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Grad outlines Islamic financial practices

By Chris Mumford, Staff Writer

Ever since the financial crisis of 2008, pundits and lawmakers have considered an array of regulations and punitive measures to remedy the system’s problems, but real solutions could be found in an unexpected place8212;Islamic countries.

Siddhartha Herdegen, a U graduate in economics and a business consultant based in Bahrain for the past year, returned to his alma mater Friday to discuss the differences between financial practices in the Western world and those in Islamic countries, and how principles from the latter could potentially be used to address problems in Western institutions.

“In the West, we tend to separate the various facets of our lives,” Herdegen said. “We separate out what’s legal, and that’s different from what’s ethical and what might be socially acceptable. In Islam, they have their religious law that takes into account all of those things.”

Herdegen said financial dealings in Muslim societies are governed like any other social interaction by Shariah law, which is rooted in the Quran and mandates that all transactions confer some benefit to society as a whole, as opposed to Western societies’ focus on individual gain.

“The terms “illegal,’ “unacceptable’ and “immoral’ are all pretty much synonymous (in Islamic finance),” Herdegen said.

Shariah law requires that all transactions are interest-free, risk is shared justly by all parties involved, contracts are specific in their terms and dates and no investments are made in industries that violate Shariah, such as alcoholic beverages or pornography, Herdegen said.

Islamic finance presumes that individuals conduct themselves ethically, with the community’s best interests at heart, as opposed to the assumption of decisions based on self-interest that serves as the basis for most Western economic models, he said.

Although Islamic financial institutions recognize that the assumption of risk deserves reward of some kind, the charging of interest is not considered worthy of a reward because it is not socially beneficial. In any case, risk is assumed to be minimal because individuals are assumed to act ethically.

Banks under Shariah law must keep full reserves on hand, in the form of goods, to match any loans taken out, meaning that they cannot make loans using borrowed money as in the fractional reserve system in Western banks.

These were just a few of the differences Herdegen outlined that could have contributed to the relative health and stability of Islamic banks. During the worst of the financial crisis, Herdegen said most Islamic banks posted robust gains while their Western counterparts spiraled into insolvency. Islamic financial products have been growing at a steady 15 percent to 20 percent clip for the past several years, according to The Korea Times.

Principles aside, however, Herdegen said a number of Islamic financial tools and contracts act like interest but are made to conform to Shariah by stipulating, in some cases, that interest gained is given to charity.

Whatever the relative strengths of Islamic finance, Herdegen said his purpose wasn’t to advocate that the Western system be supplanted by Shariah-based financing, but he pointed to Islamic finance as an opportunity to rethink our own financial systems and allow Islamic financial institutions to expand in the United States.

“There’s certainly areas where we can look at what’s good about this Islamic financial system without converting to Islam,” Herdegen said. “We can still say there’s some societal benefit here.”

Although the United States represents one of the biggest potential markets for Islamic finance, Yasir Butt, who is the Friday imam for the Muslim Students Association of the University of Utah, said wariness of Islam could pose an obstacle to its growth here and suggested that countries such as Canada could take the lead as a result.

Herdegen also acknowledged that mistrust on both sides of the Islamic-Western divide would pose a challenge, but nothing insurmountable.

“I think the more exposure people have to the notions of Islamic financing, the whole concept of Shariah, they understand that it’s not as weird or as different from Judeo-Christian tradition,” he said.

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