supply shocks (soaring oil prices and Japan's earthquake), financial shocks (euro zone and US debt crises and downgrade of US credit rating), high unemployment, famine and hunger in the Horn of Africa, social unrest in the Middle East and North Africa, and food crisis".
While Ali went on to also discuss his concerns over global economic recovery; the economic growth and prospects in IDB member countries; and the group's responses to the needs of the MENA countries, especially those ones undergoing political and economic transformation, he failed to take the opportunity to put the case for the role of Islamic finance in promoting economic growth and contributing to financial stability.
He instead urged IDB member countries to bolster domestic and regional markets through a coordinated intra-investment and intra-trade agenda that distribute production of goods and services among countries based on comparative advantage; and to enhance human development and critical infrastructure to create incentives for effective private sector growth that create jobs. In some MENA countries, for instance, youth unemployment ranged between 35 to 40%.
He expects economic prospects of the MENA countries to improve in 2012 mainly due to contribution of Saudi Arabia and Turkey, who are also members of the G20 and who have "sufficient fiscal space to provide countercyclical fiscal stimuli to support economic recovery".
The IDB has formulated a multi-tiered program to assist the affected Arab countries in achieving better alignment between economic growth and employment generation objectives, particularly through support to SMEs [small and medium enterprises] and improved access to microfinance facilities. For instance, the IDB along with International Finance Corporation (IFC) and the World Bank established an "Arab financing facility for infrastructure," which will mobilize new resources of up to $1 billion to support inclusive economic growth objectives.
The IDB along with the World Bank, the Arab Fund for Economic and Social Development (AFESD), the African Development Bank (AfDB), the European Investment Bank (EIB), the Agence Francaise de Developpement (AFD) and the Arab Trade Financing Program (ATFP) are also in final stages of establishing a "cross-border trade facilitation and infrastructure program."
The IDB and the IIFC are also mobilizing in the range of $1.5 billion to $2 billion over the next five years to support job creation opportunities and provision of relevant labor market skills for the Arab youth. The IDB itself is in the process of preparing an interim assistance strategy for both Egypt and Tunisia, covering the period 2011 to 2013, with an estimated financial envelop of $2.5 billion and $1.5 billion, respectively.
For that matter, Ibrahim Al-Assaf, minister of finance of Saudi Arabia, addressing the committee on behalf of the Arab group of countries, similarly did not allude to any potential role Islamic finance could play in economic development despite the fact that Islamic banking, according to Muhammad Al-Jasser, governor of the Saudi Arabian Monetary Agency (SAMA), accounts for about 38% of the banking sector assets in Saudi Arabia, which of course is also the largest Islamic banking market in the world in terms of capital and assets under management.
Al-Assaf, however did comment on two important issues which are very relevant to the Kingdom's economy and where Islamic finance does have a role - youth employment and gender equality in the economy. The World Bank in fact is due to publish its next World Development Report (WDR), but his warning was that each country should tackle these challenges within the context of their particular socio-cultural and economic norms.
"Recent developments have indeed put jobs at the center of the policy debate and it is entirely appropriate for the World Bank Group to take an integrated approach to this issue. In addressing issues of social change and social cohesion, the bank should remain within the bounds of its development mandate. [This was a warning shot in the face of the World Bank's policy to advocate gender equality which is an anathema is Saudi Arabia.] Cognizance must also be taken of the variety of cultures and economic settings across the bank's membership, and that no single policy prescription would fit all situations. Lack of adequate employment opportunities, especially for the young, can have significant negative impacts on social stability and the economy," he added.
Perhaps in the light of the recent decision by King Abdullah to give Saudi women the vote in the next elections, Al-Assaf's remarks on gender equality is room for optimism for Saudi women.
The gender equality initiative (of the WDR), he maintained, deserves consideration on its merits. "My overall reaction is that the potential for women's role in and contribution to, developing economies (presumably also the Kingdom) is far from fully realized. Economic empowerment of women is an important development goal because it makes economic sense," he said.
However, the Islamic finance and real economy development message resurfaced a few days after the World Bank Group proceedings on Sept. 29 at Columbia University's World Leaders Forum where IDB President Ali spoke on "The contributions of Islamic finance to global financial stability" in the presence of Professor Jeffrey Sachs, director of the Earth Institute at Columbia University, who advises on the IDB's Islamic Solidarity Fund for Development and its engagement in the Millennium Development Goals.
"The principles of Islamic finance," he emphasized, "are capable of minimizing the severity and frequency of financial crises by introducing greater discipline into the global financial system and requiring the financier to bear or share in the risk. Islamic finance also requires the creditor to bear the risk of default by prohibiting the sale of debt, thereby creating a proper enabling environment for ensuring due diligence by those who extend credit."
The elements of the Islamic financial system which are crucial for ensuring the health and stability of the global financial system include increasing equity financing and reducing debt; confining credit primarily to transactions that are related to the real sector so as to ensure that credit expansion moves more or less in tandem with the growth of the real economy; proper regulation and supervision of all financial institutions so that they remain healthy; and the extension of respite to the debtors who are in distress, so as not to cause misery and agony to them by auctioning off their properties at giveaway prices.
But Ali warmed that despite the negative role that credit default swaps played in the present financial crisis, financial instruments can play a positive role in encouraging healthy expansion of credit and economic growth as long as they are properly regulated.
However, he had a final message which probably would have been more appropriate and effective had he uttered it in his the Development Committee statement. "Let me emphasize that the essential principles of Islamic finance are not specific to the Islamic faith. They are a part of not only the divine religious but also secular paradigms. Therefore, the main message of Islamic finance, while ethical, is also universal. At a time when world leaders are calling for financial reforms, it is appropriate to have our financial systems rebuilt on widely accepted ethical and moral bases to serve the common good of humanity," he emphasized.
Source: Arab News, Saudi Arabia, October 3, 2011. Changes were made in keeping with the editorial policy of www.memrieconomicblog.org.