The Economist article on European mutuals
This week's Economist magazine has a nice article on financial mutuals or cooperatives (where the shareholders are the same as the depositors), and their merits during financial market turmoil. In particular, they highlight the inherent risk-management benefits of not having separate shareholders on whose behalf the manager may try to take excessive risk with the depositors' money (they can only lose their capital, and the profit potential is unlimited). The article also talks about how mutuals-of-mutuals have emerged in Europe, to replace partially the need for central banks as lenders of last resort or other ways to bail out failed banks. In my earlier papers and my book on Islamic finance, I have echoed those well known arguments for the benefits of mutuality, and shown that one reading of Islamic jurisprudence is that the forbidden elements of riba are eliminated in the case of mutuals. See three articles of mine on this topic here 1, here 2, and here 3.
posted by Mahmoud El-Gamal at 10:12 AM
6 Comments:
Dear Professor Gamal,
Jazak Allahu Khair for your post, the Economist article was very interesting, especially since it highlighted the fact that some of the European mutuals that did suffer heavy losses did so due to their desire to aggressively expand into Investment Banking. You have clearly highlighted these points in your previous papers, which were very interesting. I think the issues you have raised a few years ago are definitely the ones that the Islamic Finance industry needs to focus on, and on a larger scale there is huge potential for the underdeveloped capital market of Muslim countries to benefit from mutual credit organisations. As you have also mentioned in a previous post, this really does focus on the issue of social cohesion and bringing greater good to the whole Muslim Ummah through such cooperative arrangements, rather than private gains. In addition, the positive benefit of reducing agency problems of shareholder/manager incentive misalignment would be of extreme use as you have mentioned. I think the key barriers that you highlighted are the fact that the industry is run by large global investment banks in whose interest Shariah arbitrage very much is, and also the fact that these mutual arrangements are often low risk and low reward which may make them unattractive to some investors when compared to other asset classes (of course we should really see this low risk low reward as a good thing).
I have a couple of questions for you:
(1)Do you know of any independent Islamic organisations who are actually implementing these cooperatives in either banking or insurance, in a non Shariah arbitrage manner that you would deem as a positive for Islamic society?
(2) What was the reception to these academic papers you published a few years ago, in academia, the Islamic community and the regulatory bodies? (of course I’m not asking how the big banks would view your suggestions, that would be a silly question!)
A new book by Yahya Abdul Rahman:
The Art of Islamic Banking and Finance: Tools and Techniques for Community-based banking. LOL
http://books.google.com/books?id=k8LRZ1tSQtgC&dq=#v=onepage&q=&f=false
http://www.ufana.org/
Islamic finance conference coming up in Canada.
as sunnah ma 3amaloosh 7aga khaleena nakhosh ma3 al ismailia fi al mashroo3 beto3 al credit union.
http://www.islamtoday.net/bohooth/artshow-87-1008.htm
new book on islamic finance
المصارف الإسلامية بين النظرية والتطبيق
الاثنين 01 ربيع الأول 1431 الموافق 15 فبراير 2010
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