An Islamic Approach to Banking?

In the Guardian's Comment is free belief section (7 January 2011), Imaduddin Ahmed asks whether an Islamic approach to banking might have prevented the financial crisis that we find ourselves in:

"Imagine a world without a financial crisis. No moral hazard, so brokers won't sell mortgages without carrying out appropriate credit checks. Imagine banks not deliberately selling complex derivatives, knowing that they will be worthless. No short-selling speculation, so companies tinkering on the edge won't be pushed over. Imagine a world with Islamic finance.

"The practices that caused the financial crisis would not have passed muster with sharia boards – committees of religiously inspired legal scholars who conduct a religious audit of a bank's activities. Neither the securitisation of sub-prime loans nor credit-default swaps are acceptable in Islamic finance," says Ibrahim Warde, author of Islamic Finance in the Global Economy and a professor at Tufts University.

"Similarly, negative Islamic attitudes towards short-selling were vindicated by the role short-selling played in many aspects of the crisis and subsequent limits placed on short-selling in London and New York. Some old-fashioned principles such as the distrust of excessive leverage and of open-ended innovation proved well founded. As for the systematic vetting of new products by sharia advisers, it could be looked at as a system of checks and balances, a useful corrective to the groupthink that had overtaken conventional finance."

Islamic finance extends beyond its well-known characteristics: interest-free banking and the prohibition of investment in items or activities deemed un-Islamic, such as prostitution, gambling, pornography, pig farming and alcohol. In contrast to conventional loans, Islamic bank loans are confined to financing the purchase of physical assets, to which they have recourse in case of default."

You can read the full article here.