From Humble Beginnings

 Source: MARWAN NAAMANI/AFP/Getty Images Source: MARWAN NAAMANI/AFP/Getty Images

Source: MARWAN NAAMANI/AFP/Getty Images



In the year 1963, Egyptian economist Ahmed El-Najjar started a quiet revolution in a small, unknown city about 75 kilometers outside of Cairo. In the city of Mit Ghamr, home to pious villagers and traditional Egyptians, El-Najjar set up the first Islamic bank. His bank prohibited interest (riba), granted loans very cautiously, and adhered to the key Islamic economic principle of profit-and loss-sharing. It was an undisputed success. Still, the bank closed its doors in 1967 due to pressure from the government, which associated Islamic banking with the Muslim Brotherhood.

A precedent had been set in spite of the Egyptian government’s opposition. Dubai’s turn was next: in 1975, the Dubai Islamic Bank opened its doors. It was the first modern Islamic bank, far more sophisticated than the Egyptian experiment, and one that was in a position to compete with Western banks. Today, Dubai Islamic Bank has branches all across the UAE, makes global investments, and is widely considered to be one of the top Islamic banks in the world.

Still, even after the launch of Dubai Islamic Bank, growth did not take off for another two decades. Indeed, several powerful Muslim countries, including Saudi Arabia, shunned the industry at first. The Kingdom preferred conventional, Western-style banking. In Egypt, political elites associated the industry with the outlawed Muslim Brotherhood—many of whose thinkers played a role in the intellectual underpinnings of the industry. Oman only lifted its ban on Islamic banking in 2011. Today, Islamic banking is widely accepted and encouraged by governments across the Muslim world, many of whom are in competition to become the hub of global Islamic banking hub. It has also lost much of its early, Islamist-tinged anti-colonialism and anti-Westernism.

From humble beginnings, Islamic banking is now growing at 15% per annum, making it one of the fastest-growing segments of finance. Every major Western global bank has opened Islamic operations. There are more than four hundred Islamic finance institutions and Western banks and organizations, from HSBC to Lloyds, JP Morgan to Citi, have dedicated Islamic operations. Western financial services companies like Dow Jones, Bloomberg, and Standard & Poor’s follow the Islamic finance industry closely. Standard & Poor’s has reported that Islamic finance assets could top USD 3 trillion by 2015; Islamic bonds, known as sukuk, have proliferated.

Western institutions have poured into the industry, taking it from financial curiosity to financial mainstream. Citigroup, HSBC, Lloyds, Barclays, and Deutsche Bank have opened Islamic-compliant branches or divisions. GE Capital, the finance arm of General Electric, has issued Islamic bonds. Mortgage securitization company Fannie Mae buys Islamic mortgages from US-based institutions. Dow Jones has created an Islamic Index that now tracks more than 600 Shari'a-compliant companies. Credit rating agency Moody’s issues detailed reports on key Islamic banks. Clearly, this is a sector with plenty of room to grow.

The post-9/11 oil boom has created a perfect storm of growth in the sector. This has been combined with the growing sophistication of Islamic debt products, the alienation felt by many Muslim businessmen regarding US policy, the growing ties between Malaysia and the Gulf states, and the participation of major Western banks to cause a boom in the sector. Today, intense competition exists among leading Islamic finance hub cities like Kuala Lumpur, Dubai, Bahrain, and even London.

Enter Dubai

On January 9, 2013, the ruler of Dubai, Sheikh Mohammed bin Rashid Al-Maktoum, announced an initiative that should add fire to this simmering revolution. In a speech before gathered Dubai luminaries, he announced the emirate’s newest ambition: to be “the capital of the Islamic economy.” This was not a strategy paper churned out quietly by a consultancy firm and presented in a seminar; it was the full force of the Government of Dubai announcing its newest intiaytive to great fanfare. The announcement promised large investments in infrastructure, ecosystems, and growth strategies, in the usual Dubai way. Standing in front of a huge banner that read, “Dubai: Capital of the Islamic Economy,” Sheikh Mohammed said, “Our cosmopolitan outlook to doing business continues to be our economy’s driving force . . . Adopting a modern and scientific framework for Islamic economies worldwide, here in Dubai, meets the demand from local, regional, and international investors for a central hub to invest, grow and do business.” To underscore the importance of the initiative, Sheikh Mohammed’s son and heir apparent, Sheikh Hamdan bin Mohammed, has been appointed to lead the effort, and some of the most senior and respected advisors of Dubai Inc. will form the core of the planning committee.

The race to be the global hub of Islamic finance has existed for at least a decade, and Malaysia has arguably been in the lead despite Dubai’s early start as host of the world’s first sophisticated and commercially viable Islamic bank in 1975. However, the new Dubai initiative goes beyond finance. It posits a global Islamic economy that is untapped but full of potential, and in need of a hub for standards, certification, and thought leadership. By targeting the Islamic economy, Dubai is treading into some familiar territory, including halal food certification and the ongoing Islamic scholarly debates about what makes a debt instrument or insurance product ‘Islamic.’ It is also venturing into new territory, in developing ‘Islamic’ standards on corporate governance and environmental regulation.

One senior Dubai official asked me a rhetorical question: “Why not create an ISO9000 for the Muslim world?” He was referring to the widely used global standard of certification and quality management. “For us, an Islamic product should mean clean, environmentally sustainable, [and] produced with the highest ethics.”

What makes a financial product ‘Islamic?’

Islamic banking’s core concept—a ban on interest, known as riba—dates back to the time of the Prophet Muhammad, who was a merchant. The ban on riba corresponds to similar rules against usury in the Jewish and Christian traditions. The central idea behind the prohibition of interest arose from a mercantile bias in early Islamic theory. Put simply, early Islamic scholars felt that money alone cannot beget money: an underlying asset or good must be involved.

The early promoters of Islamic banking in the 1960s tended to be Islamist intellectuals, many of whom were members of the Muslim Brotherhood and opposed the Western banking that dominated their countries. An anti-Western, anti-colonial outlook colored the views of these early theorists—many of whom would likely bristle at the major role Western financial institutions play in the 2013 version of Islamic finance. That early Islamist anti-colonialism has since given way to a more opportunistic, globalized industry eager to engage in the mainstream of global finance. In addition, the modern study of Islamic economics is still a relatively new field compared to the study of economics in the West. The first international conference on Islamic economics and finance was held in Mecca, Saudi Arabia in 1976 under the auspices of Jeddah’s King Abdul Aziz University in. The conference is widely viewed as key catalyst for the modern study of Islamic economics and finance.

Early theorists concentrated on the ban on riba, as well as on the other core principle of Islamic banking: that all transactions must involve profit-and-loss sharing on all sides. Islamic finance theory argues that a bank should not charge interest for lending money, but instead should earn money if the venture is profitable and lose if it is not. These two concepts remain at the core of contemporary Islamic banking today.

All Islamic banks have Shari'a boards: groups of recognized Islamic scholars who rule on the permissibility of financial instruments. The dearth of top scholars means that some sit on a dozen boards, shuttling between Doha and Dubai, Kuala Lumpur and London, earning millions of dollars a year in the process. Essentially, the practice of Islamic banking today involves creating complex financial instruments that will be approved by Shari'a boards. This has led some critics of Islamic banking to argue that the industry is simply aping Western financial instruments by creating complex structures that mimic interest rates but are acceptable to Shari'a boards.

Attempts have been made to create centralized Shari'a boards. While Malaysia has emerged as a thought leader, there is currently no over-arching regulatory body with the final say on all matters. This might indeed be a good thing, as it promotes a wider array of scholarly thinking, but it could also promote as a race to the bottom as standards are lowered.

As previously noted in The Majalla, at the heart of Islamic economics and finance is an emphasis on justice and shared risk. Rodney Wilson, a pre-eminent scholar in the field, notes in a 2008 article that “there are parallels between the modern ethical finance and socially responsible investment movements and Islamic finance, with investors not only concerned with financial returns, but also how their money is utilized and its implications for resource allocation.” He emphasizes that “the stress is on justice in economic transactions, not on income or wealth inequality.”

Of course, questions of justice and resource allocation are often foremost on the minds of scholars, but consumers also simply have an emotional attachment to Islamic economics, without quite understanding what it means. For many, checking the ‘Islamic’ box is important to them for purely emotional reasons, rather than because they have thoughts of the greater good.

In Indonesia, the world’s most populous Muslim country, Islamic assets as a percentage of total assets is very small, at less than 5%. An At Kearney report noted that even in Saudi Arabia, where a thriving Islamic banking industry exists, the majority of assets are non-Islamic. In all of the countries with large Islamic banking sectors, the size of conventional banks is larger—in some cases considerably so. Still, growth trends are real. Islamic banking is still young, and the industry has created a USD 3 trillion market in only 40 years.

Dubai’s future in the Islamic economy

There are some 1.6 billion Muslims in the world today. The Pew Research Center estimates that there will be 2.2 billion Muslims by the year 2030, accounting for 26.4% of the world’s population. That means that one in one in four humans on earth will be Muslim. This is a vast market for the Islamic economy—and one that is still largely untapped.

The majority of Muslims do not live a Shari'a-compliant commercial and economic life. However, the majority of Muslims choose to eat halal foods, even in Muslim countries where Western-style banks are more predominant than Islamic ones. In a 2011 study, the Government of Canada estimated that the halal food market is worth approximately USD 632 billion globally. Food products that are prepared according to certain dietary laws and regulations, which include treating animals humanely and prohibitions on pork and alcohol, are deemed halal (acceptable). There is no widely recognized thought leadership or standards and certification center for halal food. Most halal certification is local.

The Dubai initiative has the potential to create new products for the Islamic economy, such as cars built on Islamic principles, or even Islamic real estate. Given the greenfield nature of this new frontier, the possibilities are seemingly enormous. If this were any other city or any other leader, one might dismiss such a bold initiative—but people who have been betting against Dubai over the past three decades have lost a lot of money.

Under Sheikh Mohammed’s watch and leadership, the emirate has quickly seeded and built some of the world’s most iconic buildings, global brands like Emirates Airlines and Jumeirah Hotels, and world-class infrastructure. It has become a global aviation and shipping hub, a tourism and trade hub, and a regional financial services center. While the core of the Dubai model as a hub and regional entrepôt dates back a century, in the past two decades it has risen to new heights.

The emirate has stumbled, of course, by over-leveraging and building a pile of debt on property that was destined to crash. Yet the core Dubai model of serving as a hub for trade, logistics, tourism, services, and finance remains sound—and has helped drive Dubai’s current rapid recovery from the 2008–2009 dual property crash and global financial crisis. Its full-fledged entry into the world of Islamic economy is sure to rankle some in Malaysia or in Bahrain, the Gulf’s traditional Islamic finance hub. At the same time, Dubai will add energy and momentum to a field that is still new, but which has tremendous implications for companies, countries, and industries worldwide.


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