Wednesday, January 05, 2011

Can Islamic Finance add value to the global recovery in 2011?

This question was posted on the "Islamic Banker" Group on Linked In. Below is my modest comment on that question. I can not claim that I can answer it of course because the Islamic banking sector is one of the poorest in terms of empirical data and statistical resources.

My Comment
I am not sure if the Islamic banks can add to the global recovery because they were in a neutral shell during the crash. Islamic banks do not contribute much to the global growth as well (so far).

If Islamic banks want to add value to the global recovery, they have to fund production at a decent scale. So far, banks were not involved in the production funding mechanism neither in their home countries nor in the west.

Another major area where Islamic banks can create a real value is by enabling the under-utilized Muslim resources in the west. A lot of the Muslim communities in the west are not fully efficient because of the non-friendly environment that is welcoming them to live in and do the low level jobs whatever degrees they have. If Islamic banks want to do well in the recovery of the big west, a good starting point for them is to invest in real projects that benefit the Muslims minorities and consequently the whole economy.

What kind of projects can they get involved in?
The best two sectors to start with is the SME financing and housing. These two sectors are very stable in North America and Western Europe and they have a decent return that can be mutually beneficial to the host countries and the banks as well.

Why would Islamic banks invest in the Muslim minorities activities in the West?
First of all, they will be franc to their original mission statement (creating well fare for the Muslim societies).
Second, Islamic banks have a minor stake in the global economy and they can fund a minor portion of the recovery. If this funding portion is allocated for the under-utilized human resources in the west, the resulting synergies are many folds more important than the yield of investing Islamic banks capital in the conventional investment venues that they pursue.

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