Can the Islamic banking system be a model for the United States, and if the overseas system had been in place domestically prior to the market meltdown, would stocks and exchange traded funds (ETFs) have been better off?

While consistency and sustainability are the foundation to the Islamic banking system, the proof is in the fact that the current market meltdown did not take the system down with it. A sustainable growth was witnessed in the system and the subject to which, 27 Muslim and 15 non-Muslim nations invited the Islamic banks in hopes of getting sustainability in their financial sector.

The principal basis of this economic system is the Islamic law – Sharia, explains 8000 Muslims are required to follow strict Islamic standards known as Shariah. Generally, these principles state that Muslims are forbidden to participate in any financial practices or do business with any money-lending entity that charges interest, known as riba; invokes gharar, or uncertainty, most commonly in the form of variable interest rates; or uses funds for maysir, or gambling.

Some of the reasons why the Islamic Banking system withstood so much of the turmoil that infected other banking systems include:

  • The pragmatic interest policy in the Islamic financial system was one of the major factors attracting the affluent investors of Arab, which gave the system a strong base
  • The internal wealth became the platform to the Islamic Finance, and gathered enough interest and support to sustain the current condition found in the world economies today
  • The system is transparent, which helps risk-taking and profit-sharing among all, which in turn guides the market in a better direction

On the flip side, though, the banks never have enough liquidity for unforeseen events and the needs for risk protection are always increasing because of increased traffic.

The point of transparency is one that the Western world should strive for, and with the new administration this may come to fruition soon in our own banking system.

  • WisdomTree Middle East Dividend fund (GULF): down 8.9% year-to-date

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.