Understanding Islamic Finance - Doha Academy of Tertiary Studies

The Way Forward 459human society at large. 4 There should be an international conference like the one thatwas held in Bretton Woods in 1945 to discuss matters relating to the creation of reservesand of national currencies on merit.2. Money and credit creation should be commensurate with real sector development in alleconomies. The economists must devise strategies such that an increase in monetary assetsis matched by the real assets in an economy, with a possible allowance for realizing thegrowth potential of respective assets, businesses and economies during the related planperiod. This has to be particularly observed in the case of currencies used for internationalpayments. In other words, the issuance of the certificates of investment/financial assetsmust be based on real assets and their potential growth. For this purpose, the principles ofSukuk issue in Islamic finance can be of great help in transforming the basis for creatingfinancial assets from thin air to some underlying real assets.3. Loan-based finance leads to the squandering of wealth due to corrupt practices ostensiblyresorted to by officials of the donors and also the recipient countries/institutions. Suchfinance must be replaced by (i) direct investment in commodity-producing or servicesectors; (ii) project-based financing under strictly observed transparent standards; (iii)portfolio investments by sovereigns and multinational corporate bodies to strengthenequity markets in the recipient countries; and (iv) granting return-free loans or “in kind”assistance in the case of large-scale natural calamities in any part of the world, ensuringtransparency and proper distribution among the affected people. Interest-based financialaid to the affected countries is fatal for their economies and could adversely affect theflow of global finance in the long run. 54. “Foreign aid” or other forms of financial assistance to the poorer nations of the worldmust take the form of financial help, with the affected country benefiting rather tangibly,by controlling any corrupt commercial behaviour of the donor agencies as well as officialsin the recipient countries.5. If projected properly, Islamic finance should have appeal to followers of all religions.By introducing it as religious and / or ethical banking in all societies of the world,Islamic finance can become an engine of economic growth by mobilizing savings fromso-far untapped groups of people and channelling them to healthy and real-asset basedinvestments. The prohibition of Riba in all revealed religions could be instrumental inenhancing this appeal.18.2.1 Muslim States and Islamic FinanceWhile Islamic principles of finance have proved their viability worldwide, and individualIslamic financial institutions and giant multinational groups are queuing to exploit thepotential benefits, Muslim countries are not yet playing any effective role in the promotionof Islamic finance as a policy objective at the state level. Only one or two countries maybe considered exceptions. To reiterate, the foundations of the asset-based and risk-relatedfinancial system have been laid down and it has already passed the significant milestones of4 The observations of John Perkins in Confessions of an Economic Hitman, as briefly given in the first chapter, may be kept inmind. Readers may like to study pages xi–xiv and 211–225 of his book. To quote another of his observations: “Admitting to aproblem is the first step towards finding a solution. Confessing a sin is the beginning of redemption. Let this book, then, be thestart of our salvation. Let it inspire us to new levels of dedication and drive us to realize our dream of balanced and honorablesocieties”. (p. xiv).5 For details see Chapra, 2002, pp. 219–235.