Western Crisis. Eastern Response

by Gianluca Ansalone

Gianluca Ansalone Adviser to the President
of the Republic

The economic and financial crisis asks commentators, economies, bankers and political leaders questions not only about its causes but rather about the “recipe” for an effective exit strategy. “It would be a shame to waste a crisis” is the common saying. That is true if there is no admission of guilt about the limits of a virtual finance and a securitized economy. There is no need for creative solutions to define a new architecture of development, but there is a need for breaking up the old paradigm of economic growth. Perhaps, we should consider those virtuous models that are not only resisting the crisis but also increasing their profits and geo-economic weight. This crisis is essentially a Western crisis. While the governments of the G7 discuss sovereign debt consolidation and growth stimulus, part of the planet ignores the word “crisis” itself and continues to record an excellent GDP growth. The BRIC countries (Brazil, Russia, India, China) stands for a new paradigm of growth, along with the countries of the Persian gulf and the new African giant. Linking up the new social dynamics with growth opportunities is nowadays the most difficult and promising challenge.
The model of Islamic finance is not suffering at all and in recent months it also helped the major financial giants of Europe and America and saved them from bankruptcy through the influx of liquidity from sovereign investment funds. In addition, there are new individual and collective needs from the “new citizens”: those who emigrated from their countries and today can buy, invest and send remittance to their families. The finance and economy must adapt to these changes, size these new opportunities and become instruments of social cohesion. Today, in the countries with a higher rate of ethnic composition for historical events or geopolitical reasons (in particular, France and Great Britain), Islamic finance is already well structured. Islamic finance is based on a principle that should sound as a warning to those who have caused financial bubbles in recent years: money must not just produce more money but they must be invested in real economic activities. The keystone of Islamic finance is not religion but rather a form “economic justice” prompted by Islamic ethics.
The difference is not therefore about the origin of ethic principles but rather about real services that respect moral principles to protect customers. Islamic finance excludes the mere mathematical calculation of a fixed return rate on invested capital whatever the financial investment is (personal or business loan, commercial activities, real estate, infrastructure). Islamic finance and is a profitable hybrid between the western financial system and the teachings of Islam. The adjective “Islamic” should not lead to a distorted view: Islamic banking is just a form of “ethic finance” that not only is addressed to Muslims. In early 2008, 300 Islamic banks were registered worldwide with a total capital of 500 billion dollars in 70 countries.
The potential market considering only the Muslim-majority regions amounts to more than 1 billion customers; 150 million are the estimated residents in non-Muslim countries. Islamic banks accounts for 40% of the savings from the private sector in Muslim countries. It is expected that this proportion will reach 70% by 2020. This sector is worth 4000 billion dollars over the next 10 years. Driven by the need to finance large-scale investment projects, the bonds for infrastructure projects (sukuk), or Islamic bonds, are the fastest growing segment of Islamic finance. According to market estimates on sukuk, issues exceed 45 billion dollars. In the period 2007-2008, the share of sukuk issued in the countries of Gulf Cooperation Council increased from 40% to 44.80% of the regional bound market. The Mediterranean basin is clearly the main economic hub for the flow of capital from the most dynamic Arab Islamic word (Maghreb, Mashriq and Persian Gulf) to the European financial centres. Given the prominence of the United Kingdom among the most important financial centers, it is not a surprise that part of this growth took place mainly in London, the main centre of global Islamic finance transactions. In the rest of Europe, the major French banks and financial groups have focused mainly on retail customers, encouraging the opening of “Islamic branches” for Sharia-compliant loans and customer credit. A productive additional element to the positive experience of microcredit, which in France have enabled poor families and immigrants to start small businesses. What about Italy?
The Muslim community living in our country amounts to 2% of the total population and its social and demographic dynamics are particularly worthy of comment. The progressive diversification of financial service demand, led by second generation of immigrants and small-sized business development, requires an analysis of the potential of the Italian market in the offer of Sharia-compliant retail financial product. So far in Italy the service offer focused on money transfer services (remittances, payment instruments) mainly provided by the Post or other specialist market operators. However, in this particular phase of financial market, the Islamic community is a potentially attractive sector for banks.
Our country, which is an ideal platform to attract such investments and stimulate an economic and cultural encounter, suffers from a lag.
There are only two ways to deal with change: reject it or transform it into an opportunity.
There is much talk on integration and coexistence because of the inevitable increase of migration flow from North Africa to Europe and Italy. Migration is as old as humanity and, within the principles of legality and living together, it has always been the beginning of a new road to economic development.
The Islamic financial service offer could support social integration, a way to seize the enormous potential of an increasingly complex society. It is not a “conversion” to a religious vision of capitalism. From a customer view, Islamic finance is reminiscent of universal principles and values. From economic operators’ view, it is the cutting edge of business, which broadens the horizons of traditional services that still stagger under the blows of the crisis.
The crisis will not end if we cannot find sustainable, innovative and durable solutions. Otherwise, we will have only blown an opportunity waiting for the next financial earthquake. The Italian financial system is slowly opening up to these perspectives, aware of the potential of the Islamic community in Italy. We should avoid the marginalization of Islamic financial services and foster their integration in the banking service offer as mentioned by the Italian Banking Association and the Bank of Italy. Finance could save the world this time.