Monday, April 09, 2007
The benefits of Islamic finance
There's a headline you won't read every day on this blog. Still, there's something to it.
Mark Steyn linked with apparent disapproval to an article in a British business publication that brags that the English are "leading the Sharia pack" -- meaning that British financial institutions have carved out a niche for themselves catering to lenders and borrowers who want to comply with the Islamic prohibitions against the paying of interest. Steyn says it is "not unrelated" that Britain has also become a leading, if unwitting, exporter of terrorism.
Whether or not these two factoids are "not unrelated" at any level that matters (sure, having a lot of Muslim scholars in your back yard probably makes it easier to develop lending facilities compatible with Islamic law), Steyn's implication that it is unfortunate for British banks to woo Islamic clients strikes me as off target. These British banks are competing with Arab and other Islamic banks that cannot match the quality and sophistication of service provided in London and (for that matter) New York. If large Western commercial, investment, and merchant banks can learn to cater to Islamic clients they will drain assets out of the Gulf and into the Western financial system. Not only does that move profits from the oil states to the West, but it probably increases the likelihood that oil money will get recycled through Western economies (since Sharia-compliant deposits in Western banks can, presumably, be reinvested in Western projects more readily than deposits in Arab banks). That, in turn, increases the leverage that the West has over the oil powers. Finally, since Western banks have to comply with economic sanctions and other international disciplines, the more Arab assets that flow into those banks the more effective will be sanctions against rogue states.
There are, of course, potential disadvantages. If Western banks have huge Islamic assets under management they will resist the imposition of economic sanctions against Islamic states. True, but there is actually no reason to believe that financial institutions have that sort of power in either the United Kingdom or the United States. It will be a long time before any major Western bank would prefer to be ejected from the United States than to lose its Islamic deposits, and if that day does come all will have been lost already.
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