IDB chief urges EU not to repeat mistakes of the past

"Of course, a number of our member countries especially in the Mediterranean Basin such as Turkey, Morocco, Tunisia and Algeria are major traders with Europe. As such, they are definitely affected as exports start to decline because of the credit crunch and economic situation in the European Union (EU). We do hope that EU policymakers find the right solution and do not repeat the same mistakes of the past, which include a highly leveraged economy and excessive lending and speculation in the banking system, all of which had little connection with the real economy," he explained at the "Islamic Finance on the 21st Century" symposium which was held in Madrid on Dec. 1.
The symposium actually marked the relaunch of the Saudi-Spanish Center for Islamic Economics and Finance (SCIEF), which was formerly the Center for Islamic Economics and Finance, a collaboration between IE Business School in Madrid and the Islamic Economics Research Center at the King Abdul Aziz University (KAU) in Jeddah, and the launch of a book by SCIEF titled "Islamic Economics and Finance - a European Perspective" which was edited by Jonathan Langton, Cristina Trullols and Abdullah Turkistani.
Professor Rafael Puyol, chairman of the board of directors of IE Business School, stressed the importance of this collaboration especially in the context of further enhancing Spanish and European relations with Saudi Arabia and the wider Islamic especially in the context also of Islamic finance education. Professor Osama Tayeb, president of King Abdul Aziz University, expressed his confidence that this collaboration between IE Business School and KAU "will allow for scientific and academic research to develop and flourish" especially in ethics and financial rules and contracts.
IE Business School, elegantly located in Maria de Molina in the financial district of Madrid, is one of the top business schools in Europe according to several rankings including the Financial Times and Forbes. Its commitment to SCIEF and Islamic finance education is further underlined by the fact that since the last few years Islamic finance has become a compulsory subject for its MSc in finance course.
In fact, Ali, in his keynote address, agreed that the "establishment of the centre will go a long way in promoting better understanding between Muslims and Western civilization with a view to promote harmony and peaceful co-existence. Spain has been chosen as the venue for this center because Spain has historically served as a strong link between Islamic and Western civilization. It became the intellectual and cultural center of Europe during the Muslim period of more than 700 years from 713 to 1492 and led the way to the European Renaissance which played a crucial role in the development of Europe."
The establishment of the center, he added, "will not only enable us to benefit from your expertise in the area of development finance but will also help you have a more intimate knowledge of Islamic economics and finance and of what is going on ion the Muslim world. Madrid will thus be able to increase its potential of becoming the European hub for knowledge on Islamic economics and finance."
However, to what extent SCIEF will contribute to the understanding, demystification and even progress of Islamic finance in Europe remains a moot point. Spanish involvement in Islamic finance is almost non-existent. The country's premier bank, Banco Santander, which styles itself as a global bank, has been non-existent in the international Murabaha syndication, Ijara financing and sukuk investment market. This unlike other global banks such as HSBC, RBS, Citi and Deutsche Bank. HSBC and Goldman Sachs have earlier this year even embarked on their own sukuk programs to raise funds from the market.
The first half 2011 attributable profit of Banco Santander, illustrates its insularity as a global banking player and the opportunity costs lost in failing to leverage business opportunities in the Middle East and Asia, which are the GDP growth engines of the global economy. Some 50 percent of profits of Banco Santander were generated from the US and South American markets; and the other 50 percent from retail Spain, retail UK, corporate Spain, Germany and the EU. Not a single euro was generated from the Middle East, Asia let alone Islamic finance.
The Spanish economy too is caught in the eye of the Euro sovereign debt storm together with Greece, Portugal, Italy, Ireland and France. Ali's advice to the European economies is to "decrease the debt in the economy and the banking system; to have less speculation in the financial sector; and to tie financial activities with the real economy through financing especially small-and-medium-sized enterprises."
The global financial system has become highly sophisticated over the years and has contributed to generating great wealth and development. But over the last few decades it has been plagued by recurring financial crises, because of excessive lending and in particular lending for speculative purposes which accentuates risk without adding any real value to the economy.
"Any financial system which does not have risk-sharing is likely to promote the tendency among banks to lend excessively in order to maximize their profits. This leads initially to an artificial boom in the assets market. Since this is unsustainable, there follow a bust which leads to a recession and causes problems for nearly all countries. The recent financial crisis, from the adverse impact from which the world is struggling to come out, has vividly made this clear. If the banks participate in risk, they will themselves be more cautious in lending and will evaluate loan proposals more carefully. It is also necessary to link the growth of credit to the growth of the real economy," explained Ali.
Islamic finance has in-built checks and balances which pre-empt the type of excesses seen in the conventional banking sector. These include proscription on interest, speculative gambling and sale of debt; and non-disclosure and non-transparency in transactions such as the CDOs backed by junk subprime mortgages which were not disclosed to investors. The ethos and efficacy of Islamic financial principles were vindicated during the recent financial crisis "when Islamic banks were generally able to maintain their health and strength while other banks were exposed to serious problems."
He agreed that sukuk is juts one tool in the Islamic finance space that could help in terms of fund raising and monetary policy management, which in turn could contribute to economic growth and financial stability.
Ali maintained that the IDB has made substantial progress over the last three decades. Last month, Fitch Ratings reaffirmed the IDB's "AAA" long-term Issuer Default Rating and "F1+" Short-term foreign currency issuer rating with a "Stable" outlook. The other two international ratings agencies, Standard & Poor's and Moody's have similarly assigned AAA ratings to the IDB in recent months. All three highlighted the bank's excellent capitalization, strong shareholders' support and moderate credit risk as being key rating drivers.
He revealed that as of last August, the IDB Group had extended $76.2 billion of financing in 7,195 operations in member countries; and for the year ending November 2011 the IDB extended $7 billion of trade, project and technical assistance financing to member countries and to Muslim communities in non-member countries.
At the same time the IDB is working toward achieving its Vision 2020 objectives which calls for the multilateral institution of the Muslim world to become a world-class development organization by 2020. The IDB is also aiming to boost intra-trade between member countries to 20 per cent of their total trade by 2015, a task according to Ali which is tough but achievable.
The IDB also values partnership with other multilaterals and international organizations. It has a technical agreement in place with the World Bank/International Monetary Fund (IMF) whereby the latter would give technical assistance to countries interested in introducing Islamic finance and also in issuing sukuk. Only two weeks ago, the IDB concluded a $6 billion Framework Financing Agreement (FCA) with the Manila-based Asian Development Bank (ADB) to step up co-financing operations, of which the IDB will contribute $2.5 billion and the ADB will contribute $3.5 billion.
Under the agreement, the two multilaterals aim to cooperate in their common member countries in such areas as agriculture, food security, rural development, human development, education and health, private sector development and credit insurance. This follows a similar successful $4 billion agreement (2009-2011) which saw eight major infrastructural projects co-financed in six of the member countries of both entities, namely; the Azerbaijan Republic, Bangladesh, Indonesia, Kazakhstan, Pakistan and Uzbekistan, in addition to a regional Islamic infrastructure fund.