Islamic finance could have prevented subprime crisis

UNTHINKABLE CRISIS: The US subprime mortgage meltdown would not have occurred under Islamic principles, according to a scholar. (Getty Images)

The global economic crisis sparked by the US subprime mortgage meltdown would not have occurred if Islamic principles were applied in international financial markets, an Islamic scholar said.

Defaults in the US market from risky mortgages have caused major global credit turmoil, as massive US losses led to a squeeze on international credit markets, and subsequent fall in global equity markets.

However, Mohammed Mahmud Awan, a scholar at Malaysia-based International Center for Education in Islamic Finance (INCEIF), said the mortgage crisis was "unthinkable" under Islamic principles regarding debt, Arab News reported on Thursday.

“A crisis such as the mortgage one would technically be unthinkable in the Islamic capital markets sector because it would be against Sharia principles to sell a debt against a debt.”

The subprime mortgage crisis had seen trillions of dollars traded without the backing of assets, he said.

“If such transactions followed the Islamic finance model it would have easily prevented the current economic crisis.”

Speaking at a globalization conference at the University of Bahrain, Awan said the global economic crisis could be stabilised by the use of Islamic finance principles.

“Islamic bonds, carrying unique structure features, cannot fall foul of a crisis such as subprime mortgage crisis. Subprime mortgages are backed by dubiously rated collateralized debt packages which subsequently precipitated a global credit crunch.”

Awan said that it was time for Islamic banking industry to present solutions to the global economic community in the wake of the crisis.

Islamic finance assets are growing at an annual pace of 20% and are set to hit $2 trillion in 2010 from the current $900 billion, fuelled in part by a flood of petrodollars generated by the rise in energy prices.

Islamic finance principles stipulate that deals must be based on tangible assets and require tight controls on debt levels, features analysts say offer some protection to investors and ensure corporate accountability.

However, earlier this month a senior Islamic finance expert warned the sector was in danger because both banks and Sharia scholars were not providing solutions which are Sharia-based.

Abdulazeem Abozaid, member of the Sharia department in UAE-based Emirates Islamic Bank, told ArabianBusiness.com banks only aimed to maximise profits.

"They know that there is no real difference between conventional banking and Islamic finance," Abozaid warned.

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