The hyperinflationary conditions and shortage of foreign currency that prevailed in Zimbabwe before the adoption of the multi-currency regime gave a whole new meaning to speculation, spawning the “burning” phenomenon. As if it needed any explaining, “burning” is generic euphemism for the speculative activities under which people basically created money out of thin air not by sleight of hand but by merely standing at street corners and manipulating exchange rate differentials between the “official” and “black” markets for foreign currency.
At one time, an SMS joke apparently meant to sanitise this “burning” sensation (pun intended) did the rounds claiming that “Zvekuburner izvi hazvina kutanga nhasi, zvakatanga munguva yaJesu. Iye mbune akaburner 5 loaves nehove mbiri vanhu vanokwana 5000 vakaluma!” (This burning thing is not new; it was there in the time of Jesus. He himself miraculously multiplied 5 loaves of bread and two fish and produced enough food for more than 5000 people!) Morally, this crude attempt could not have been wider off the mark but — bordering on blasphemy as it may seem — it appears to have a measure of factual plausibility, because even in the time of Jesus, the spectrum of human endeavour boasted of everything from simple trading to speculation. In Matthew 21:2 we are told that “Jesus went into the temple and drove out all those who were buying and selling there. He overturned the tables of the moneychangers…’ Apparently, money changing — as burning was known then — is as old as the gospel!
Islamic Banking: Balancing Faith & Finance?
The state of the financial sector in Zimbabwe up to 2008 would no doubt have brought into sharp focus ssues of morality/ethics/faith in finance. Was it moral or ethical for such a large number of people to wish wealth into existence without any underlying productive activity happening, some may ask? In an attempt to answer this and other questions, this week we focus on a form of finance that seeks to strike a balance between faith and finance: Islamic Finance/Banking. Islamic Finance is based on the principle that money must never spontaneously generate money. Instead capital must be made fruitful or “fecundated” by labour, material or intellectual activity or be invested in a wealth creating activity. Islamic Finance therefore frowns upon speculation and applauds risk sharing.
Some common terms used in Islamic finance include sukuk issue (bond issue), Mudarabah (profit and loss sharing), Musharakah (joint venture) and Ijarah (leasing). Interest is called riba and an instrument that complies with the dictates of Fiqh al-Muamalat (Islamic rules on transactions) is described as sharia-compliant. Investing in businesses that provide goods or services considered contrary to the principles of Islam is haraam (forbidden) while those that are permitted are halaal.
Joint ventures under which the funder and the borrower share profits and risks are common in Islamic Finance because of the strict prohibition of the giving and taking of interest. Shariah- compliant mortgages, for instance, are typically structured so that the lender buys the property and leases it out to the borrower at a price that combines a rental income and a capital payment. At the end of the mortgage term, when the price of the property has been fully repaid, the house is transferred to the borrower.
Apart from skepticism about its financing techniques, Islamic finance faces a number of challenges including transactions costs which tend to be higher in complex Islamic transactions than in more straightforward ones. Shortage of skills is another since scholars, who are the central industry figures, are in short supply to fulfill roles for international players – demanding knowledge of Islamic law and Western finance, as well as fluency in Arabic and English. Banking institutions that offer Islamic Banking products and services are required to establish a Shariah Supervisory Board to advise them and to ensure that their operations and activities comply with Shariah principles. Since Islamic instruments typically finance long-term assets, in the context of Zimbabwe, liquidity would be a formidable challenge given the mismatch between the duration of banks’ liabilities and their assets in an environment in which banks struggle to raise long-term debt.
Why Islamic Finance?
Apart from the moral/ethical issues of finance, why would the issue of Islamic Banking be topical in Zimbabwe at this point? Firstly, even though Zimbabwe is predominantly a Christian nation, we can’t ignore the fact that there is a sizeable Muslim/Islamic community in Zimbabwe and the fact that some of whom may control significant amounts of wealth. It is reasonable to assume that this group has unmet investment needs that seek to benefit their savings as well as their souls.
Secondly, the President of the Bankers of Zimbabwe, Mr John Mushayavanhu recently said that growth in the banking sector would hinge on the players’ ability to come up with innovative ideas to convince the public to channel their savings into the financial system. Could Islamic Banking be one of the innovations Zimbabwe needed to mobilize finance from Muslims? Institutions like NMB Bank Limited have flirted with the idea of Islamic Banking since the early 2000s but it is territory that remains largely uncharted for the majority of banking sector players, so it can be considered to be a growth area.
Experts note that Muslims account for 20% of the world’s population, but Islamic finance accounts for less than 1% of its financial instruments hence this gap represents a big opportunity. Thirdly, due to the ban on speculation, Islamic transactions must be based on tangible assets such as commodities, buildings or land. Islamic Banking therefore lends itself to financing infrastructural development. The Zimbabwean economy has such a huge need for infrastructure financing right now that the case for Islamic banking instruments is a compelling one. The argument is that Islamic banking can, in the short to medium term, be used to mobilise internal resources for purposes of infrastructural development and in the long term, when our sovereign risk rating improves; it could be a vehicle through which foreign direct investment can be attracted from those wells-healed Middle-Eastern sovereign funds. After all, don’t we already have a Saudi Prince as an investor in Joina Centre?
Recently, GTR Magazine announced that Japanese investment bank Nomura won an oversubscribed $70million (from an initial request of $50 million) syndicated shariah-compliant commodity murabaha facility, signifying the first time a Japanese firm has tapped the Islamic market using a murabaha structure. A murabaha structure is basically a credit sale of goods at a price which includes a profit margin agreed to by both parties. The deal, which has ABC Islamic Bank as its mandated lead arranger, comes at a time when the bank has issued a US$100 million sukuk in Malaysia. Commenting on the transaction, Naveed Khan, managing director of ABC Islamic Bank said, “We believe strongly that this will act as a trailblazer for other Japanese issuers looking towards the fast-growing market of Islamic banking.”
According to Alhaji Mohammed Bintube, the Managing Director of Jaiz International Plc, Nigeria’s Islamic Banking market was worth around N4,35 trillion (US$27,7 billion) as at July 2009. Speaking at a forum titled Increasing Access to Finance through Islamic Banking, Modupe Ladipo, an industry executive said Islamic finance is a potential innovative approach to give the unbanked access to finance. He added that Islamic banking is globally being discussed as innovative, profitable and ethical, especially in the light of the global financial crisis and volatile interest rates. The Central Bank of Nigeria recently developed a draft framework for non-interest banking in response to a growing desire by banks and investors to establish Islamic Banking products. West Africa has a significant Muslim population, so Islamic Banking appears to be catching on quite fast in that region.
Recently, Exporta, the publishers of GTR Magazine announced that they will be convening a conference on Structured Commodity Finance in West Africa and one of the topics up for discussion is “The growth of Islamic Finance and adoption of Shariah-compliant financing models.”
•Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd. He writes in his personal capacity. Feedback: email@example.com