We know that the global community today is facing some of the gravest economic challenges it has ever encountered. The rich are getting richer, the poor are getting poorer, and with rising inflation, more and more people the world over are lying awake at night, worrying about how they will pay the next month’s bills.
We believe that Islamic finance, guided by the spirit of the law of Islam, the Maqasid al-Shariah, holds one of the keys to tackling this most severe of crises. With its instruments for wealth redistribution, its protections against risk and its deep-rooted moral values of social good and shared prosperity, Islamic finance has the potential to grow us out of these challenging times in a fair and sustainable way.
So, how can we work together to integrate Islamic finance more thoroughly in a conventional stakeholder economy? How can we demonstrate that its values and norms, in many ways, complement those of the wider financial system? These are questions that I certainly cannot answer alone.
I share my thoughts as an observer of global economic and financial developments, rather than as a specialist in this field. My intention has been to help frame some of the wider contextual issues and set the broader scene in such a way that experts and industry players might find them useful in their work. I want to begin by briefly giving my take on current geopolitical developments, before moving on to focus on some of their associated economic impacts. Lastly, I will consider some of the implications and opportunities for the Islamic finance community.
We are living in a period of significant change — one might even call it “turbulence” — on the world stage. Foremost among these challenges are shifting geopolitical realities, a growing number of climate-related events, and the very real risk of rising poverty around the world, due to higher fuel and food prices. The insecurities that humanity is facing today may be qualitatively different from anything experienced since the end of the Cold War, now some three decades ago. Some current geopolitical events are, of course, most concerning for those most directly involved and affected, whether nationally or in regions undergoing difficulties as in the Ukraine-Russia conflict. But, in our highly globalised world, major events and developments will always have broader ramifications. We experienced this first-hand during the pandemic, and we feel it now as food and fuel prices continue to rise around the world. We cannot — indeed, we should not — view crises in a faraway, distant land as somebody else’s problem.
And yet, at the very time we most need to pull together as a global community, there are some worrying signs of a retreat in patterns of international cooperation. This can be seen in the increasing use of discriminatory trade and investment measures on the grounds of national security and even breaches of national law. The free trade principle of non-discrimination has given way, I’m afraid, to active discrimination.
Security concerns have also affected the all-important “technosphere”. Both newer technologies such as fifth generation or 5G communication technology, and established ones such as semiconductors, are now regarded as of critical strategic importance. The energy sector is another area where such concerns are increasingly being prioritised. Investment bans are being introduced by some to protect such strategic areas, in what has been described as “friend-shoring”.
The growing restriction of investment by some countries to only those with which they are politically aligned, is a marked reversal from recent trends of deeper global integration even in these strategic sectors. Meanwhile, there is an increased focus on national production in critical sectors, particularly in relation to food supply. Food security has become a vital component of national security.
According to the Bank of International Settlements, the world economy is currently facing three major sources of threat: rising inflation, “fragile” economic growth, and financial vulnerabilities. In addition, the threat of a repricing of risks, and an escalation of the current sanctions regimes — both potentially leading to sharp declines in asset prices — also remain high. Having assessed the likely impacts on global financial stability of the Russia-Ukraine conflict, the International Monetary Fund concurs with this pessimistic outlook.
Against this backdrop of geopolitical uncertainty, growing isolationism and unprecedented economic difficulty, I believe that Islamic finance has never been more urgently needed. It offers practical instruments and solutions to address the present financial challenges and, even more crucially, it is grounded in unshakeable ethical principles and practices. Its foundations are in social good, generosity, responsibility and fairness — and we need strong foundations if we are to build back from this crisis. However hard individual countries try to protect themselves from financial shocks, crises, today, are global. This is where I think Islamic finance can present an alternative approach — setting an example through how it works across borders and encourages international cooperation and collaboration.
As thinkers who appreciate Islamic principles, with singleness of mind, heart and purpose, we will all want to work together to see Islamic finance flourish and grow. This is because we all understand the important and unique contribution that this form of financing represents. We think of ways in which it can help to meet global development goals, for instance, through the issuing of sukuk with societal objectives. We also understand how solid its basis is, ethically and structurally, and how useful such an institutional basis can be in periods of crisis: Islamic financial institutions, of course, fared comparatively well during the global financial crisis of 2008.
We should build on the existing structural foundations of Islamic finance around the world. This should allow us to ride on the highly positive trends that the sector is already displaying. Strong growth in various aspects of Islamic finance tools has continued, both since the 2008 crash and, more recently, throughout the Covid-19 pandemic. During the pandemic, Islamic finance has grown more strongly, even when compared to the conventional financial sector.
We see these same trends of growth in size and reach in relation to the Islamic fintech sector. Recent figures show strong growth of Islamic fintech start-ups. As of August of this year, for example, there were 57 of these operations in Malaysia, 41 in Indonesia, and another 50 in the Gulf States. Accelerated adoption of fintech applications has been one of the unexpected positive consequences of the Covid-19 pandemic. The sector leverages technological advances to provide alternative and affordable financial solutions that help to bridge the financial inclusion gap. That Islamic finance has been able to flourish in this digital sector is a most encouraging sign. Islamic fintech transactions are expected to reach US$128 billion by 2025, up from US$49 billion in 2020. Conventional fintech start-ups are also reportedly venturing into the Islamic space in some cases.
It is clear from this single example that the present global financial landscape offers Islamic finance institutions real opportunities to make a positive difference. That is why I feel that this is a pivotal time. Now is the moment for all of us to reflect on how we can shape a true stakeholder economy in our society, and to consider the role Islamic finance has to play in this.
Creating true stakeholder economies might seem a gargantuan task, but I remain optimistic. Simply put, the business practices of today bear little resemblance to those of the past. They have undergone massive changes over time, largely because of social pressures driving political interventions. A hundred years ago, industrial sweatshops were still rife throughout the Western world. Coal miners had to go on strike just to ask for safer working conditions, standard hours and decent pay. Children regularly worked 70 or more hours a week for a pittance, and regulations governing their welfare were unheard of. In the US, federal law against big monopolies and their exploitative practices had only been enacted a decade earlier. The idea that governments could spend to lift economies out of economic depressions — something taken for granted today — ran contrary to classical economic thought at that time, and remained to be systematised.
None of the efforts of the so-called “progressives” were welcomed by businesses a century ago, and neither are they today. Many critics of stakeholder economics continue to use illusory dualistic and ideological notions of “either capitalism or socialism”. Such criticisms continue even after businesses have internalised and taken these changes in their stride, enjoyed the relative social stability afforded by the historical legacies of the same past progressives, and grown. Were the exaggerated “either-or claims” to be remotely true, one could hardly have expected the world economy to have remained as liberal or performed as well as it has for most of the past almost eight decades. Advocates of stakeholder economics, particularly those foundationally built on Islamic principles, ought not to be wrong-footed or undermined in this regard.
By bringing Islamic perspectives, discussions and efforts to realise the Maqasid, spirit, goals, and purposes of Islamic law, I believe we can make real contributions to the economic problems we are faced with today. In our midst are not just those with good knowledge of the Shariah, but also those industry players who can translate it into banking and financial reality. Perhaps unlike many others, we are welded by a common purpose and belief in the mission of Islamic finance. Economic efficiency, stability and social justice are at the heart of Islamic banking and finance. They are the core values of our industry’s DNA.
On the topic of building a stakeholder economy, I would like to now share a few of my own questions, which I believe can prompt us to meaningfully reflect upon the role Islamic finance has to play.
• First, what is the purpose of business? What are the roles and responsibilities of businesses? This is a question that scholars and business leaders are really struggling with at the moment!
• Can corporations create both wealth and social well-being?
• How can businesses adapt to take advantage of technological opportunities and address environmental challenges?
• Next, the “million-dollar question”, if you will: can we move from the notion of “shareholder primacy” to “purpose primacy”? Surely, Islamic finance has something meaningful to contribute to this particular question, which great businesses and academic minds are grappling with!
• And finally, what is the role of investors and capital markets in addressing these challenges? This is where one can drill down into the finance angle and capital markets.
We realise the urgent need to build a true stakeholder economy. This is a concern that has begun to catch on in the West, but which is still to become part of mainstream corporate culture. For us in the field of Islamic finance, we must consider this especially in relation to human well-being and social good, as our own Maqasid tradition emphasises. I would encourage us to think deeply about how to embed the concepts of Islamic finance and Islam more deeply into our businesses, economies and lives.
This is an excerpt from the royal address by Sultan Nazrin Muizzuddin Shah of Perak at the 13th Securities Commission-Oxford Centre for Islamic Studies Roundtable held on Sept 10 in the UK