KUALA LUMPUR (November 04 2002) : Pakistan and seven other Muslim countries launched a global agency on Sunday to set standards for an Islamic financial system that will end “debt slavery”, according to Malaysian Prime Minister Mahathir Mohamad.
The basic principle of Islamic banking is the prohibition of usury or interest.
It also outlaws investments in companies involved in gambling, alcohol and pig farming.
The Islamic Financial Services Board (IFSB), inaugurated in the Malaysian capital Kuala Lumpur on Sunday, is entrusted with setting standards for Islamic institutions and ensuring they conform with principles of Islamic sharia laws.
The IFSB's founding members are Pakistan, Malaysia, Indonesia, Bahrain, Saudi Arabia, Sudan, Iran and Kuwait.
Mahathir, in an address to about 1,000 delegates from around the Muslim world, said a hallmark of the Islamic system was that risk was equally shared between the lender and the borrower.
The international banking system stacks deals heavily in favour of lenders, he said, and some countries end up in “debt slavery”.
“They are not going to lend if they cannot gain control over their borrowers in order to recover their loans, irrespective of the misery this might cause,” Mahathir said.
“Clearly, debt slavery has not been abolished in the international financial system,” said Mahathir, who refused to accept a bail-out from the International Monetary Fund during the Asian crisis in the late 1990s, or submit to IMF policies that caused economic pain for neighbours.
FEAR OF BACKLASH: Bankers attending the inauguration of the board said growing demand for ethical investments cut across religions, and non-Muslims were increasingly active investors in Islamic instruments.
Some Arabs, who withdrew investments from the United States in fear of a backlash after the September 11 attacks in Washington and New York, were also putting more money into Islamic banks, they said.
“The backlash against Muslims following September 11 is in fact helping Islamic banks,” said one Muslim Malaysian banker.
One estimate said some $200 billion of Muslim funds had fled the United States.
“Some $200 billion of Muslim funds have moved out of the United States and are now looking for a home,” said Noorazman Aziz, head of Malaysia's Labuan Offshore Financial Services Authority.
A Western banker said Islamic funds run by mainstream Western banks are also attracting interest from non-Muslims riding an ethical investment bandwagon.
There are about 200 Islamic banking institutions in at least 48 countries with combined assets of about $170 billion.
Under Islamic laws, banks make money through a system of profit sharing from returns and approved investments.
The Islamic banking industry, which grew by more than 10 percent a year over the past 40 years, is expected to grow by the same rate over the next decades, said Bahrain-based General Council for Islamic Banks and Financial Institutions.
Efforts are also underway to develop an Islamic capital market to tap the estimated $1.3 trillion in Islamic funds that are invested in conventional markets.
Mainly Muslim Malaysia has been running an Islamic banking system alongside a conventional financial system, a trend that Mahathir said would continue.
“The Islamic banking and finance has been described as a 'mirror of the sea',” Malaysia's central Bank Negara governor Zeti Akhtar Aziz said at the launch of the IFSB.
“For until and unless we have the courage to explore its depth, we would never be able to uncover the treasures that reside within,” she said.
Islamic banks in Malaysia represent about 8.8 percent of the country's total banking assets, worth about 65 billion ringgit ($17 billion).
In June, Malaysia completed the world's first Islamic global bond issue, lead managed by HSBC.