The Political Economy of Islamic Banking and Finance in the Gulf Cooperation Council Countries

Ashraf Mishrif

Introduction

Perhaps the most challenging question in Islamic finance is whether the current phenomenal growth in the Islamic banking and finance industry is sustainable in the medium and long-term and, if so, how the sustainability of growth in this industry impacts on the political economy of the member states of the Gulf Cooperation Council (GCC), more specifically on their economic diversification and integration projects as well as their trade and investment strategies within the region and with the rest of the world. Though this issue is hard to explore from the perspective of policy, it is evident that industry debates on Islamic finance are no longer based exclusively on religious grounds. Rather, they have latterly concentrated on technological innovation and new banking products to the extent that Islamic banking and finance now competes on an almost equal footing with conventional banking in the global financial system.

The phenomenal growth in Islamic finance has led some scholars to argue that this industry is entering its renaissance period by adapting and changing to meet the needs of modern finance in a way that has gained the attention of large global financial institutions such as Citi Group, HSBC and Barclays Bank. Financial data shows that the Islamic banking and finance industry has developed slowly but surely since the mid-1970s until reaching unprecedented levels, with global Islamic banking assets estimated at US$826 billion in 2010 and expected to reach US$1.8 trillion in 2013. The World Islamic Banking Competitiveness Report 2011-2012 confirms the prominent position of GCC as a global hub for Islamic finance, with the GCC countries collectively accounting for a higher percentage of Shariah-compliant global financial assets than any other region in the world. In 2010, the GCC Islamic banking assets amounted to US$127 billion, almost five times higher than the entire Middle East and North Africa (US$25 billion) and more than three times the share of Malaysia (US$38 billion), the world's leading nation in this industry (Ernst & Young, 2012: 3-5).

To examine the sustainability of the growth of GCC Islamic finance industry and how it impacts on the political economy of the region, this chapter looks at ways in which Islamic banking and finance could enhance the internal markets of the GCC member states, strengthen their financial and economic power and integrate them with the global economy. It begins by focusing on the relationship between the evolution of modern Islamic banking and finance, which originated in the GCC with the creation of the Dubai Islamic Bank and the Islamic Development Bank in 1975, and on the accumulation of wealth resulting from rising oil prices since the early 1970s. Also, it explains the extent to which sustainable growth in the Islamic banking and finance industry can facilitate economic diversification and economic integration among the six member states of the GCC. This is analysed in terms of both the political will and commitment of the GCC governments to boosting Islamic finance, as well as policy measures aiming at economic and financial liberalisation and accumulated wealth through Islamic finance and sovereign wealth funds. It ends by arguing that the increasing size of this industry necessitates a higher degree of harmonisation of financial principles, policies and regulations, which could serve as bases, if not prerequisites, for the creation and success of the GCC customs and monetary unions.

2. The Evolution of Islamic Banking and Finance in the GCC

Although the practice of Islamic finance is well-known to Muslim populations over the past fourteen centuries, modern Islamic banking originated in the Gulf region with the creation of the non-governmental Dubai Islamic Bank and the intergovernmental Islamic Development Bank (based in Jeddah, Saudi Arabia) in 1975. The evolution of this industry has been driven by the rise of pan-Islamism and, most recently, of political Islam across the Muslim world and by the accumulation of wealth in the Gulf region since the early 1970s. Some scholars believe that the roots of this development go back to the 1960s, particularly to the reign of King Faisal (1964-1975), when Saudi Arabia used pan-Islamism as a means to expand its political and economic influence across the Arab and Muslim worlds. The doctrine of Islamic solidarity initiated by King Faisal was, in fact, instrumental in combating President Nasser's pan-Arabism and curbing Egypt's influence in the Arab and developing countries, particularly after Egypt's defeat in the 1967 war, as well as making it possible for the Kingdom to position itself in the leadership in the pan-Islamic movement, which included non-Arab Muslim countries such as Pakistan, Turkey and Iran (Mortimer, 1982: 217). The politico-religious role of Saudi Arabia was further strengthened by the creation of the Organisation of Islamic Conference in 1970. Since then, this organisation has served as a political forum through which the Saudis have been able to exert...