Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=153594
Story Retrieval Date: 5/19/2013 8:50:50 AM CST
Ever since Islamic funds and banks emerged relatively unscathed from the economic crisis, Islamic banking and investing practices have been in the international financial spotlight.
The pope has called the principles of Islamic finance a solution to the woes of modern-day interest-based capitalism. The Shariah-compliant Amana mutual fund company has become known as an investing powerhouse in its own right.
But according to two experts, the industry is still too small and untested to be praised as a panacea for the world’s economic problems. Karim Pakravan, a finance professor at DePaul University, said that it’s the nature of the customer and the transaction that has kept Islamic banks safe.
“A lot of Islamic finance is based on short-term finance,” he said, explaining that the risk for these investments is usually little, and is spread out evenly over investors.
“Islamic banks have not suffered the same losses because the products they offered were much more limited and much more conservative,” he said.
As the industry grows, though, Pakravan said he foresees the greatest problem to be legal disagreements. Because of the decentralized religious governance, he said, different scholars and boards can have different opinions on what is halal (religiously compliant) and haram (religiously forbidden).
“There’s no precedent,” he said. “All the opinions differ.”
In addition, the shortage of people knowledgeable in the field can mean banks have to pay a high fee for religious consulting.
“There are very few people who are experts in both Islamic law and finance,” he said.
David Loundy, vice president of Devon Bank, said he thinks that the difference with Islamic banks lies in the type of customer they serve. Devon is a community bank in West Rogers Park that offers religiously sanctioned Islamic financing products. According to religious scholars at the Shariah Board of America, its products are the only ones in the U.S. that comply with Shariah.
Loundy cited both the different kind of customer for Islamic banking, and the size of the industry as reasons for its immunity from the worst of the downturn.
“The customer is culturally and religiously predisposed against having debt,” he said. “Plus, there’s no Islamic subprime market.”
Ultimately, Loundy said, he still sees the market as young.
“It’s the immaturity of the industry that helped save it,” he said.