Published January 13, 2009

Crisis a golden chance for Islamic finance: KL

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(KUALA LUMPUR) The global economic crisis has handed the Islamic finance sector a 'golden opportunity' to show that it is a better alternative to capitalism, Malaysia said yesterday.

Although capitalism has been pre-eminent for centuries, 'it is becoming obvious that there is now more proof of its weaknesses', Deputy Prime Minister Najib Razak said in a speech to an Islamic economic conference. 'We Muslims should see the current situation as a golden opportunity for us to prove the power, strength and effectiveness of the Islamic banking and finance system.'

Islamic banking, a booming US$1 trillion global industry that prohibits speculation and high levels of debt, has been relatively unscathed from the credit crunch.

The rules of the sector - which incorporate principles of syariah or Islamic law - prohibit many of the risky activities that triggered the crisis that is felling economies around the world.

'An economic system that is not closely linked to real and productive activities is a threat to the entire system,' said Mr Najib.

He said that the Islamic approach could provide 'concrete and realistic' measures to tackle the crisis and that Malaysia, South-east Asia's leader in the field, was committed to developing the sector with better training and marketing.

Islamic law prohibits the payment and collection of interest, which is seen as a form of gambling, so highly complex instruments such as derivatives and other creative accounting practices are banned.

Transactions must be backed by real assets - not repackaged sub-prime, or high-risk, mortgages - and because risk is shared between the bank and the depositor, there is an incentive for the institutions to ensure that the deal is sound.

Islamic finance also shuns investments in gambling, alcohol and pornography in favour of ethical investments. -- AFP