|Rising Islamic bankers face surprise challenge from Fed|
|Sunday, 14 December 2008 09:16pm|
©The Malaysian Insider (Used by permission)
LONDON, Dec 14 — A massive market infrastructure is being built to facilitate clients who include wildly rich Persian Gulf oil tycoons.
Yet isn’t this industry being pirated by the Bank of Japan (BOJ), the US Federal Reserve and other central banks destined to offer interest-free loans? Former US President Richard Nixon, echoing Milton Friedman, famously quipped in 1971: “We are all Keynesians now.” By next year, we may all be Islamic bankers, too.
It’s an odd yet apt comparison. Islamic banking is more about the means by which a certain group of people obtains money. Zero interest rates are about getting as much money, in any way possible, to everyone.
There’s still something to be said about the spreading appeal of scrapping interest rates. It’s no longer a unique aspect of certain transactions. It’s becoming the norm, and it’s quite disorienting.
Japan’s benchmark interest rate is 0.3 per cent and headed to zero in the months ahead. The US federal funds rate is 1 per cent and headed lower, too. Britain’s’s rate is 2 per cent, Canada’s 2.25 per cent and the euro zone’s 2.5 per cent. As the fallout from the global crisis worsens, these and many other benchmark rates will edge towards zero.
According to Islamic law, the charging of interest is unjust and exploitative. This concept bears little resemblance to Japan’s zero interest rate policy (Zirp).
The BOJ never argued that it was seeking to foster brotherhood or socio-economic justice. But that’s what it did. By eliminating borrowing costs, and going further in recent years with “quantitative easing”, the BOJ was doing its bit for social fairness and stability. It was about protecting the Japanese way of doing business and maintaining the egalitarianism on which the nation’s 127 million people pride themselves.
Now the Fed is heading down a similar road for similar reasons. With an unprecedented array of emergency loan programmes aimed at easing the worst credit crisis in seven decades, the Fed is engaging in Japan-like quantitative easing.
The level of rates is one thing. The fascinating development is that the Fed pushing waves of extra liquidity into the financial system. It’s no wonder that economists such as Michael Feroli at JPMorgan in New York are referring to Fed chairman Ben Bernanke as “Bernanke-san” these days.
Some worry the costs of all this will outweigh the benefits. “The concern is Zirp encourages inefficiency, and an inefficient allocation of resources is likely to ensue, as occurred in Japan,” says Benjamin Pedley, the Hong Kong-based managing director of LGT Investment Management.
The point here isn’t to downplay a fast-rising asset class. Globally, Islamic banking assets are estimated at between US$600 billion (RM2.16 trillion) and US$650 billion, according to Celent, a Boston-based financial research and consulting firm. They have registered annual growth of 10 per cent to 15 per cent over the past decade.
That kind of growth meant Islamic assets would top US$1 trillion by 2010, Alexa Lam, the deputy chief executive officer of the Hong Kong Securities and Futures Commission, said last month.
Data from Boston and perspectives from Hong Kong are being highlighted here to show just how anxious the world is to get a piece of Islamic finance. The figures and growth rates speak for themselves. Islamic bankers are looking to marry that potential with China’s rapid growth.
“The pie is getting bigger and bigger,” says Badlisyah Abdul Ghani, the chief executive of CIMB Islamic, the Islamic banking arm of Malaysia’s second-largest bank.
Only now, the pie is going to get really, really big as the world’s major central banks offer zero per cent loans.
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