The Islamic financial system as a solution to tackle social issues

In this article, Evan CHAISSON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2022-2023) comments on a quote by Wolfgang Schafuble about Islamic finance.

Quote

Islamic finance is growing in importance for the global economy. It is therefore important consider questions related to integrating Islamic finance into global finance.

Analysis of the quote

This quote, by Wolfgang Schauble, highlights the growing importance of Islamic finance in the global economy. Islamic finance is a rapidly growing sector, with an estimated value of over $2 trillion in assets worldwide. Figure 1 below gives the Global Islamic Finance Assets Growth (in US$ Trillions). As you can see from the figure, the sector is projected to more than double in value in 2024 based on its 2012 value.

Figure 1. Global Islamic Finance Assets Growth.

Source: ICD – Refinitiv Islamic Finance Development Report (December 2020).

As such, it is becoming increasingly important for the global financial system to consider questions related to integrating Islamic finance into global finance.

Additionally, this quote presents Islamic finance as a financial system that is different from the classical “Western” system that is commonplace today. As such, it may be able to offer solutions to global issues that the current system is unable to solve.

About the author

Wolfgang Schauble is a German politician who has played a prominent role in German and European politics for several decades. He served as Germany’s Minister of Finance from 2009 to 2017, during which time he played a key role in managing the global financial crisis and the European debt crisis.

Prior to serving as Minister of Finance, Schauble served as Minister of the Interior, where he was responsible for domestic security and law enforcement. He is widely regarded as a conservative politician and has been a member of the Christian Democratic Union (CDU) since 1974.

Financial concepts related to the quote

Although much separates Islamic law from the Western system, there are three main aspects that stand out: prohibition of interest, asset-based financing, and ethical and social considerations.

Prohibition of interest

The prohibition of interest, or riba, is one of the foundational principles of Islamic finance. This principle is based on the Islamic belief that money should not be used as a commodity to generate profit. The concept of riba is not limited to charging interest on loans, but also includes any type of fixed, predetermined, or guaranteed return on investment. Instead of interest-based lending, Islamic finance relies on profit-and-loss sharing (PLS) arrangements, where both the lender and the borrower share the risks and rewards of a particular investment.

PLS contracts take several forms, including mudarabah, musharakah, and ijara. In mudarabah, one party provides the capital, and the other party provides the expertise to invest the capital. Profits are shared according to a pre-agreed ratio, but losses are borne solely by the provider of capital. In musharakah, both parties provide capital and expertise, and profits and losses are shared according to a pre-agreed ratio. In ijara, the financier purchases an asset and leases it to the borrower for a fixed period of time, with the option to purchase the asset at the end of the lease term.

Asset-based financing

In Islamic finance, financial investments are tied to physical assets, such as property or commodities, rather than financial instruments such as stocks, bonds, or, say mutual funds. This is known as asset-based financing, and it is designed to promote stability in the financial system. By tying financial investments to tangible, physical assets, Islamic finance encourages investment in the real economy and discourages speculation.

The use of asset-based financing also has implications for risk management. Since investments are tied to real assets, the risks associated with those investments are more tangible and can be more easily managed. This also encourages all parties involved to share the risk of the venture. In turn, this will help build trust between partners, and, as more time goes by, investment risk will steadily decrease.

Ethical and social considerations

Islamic finance places a strong emphasis on ethical and social considerations in investment decisions. This includes avoiding investments in industries such as alcohol, tobacco, and gambling, which are considered harmful to society. Additionally, Islamic finance institutions often have social welfare programs that aim to promote social justice and alleviate poverty.

One example of a social welfare program in Islamic finance is zakat, which is a form of mandatory charitable giving. Muslims are required to give a portion of their wealth to those in need, and Islamic finance institutions often collect and distribute zakat on behalf of their clients. Islamic finance institutions may also engage in other forms of social welfare, such as providing interest-free loans to small businesses or supporting community development projects.

My opinion about this quote

Having stumbled on this quote by chance, I chose it because it made me curious about a financial system which I previously was not familiar with. This then led me to learn about a financial system which operates in a way that is decidedly different from what Westerners are used to. As a young adult growing up in an increasingly uncertain world with more than its fair share of issues, I am always searching for a solution. Thanks to this quote, I have discovered a financial system that, perhaps, can shape a path towards a better future.

Why should I be interested in this post?

Any student of business and finance, regardless of its origins, has much to gain from simply learning about the Islamic financial system.

This system should be studied, first and foremost, simply because Islamic finance is an increasingly important and influential component of the global financial system. According to the Islamic Financial Services Board, the global Islamic finance industry had assets worth $2.88 trillion in 2019. As the industry continues to grow, there will be a growing demand for professionals who understand the principles and practices of Islamic finance.

Another more ethical reason is because, as mentioned earlier, Islamic finance places a strong emphasis on ethical and social considerations in investment decisions. This includes avoiding investments in industries such as alcohol, tobacco, and gambling, which are considered harmful to society. For students who are interested in pursuing careers in finance with a social and ethical focus, Islamic finance may be of particular interest.

Useful resources

Islamic Finance: Principles, Performance and Prospects

About the author

The article was written in March 2023 by Evan CHAISSON (ESSEC Business School, Grande Ecole – Master in Strategy & Management of International Business, 2022-2023).

About the company

During my first six-month internship I worked for SuperYachtsMonaco. As the name suggests, this company is focused on the yachting industry and is located in Monaco. Founded in 2008, this company has a long history of providing clients with consistent service and top-of-the-line yachts throughout the globe.

Logo of the SuperYachtsMonaco.
Logo of SuperYachtsMonaco

Source: SuperYachtsMonaco.

While interning there, I worked for the Charter department. For those who are not familiar, chartering is when the client wishes to rent a yacht and also have a complete catering service accompanying them on their stay. In other words, chartering a yacht is like renting a hotel on a boat with all the personnel that one might need. Typically, clients will charter a yacht for 1-2 weeks and will set sail on a pre-determined itinerary. An average charter experience involves approximately 10 clients on the same yacht.

My internship

As part of the charter department, my primary mission was to prepare the department’s annual brochure. This is the charter catalogue that new clients will consult before contacting SuperYachtsMonaco and entering more detailed negotiations. Therefore, it was of the utmost importance that the brochure present the yachts in an enticing way and leave potential clients with a good impression of the company. In order to achieve this, I had to create the brochure’s theme and properly organize its layout and photo selection. I also had to write copy for each yacht so as to present the vessel’s most appealing aspects while staying concise.

Additionally, I had to prepare travel itinerary presentations based on itineraries desired by clients. Starting with a simple list of places that were to be visited, this task involved looking up these locations, finding places of interest and then writing copy. One last task I had was to help create the company’s monthly newsletter. This involved writing articles on various yachting-related topics.

Required skills and knowledge

The primary skill that I needed was copy writing. Indeed, I spent a considerable amount of time writing text with a specific target client in mind. This meant that I needed to adapt my writing style every time that the audience changed. Another skill that I needed was the ability to multitask. Aside from my main missions that I previously listed, I also had to accomplish a series of smaller tasks that, in the moment, were just as important as the larger ones. Therefore, it quickly became evident that I would need to find a good balance between the two types of tasks, otherwise I would fall behind on some of them.

What I learned

Overall, I learned the importance of soft skills and, above all, the proper way to interact with colleagues and manage their expectations. Indeed, it was easy to get along with all of my colleagues at the office if the relationship focused on topic external to work. However, it became challenging when I had to interact with these same people in the context of work, especially when these same people were giving me tasks to complete. For instance, my internship mentor initially told me to be open with my colleagues and be direct with them when I did not have the time to help them. Yet when I did this same thing, I was later reprimanded. This is when I learned that I had to read between the lines of what I was being said and communicate accordingly without refusing a task being assigned to me.

Financial concepts related my internship

Given the department that I worked in, I had little to no interaction with anything related to finance. What’s more, this is my work experience during which I came the closest to the world of finance. This is why I can only list one financial concept related to my internship, which is a cost-benefit analysis. One of my missions as an intern was to check an international yachting database for yachts that had recently decreased in price and conduct a cost-benefit analysis to evaluate different options for purchasing or maintaining a yacht. For example. To this end, I had to compare the costs and benefits of buying a new yacht versus a used one and weigh the costs of various maintenance or repair options against the potential benefits of purchasing the yacht in good condition. My findings were then directly reported to the company’s CEO.

Why should I be interested in this post?

A student wishing to enter the world of finance after graduating might find my blog post as useful insight. The first reason is because it provides them with an insight into the yachting industry from the perspective of an intern, which is a position they would likely find themselves in. Even if I had scant experience in finance during my internship.

Aside from this aspect, my hope is that this post will make other students curious to learn more about the yachting industry, as there is immense potential for any student wishing to delve into finance. For instance, I can attest from personal experience that the yachting industry is resplendent with high-net-worth individuals. So, it is easier to find opportunities for students to work with clients who have substantial financial assets and require specialized financial services. It is also a global industry that involves clients from around the world, so, say, a French student wishing to open themselves to the rest of the world might find that the yachting industry to be the perfect opportunity to do so.