“If America sneezes Europe catches a cold.” This is the classic saying used to summarise European economies’ dependence on American. If this is true, then Arab countries are currently sick with the flu. The global crisis has in fact seriously affected the wealth of countries in the Gulf region. On the other hand, caught as they are between the fall of oil and gas prices, that of the share portfolios of royal families, local banks with cash crises, the burst property bubble in Dubai, the collapse of the Arab stock markets and sovereign funds affected by the American crash, how could they possibly be immune? And yet on the Southern shores of the Mediterranean there are some who are increasingly optimistic. These are all financial institutions that respect the Shari ‘a and the phenomenon is known as “Islamic finance.”

For them the sting of this crisis has not been so terrible, and it has been precisely the collapse of speculative finance that they believe will give them new life. This, because Islamic banking is based on a different way of doing business. It is forbidden to loan with interest, to speculate, there is solid pegging to the real economy and income is based on clients’ accounts. Essentially, what in the West is known as “ethical finance”, the principles of which would have been sufficient to prevent the origins of the current economic crisis.
Financial turbulence could not spare economies such as the Arab ones so dependent on Western markets. Just as during the last three years the price of oil’s crazy rise brought untold wealth to almost all the countries in the Arab peninsula, its fast fall in the last four months almost took their breath away. All this can be summarised in one number, one hundred. Hence the difference between the top price for crude last July of 147 $, and the last quote for December of 47 $.

To this one must add that the collapse of shares and bonds exchanged on Wall Street resulted in a large fall in the value of share portfolios owned by the various Arab royal families and businessmen. Two phenomena have greatly reduced the number of dollars circulating in the Arab peninsula creating problems for local banks. Some of these banks were obliged to ask the state for help, as happened in the Emirate of Dubai. The property bubble burst precisely in Dubai causing all the Gulf area stock markets to fall even further. The Saudi stock market, for example, has lost 60 % of its value since the beginning of the year. Things went even worse for the Dubai financial market index; a drop of 70% since January.

Within this scenario sovereign funds deserve to be discussed separately. These are containers of capital controlled by states that buy portions of companies all over the world. With a total of about 1.800 /2.000 billion dollars in international assets, Middle Eastern sovereign funds are the most powerful in the world. Among these the Abu Dhabi investment authority, Istithamar World, the Saudi Arabian monetary agency and the Kuwait Investment Authority are the most important. However, the crisis has also been detrimental for these small battleships, as the depreciation of stocks has automatically resulted in a depreciation of their assets. The Abu Dhabi sovereign fund, for example, certainly did not make a good deal buying Citigroup shares for 7.5 billion dollars. And nor did those countries belonging to the Gulf Cooperation Council who loaned Barclays 9.4 billion dollars. All this to the extent that Arab countries are asking for these funds to be returned home where they could be invested in local stock markets.

In this very difficult situation, having done better than traditional banking systems, Islamic finance is holding out. “There have been negative effects, but these are only a consequence of those directly affecting the conventional financial system in Arab countries” says Ermanno Mantova, founder and president of the ISME, Institute of economic and financial studies for the development of the Mediterranean , “Islamic finance did not directly lose any money, since speculation is excluded a priori, there was no speculation in high risk shares on the stock markets. It is this natural immunity to speculative markets that strengthens interest for the future.” This “natural” immunity, as Mantova described it, exists because this banking system is based on the prohibition to loan money for interest; in some way the financial institution must participate in the business risks run by the person borrowing the money. Obviously these banks did not buy large amounts of toxic shares as others did and thereby protected their assets.

This, therefore is an ethical way of interpreting finance, one that may prove very successful in a period in which the excessive importance in recent years of “creative” finance is being questioned. It is in fact no coincidence that Islamic banking has grown very quickly, on average between 15 and 20 % per year, achieving a turnover of between 800 and 1.000 billion dollars, equal to one percent of the global financial market. These are significant figures and yet still small ones compared to those of the West. According to Mantova, what matters above all is the future. “To use stock market language, what one must assess in Islamic finance is its ‘fundamentals.’ Hence, considering the new analysis of economic, financial and ethical models currently underway all over the world, one should look at other advantages rather than at growth indexes. This is a world that is still busy removing the debris of an earthquake, with subprime loans at its epicentre, but that then affected everything and everyone.”

Translation by Francesca Simmons