Abdullah Turkistani: Latin America should open doors to islamic finances

Posted: July 27, 2012 by jennroig in English, Interviews
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Abdullah Turkistani, dean of the Islamic Economics Research Center at the King Abdulaziz University of Saudi Arabia

This is the unedited, English version of my Interview to Mr. Turkistani, originally published by AmericaEconomia on 19 December 2011.

During these days when the 99% movement has taken Wall Street, we’ve seen posters and placards advocating to give a chance to islamic finances. Why is that?

I’ve seen a lot of these messages during the 99% movement in New York. Islamic finances, first of all, have a very important principle. It commands to be correct.

What happened during the financial crisis… the extended damage… what was funding the system of banking. They found out they (the bankers) didn’t know what were the causes of the financial crisis and that’s maybe when the public was aware of that, they asked for a way, an alternative way of financing, other than traditional finances.

Could you please explain what makes islamic finances different from the conventional financial system?

The difference between both, traditional and islamic finance systems could be expressed by two points. One is the islamic finance that is 100%, or what should be the 100%, attached to the real sector. While the traditional finance, especially what is called the new order of traditional finance, are completely disconnected of the real sector. The financial sector is growing too much. If they apply islamic finances, it would not let go that much, so it would not explode. One important point is the attachment to the real sector.

Based on the Sharia, islamic finances are supposed not to profit from trade with money, that means it cannot profit from interest rates. Could you please briefly explain this as a business model?

I have to explain it in this way. In the traditional economy, the money sector, the financial sector have contracts for allowance, where you borrow money and then pay back in addition with interests. This kind of contracts is completely unacceptable in islamic finances. Our contracts replace that agreement with a different kind of agreement, where someone has a project and needs finance, then the bank sings a contract with this person or company for the project where they share the profit and loss at the same time. There’s no interest but there is a kind of profit sharing. Of course, the bank puts itself at risk, with profiting or not profiting, but this is the basic of islamic finance,no direct loan bonding for interest. In islamic finances we believe that if we lend is for real things. … go to the charity sector, to helping other people. In business is completely forbidden to pay extra. The practice nowadays in the islamic banking is that if I want to buy or ask a loan to build my house, I need some material to buy, the bank will buy this material for me, and sell it again to me, with higher prices. Let’s say, they buy it for 100 and sell it to me for 110, which I will pay in one year or two. It’s not like financing, it’s buying and selling.

In this way, the real sector is loaned to work. Islamic system is not meant to lend loans, but it can buy for you whatever you want, so the money goes to the real sector. So once the bank buys the material ans sells it to the man who needs them to build his house, that way the growth of real sector will be affected very poorly by this kind of financial crisis now.

What is bringing this islamic financial system to a more ethical manner to deal with finances?

There are different ways in which we could contribute to a more ethical performance of the banking systems. Islamic finance is supposed not to finance any activities that harm society. For example, it should not finance smoking companies, especially it’s not supposed to finance companies that harm the environment. The other part is that we believe we are not financing through interest so to help the society, to heal disputes between members of society. That of course appear in the long run, but it is also considered part of the base of the system.

Have the events known as the Arab spring affected somehow the stability of the islamic financial system? How are finances doing within this scenario stressed by political unstability?

I think islamic finance, islamic banking, will have a greater role to rebuild these societies like Egypt and Lybia and other countries, now when different political systems will be in place, after they hold elections. For instance, in Tunisia, the Islamic movement did very well in the elections. Of course, as we are there, we expect the our finance to grow. Then the finance sector of Tunisia will be very close to society and its members. People are now aware of more rights, they are allowed to talk about that, so we actually expect more stability in those countries.

As well, among the goals pursued by Islamic financial institutions there’s the attraction to investors interested in participating in operations which respect the Sharia. As well, some large diasporas from muslim countries have successfully settled in Latin American countries. Are you aware if is there some relevant participation from stakeholders based here in Latin America?

Now in the conference in Madrid someone raised the point that in Malasya there is a very high number of non muslims participating in islamic banking. Maybe that’s the thing. The point with islamic finance is that everybody can participate, it is for everyone that wants to work according the principle, we accept projects from christianity, jewish… because in fact the text, the holly books are similar.

It makes sense that arabs have done well in South America because they have been able to invest and in south America everybody is looking for that. Of course, they want to secure their investments, so to invest in the islamic way is… if south american countries open their doors and allow for investment in the islamic way I think a huge aount of capital will flow to that area.

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