Why Islamic banks escaped crisis

April 28, 2009

, NAIROBI, Kenya, Apr 28 – The current global economic downturn would never have happened if the banking sector had pegged its business on the Islamic banking, an industry player said on Tuesday.

Gulf African Bank CEO Najmul Hassan says none of the 375 banks that practice Islamic banking globally has been affected by the crisis so far.

“The reason for this is that Islamic banking does not go into the products that got these banks into this downfall. Look at Societe Generale, it lost billions in speculative transactions; Somitu Corporation lost because it was speculating on prices of copper,” Mr Hassan explained.

“These are the very things that Sharia banking disallows.” 

 Mr Hassan noted that Islamic banking is based on neither speculation nor interest but real growth.

“All the trading that happens in this world is not interest-based; there is real trading taking place. Some assets are purchased, you add value, and you sell them out. That is what Islamic banks do,” he said.

Mr Hassan explained that Islamic banks buy assets, add value and sell them on deferred payment and make their profit from taking part on real economic activity in a society as opposed to conventional banks which makes money on fractional lending which he described as ‘paper business’.

Speaking during the first ever Islamic banking conference in the country, Mr Hassan noted that the biggest challenge for Islamic banking in the country was demystifying the concept.

“Most people stereotype us and make our banking concept look like we discriminate people on grounds of religion. This not the case because we are open to everyone,” he said.

Mr Hassan  said the conference is intended to impart comprehensive and practical knowledge on Islamic finance product structures and their practical applications, highlight the challenges facing Islamic banking; their regulatory framework and legal issues; options to investing in equity markets; a comparative analysis of Islamic and conventional banking products and Islamic insurance models, amongst other issues.

Meanwhile Mr Hassan said he hoped Central Bank would soon set up a department to cater for the growing Islamic banking sector in the country.

“I think Kenya has a huge potential of becoming the centre of Islamic banking in the African region in the next five years. London and Paris are vying for this position in their respective regions,” he said.

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