The Growing Potential of Islamic Finance in Western Economies

On Friday of last week, our professor, Walid Hejazi, was acting as host to a panel of speakers discussing "The Diversification of Global Finance and Opportunity: The Growing Potential of Islamic Finance in Western Economies".

Panelists included: Michael Ainley, Head of Wholesale Banks and Investment Firms Dept., UK Financial Services Authority (London, UK), Dany Assaf, Partner, Bennett Jones LLP, David Dodge, Senior Advisor, Bennett Jones LLP and former Governor, Bank of Canada, Mohammad Fadel, Assistant Professor of Law, University of Toronto Faculty of Law.

One of the interesting take aways came in the form of a question at the end of the session. The background was that one of the common lessons we had learned in the Middle East study tour is that Islamic finance is not exempt from the mechanics of finance (requiring a reasonable rate of return proportional to the risk of the investment - the foundation of finance).

As a result, there are many Islamic financial transactions which mirror or replicate similar instruments in "conventional" finance. While there are some issues which arise: UK law requires that deposits are guaranteed and insured, however Islamic finance doesn't not permit the guarantee of loans (provisions against default penalities) there are some unique solutions which arise: Depositors can waive their right to guaranteed deposits.

This raises an interesting question: Is Islamic Finance only for Muslims? And the answer is unequivocally: "No". The principles of Islamic Finance, while rooted in teachings from the Koran, are only intended to drive the moral thought process behind why the instruments are so structured. However, there is no reason why someone from a "western" culture wouldn't be interested in buying "stable, asset backed securities which happen to be Sharia compliant". It's like humus. It's a tasty, healthy and convenient snack which people buy without concern for the fact that it also happens to be Halal.

In fact, based solely on their merits as financial instruments, greater demand for Islamic products through improved due diligence and stable, equity and asset based transactions would improve their marketability by providing another high quality asset class in the market.