Finance Essay on Islamic Financial Services as an Alternative to the Conventional Finance Industry and a Path to Recovery

Business Letter

Your Name

Address

Date

Recipient’s Name (Brian T. Moynihan)

Corporation (Bank of America)

Address (100 North Tryon Street)

City, State Abbreviation (Charlotte, NC)

Dear Mr. Moynihan:

Islamic Financial Services as an Alternative to the Conventional Finance Industry and a Path to Recovery

It is with much pleasure and gratitude that I have taken this opportunity to inform you of Islamic Financial Services, as a viable alternative to the conventional finance industry in which you still are a part of, and also of the opportunities that accrue from Islamic banking as a path to financial recovery, and ensuring there is considerable reduction in banking risks. Being well aware that you are among the biggest banks of the Western world’s financial industry and having an ambitious plan, considering your history of investments and acquisitions, of being not only the biggest bank in North America, but also the leading global player in financial services, I will make some insightful disclosures that you should find very informative. It is my desire to enlighten you to be able to adopt Islamic financial services as your preferred model of business.

You are well aware of the financial crisis of 2008 that was brought about by innovations of structured financial products and financial derivatives, and the impact they had on the global financial industry. This too had a negative impact on your bank that led to the aiding of your operations by the Federal Government to keep you in business. It will delight you to know this was never experienced by any of the banks practicing the Islamic banking model but even more, they remained profitable all through the financial crisis (Alzalabani and Reji 15),  but what precisely constitutes the model that is Islamic banking?

According to Alzalabani and Reji (16) Islamic banking refers to a banking system that is Sharia compliant, that is, consistent with the Islamic law, which prohibits any transactions that will generate interest fees for money, as well prohibiting investing in businesses that are Haraam, considered to be contrary to Islamic principles considering it is the drive to excessive profits that caused the risks and eventual financial crisis (Ahmed, H. 8). Adel argues that the Islamic banking model can be a viable alternative to the conventional banking industry in terms of offering quality and safe banking services to clients (306). Islamic banking allows for financial transactions and activities that allow banks to be risk resilient and have an atmosphere of profit making that is driven by other factors, such as increased business volumes, higher margins and reduction in costs (Ahmed, H. 8), as opposed to new financing structures and products that fail to ascertain and manage risks at various levels, leading to problems, such as the crisis.

A major function of the banks is to manage risks by various means inclusive of using tools, such as hedging, diversification, derivatives, and insurance among others (Ahmed, H. 9) Risk and resultant lose is highly mitigated in Islamic financial practices. The Islamic structure has many more layers of risk measurement and management, which could help guard against the problems afflicting conventional banks (Alzalabani and Reji 17). 

Knowing that every system has its weaknesses, it is in order that I highlight those that may pose a challenge to the Islamic banking model. Alzalabani and Reji (19) acknowledge that Islamic finance is still a niche industry with Bershidsky putting it at 1% of global finance assets. How Islamic finance reacts to the challenges that face it will impact on whether it will eventually offer an alternative to the conventional industry. Vizcaino identifies that the Islamic finance was not immune from the crisis, and it had to contend with issues of liquidity problems, as there were no well-developed interbank money markets for the Islamic banks. This is through being mitigated through the introduction of Islamic Liquidity Management Corp to deal with credit crunch (Vizcaino), while for vulnerability of the Islamic finance, real estate, a key area of exposure among others management, is being hinged on taking up actions where risks can be capably managed, shifting those risks that can be transferred, and avoiding other risks by uncomplicated business practices, and by not taking up certain activities (Ahmed, H. 11).

Moreover, you should note that you would not be the first western giant bank that will be adopting Islamic banking practices. Banking in the Western world has big players of the likes of “Lloyds TSB, HSBC, Deutsche Bank and Citibank” which have “Islamic finance products,” Alzalabani and Reji (16). In addition, governments have also followed suit, according to Bershidsky for Bloomberg View, the UK planned to issue a Sukuk, a bond that is sharia compliant, which had already been successfully executed in Germany back in 2004. “Sukuk is tied to an underlying asset providing a certain revenue stream, a feature that makes them particularly conducive to financial stability,” added Bershidky.

Recent literature and public opinion and debate have significantly shifted towards the Islamic financial services/banking model as the panacea towards the malaise that is constant financial crisis’ that arise from conventional banking practices. As a subject of truth, Ahmed, P. (n.p), in his article for the Huffington Post states that all through the financial crisis one thing remained the same, “Financial assets offered by the Islamic Financial Services Industry (IFSI) and generally classified as “Shariah-compliant” were negatively impacted far lower than the remainder.” In addition, Ahmed P. (n.p) has credited that now is the moment in time that Islamic finance must have a part that it needs to play on the global arena that is the financial industry.

Therefore, it will be of importance if you are to see and recognize the future now sir, as Islamic Finance and Islamic Financial Services becomes the new trend in the banking industry both locally, regionally, and finally globally. With movements towards more stability and profit making based on sound financial practices, that Islamic finance offers, it will definitely be the next frontier in the business world. You now stand at a momentous time in the banking history and if you were to make to make the decision of switching to Islamic financial services, you stand to reap big, gain from the advantages of the first mover and most importantly receive benefits that do not accompany unnecessary risk. It is a model that has been proven to work elsewhere and is now an opportunity for it to be taken further beyond its traditional boundaries of operation. It is my believe, with the kind of assets, workforce and institutional structures that is Bank of America, you are the right person to roll out Islamic financial services and adopt it as your modus operandis.

Sincerely yours,

Your Name

Works cited

Adel Ahmed. “Global financial crisis: an Islamic finance perspective.” International Journal of Islamic and Middle Eastern Finance and Management 3.4 (2010): 306 – 320. Print.

Ahmed, Habib. “Financial crisis, risks and lessons for Islamic finance.” ISRA International Journal of Islamic Finance 1.1 (2009): 7-32. Print.

Ahmed, Parvez. “The Current Economic Crisis – Is Islamic Finance a Solution?” Huffington Post 29 March 2010. Web. 19 June 2014. <http://www.huffingtonpost.com/parvez-ahmed/the-current-economic-cris_b_516965.html>

Alzalabani, Abdulmonem, and Reji D. Nair. “Financial recession, credit crunch and islamic banks: a case study of al rajhi bank in the kingdom of saudi arabia.” Journal of Economics and Business (2013).1: 15-36. Print.

Bershidsky, Leonid. “Islamic finance can save the world.” Bloomberg View 29 October 2013. Web. 19 June 2014. <http://www.bloombergview.com/contributors/leonid-bershidsky>

Vizcaino, Bernardo. “Islamic finance yet to be fully tested –report.” Reuters 22 May, 2014. Web. 19 June 2014. <http://www.reuters.com/article/2014/05/22/islamic-finance-stability report-idUSL6N0O80W020140522>