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After Arab Spring, Islamists test religion in economics

By Farah Halime With the rise of political Islam across North Africa in the wake of the Arab Spring uprisings of 2011, Islamic finance is being touted as the solution to decades of unemployment and economic inequality. “We’ve tried socialism, we’ve tried capitalism, now we’re trying Islam,” cried supporters of Mohamed Morsi, when he was …

Farah Halime
Farah Halime

By Farah Halime

With the rise of political Islam across North Africa in the wake of the Arab Spring uprisings of 2011, Islamic finance is being touted as the solution to decades of unemployment and economic inequality.

“We’ve tried socialism, we’ve tried capitalism, now we’re trying Islam,” cried supporters of Mohamed Morsi, when he was elected as Egypt’s first Islamist president last June. In Libya and Tunisia, new political movements have pledged to use Islamic principles to right their wayward economies.

But some critics, including advocates for the greater use of Islamic finance, believe that a sudden and rigid adherence to Islamic law, known as Shari’a, could dramatically slow down economic recoveries across the region at a time when governments are already struggling to establish stability.

With rising unemployment, growing deficits and continued protests, anything less than a quick-turnaround for post-Arab Spring economies could be disastrous, economists warn.

“Governments have to prioritise getting economies back in shape before introducing Islamic finance,” said Douglas Johnson, chief executive of Codexa, a New York-based investment bank that creates Shari’a-compliant financial products.

Egypt, where the Muslim Brotherhood is positioning itself as the most powerful political group in the post-Mubarak era, has become an important test for whether the marriage of Shari’a with a 21st-century country can ameliorate financial and social hardship.

The Islamist government has focused on passing new laws to allow the issuance of sukuk, or Islamic bonds, and pledged to centralise zakat, a mandatory charitable giving from Muslims, to better target poverty.

While a shift to Islamic finance could bring an economic boost by giving countries access to a huge pool of Islamic investment funds from the oil-producing countries of the Persian Gulf, such as Saudi Arabia, Qatar and the United Arab Emirates, some say Shari’a is out of sync with modern economics and cannot work in today’s world without extensive updating.

“What passes as Islamic finance is anything but interest-free,” said Timur Kuran, a professor of economics and political science at Duke University. Kuran is the author of “The Long Divergence”, a book that argues that Arab countries have failed to keep up with the economies of the West because of the rigidity of Islamic law around business and finance.

“Shari’a, which is ‘out of date’ and has not played an important role for almost two centuries, only serves to add an “Islamic veneer [which] will not improve an economy in any measurable way,” Kuran said.

Egypt’s long-winded negotiations with the International Monetary Fund (IMF) for a $4.8bn loan have shown how an uncompromising adherence to Shari’a can slow down much-needed injections of funds. Clerics and Islamists have dithered over the loan, in part, because the loan comes with a 1.1% interest rate. Shari’a prohibits usury.

After an initial reluctance, the Muslim Brotherhood’s Freedom and Justice Party recently endorsed the IMF loan and called it Shari’a-friendly. They describe the interest rate as “an administrative fee”.  But the IMF has distanced itself from any claim that the loan is Shari’a-compliant, saying instead that the terms of the loan are “favourable”.

Without the funds, Egypt has had to allow the currency to gradually devalue and risk higher inflation, especially for food, provoking a backlash from protesters who believe the government has relegated demands for social justice.

The careful deliberations of the Brotherhood and its political arm reflect the group’s more pragmatic views of religious doctrine, but also what they see as a tremendous opportunity.  About 65% of Egypt’s mostly Muslim population do not have bank accounts. By increasing access to Islamic finance, they believe Egypt could gain billions of dollars in new deposits.

“Islamic finance is a realistic option especially with demand coming from those who by nature prefer ‘Islamic’ solutions regardless of the sector and domain,” said Ashraf Serry, one of the Muslim Brotherhood’s top economists.

Governments across North Africa are also shifting to Islamic finance as a way of reducing deficits.

The Tunisian government is trying to diversify and increase its sources of revenues by tapping into Islamic finance and issuing sukuk.

Tunisia’s newly elected Islamist movement Ennahda, which has led the government after the overthrow of former president Zine El Abidine Ben Ali last year, said the government would ensure that Islamic banks were able to compete on a level playing field with conventional banks and wants Tunisia to become a regional centre for Islamic finance.

Critics in Tunisia believe the strategy is more about playing to Ennahda’s fervent constituency than wise economic policy. Tunisia’s economy has long been a hotspot for foreign investors, especially from Europe, because of its Western-influenced political, economic and legal system.

Since protests broke out in 2011, Tunisia’s unemployment rate has risen to 18% from 13%, with about 750,000 people out of work. The worsening situation has fuelled arguments that what the country needs is stability, not Shari’a-compliant financial products.

“Islamic finance is not really the valuable option here,” said Mohamed Araar, a director at the Central Bank of Tunisia. “We need to focus on the main factors hindering development in our economies and remove the label of Islamic finance.”


This post originally appeared on Rebel Economy


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  • Reda Sobky

    What has failed in Egypt is honesty, whatever system you have, if it is corrupt and runs on bribery and extortion it will fail. It is not capitalism or socialism that is a failure, others have succeeded with both. It is that whatever form is chosen, it needs to enjoy a reasonable degree of integrity, otherwise, the hemorrhage of extorted and stolen resources makes it fail. The fundamental problem is that there is no confidence in the integrity of the center and the highest levels therefore, whenever, anything happens, everybody wants to get out of it what they can before it either fails or they leave for something else. It is present to a degree in every society but in Egypt it is more like the rule. I know that there are “honest” Egyptians in government but how many percent do you think are not? Fifty fifty, if so it will always fail because it is too much.
    It has to be something under ten percent for an enterprise to be able to carry the inefficiency for an extended period. Unless there is a general cleanup of the system, things will always fail just by the sheer weight of the dishonesty. We have seen religious based investing schemes in the past that failed and taken people’s money, will this be different? A thief by any other name, is still a thief, yes, no?

  • What a joke. After GFC, Euro debt crisis, flash crisis, frauds and speculative bets that are taking place left and right, someone is sugesting that “modern” finance is cure for anything. LIBOR is banchmark to financial contract 12 time GDP of entire world. Islamic finance is linked with real economy and thus can not profit from phantom financial arrangements that are hallmark of unjust financial system we have today. Islamic banks due to lack of exposure to CDO’s and other toxic assets were much less effected in GFC and would have prevented it due to its guiding principles… this is why it is fastest growing segment of finance industry… entire world is changing rules to accomodate for Islamic finance and we are asking what we should do in Egypt… take loans to get people in more debt without link to assets? Of finance real economic activity that would actually stimulate manufacturing, services and something tangible (as Islamic finance wants us to do) – I guess better go to making money out of money – that will save all… I wish people actually think what they are saying… listen to into to Islamic finance at www (dot) auscif (dot) com and download webinar recording on this topic.Do we need to go to other speculative transactions, short selling, derivatives, high frequency trading and so many other disastrous ways of making money out of garar…

  • mohamed araar

    I am afraid the article is confusing about the Tunisian study case and it is not expressing my point of view as my responses were:
    Réacheminé par MOHAMED ARAAR/BCT le 24/04/2013 16:26 —–
    30/01/2013 16:01
    A Farah Halime

    Réf : Re: Urgent request on
    TunisiaNotes Link
    Not exactly, Sharia principles are fundamental and are not subject to up to date. It is not as simple as that. But we should focus on the main factors hindering development in our economies and thus we should remove the label and veneer of Islamic finance and focus on real due diligence on financial intermediation based on Sharia principles.
    I hope that you are understanding what I meant by this.
    Farah Halime
    30/01/2013 15:47
    A mohamed.araar@bct.gov.tn
    Re:Urgent request on Tunisia
    Dear Mohamed,
    Thank you for your quick response. If I’m correct in understanding, you are basically saying that Islamic finance is one way the country can improve its economy, but that Sharia has to be up to date with modern economics and can’t be used as it is now?
    On Wed, Jan 30, 2013 at 4:44 PM,
    Dear Farah,
    I am very concerned about your paper and the effort that you are making
    for “Rebuilding Arab Spring Economies”.
    Let me tell you that the state of Islamic finance today is not really
    the option that is valuable, especially for Arab Spring economies, but if
    linked to social and political considerations of the state beyond its
    economic sphere, it is the Islamic Finance that could gain a shift from Arab Spring economies.
    In Tunisia, we are focusing on this question: What is the relevant approach of Islamic finance that should be used for an ambitious development model which should reconsider, in depth, an outdated social/political/economic organization?
    An Islamic finance startegy or roadmap for change management is needed as long as monetary authorities are reviewing their debt financing policies to be led by financing inclusive development based on risk sharing and as long as budgetary authorities are covering the financial deficit by exploring the potential of many innovative project finance structures.
    The “renaissance” founded in Islamic principles will remain a talk unless there are an increased involvement of western regulators and
    credit rating agencies, an increased protection of stakeholders, a government support and a conformity to risk mitigation procedures which would impact the growth of Islamic Finance sector. On the other hand, the lack of Shari‘ah advisors within the country and the scepticism generated in
    practitioners towards the conflict between the provisions of Sahari’a law and the performance of Islamic finance should be removed.
    Best Regards

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