Toby Birch

Articles:

Interest-free Finance for All

By Toby Birch October 2008 EUBankers

Continued . . .

Muslims invest heavily in real estate and tangible assets. Joint ventures and private equity (without enormous leverage) also appeal with their partnership approach which shares risk and reward. Islamic mortgage holders pay rent rather than interest and banks match loans with deposits, charging fees rather than interest margin to pay for their services. The method may sound like semantics but there is a crucial difference: it avoids the creation of credit which is inflationary for the economy and ultimately self-destructive for the bank. In this grown-up form of finance there are no guarantees or deposit protection schemes but lending is far more responsible. Islamic banks are by default small, well capitalised and conservative. For many, a safe bank paying no interest may well be better than a bust one which offered 7%. To receive a return, savers may pool their money and participate in low risk schemes investing in communal projects.

As with the Guernsey Experiment we could show leadership by providing liquidity and interest-free financing as a role model, with the motto ‘legacies, not liabilities’. Guernsey has an admirable record for chameleon-like adaptation to new business opportunities. Finance need not fold but can evolve, with a little training and flexibility. Jersey and Cayman are already ahead of the game in Islamic Finance; it’s time for us to wake up and catch up before they corner the market.

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