At the second Islamic Finance and Trade Conference held on the 28th and 29th October 2008 in London, strong calls were made for radically reshaping the world’s financial architecture, both by Muslims and non-Muslims. Anne Pettifor, executive director of Advocacy International, a consulting firm that works with low income country governments and organisations to promote positive development, investment and environmental sustainability, demanded that conventional bankers follow Islamic financial ethics and prohibit interest. Five years ago, Pettifor argued that “the next seismic debt crisis would be in America, not Argentina.”
Islamic economics emphasises the importance of distribution of wealth. In sharp contrast, our financial system with banks at the epicentre, promotes hoarding of wealth. Even Islamic banks offer products that are shaped around their conventional banking counterparts. Assets and liabilities are priced off the yield curve and remain dependent on the term structure of interest rates.
This paper proposes an alternative framework for Islamic finance that strives to move from Shariah-compliant to Shariah-based. The model proposed herein, which better resembles fund management, suggests that an investment fund can be launched for every business a bank extends credit in, albeit on an equity participation basis.
A fund structure provides the fund manager with more flexibility with respect to asset liability management. That is, unlike a bank treasurer who is continuously plagued with maturity mismatches between short-term liabilities and long-term assets, a fund manager has more freedom to deploy capital in lucrative investments without nearly the same level of concern for liquidity or redemption.
