Trump and Brexit events highlight the need for more Participation/Islamic Finance

The report proposes that after decades of increasing financial inequality and insecurity, the majority of citizens in the USA and UK have expressed their desire for change via the election of Trump and the Brexit referendum. This demographic has been broadly excluded from substantial wealth creation of recent decades that has been largely driven by globalisation, financialisation and technology.

‘Islamic Finance’ – also known by the more descriptive and inclusive name of ‘Participation Finance’ simplistically discourages interest income from debt and hence favours equity, productive asset and revenue generating investment instead of unsecured lending for consumption and speculation. The report proposes that a more widespread application of Participation/Islamic Finance principles would ensure more inclusive approach to the gains of capitalism and help reduce the inequality that is a key factor driving increased protectionism and social intolerance.

“The top 10 per cent of people globally control 50 per cent of household wealth in OECD countries, the bottom 40 per cent have only three per cent and the USA scores particularly poorly for equality with a surprisingly high level of poverty” says Khalid Howladar – Managing Director and Founder of the new GCC risk, rating and Islamic finance focussed consultancy Acreditus – in the report. Khalid was formerly Global Head of Islamic Finance at Moody’s investor’s service and the Senior Vice President-Team Leader of the GCC banking team. “Both the UK and USA saw a worrying increase – from two per cent to over 70 per cent – over the last decade, of households whose incomes declined or remained flat” he adds.

The metrics derived from comprehensive studies undertaken by the Organisation for Economic Co-operation and Development (OECD) and the McKinsey Global Institute show a very real and rising trend in inequality and highlight the need for more equitable and inclusive forms of capitalism.

“Recent economic policies often encouraged an endless cycle of debt-based consumption and leverage as a path to prosperity, an approach that caused the Global Financial Crisis which hurt the weakest in society” notes Howladar. “Participation or Islamic finance discourages such lending in favour of equity and tangible asset investment, where most of the wealth creation of recent decades have occurred.”

The report notes that Malaysia’s substantive pension and Hajj funds show the relative success of this approach, with a bias towards equity and helping to institutionalise a widespread and long-term investment mentality to share the gains of economic growth. “Islamic banking in Malaysia is relatively advanced globally and is providing a solid retail foundation to help to take the industry to version 2.0 – i.e. closer to the underlying investment principles of Islamic Finance and helping to differentiate it from conventional banking’ says Howladar. “In the GCC however, for various reasons the long-term, non-sovereign institutional investment environment is relatively limited given the substantive wealth in the region” he notes.

The report describes some ideas to help promote awareness and implementation of Participation Finance but notes the success of any efforts depend crucially on the corporate governance and incentives around such initiatives.

Authored by Khalid Howladar in a new report published by Acreditus

Copyright Reserved CPI Financial 2017

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