The West's bankers may learn from their Islamic brothers

If the former chief executive of the Royal Bank of Scotland had been a Muslim, would it have prevented the disaster?

If the former chief executive of the Royal Bank of Scotland had been a Muslim and had run his bank on Sharia-compliant principles, would it have prevented the disaster that has befallen RBS? It sounds hypothetical in the extreme. Sir Fred is a Scots Presbyterian, and RBS was the epitome of gung-ho western capitalism before it came crashing down. But the question came to me as I sat at a dinner in Dubai's Grand Hyatt hotel this week, where 300 or so bankers and financiers had gathered to slap each other on the back at the Islamic Finance News Awards ceremony. If the financial world was run on Sharia lines, the backslappers concurred, we would not be in the middle of economic meltdown.

That opinion came not just from Dubai. In Jakarta, president Susilo Bambang Yudhoyono of Indonesia told the World Islamic Economic Forum much the same thing, adding that Islamic financiers should "do some missionary work in the West" to teach the former masters of the universe how to run a proper banking system. Incongruously, the sentiment was echoed in Rome, where the Vatican newspaper L'Osservatore Romano said: "The ethical principles on which Islam is based may bring banks closer to their clients and to the true spirit which should mark every financial service ... Western banks should use tools such as the Islamic bonds known as sukuk as collateral."

From the Far East, to the Gulf, and on to the heart of Christendom, the belief has been gaining ground as quickly as the financial crisis has accelerated: if western bankers had applied the cautious, prudent methods of Islam, instead of the bonus-fuelled jiggery-pokery of the US and Europe, we would not be on the brink of financial disaster. Islamic financial principles can show us a way out of the mess.

They have a point. Apart from banning investment in industries such as alcohol and gambling, Islam also bans financial interest and the so-called "products" that derive from them. Collateralised debt obligations, the class of products largely responsible for our current disaster, are as un-Islamic as it gets. Sharia-compliant personal and consumer finance, such as mortgages, leasing agreements and loans, are matched much more closely than their western counterparts to true asset value and are generally more conservatively rated. That does not mean Islamic finance has been unaffected by the crisis caused by the West. There are credit crunches and liquidity shortages aplenty in the Gulf, and the rest of the Muslim world - the direct result of western contagion.

My host at the Dubai dinner, Dr Humayon Dar, the chief executive officer of the BMB Islamic group controlled by the Sultan of Brunei and several Middle East royal families, put it neatly: "Western institutions are sick and hospitalised; Islamic financials are hospitalised alongside them, but not that sick. We can be back on our feet more quickly." But if so, will they pull the West out of its predicament? And will the western financials pay any more attention to Islamic banking once they get out of the current predicament?

Within the global economy, Islamic finance is still minuscule. According to London Business School, the total value of Islamic financial business in 2007 was something like US$729 billion (Dh2.6 trillion). That sounds big, roughly the same magnitude as the US government's current bailout programme of its toxic assets, but it is still a mere 1 per cent of the total value of the world economy. With 1.6 billion Muslims out of the world population of 6.6 billion, you could argue that Muslims are hugely underserved by their financial providers. So there is plenty of potential.

Some western bankers saw that several years ago, and there was a rush to hire Muslim staff and initiate Sharia-compliant operations. These focused on the big Muslim communities in the Middle East, Indonesia and Malaysia, but also began to fish in the big pools of Islamic communities in Europe and North America. Whether this represents "conversion" to Islamic financial methods on the part of westerners is another matter. They were after business, of course, and particularly the big pools of liquidity held by governments and wealthy individuals in the Gulf, and the mass markets of the Far East. Their motive was profit, not a more secure global financial system, and they were ready to bolt on Sharia-compliant procedures to the most hair-raising and risk-taking aspects of casino capitalism.

They also did it grudgingly and with many reservations. There was much complaint in western banking circles about lack of regulation in Islamic finance, the high fees needed to lure the comparatively small number of Sharia-qualified financiers in the world, and the cost of "fatwa-shopping", the process by which western-originated financial products were issued with Sharia-compliant authorisation.

"It's a con. They know it and we know it. But it's the price we have to pay for access to the Islamic markets," said one western banker at the Hyatt last week. There is no real conversion to Islamic principles there; merely a typical western business imperative to get a slice of some action when conventional markets are locked in financial paralysis. HSBC, one of the better-run global banks that has so far stayed out of the spiral of government bailout, has decided Islamic finance is a top priority.

"It will be one of the few areas of world finance where there is any growth this year. We think the market for sukuks will revive and there is huge potential in consumer retail banking products. The demographics are all-important: Islam is young and growing, Christendom is old and dying," said a Dubai HSBC executive. But what about Sir Fred, and his bonus - would a multimillion-dollar compensation package for wrecking RBS have been acceptable under Sharia principles?

Dr Dar said: "It would not have been 'haram' (forbidden) - that is a very strong phrase in Islamic finance. But it would have been objectionable." That is roughly the predicament of the British politicians are trying to get him to pay it back. It seems the two systems have plenty in common already. [e-mail]