Can Islamic banking help boost Czech exports?

Photo: Czech Television

A good deal of the ongoing economic and financial turmoil on world markets has been blamed on the unscrupulous practices of the international banking and financial sector. Islamic banking, on the other hand, is seen as a fairer and more balanced alternative which has been much less affected by the crisis. Can the Czech Republic benefit from a financial system based on the Islamic law? And can Islamic banking help boost Czech exports into Muslim countries? These are some of the issues debated at an international conference on Islamic banking held in Prague.

Cihad Erginay,  photo: Czech Interior Ministry
Based on the principles of Islamic law, or shariah, Islamic banks are prohibited from charging interests, speculating as well as investing in businesses considered unethical by Islamic scholars. Instead, Islamic or participant banking offers a system of shared risks and profits, and its supports claim it is committed to promoting equity, moderation and social justice.

Islamic banking is today the fastest growing segment of the financial system, and is also considered a more honest and fairer alternative to conventional banking. Cihad Erginay is the Turkish ambassador to Prague, and head of the local group of the Organisation of Islamic Cooperation which organized the event.

“There was great interest on the subject from our Czech colleagues, Czech bankers and journalists who kept asking us about it and expressed their interest because they saw that Islamic banks were not as affected by the economic crisis that we see today. That led us to think that it could be interesting to organize such a conference. And as you can see from the participation, there is great interest in the subject.”

“Banking as it should be” is the slogan of the Abu Dhabi Islamic Bank, the fourth largest Islamic bank in the world, whose head of marketing, Petr Klimeš, was one of the speakers at the conference. I asked him what the attraction of the Islamic finance system for non-Muslims was.

Photo: Czech Television
“The slogan ‘Banking as it should be’ in fact came from non-Muslims. When we tested the proposition and the banking model that was based on hospitable, transparent banking that protected the best interests of the customer and banking that was simple, it was non-Muslims who said that.

“So yes, it is very attractive to non-Muslims. As recently as yesterday, when I had dinner with one of my friends, I was telling him about how we conduct our business. He’s Czech, and he said, ‘I wish my bank was like that’.”

Some 200 people from Czech and international financial institutions, the private sector and public administration took part in the conference. One of the panellists was Emad Yousuf Al Monayea is the CEO of Kuwait’s Liquidity Management House. I asked him why Islamic banking was largely sheltered from the global financial crisis.

“If we look at the basic principles of Islamic banking, they require the right structures and practices whereby the evaluation of each potential project would be conducted rather than just jumping into a project without a proper assessment, without finding the right assets to back that kind of project. Otherwise, we will end in difficulties.

“We have to admit that there were, as everywhere, some good examples and, Alhamdolillah, some bad examples, when it comes into practise.”

Emad Yousuf Al Monayea
Through cooperation with Islamic banks, Mr Al Monayea said, Eastern European countries including the Czech Republic could benefit by attracting new investors from the Gulf Region and beyond.

“Liquidity is building up all over the market, there is good liquidity but a lack of good projects that would give you comfort to invest in. In comparison with other international markets, we have seen what’s happened in the US and Western Europe, and Eastern Europe should now open the door for new capital which is searching for new havens of good assets.”

The Czech Republic recently announced it would try to diversify its exports the majority of which now go to Germany and other EU member states. Czech officials and business leaders are now eyeing Turkey, Kazakhstan and other Muslim nations, and closer ties with Muslim financial institutions could help those efforts, according to Jaroslav Hanák, the head of the Confederation of Industry of the Czech Republic which represents around 1,500 industrial firms.

“Our efforts to diversify our exports and our export strategy which includes a number of countries from the area such as Iraq, Kazakhstan and Turkey, all that makes any links, including banking and financial ones, very interesting and valuable. But we have been working with many other countries as well, and we should not underestimate their interest in investing in Central Europe.”

Jaroslav Hanák says that cooperation with Islamic banks for example in Turkey would certainly provide a boost to mutual trade. When it comes to potential private customers of these banks, Mr Hanák is sceptical.

“We already have experience with dealing with those countries. On his recent visit to Turkey, President Klaus was accompanied by dozens of Czech businesspeople, and that’s a typical country where we could develop further ties. But I think it’s only interesting for businesses really. I don’t think it has some kind of immediate potential for regular Czech clients.”

Tuesday’s conference was held at the headquarters of the Czech National Bank in Prague. The bank’s officials refused to share their view on Islamic banking and how it could contribute to Czech export strategy. But Professor Michal Mejstřík, who is a member of the Czech government’s economic board, says the event could prove to be a good start.

“If you look at it from the perspective of Czech exports – and we are a country with one of the highest export quotas – it’s absolutely inevitable for our exporters. They have to understand the principles and get familiar with the banks. I understand that cultural differences are part of business and banking too, so from this perspective, it’s a good kick-off.”

Ivana Hrdličková
According to the organizers of the conference, shariah-compliant assets represent about half a percent of the world’s total assets but the industry is growing at an annual rate of between 10 and 15 percent. Islamic banks now operate in the UK, Germany, Demark and other countries. So how would the Czech law need to change to allow them into the Czech Republic? Not that much, says Judge Ivana Hrdličková, a legal expert for the Council of Europe.

“There are several issues related to for example book keeping, or tax law generally speaking, and to the rules concerning the protection of creditors. But we could find inspiration in Germany for instance which changed its laws slightly to allow such institutions to operate in the country.

“But I don’t think there are any major obstacles in the Czech Republic either. As far as Islamic banks are concerned, some changes would also have to be made but we could look at other European countries for examples.”

Another issue has to do with the negative connotations of shariah in liberal democracies where people link the Islamic law to Islamism and Islamist extremism. But Petr Klimeš from the Abu Dhabi Islamic bank says their non-Muslim clients care about what they can get rather than the shariah principles.

Petr Klimeš
“We mainly operate in Muslim countries where the word shariah has a very positive connotation. It’s actually the Arabic word for law. So we don’t see an issue with saying we operate in compliance with shariah which is an absolute requirement for our Muslim customers. And what’s important for our non-Muslim costumers is what they will get at the end of the day. They might not necessarily be interested in whether the transaction is compliant with shariah but they don’t mind. They are interested in the value they get and they are very happy with it.”

Petr Klimeš, who worked for the Czech branch of Citibank before he joined ADIB in 2008, says it will take some time before a bank observing the Islamic law opens up a branch in the Czech Republic. But Czech exporters hope that cooperation with Islamic banks will bring more immediate results.