Monday, December 08, 2008

Fed, BOJ Signal We Are All Islamic Bankers Now

Commentary by William Pesek

Attending Islamic finance conferences these days, it’s hard not to notice how this investment class is catching on.

The world’s roughly 1.5 billion Muslims need a way to bank and invest according to Islamic Sharia law, which bars receiving or paying interest on loans or deposits. A massive market infrastructure is being built to facilitate clients that include wildly rich Persian Gulf oil tycoons.

Yet isn’t this industry being pirated by the Bank of Japan, Federal Reserve and other central banks destined to offer interest-free loans? As U.S. President Richard Nixon, echoing Milton Friedman, famously quipped in 1971: “We are all Keynesians now.” By 2009, we may all be Islamic bankers, too.

It’s an odd yet apt comparison. Islamic banking is more about the means by which a certain group of people obtains money. Zero interest rates are about getting as much money, in any way possible, to everyone.

There’s still something to be said about the spreading appeal of scrapping interest rates. It’s no longer a unique aspect of certain transactions or a banking novelty. It’s becoming the norm, and it’s quite disorienting.

Japan’s benchmark interest rate is 0.3 percent and headed to zero in the months ahead. The U.S. federal funds rate is 1 percent and headed lower, too. The U.K.’s rate is 2 percent, Canada’s is 2.25 percent and the euro zone’s is 2.5 percent. As the fallout from the global crisis worsens, these and many other benchmark rates will edge toward zero.

Quantitative Easing

According to Islamic law, the charging of interest, or “riba” in Arabic, is unjust and exploitative. That concept bears little resemblance to Japan’s zero-interest-rate policies, or ZIRP. The BOJ never argued it was seeking to foster brotherhood or socio-economic justice.

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