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The Global Impact of Islamic Finance

“This is a historical event. We haven’t ever had any events about Islamic Finance at HBS that I am aware of,” said Samuel L. Hayes III (HBS, ’61), Jacob Schiff Professor Emeritus. Hayes was a principal contributor to the Harvard Islamic Investment Study and the author of seven books, including Islamic Law and Finance.
Hayes, the first speaker of the panel, explained basic concepts and principles of Islamic Finance to the audience. Islamic Finance refers to a system of finance or banking that is consistent with Islamic law (Shariah) principles. His “Islamic Finance 101” started with the guiding principles of the Prophet Mohammed, the historical founder of Islam: “Be fair with all others,” and “one party cannot exploit the misfortune of others.”
As a result, usury (the collection and payment of interest), in addition to any forms of speculation trading in financial risk is prohibited because it is considered gambling, which is also forbidden. Hayes pointed out that Islamic finance places emphasis on a philosophy of investing which closely resembles the idea of “socially responsible investing.” Islam does not permit the investing in businesses that are considered unlawful (haraam) and contrary to Islamic values such as those related to illicit drugs, weapons, alcohol, pornography and terrorism. Moreover, Islamic law prohibits borrowing money by using collateral and selling account receivables, which are commonly used financial practices by companies. Hayes said that businesses run by Islamic principles pay monetarily for their religious devotions.
Ibrahim Ward, an adjunct professor at the Fletcher School of Law and Diplomacy and an international consultant specializing in global finance, gave his speech on the historical background and industry overview of Islamic finance. He said that commerce has always been central to Islamic tradition since the Prophet Mohammed, who himself was a merchant, established elaborate business ethics and commercial rules.
Modern Islamic finance began in the early 1970s, at the intersection of two important developments in the Islamic world: the rise of pan-Islamism and the oil boom. In the wake of the political movement advocating the unity of Muslims under one Islamic state and the quadrupling of oil prices, the Organization of the Islamic Countries agreed to create the Islamic Development Bank in 1974. Ward stressed that the real beginning of modern Islamic finance started with the development of this bank. During the 1970s and 80s, Pakistan, Sudan and Iran embarked on a full Islamicization of its banking sector.
Ward noted that Islamic financial institutions have grown at rates approaching 20% a year in the past few years, and that assets of these Islamic institutions exceed $350 billion. Additionally, most large financial institutions are involved in Islamic finance by supplying financial tools in over 75 countries, and there exists a Dow Jones Islamic Market Index that tracks companies that operate in a manner compatible with Islamic law. The events of September 11th, Ward said, ironically influenced on Islamic finance positively. For example, Muslim-Americans who previously invested abroad in Middle Eastern markets stopped doing so after funds that were invested in these countries were frozen post-9/11. As a result, many sought for domestic alternatives in which to invest their money and began to ask financial institutions to create products, such as no-interest accounts that were in line with their beliefs. Additionally, increased demand for Islamic finance funds came from Middle Eastern investors who wish to diversify their assets by investing in North America and Europe. Ward added, “It was the boom of Islamic finance that was driven by both micro-economic factors and political religious factors.”
Aamir A. Rehman (HBS ’04), who served as president of the Harvard Islamic Society in college and is a founding co-president of the Islamic Society at the HBS, covered the current state of Islamic finance. Rehman, a former consultant at BCG and the Monitor Group, spoke based on his experience of leading strategy development for the HSBC Group’s Islamic finance business. He stressed the need for professionals who have an understanding of finance and Islamic law as the demand for Islam-compatible financial tools grows in the current marketplace.
Audience member, Fahad Ashraf, a Harvard Dental School student, said “The speeches were very interesting and informative. The lecture was helpful to understanding the general state of Islamic finance, but it would have been better if they covered specific Islamic finance products in the U.S. market.”

April 23, 2007
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