INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA
ISLAMIC ECONOMICS COLLECTION
DOC.NO:
1420
.\l TIIOR (S) :
TITLE:
ISLMDC FINANCE : OPEC'S PLIGlff ; REAGAN'S UNBALANCED
BUDGET/ ECONOMIC POLICY: TURKEY'S MONETARIST
ROAD/ ECONOI\1IC COOPER.ATION : HO\V AGRICULTITRE
SHOWS THE WAY/ ISLAMIC BANKING
SOURCE TITLE :
ARABIA : THE ISLAMIC WORLD REVIEW
VOL~IE:
4
ISSUE:
42
YEAR:
FEBRUARY 1985
PAGES:
51- 68
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---YOUM
FEBRUARY 1985/JUMADA AL- OOLA 1405
Arabia
l.nside Afghanistan
While there is no doubting the fight ing spirit of the
Mujahideen , German TV came rama n Dittmar
Hock 's repon from inside Afghanistan highlights
the yawning chasm between the lethal technolog.y
o( the Soviets. and the limited firepower of their
antagonists. In particular, arms supplied by
western sources to the liberation fighters arc a
decidedly mixed blessing - too light to do much
damage other than reveal to the enemy the
positions o f their users.
Paae 10
The Islamic U6rld Review
VOLUME 4 NUMBER 42
Crown Hou.e:. Crown Lane.
E.ut 81o1mham: nr. Slo ugh.
Bum, SU 3SG.
Tel. Farnham Common (02814) SITI
(FaC'Stmilc 02814 41 SS)
Telex: 8'7031 Arabia C
8-\8396 Tramh G
POLITICS
•
Iran enters year six
6 Iran: The re vo lution ente rs its sixth year
··t can reveal exdusively 1hac following
' 10 Afghanistan: Why the West's a rms backfire
Iran's recapture of Khorramshahr more
than two years ago. the Soviet Union
massed more rhan 100.000 troops on
Iran's northern borders .. . and even
crosse d Iranian borders." Fahmy Howoidi
repons on the major issues facing Iran as
the Islamic:: revolution tntcrs its sixth year.
Pag, 6
on the Mujahideen
14 Israel: The reality behind Operation Moses
15 India: R ajiv G andhi's reasons 10 be cheerful
22 Philippines: Moro struggle goes on despite
Marcos amnesty
2J Spain: GonZ3lez wavers on Israeli
recognition
l-1 US: Hopeful changes in the post~lection
Senate
26 lnaq : Links with US rebuilt
27 Mauritania : Military oust Preside nt Ould
Haidallah
. 41 Morocco: War fears over the Sahara conflict
29 Pakistan: Interview with Jamaat leader
Mian Tufail; The December referendum
and March elections
32 OIC: Political infighting at Sanaa meeting
34 Ta.mania: New approach to human rights
37 File: The politics of starvation
I
File: fllmine in Africa
While hundreds of thousands of
Africans starve. the industrial world
wa llows in food it can't consume.
International aid ha.s not been
adequate . 3.nd its flow stemmed by
polit ical co nsiderations. As our File
makes clear tht ca1astrophe in Africa
is. in large pan. of man ·sown ma~ing
as practices which erode the soil go
unchecked and people are made even
mo re vulner3ble by the switch from
subs is1cnce agriculture to cash crops.
Page37
ISLAMIC FINANCE
51 Editorials: Opcc's plighJ ; Reagan's
unbalanced budget
.
56 Economic Polley: Turkey's monetaru~road
60 Economic Coopt'n tion: hoW agriculture'· - ·. _.
shows the way
:
(".. .. "- .. ,
• 64 Islamic Banking
·'-' ' 67 News and Projttts
70 Company News
Troubled times ror b la m lc banks
.
As DMI weathc:red one of the toughes1 tests in its fo ur-year history, Faisal
Islamic Bank Sudan ca me under fi re for its role in the economy. _Two
repor1s and an interview analyse the performance of the two '!'aJo r
Is lamic banks.
"7il4m~ inontt starts on page 5 1
I
LIVING HERITA'G·.c.;;,,,,.- -.L
82 Arts: Third World cinema at London Film
l•ca).iV&l
87 Educa tion: Still a role for madrassa
93 Minorities
REGULAR FEATURES
•
18 On Reflection
35 Central Asia Focus
47 Personal Not.i-1<
48 Nowsmonth
'
1
A wt ';!em view of the blamlc rtSUrgence
Altho ugh Julian Crandall Ho/lick believes Islam h3s the polential to
resolve many o f the world's proble ms. " the search for a ·true' Islam ofren
appears to be a searc h for the mythical Golden Age." He q uestions the
na1ure of the current IS13mic revival , and argues that for Islam to meet the
challenge or a ropidly changing world it must look mor< to the present a nd
the future 1han to its past .
Page73
PRINTED IN THE l:.K .
ISSN OJ66..U72
February 1985/Jv mada AI-Oola
Arabia
3
A 1\10NTHLY REVIEW OF ISLAMIC BANKING & ECONOMICS
World pays as deficit
in US budget continues
Changes in the US administration may prove
significant in the badget deficit debate
~ The continuing saga of the US budget deficit is one
~ of agonising d ilemma between preserving the
military might of America or rev,talising its economic
growth. In recent debates within the US decision-making hierarchy the first has assumed the form of spending-cut proposals which anempts to shift the burden to
welfare cuts. while the second is linked w i th a plan for
tax revision. an indirect means of reduci ng the deficit by
sti mulating growth in the long run.
The rest of the world is paying ror the consequences
of the con11nu1ng US deficit th rough direct ,nvolvement
in US m1i1tary operations and indi rectly by payment o f
high interest to US banks.
The problem facing the White House is 10 find
enough cuts in expenditure to narrow the deficit to
~
,aPteu
aboutS100bnor two percent of Gross National Product
-; .t···
L;
nated.
,..
• .;
administration' s latest intemal projections showing a
lurther deterioration ,n the deficit gap of $218bn in the
current fiscal year. peaking to S240bn in 1987. The prev,ous predictions were S222bn for the current fiscal
year and S232bn in 1987. Althoogh the estimate for tis·
cal 1985 was slightly lower. the new estimate indicates
a further deterio ration fc>r 1987 which the White House
could have done w ithout at presen t.
There are three areas of cuts aimed at the reduction
of the deficit : social security benefits. tax revisions and
military spending. The most likely area is social security
but it is by no means clear that President Reagan will b e
able to have his way on th is.
While the White House would like to avoid any cuts in
military spending, the Democrat dominated Congress
1s likely 10 reject any cut in welfare benefits. with the
Republican majority Senate taking a middle position.
proposi ng cuts in both welfare and m ilitary spending.
The administration is proposing to limit total 1986
outlays to 1985 levels and the White House has attempted to gain maxim um political advantage bv labelling the
proposal as a ·treeze· in expenditure. In fact the plan is
o nly a freeze in total expenditu re not in its comp0nents:
defence spending would substantially ,ncrease while
domestic spending would be severely reduced o r elim1·
I
,
Reagan's "new reallsm" may mean wc1lare cuts !or
America's poor to ease deficit
by 1988. and in areas that are politically acceptable. The
task is difficult enoogh as 1t stands for the arm ,s a
steady reduction of the deficit from 5 per cent of GNP
this year to 4 per cent of GNP in 1986. 3 per cent in 1987
and 2 Per cent in 1988: what the administration has
come up with would narrow the gap to only 3 per cent
in 1988.
The problem 1s now made more difficult bv the
Republican Senators. however. have a d ifferent
interpretation of the term ' freeze.· They are now working on a separate plan w hich is centred on a one-year
freeze in social security i ncreases and a freeze of the
Defence Department's huclget at the fiscal 1985 level.
so spreading the burden more evenly. Yet a third
interpretation of 'freeze' is being put forward by Democractic Congressmen. Under their scheme every gov·
emment department would get the same amoont o f
money in fiscal 1986 as in liscal 1985 but with a reversal
of the priorities of other plans by including m ilitary
spending but excluding social security benefits.
Although the president turned down the advice of his
Budget Director David Stockman fo, major cuts 1n
defence there are some in the administration who hope
that the Senate will solve the stalemate by curting Pentagon spending as well as welfare benefits. This would
then strengthen the p resident's hand in dealing w ith
the Democratic Congress because it would then look as
if the scci:iil security cuts were " irr.posed" on the pres..
1C1ent t,y the Senate.
The Democrats in Congress would then appear
uncooperative if they proposed other means of reducing the deficit. such as raising revenues through tax
increases. The problem wi th this scenario is that the
new esumate of the deficit would then be used by Con·
gress to point out that the president's plan can·t eliminate the deficit gap by spending cuts alone.
Congress appears to have an ambiguous and some..
what i ndifferent attitude to the tax issue. This may well
be due to the conception underlying the Treasury·s "'
February 1985/Jumada AI-Oola
AraM
51
ISLAMIC FINANCE
proposed tax revision. It 1s not supposed to be addresIt is in this context that changes of position between
sed to the deficit problem in any direct way and while
Donald Regan and James Baker. the White House chief
the more liberal democrats may support the idea of tax
of staff. assumes a significance that can hardly escape
increases as a way of financing welfare measures. they
attention. Regan is a monetarist and a right winger.
are less likely to back any tax change aimed at stimulatBaker. on the other hand. is a "moderate." He was
ing growth when more effective alternatives are availasomething of an outsider inside the White House. He
ble.
only survived there because of his administrative
Indeed. the newly elected black chairman of the
abilities and political skills in getting things done. His
House Budget Committee. William Gary. does not
departure from. and Regan's entry into. the White
"think that the Congress is going to be receptive to any
House has made President Reagan's new inner circle
kind of tax. whether it be a tax raise or tax reform." Yet
more of a homogeneous entity.
the proposed tax plan would have significant consequYet Regan's proposed tax scheme does not have
ences for the present and future of the US economy.
much of a chance as it stands. without some concesThe political forces involved in the tax issue are more
sions on business taxes. It is here that "moderate"
complex than is the case with the question of benefit
Baker can establish bridges between conflicting
cuts. The proposed tax revision brings this into light by
interest groups to turn the proposals into practical realrevealing the realities of faction fights within the
ity. Baker is a supporter of "easy money." He believes
administration and the principal economic interest
"the Fed ought to bring down interest rates in order to
groups they represent.
stimulate economic growth." a former official says. l
The tax revision plan was initially put forward by the
"His view is that the problems are unemployment and
former Treasury Secretary, Donald Regan. The proposal
growth. not inflation." In this he is likely to have the
is "revenue neutral," that is. it is not aimed at raising
backing of the President's Council of Economic
more or less income from the government than the preAdvisors who represent the interests of US indussent tax system. Its main supposed benefit is to stimutrialists. particularly export industries (see Arabia.
late growth by simplifying tax incentives to encourage
March. 1984).
more productive investment and discourage unproducThe Treasury's tax plan aims to encourage recovery
tive ones undertaken in order io take advantage of existby raising spending power of individuals as consumers
ing tax benefits.
rather than expanding investments. To this extent it
The plan would increase the overall tax burden on
keeps alive a mild and superficial recovery leaving the
businesses while easing the burden on individuals. The
more fundamental question of industrial renewal
average individual tax payer would get an 8.5 per cent
untouched. This in turn indicates the weak position of
tax cut under the plan while business as a group wouid
the industrialists vis a vis the financiers in the present
see taxes rise substantially. The controversy has been
political set-up and prolongs the recession.
focused not so much on reducing tax burdens of the
It has always been the case that money lenderj.·
individual consumer as on the harm it would cause to
flourish when debts are high and industry is in deep
recession. A "moderate·· US Treasury Secretary who
investment.
The large econometric models of the US economy at
represents something between the interests of finance
Earton Econometric Forecasting in Philadelphia and at
and that of industry 1s a step in favour of the latter but as
Data Resources in Lexington. Mass .. both predict that
yet too small to alter the balance of forces against the
the plan would cause a drop in investment and
former.
economic output for the rest of the decade. That view is
backed by the former head of the Council of Economic
Advisors to tht:: P1 es1dent. Mar tin Feldstein. Wh1!e there
1s wide agreement that the economy would beriefit
from more equal taxation of business. Professor Fe1ostein argues that this effect is likely to be small in com- The monitoring system is likely to be
parison to the fall in investment that would follow any
inadequate without compromise on price
increase in business taxation.
·
~
On the eve of the latest meeting of Opec ministers
However. another Harvard professor. Dale Jorgenson. argues the opposite. that the boost to economic ~ in Geneva in late December 1984, various
growth would outweigh any disincentive from higher observers predicted the imminent collapse of the
business taxes. resulting m additional growth of five per organisation. It was not the first time such predictions
cent over the next seven years. In part. the difference were being made by western observers. nor to be sure
between the two views may be due to timing. Substan- would it be the last time. Though it would be a fair
tial business tax increases may cause a fall in invest- comment to say that such observations are more a
ment during the first two years or so but with new reflection of the hopes and prejudices of a certain group
investments being mmE' produC'tive_ th~ r~oposP.d ;:,:zin of commentators than being an objective assessment
would boost growth in the long run. c~ :;u tr.~ Treasu;y of !he situation. they nevertheie~s par.ray the fa<.:( llicil
argues. Even so. the opponents of the tax plan argue. as Opec is passing through one of its difficult phases. In
Feldstein has. that the economy can·t afford the short- principle there is no particular reason why Opec may
term damage which the plan would inflict at a time of not be able to weather the storm and set right the
relative disarray which has developed among its ranks.
unprecedented budget and trade deficits.
The proposed tax reform 1s anti-inflationary in so far as it has successfully d<;>ne on previous occasions. This
as it discourages investment. To this extent its suppor- time. however. both the situation in the oil market and ·
ters are to be found among those who give the fight the economic conditions in oil exporting economies are
against inflation priority over the exp"lnsion of empioy- such that 1t requires more intensive coordinating efforts
and compromise among the member countries.
ment and industry.
011 price compromise a
key to Opec survival
52
Arabia February 1985/Jumada AI-Oola
ISLAMIC FINANCE
At the December meeting of Opec ministers two
issues formed the subject of negotiations: first the
issue of monitoring the member countries so that they
keep within the limits of their expon quotas and
second. the question of price differentials.
The monitoring system established at the meeting is
to involve independent audits of each country's
production volumes of crude and refined products as
well as prtcing of crude. A committee of five ministers is
to devise rules for the auditing system and would al so
have the right to send auditors into Opec countries to
inspect their performance.
The slack in the oil market together with the.
mounting budget deficits and balance of payments
problems apparently forced various member countries
to exceed their expon quotas during the past year. It is
commonly said that the main cause of excess supply in
the international oil market at the agreed Opec prices.
during the past few months. has been the oversupply
by some member countries in excess of the quotas set
by the 16 million barrel ceiling agreement last October.
This. however, should not overshadow another
imp0nant factor which has recently exerted a
significant downward pressure on market prices namely destocking by the major oil companies. Opec
estimates indicate that western oil companies had
been destocking at a rate ot three million barrels a day
during the month of December. Independent studies
have shown that destocldng was running at a level one
m illion barrels a day abcve the Opec estimates: at
present. the level of stocks ,n the West are estimated to
be at their lowest tor eleven years.
Opec ministers justifiably argued that this was
indicative of the concened effon by the industrial and
consuming states to press for a price cut on the eve of
the Opec meeting. Th,s also to some extent indicated
the artlitrary element in spot market prices. and that it
would be a great folly for the 0<1 producing countries to
take the lead from the market. The agreement on the
monitoring system which ,s meant to enforce strict
adherence to Opec price and production decisions
..::ou;d pldy a vef'\' useful pt::pcse in strengthen!r:g the
market and neutralising downward speculative
pressure.son prices. by 9'"'"9 a signal to the market to
the effect that Opec ,s serious this time abcut the
implementation of its decisions. For the survival of
Opec it is im ponant ar this tim e to fight off .the
temporary speculative attacks in the spot mar·ket and
take a strong position aaainst reduc;.:i:;.
na..r::==-
On this account Opec's December agreement could
be said to have been highly successful. The monitoring
system cannot, however. serve any useful putpose
except for its temporary signalling effect to the market
if the member countries a,e not convinced atx>ut the
fairness of the prevailing quota and price differential
system. The issue of price differentials was the
weakest peint in the December agreement. and i f the
necessary compromise cannot be shown in the
February meeting it could well turn out to be the
Achilles' heel of Opec as a w hole.
The issue of price differentials is basically related to
the technological improvements in the refining of heavy
crude oil in recent years. As a result. demand for the
heavies has risen in recent years largely because
improved tefining equipment allows oil companies to
derive more gasoline and other high-value products
from the cheaper heavy crudes. Consequently, spot
market prices of Opec' s lighter crudes have slipped $1
to $.3 below official levels, white the heavier varieties
are generally trading in the market at or slightly above
official price levels. By the end of 1984. Opec' s pricing
structure dictated a $4.5 a barrel differential between
the lightest of its crudes and the heaviest. while the
spot markets set the differential at only $2-3.
To redress the divergence between the official price
structure and the market value of different grades of o,I.
the December conference temporarily agreed on the
following configuration for the readjustment of
differentials: A1abian heavy was ,ncreased by 50 cents
a barrel and Arabian medium by 25 cents. while the
price of ext ra light was reduced by 25 cents. The
benchmark price - the $29 per barrel Alabian light remained unchanged.
The new price d1fferent1als obviously fall shon of fully
adjusting the official and market price structures. This
holds to be true even if one takes into account the fact
that the spot price of lights at present is below its
normal market price due to speculative attacks.
especially si~ce Noiwav and Britain decided to let the
spot market take the lead in their pricing mechanism .
· The obstacle w hich stands ,n :he way of funher
redressing price differentials ,s the specialisation of the
different member countries at the two ends of the
market. Saudi Arabia. Kuwait. Iran and Iraq operate
mainly on the heavy s,deof the market. These countries
were on the whole satisfied with the present price
differential s. Producers of light crudes such as the
United Arab Emirates. Nigeria and Algeria. on the other
hand. have suggested that heavy crude should rise a
funher 50 cents to $1 . With Sheikh Yamani's ruling out
of any funher rise in the price of heavy crude. scope for
a pricing compromise appears to be severefy limited.
Under present market conditions the decision of
Opec to keep the benchmark price unchange<I and not
to make any drastic price reductions on the light side of
the mark"t is of imponant psychological value. The way
out of the dilemma of price differentials under these
circumstances would be a gradual increase in the price
of heavy crude with the expansion of demand. which
wi th the panicularty cold winter in Europe since January
and the very low level of stocks is likely to be underway
in a significant way. Without the necessary
compromise on the issue of price differentials no
monitoring syStem. no matter how strict and
sophisticated it may be. is likely to save the day.
February 198SIJumada A1 0ola
4
Attlbia
53
ilSLAMICFINANCE
DMI is bullish despite Its toughest year
A rights issue and the opening of Faisal Islamic Finance Institution , Turkey have helped Dar Al
Maal Al lslami overcome a difficult year and look with confidence to the future
~ " Nothing exciting," quipped Prince
~ Mohammad
al-Faisal
when
questioned in his Istanbul press
conference about DMl's annual general
meeting of s~areholders that took place
that same day. The rest of the press
conference was all excitement however.
$ince the prince tackled two of the
thorniest issues facing DMI: the precious
melals episode and relations with certain
Muslim governments and central banks.
Al-Faisal insisted " the gold episode is
now firmly behind us." and stressed that
the
people
responsible
for
the
misjudgment had been firmly dealt with.
All the top management team at the time
has since been replaced. and al-Faisal also
revealed that the whole operation took
place in three days and the weekend in
Februarv 1983 - when the board of
supcrvisOrs came to know of it . it was .:all
over. ··we had 10 cover the sum from our
own pockets." said the prince. The
behaviour of the former mam1gcmcnt
team. al-Faisal insisted. was in contr3·
I diction
to che written ins tructions 1hey had
I
abou1 such deals and was far in excess of
their powers. That is why anybody who
was involved in the operation "at all
levels·· was duly "disciplined."
It is understood that the subject was the
cause of a heated discussion at the
shareholders' meeting. Dr Sani al•
, Darwish. DMl 's chief executive. later told
1 Afabia: "Oearly the shareholders were
· no1 very pleased. Forty-eight million
dollars is not j ust some1hing you throw out
of the window.·· Bue it i, understood also
that the shareholders were firmly behind
al-Faisal and his treatment or the issue.
ahhough they demanded some explana ..
1
tion of the board of supervisor's inquiry.
I However they stopped short or asking for
any new inquiry. which proves that the
management was able to satisfy them on
this score.
"The shareholders were clearly rc-lieved
to know that a source of loss has been
closed." says al-Darwish. "For us also ii
• was a great relief. For the last two ycan
I everything m DMI was 1.l iscussed m
relation to gold. It took disproportionate
time at our meetings. and we had to
commit considerable resources to follO"'
up the international gold market$. Now
we can get down to the real business of
ma.king the company work.·•
DMI was helped in its a nempts 10
disentangle itself from its problems by two
events which were not wholly due to luck.
First the month of December coincided
I
I
I
I
54
Arabia February 1985/Jumada Al-Oola
with the accounts (unaudited) of the first was .. reasonably successful .. . Added a lfour months of 198-1-85 which showed 1he Darwish: "Sixty per cent of the issue was
first significant profits of the year. Al- subscribed by the time it was closed. That
Faisal took the opponunity 10 express
is 230.000 ou1 of 400.000. which was quite
confidence that from then on. this pattern good. We anticipated some problems.
would be followed. But by far the most Some of our shareholders arc groups or
imponant event was the opening of Faisal
bodies involving 40 people who have 10
reach agreement- naturally that was not
Islamic Finance Institution. Turkey
very easy."
(FIFIT). The ceremony was an occasion
for euphoria in this profoundly Islamic
OM( sources say that there was no
country, in which three quarters of a offloading of shares last year and demand
kept up with supply in the DMl .con1rollcd
century of deliberate secularisation have
hardly touched more than its periphery- market. However the premium at which
90 per ce.nt of Turks are said not to favour shares are selling is somewhat lower, a t
using banks. However it was not only about 25-30 per cent above their nominal
those who harbour nostalgia for the days price orSIOO. In 198-1. about 35.000 shares
when Istanbul used to be the capital of the were repurchased by DMI. compared to
Muslim world who received the event 5.500 in 1983. Al-Darwish isqui1e sa1isfied
enthusiastically. for the official and the with D~ffs performance in this regard.
mainstrea m press talked o f nothing else .. h is a difficult market these days but we
for d3'·s. The TV followed the news of a l• have managed to meet our needs without
Faisal:s movements by the day.
many problems. Some other issues had 10
Salih Olean. depu1y chairman of make substantial cuts in the price of their
FlFlT. was jubilant about the whole shares to ensure an adequate subscription.
thing. "Never was an event in financial I know of at least three separate issues in
circles received with such attention and the Middle East where prices were cut to a
enthusiasm.
The
(overage
was
unanimously favourable and positive."
He sees two reasons for this: the strong
Islamic feelings of Turks generally and the
immense popularity of Prince al-Faisal.
·· He is well known here.and his father was
held in great reverence by most people."
The Turkish subsidiory or DMI is not
yet very large (its c3pi1al is $5m) but the
potenti:al is hugt. and it helped make a l•
Faisal's point that the losses connected •
with the gold deals hav.: not in any way t
affected the expansion or OM!. He h3d
told the share holders that .. ,he strong
capital position or DMl has enabled it to
absorb the losses without in a ny w:iy
affect ing its operaiing plans or future:·
Al-Darwish insists on makin.g the point
that the losses were in no way related 10
the funds under management. ··Investors'
money is absolutely safe." he stresses. In
fact those funds had been continuing to
turn in handsome prorits - it is the
..,hareholders who wtrc :1.ffccted.
But ctid this affccr n~irs anempts to :
win new shareholders? L:ast year DMl
embarked on 3n 3mbitious drive to
market 1.2m shares. expected to net for
the company over Sl60m in additional
capital resources. The issue was planned +
in three stages: private. rights and public
issues. each of 400.000 shares.
The rights issue was launched first at the
beginning of last year ... in a very difficult
marke.-· according 10 a l-Darwish. but it IJMI headq uarters In Geneva
tI
1
_______________..,.
Chief executive S;inl •l·O•rwlsh
half before full subscription was ensured ...
Like all other companies. DMI has
surfered from the downturn in Middle
Eas1 markets in the walr.e of the present
slump in demand for oil and the ensuing
'·low level of economic activitv in the
region. But al•Darv,tish is confident that
DMI had dealt with this situation better
than most : ··we handled the reverse trend
very well. I hope we don ·1 meet any more
rising clouds in the Middle East . but we
were able to weather this alright. This is
where companies collapse: you arc geared
for ~expansion in a favourable market
where e\·ery product c:m make profit 3nd
suddenly . no buyers! DMI had also Hexed
its muscles in l982-83 for the continuation
of the gent:ral upward ucnd but it was able
to adjust just in time for the downturn : ·
However it wasn ·1 all downturn for
OMI for in the meantime most or its
investments started to ~y off. "You
wrote about our We,s t African subsidiaries
in 1982: now t hey are a physical reality."'
In particular. DMI was ple:isantly
surprised by the performance of its
Guinea subsidiary. "Faisal Islamic Bank
J Guinea (FIBG) opened 1.500 new
! a~'Counts d1Jring a period of two months
1 last yt:ar:· says al-Darwish. The reason
s(cms to be the sudden new interest
generated in the West by the political
changes in the country. which has greatly
helped the country's economy and
• generated business for FJBG. " We get
· people from all o ver the world coming to
do deals with us. We ask 1hem how did
they know about us? And it turns out they
, ;,re newcomers to Joing business in
Guinea and discovered that we arc the
I
only n~.n-govemmen1 bank in the
country.
·
But how is 01\11 functioning globally as
distinguished from the partial successes of
' its subsidiaries? For it is there it seems. in
; the ovcr.111 performance. that the real
· problem lies. '"Less than eighteen months
:.1go we only had I lCG (Islamic Investme nt
Company of the Gulf) - now there are
over 24 companies. \Ve have seen our
3SSets grow phenomenally. The major
factor in the success o( an operating
company is its a Ilise ts. IICG nets an income
~f Sim a month . How much will that be
wonh? The newly · established Masraf
Faisal al-lslami Bahrain already generates
S3SO.OOO a month in income . and it can
. c:arn much more. FIB (Bahamas) now
: t::irns between 560.000-70.(XX) a mon1h
; with a capital of S~m. The whole
1Jpcration is mushrooming. to say nothing
()f the knowledge and c:xpcricnce we have
amassed in the course or ._,ur operations.
: You pay for the knowledge only once and
it is there at your dispos:il whenever you
need it. For example we h3\'e now staned
FIFIT here in Istanbul and it is ready to
t::ike off from dav one b«ausc it has all the
expertise of DMI behind it. Of rour<e it is
not .:xpcct'ed 10 shoot info prnllt from d:ty
l)ne, but h couldn ·1 have asked tor a better
; tan ."
Then we come to the perennial
q uestion: what for all this success? What
purpose will Islamic b"nking serve after
winning the battle to es.t ahlish itself? In
the past. the issue had a lways been ro
make Islamic banking work. Now that it
works. the question has bf:1.·1.,me where is it
~oing? In particular. what rl'lle ls it going
I
to play in development given the pre•
dominantly short-term nature of i1s
opc:rations?
Al-Darwish: " Banks are bv definition
mobilisers of shon-term fund$. We are a
private institution and our marketS are not
yet ready for long-term finance. although
we arc coaching our customers into it
slowlv . A customer comes to invest his
mone'y for one month but rolls it over for a
year so at the end or the period you ask
him to invest half of it again for one year.
However in other areas we now have long·
term funds such as Takafol. where money
c.an be committed for anything from three
to five years. Profits arc normally
ploughed back into the investment
account.··
Ncvcnhclcss. al-Darwish docs not
think that Islamic banks arc taking their
proptr shart in development: '" Even- the
kind of trade we finance is geared to the
needs of development in Muslim countries.
We financt the cxpon needs of these
countries and help bring them closer
together. Essentially we sec our mission as
that o f serving the umma and bringing it
closer together. and all our operations are
geared to that object. We have now also
branched into industry and other a reas o f
eco nomic activity. JIC (Sudan) had be.e n
established with the l!Xpress object of
operating only in industry. Its parallel in
Egypt. llDCE. is concerned with securing
lines of credit from DMI. FIBE for
industrial projects. It has entered into the
vital area of car and spare pans manufac·
turing. detergents. pharmaceuticals and
domestic appliance> (refrigerators). In
Sudan we ha\'e also entertd agriculture
wilh the funding of the large Damazin
agricultural project . In the long term. in
countries like Sudan. Islamic banks will be
able to support all kinds of long-term
projects through the support of the
Central Bank in a wholly Islamic ban.king
syste m."
In the meantime Islamic banks will just
have to aim at the maximum they can do
for the umma in the actual circumsunces.
but how do they get along. how do they
view the competition from each other?
··we will natural!~· be very happy to see
as many Islamic banks as possible flourish.
We cooperate with other Islamic banks
and the most suitable forum for that has
up to now been the meetings of the International Association or Islamic Banks
( JAIB). We would like other banks to
contribute as much as we do to develop
instruments and techniques that will push
forward the movement and enrich the
practice. We ourselves have gone a long
way in this area - for example. we have
achieved 3 . major breakthrough in the
valua1ion of assets which we can now do
on a weekly basis. We hope others will
make similar contributions ...
Well. we :ir~ all waiting.
Our Special Envoy
February 1985/Jumada Al-Oola
Arabia
55
___,li
E::..:.
C,::.;.ON
...:.O::..:.
M__;IC
.:..:
S...:.
P_::_
O ,::.;.
LIC
;;..;_Y:___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
L.:I
Monetarism and Turkey's economy
This is the final part of two
articles by BA Sharraf
examining the theoretical and
empirical bases of the
liberalisation policies adopted
in Turkey since 1980
I cerning the developme nt of the Turkish
economy during this period to suggest that
these favourable trends are of a long-tenn
and persistent nature. On the contrary 1
the available evidence indicates the exis•
tence of imponant transitional or shonterm clements which lie behind the
favourable performance of the economy,
especially on the balance of payments
~ In the first pan of this anicle the •, side. Given the substantial hardship which
the Turkish people have undergone dur•
~ impact of the monetarist policies
I ing the..,_
past four years as a result of the
which the Turkish government has been 1
pursuing since l 980wasconsidcred. with a
view to analysing the effectiveness of suc-h
policies in relation to the declared objectives of the government. The comprehensive economic stabilisation programme
announced on January 2S, 1980 by
Dcmircl's government involved many
deOationary measures - it included a 33
per cent devaluation, planned monetary
res1raint. removal of price connols and
1
... ___
· po1·.
monetanst
1c1es o f t he government, ti
1
this makes the soundness of such policies
highly quC$tionoble .
Beginning with the balance of pay- .
ments, it should be noted that the reduc- !
tion in the rate of growth of impons after ·
1979 was mainly due to the deflationary
effects of government policy. The generals' coup of September 1980. which led 10·
the suppression of free trade union activ·
ity and collective wage bargaining. was an
important precondition for maintaining
subsidies to state economic enterprises.
cesution of deficit spending, and the abolicion of ceilings on interest rates. The pur•
pose of the stabilisation programme was
10 reduce inflation and balance of payment deficits in the short run; it was also
believed that in the long run grcaccr
reliance on market forces would encour.
age private initiative :ind foreign capital • (
and create a more efficient industrial and . h _,..
financial structure.
; :.
During the first two years o f its
~\
implemcn11tion it appears that the new
policy package, strongly advocated and ,
monitored by the IMF, was very effective :
in :inaining the dcdarcd objectives. Dur. ;
ing the 1980-82 period expons grew at an I
astronomical rate which. combined with a :
sluggish growth of impons. led to a con,
siderablc improvement in the balance of ;
payments situation. The rate of inflation ·
also moderated considerably in this
period.
An important question which arises in :
relation to what appears to be an impres- ·
sivc success story in these two years is to
what extent the causal factors put forward •
by the advocates of monetarist policiC$ .
were in fact opera tive in this period. In ·
other words. With ~the continuation of
n1onctarts1 policies shouid one e"i)t'c:t
these favourable trend$ to persi$t over
time or were they merely short-term
phenomena which could not be main•
taincd in the long run'?
Since Prime Minister Ozal has time and
again invoked the example of the 1980-82 I
success story to suppon the continuation .
• ,,_.
of mone1arist policies. this ques11on
assumes crucial political and ideological
~
.I,. ,
·
- ~
significance. As shall be argued below.
t here ex1StS little empmcal evidence con, I Dominan t Images: Evren In the free market, Atat urk on hoarding
!
I
56
Arabia February 1985/Jum-AI-Oola
,(,,
1
·
the deflationary effects of Demirel'$ j main cause of the reduced balance of paymonetarist policy package introduced ear- . menu deficit and which Jed the govern-
lier in the same year. The squeeze on real
ment to proclaim an ··economic miracle'·
wa.ge$ and consumption of worken
formed one component of 1hc deflalionary mea$UrC$. The fall in real inve$lment
was equally significant, and from the point
of view of 1he long-1erm performance of
1he economy by far 1he more important
component of the squeeze on aggregale
demand.
Viewed from the import side, 1here•
for the 1980-82 period. While during the
entire 1974-79 period commodi1y exports
grew by $0.Sbn, during the 1980-82 period
they had grown by $2.Sbn. Though to
some e.1en1 this figure was affected by the
rapid increase in the value of lhe US dollar
in 1he !airer period. it nevertheless indicatcd an im.prcssive growth of real expon$
during 1980-82. This repr=nted a doubl·
ing of cxpons of manufacturing and pro..
cessed product,.
·
fore. the improvement in the baJancc of
paymenis si1ua1ion could by no means be
regarded as a sign of improved efficiency
There were various factors involved in
in the industrial structure of the Turkish
economy. It was rather the impressive
pcrform.ancc of exports which was the
the rapid gtowth of exports. Domestic
muket conditions left the Turkish indusuy unwilling to finance inventories at the
prevailing astronomically high interest
rates. Since the contractionary policies of
lhe government had depressed the domes•
tit market so that businessmen could not
find buyen at home. 1hey scrambled 10
find outlets abroad, mainly to minimise
their losses. The subslantial devaluation
of the lira and lucrative export incentives
also contributed 10 the export drive. 11
should be no1ed, however, that the sub·
stantial decline in real exchan.ge rates bet·
ween 1979 and 1982 was not due to
increased efficiency of the Turkish indus·
1ry bul ra1her 10 lhe significanl fall in real
wages. 801h the overall produc1ivi1y and
1he manufacturing seetor·s productivity in
this period remained virtually stagnant.
A no1able aspecl of lhe export drive of
the Turki$h economy in 1hl.s period was ilS
geographic distribu1ion. As Table I reveals, 1he $hare of Turkish exports going 10
1he oil exporting counlrics of 1ho Middle
East grew from about 9 per cen1 in I 979 to
aboul 40 per ccnl in 1982. This was mainly
accounted for by lhe increase<! share of
Iran, Iraq and Libya. The average annual
raic of growth of real export$ 10 Iran during 1980-82 was 227 per cen1 and 1hose 10
Iraq and Libya 105 and 211 per cent
respectively (Table 2) . Increased expom
to these three countries constituted 65 per
cent or the total increase in exports in
1981. and Iran accounted tor more 1han 52
percent of the increase in exports in 1982.
Growth of expons 10 Iran and Iraq was
to a large extent, if not entirely, due to the
war conditions in these two counlrie-s. The
closure of their most imponant pons as
well as the acute foreign exchange shor·
!ages which Ibey faced led 10 an upsurge of
bancr trade - that is, oil ror manufac·
tures and basic necessities-wi1h Turkey.
Once the contingencies of the war no
longer run.strain the Iranian ::ind Iraqi gov· 1
crnmen1s. they arc most likely to divcn
1heir trade by looking for cheaper sources
of supply. Even without cessation of the
war, it is unlikely that 1hc rate of growth of
exports to Iran and Iraq and lor 1ha1 mailer 10 the other oil exponing Middle Eas1crn countries could be kept up. The
economics of the fonner 1wo countries are
vinual1y stagnant and would continue so
for as long as the war persis1s. and 01hcr
oil exponing economics arc unlikely to
keep up the same rate of economic expansion as they did in the immediate after·
marh nl rhe 1979 oa room.
A major pan or the upsurge in ·a urk1si1
exports during 1980-82 lhcrcfore was of a
short-lerm and cyclical nalure. By relieving the balance of payments problems in
the short,run. it provided a golden oppor·
tunity for. the Turkish government 10
expand the domestic economy. and provided a breathing sp3Ce to restructure the
economy such that iu long-term growth
potential could be realised without struc..
tural bottlenecks akin to those which
created 1he siop-go grow1h cycle$ of 1he ,.
Fol)ruarv 1985/Jumada AI-Oola
Arabia
57
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1970s. As it has turned out, however, the downwards trend in exports was more due restrictive monetarist policy stance is
Turkish government opted for a totally to the transitory nature of the export based on flimsy ground. Growth of
inappropriate set of policies resulting in boom of earlier years, as discussed previ- exports is the key variable in the perforthe economy becoming dangerously ously. Among other factors which contri- mance of the Turkish economy in 1984.
dependent on a highly transitional source buted to the deterioration in export per- The official projection for the growth of
of export revenues. And this has been formance should be included the electric- exports in 1984 was 14.5 per cent -comdone at the immense cost of high ity shortages which led to the decline in pared to the actual growth of exports in
unemployment and lost productivity. It output of cement exports, a decline in out- 1983. which was about 8.1 per cent. this is
appears that wrong policies were chosen put of the agricultural sector. and a reduc- a highly over-optimistic projection.
at the wrong time.
tion in government export subsidies.
Economic conditions in Middle Eastern
With regard to the reduction in the rate
The rate of inflation during 1983 also oil exporting economies. Turkey's main
of inflation. hailed as the "economic mira- accelerated. This was due to various fac- trading partners. were not as favourable
cle" of the generals' government in Tur- tors including the acceleration of the as they were in 1983 and they are expected
key. the monetarist interpretation of the growth of nominal wages. bad harvests. to follow an even less expansionary policy
facts also seem dubious. The three digit and the depreciation of the Turkish lira , in 1985. If the growth of exports in 1984 is
I scaled down to reasonable proportions,
inflation of 1979-80 was to a large extent (OECD, May 1984).
due to oil price rises in that period. With
The civilian government of Turgut 1 then other projections for the growth of
the stabilisation of oil prices in subsequent Ozal, which came to office at the end of I GDP, investment and so on should also be
years one would have expected the rate of 1983. has declared that it will reinforce the scaled down in accordance.
inflation to fall in any case, other things restrictive policies and continue with the
For the Turkish economy. 1985 is a cruremaining the same. Control of the liberalisation programme in order to cial year. Many accumulated debts
growth of money wages also made an reduce inflation and balance of payments become mature, and an objective assessimportant contribution on the supply side, deficits and bring about a restructuring of ment of 1984 will become possible. The
and contraction of demand played a part the economy conducive to long-term question which remains is whether on the
in relieving some shortages and reducing growth.
basis of its assessment the government will
inflationary expectations.
To assess the performance of the Tur- ' revise its monetarist stance or whether Given the opening of new export outlets kish economy during 1984. the necessary , under the pressure of the IMF or due to
in the Middle East which reduced the data is not yet available but on the basis of yet another balance of payments crisis 1
balance of payments pressures and the the above analysis one can provide strong . it will follow an even more deflationary
existence of excess capacity in industry, evidence to suggest that the optimism of 1 policy. The social consequences of the latand considering the already existing huge the Turkish government with regard to its ter path could turn out to be grave.
supply of unemployed and underemployed labour. similar reductions in the
TABLE 1
rate of inflation could be brought about
Geographical distribution of exports
without recourse to the contractionary
monetarist policies of the government.
(per cent of total)
Though in industrialised economies with ,
1981
1982
1983
1979
1980
1978
near full employment of labour with free , DESTINATION
41.2
63.3
56.7
46.8
46.8
64.8
collective wage bargaining there might be i Industrialised
some grounds for using contractionary
countries
13.2
9.5
32.5
39.6
32.5
8.9
mo1:1etarist policies as an anti-inflationary
Oil exporting
device. within the context of the Turkish
countries
2.9
5.0
12.6
19.0
Iran
1.9
0.8
~rnnomy suC'h pohcie~ are based on a
4.6
11.9
11.6
4.7
5.6
3.0
great misconception and their disadvanIraq
2.1
2.2
1.9
9.4
4.9
3.2
tages could easily outweigh their supposed
Libya
27.2
30.1
20.7
26.3
19.2
20.7
anti-inflationary benefits.
The rest
The alleged economic miracle of Tur1QQ.Q 100.0
key's military government was a house
Total
tlru! 1QQ& 1QQ.Q. 1.QM
1910
2288
2261
4695
5746
5728
built on sand, and the collapse came very
$million
quickly. By late 1982 the government had
Source: Direction of Trade Statistics: IMF 1983
to intervene to rescue hundreds of companies and banks, including many of the
I
country's largest, who were on the verge
of bankruptcy due to the shrinkage of I TABLE2
tr
their markets. astronomically high i Growth of real exports by destination
interest rates and liquidity problems. In
1983 expQrts ~lagnated in dollar terms.
(anniJPl Pf!rr.entage growth rate)
while in '<Olume terms they grew t,y 14 per
1978
1979
1980
1981
1982
cent compared to 34 per cent in 1982. The
Industrialised
-17.9
-7.8
19.2
19.5
0.1
export boom to Middle Eastern trade
countries
partners had started its downward trend.
Oil exporting
-8.5
55.3
284.5
34.5
39.9
and given the economic conditions in
countries
these countries this is expected to con-12.0
-72.3
Iran
160.4
324.7
198.5
tinue.
Iraq
11.2
38.6
39.3
4.6
300.5
The downward trend in the value of
Libya
-0.3
-36.9
225.0
17.0
617.0
exports was not due to reduced price comThe rest
-12.2
9.2
55.4
21.3 -208.0
petitiveness of Turkish exports - the real
effective exchange rate in 1983 declined
Source: Direction of Trade Statistics: IMF 1983
hy four per cent, which is an indication oi
tr Deflated by Import Price Index
improved price competitiveness. The
I
IECONOMIC COOPERATION
I
Agro-tools to prepare ground
for economic cooperation
One area in which cooperation between Islamic countries could
produce immediate benefits is the production and trade in
agricultural machinery
fur\ Recently
j
•
i
1,
there has been a growing
~ awarcnc$$ of the need for greater
commercial and economic cooperation
between the Islamic states. and the
benefits of 1his have been emphasised in
numerous OIC meetings during the past
few vcars. The formation of The Islamic
Cou~tries Permanent Committee for
Economic and Commercial Co-opera1ion
i,s an indica1ion or the prac1ical steps
which, at least at the organisational level.
have been taken to achieve greater
economic cooperation between the OIC
member .scares. Some Muslim countries
have even put forward the idea or 1he rormation or an Islamic Common Market.
_.;.;c___
_
data, or the difficulty of gaining a«:ess to
such information when it exists. has made
identification of the areas in which such
cooperation could be given a heads1an
very difficult. This is lhc first or two arti·
cles. the aim of whieh is to identify areas in
which gainful cooperation between
Islamic countries could be ini1iatcd - by
concentrating on specific 3rcas in which
such cooperation could be immediately
implemented and trying to provide infor·
mation of immediate practical utility ror
such cooperation.
Tb~ economic rationale for coopcra1ion
between countries a nd greater integration
or their economies, through the removal
~~=*-..;:---.-l""'"'i---
__
In the face of the low level of economic or trade barriers and restricciortS o n the
and commercial relations between the mobility of factors or production. arises
Islamic countries at present, any ideas or from the benefits which it could bring
!"rnctia.l rt1ov.e s whkh may contribute to I ahout both on the demand side and the
the cn!\a11~ef'!"ent of sud1 relations should supt,>lt ~ide. On tht Jcm:mJ sic.k. ~rc"l~r
be most welcomed. If the Islamic coun· cooperation between the Islamic coun·
tries arc to increase their share or world tries. either through mutual trading agree·
trade - which al present stands at no 1 mcnts or the rormation or common mar.
more than 2 to 3 per cent - and consoli· kets. would help to reap the benefits of
date their position in the world econom~·. ~conomies or scale. The n31urc or modern
they have to initially stan by benefiting lechno!ogy in various lines of production
from the economies which the greater is such that the minimum economic size or
markets and the larger pool of informa- the plant would entail a much larger martion and know-how or the world Is lamic ket than any individual Islamic country
community can orrer.
i could at present provide. Greater unifiC:a·
Unronunately lack of information :1nd i tion or markets would. therefore. not only
I.
I
so ass sstr11ecrtsnrt1 ttO?fr
induce invcstmen1 in new lines of produc..
tion but would also bring about a much
higher degree of utiliution of the presently Cltisting capacities.
On the supply s ide. greater mobility of
factors of production and increased
exchange of te.chnological know-how
could greatly enhance the availability of
resources in different Islamic economies
and could give rise to a faster diffusion of
advanced rechnology. The economics
which arise from such supply-side factors
could be considerable in the case of the
Islamic countries due to the vast differ•
cnccs in resource availabilities and
technological levels. which makes them
highly complementary to one another. In
the Islamic world, on 1he one hand there
are countries with vast amounts or surplus
labour where capital is scarce: on the
o ther hand, there arc capital surplus
economics which race labour shortages
and limited absorptive capacity. Such
complementarity effects also abound with
regard to the ditrerenccs in natural
re.source availabilities and technofogicaJ
know-how. The cultural similarities bet·
ween the Islamic countries. which introduces some degree of similarity in their
product markets and reduces some of the
important cultur.al barriers to the mobili1y
of labour, greatly enhance the possibilities
of realisation or suc:h complementarity
effects.
It is commonly believed that the wide •
disparities between the different Islamic
economies renders cooperation and grca·
tcr integration of these economies di(·
ficult . This is. however. a mistaken belief.
It is exactly the variation in the resource
bosc and technological levels of the
Islamic countries which is the main source
of strength or the economies resulting
from !ncr~ascd cooperatiQn on t he !upply
side . What has usually handicapped the
success or common markers betwt-cn the
underdevelop.ed countries is the similarity
in the suucture of the.ir economics- they
have usually all been surplus labour
economies with similar technological
levels and all uniformly dependent on
industrialised economics for technological
know-how and capital. Under such circumstances 1he rormation of a common
market would not reduce the financial and
technological dependence of ,uch
economies, neither would it increase the
size or the market or suc.h economies as a
wi1vl~. $omr o( the rnembtr, of 1t,e com·
mon marke1 wou!d increase their share of
the market at the txpense of others, with
the overall site or 1hc market rem3ining
constant. Thi$ i.s usually the main source
of tension in such common markets and
the major·cause of their breakdown. The
variety of resource base and technical
know•how in the Islamic countric:S would.
therefore, help to greatly alleviate such
problems.
One or the are.1.S in which cooperation
foreign exchange revenue are obvious.
There are, however, more long-term
and dynamic benefits both for the importing and exporting countries which can
result from such cooperation. An important element in the effectiveness of modern agricultural technology is the adaptation of such technology to the ecological
and resource conditions of the region.
Such a technology imported from an
Islamic countrv with more or less similar
economic condicions in agriculture would
therefore be more appropriate than
imports from industrialised councries.
Furthermore, cooperation between the
Islamic countries should ultimately lead to
the production of agricultural implements
- based on certain specialisation agreements - in the importing country. There
are considerable forward and backward
linkages between produciion of agricullural machinery and other sectors of the
economy, which could lead to the generation of further dynamic effects and open
up possibilities for further cooperation.
between the Islamic countries could give
rise to immediate and significant
economic benefits for all the countries
involved is production and trade in
agricultural machinery. Imports of
agricultural machinery by the Islamic
countries forms a substancial share of such
imports in world trade. On the other
hand, a number of Islamic countries during the past two decades have had remarkable success in the production of agricultural machinery and implements, to the
extent that at present not only are they
self-sufficient in producing all their
domestic requirements but they have
enough capacity - or the necessary technical knowledge to expand the capacity to export. There exists, therefore, important potential for increasing trade between the Islamic countries in agricultural
machinery
and
implements.
The
economies which can be achieved through
such cooperation are substantial, and the
short-term benefits to the exporter in
terms of greater capacity utilisation and
TABLE 1
World exports and imports of agricultural machinery and
implements (1980)
Region
Imports
value
o/o of
Exports
value
total
Developed countries
Centrally-planned
Economies
Developing countries
of which:
Africa
Asia
11
Latin America
~ Middle East
Total world
o/o of
total
8076
2568
54.5
17.3
11559
3045
77.9
20.5
4117
27.8
227
1.6
1197
824
1366
729
8.1
5.6
9.2
4.9
14.5
201
11.2
0.1
1.4
0.1
14831
100.0
14831
100
Source: International Trade Centre, UNCTAD, 1983
TABLE2
Muslim countries' exports and imports of agricultural
machinery and implements (1981)
Country Iraq
Saudi Arabia
·: Nigena
Libya
Algeria
Iran
Indonesia
Turkey
Pakistan
Egypt
As percentage of total developing countries share
IMPORTS
EXPORTS
11.0
8~
5.9
5.0
3.6
3.4
1.1
1.8
0.1
3.6
21
Q1
2.3
India
Total
1A
1.8
45.1
7.0
A recent study by the International
Trade Centre (ITC), a joint subsidiary
organ of UNCTAO and GAIT. provides
invaluable detailed data on production
and trade of selected agricultural machinery and implemencs. The ITC data could
be used to highlight the position of the
Islamic countries in world production and
trade in agricultural machinery and pinpoint the areas in which gainful cooperation between the Islamic countries could
be exiended.
The world market for agricultural
machinery and implements is large and
has high potential for growth, especially in
!he developing countries. Imports of
agricultural machinery and implements
into developing countries in 1980
amounted to S4,117m, or 27.8 per cent of
total world imports. As Table l shows,
however. there is an extreme asymmetry
between import requirements and exports
of agricultural machinery from the
developing countries. Therefore, they
import almost all of their agricultural
machinery from the industrialised and
centrally-planned economies. Given that
developing country imports have recently
been restricced by financial constraincs,
the potential for imports of agricultural
machinery in these countries far exceeds
what !he actual import data implies. This
is signified by the fact that about 75 per
cenl of the cultivated area in developing
countries was farmed with hand and animal draught technology compared with 18
per cenl for developed councries. The
developing countries. therefore. have
substantial potencial for utilisaiion of
mechanical technology in agriculture.
This would no! be at the expense of
employment of labour. since the use of
modern agricultural technology would
substantially increase the are-1 under cultivation.
The asymmecry in foreign trade in
agricultural machinery and implements
for the Islamic countries is even more
severe than 1he res! of the developing
countries.
Table 2
shows
the position of
the Islamic countries vis-a-vis the remaining developing countries. As the table
shows, while in 1981 about half of
developing country imports went to the
Islamic countries. no more than 7 per cent
of developing country exports originated
from the latter. This is caused by two factors. r'1e fi!st of w.l1ich is that the capacity
to produce agricultural machinery in
many Islamic countries is either non-existent or highly undeveloped compared to
the other developing countries. This is
not, however, the main reason. As shall
be argued in the second part of this article,
various Islamic countries have the capacity to increase their exports of this nature
- here lies an important area for the
extension of economically gainful cooperation between the Islamic countries.
February 1985/Jumada Al-Cola
Arabia
61
their course of action towards areas like l chairman o f Paribas. has however warned
helping suppon small businesses. The ·,· against over. has ty returning of the banks
other reason for the nationalisation of to private ownership in order to avoid
commercial banks is 10 promote e:tports i 'repeating the disloc3.tions from which they
and also help finance 1he budget deficil.
have suffered in the pas, 1hrce years.
The banks which were taken over have Dena1ionalisation. 1hc step-by-step n,.
in general been pro1ecied from the worst
enlry of private capilal through shares
consequence-s by a series of factors. These issues on the Boursc . is certain to re main a
are the quality of their new chainnen and ho1 political 1opic during 1he run up 10 1he
1986 and 1988 elec1ions.
continuitv in office of other senior man·
agcment: The governmem·s need to main•
New credit rules. involving the removal
tain sta ndards of banking prudence to of the rigid ceiling on lhe volume of banks'
re3ssurc foreign creditors is also a factor credit. were published recently. French
bu1 perhaps 1he moSI imponant is 1he bankers arc not sure what the recently dis•
overall shift in policy towards economic closed suppression of 1hc sys1em (en"realism" after 1he bell-tightening mea- cadrcment de credit) will entail. Com·
mcnts from the French banking associa~
sures of March 1983.
The right•wing opposi1ion is calling for rion president Jean Dromer and other
prompt de·nationalisation of banks af1er bankers maintain thac the new rules have
the next election. M Pierre Mow.sa. ex. vet to be simolified. Thev mav not be so
j !BANKING
I New credit
j
rules please
foreign banks
in France
The disadvantages of bank
nationalisation may be
~awning on the Mitterrand
government, now seemingly in
favour of loosening state
control. ForeJgn operators,
however. ape!,gve of a recent
change in ground rules
The banking sector in France has cont.tined a·s ubsta ntia l state -owned element
for many years and in 1981 all French
banks were n:::uiono.liscd bv the Miucrrand
~ovcrnmenr. This brought a total of 39
bilnks under stale control.
The presidents of 1hesc banks ha,·e
hccn appoin1cd by lhe Socialist government. The srnte has obtai ned di rect control o ver 90 per cent of total deposits and
HS per cent o f distributed credit in France .
However. the policy or nationalis ation has
no1 affcc 1cd 1he 154 foreign conirollcd
banks. 71 small indcpcndcnl banks. Sim•
comis. the semi-public and powerful Cre·
Ji1 Agricole. two savings networks and the
tradilional Cooperative banks.
Many Muslim countries· banks arc rep•
rcscnt.i:d ir, F'r:1nce. Thcv a re Al Saudi
Banquc. Arab Bank. Bank Melli Iran.
Bank Suderal Iran. Bank Tejarat Iran .
1
Banque Arabc c1 In1cma1ionale d lnvcs•
tisscmcnt. Banque In1erna1ional Arabc .
0
Riya d Bank. Habib Bank of Pakistan.
Na1ional Bank of Abu Dhabi . Saudi
Lebanese Bank. Na1ional Bank of Pakis1an and Qatar National Bank .
.. At the momcn1 . the nationalised
banking sector Cinds i1sc1C in a s itua1ion of .
fragile status quo. But in ,he long run. the ·
Slate is cena inlv not the best shareholder
to reso lve the 1Wo problems faced bv 1he
banking s ys,em : the lack of capi1al a nd lhe
~h:t!lenr:~ af f:,,.,,.,. ;.. ,!'uc1ural :Jr.J
technological) changts. · Thi, extract.
from a highly critical report reccntlv pub·
lished b y 1he righ1-wing domina1ed French
Senate. shows the unccnainties hanging
over the banking system.
M3.ny of the 36 commerc ial banks and
two financial holding companies (th(
P;Jribas and Suez groups) have undergone
impo rt3.nt structural changes. in some:
ca~s to repair the conse.q uenccs of pa.:H
management e rrors and in others 10 a lter
62
Arabia February 1985/Jumada AI-Oola
Mitterrand's relaxation of credit rules will benefit foreign banks
~implc after all.
De-spite the confusion regarding the
new credit rules. foreign banks in panicular arc jubilant because the competitionstifling effcru of the o ld encadrement sys·
tern arc almost certain to be cased. Since
foreign banks in France tend to be well
, capitalised and will be able 10 tap the bond
. f'arkct the)' are likely 10 be able to benefit
from clauses in the new regulations
favouring banks with s-1able resources.
The new control on credit volumes will
use non-interest bearing dcposi1s which
banks will be required to maintain with
Ba.nque de France i n proportion to their
lending. This will limit the growth in
money supply this year 10 6-7 per cent.
Q(fsc,s will be allowed for banks which
,·.,,,,...............................................................................................
t
MANARATSCHOOLS
SAUDI ARABIA
Invite applications from suitably qualified PRIMARY & SECONDARY,
School Teachers, M ale & Female for the 1985/86 Acad~mic Year.
PRIMARY LEVEL
Class Teachers. Male & Female. to teach all subjects to children aged
6-12.
SECONDARY LEVEL
Graduates to teach English Language, English Literature. Mathema·
tics. Physics, Chemistry, B iology. Geography, Islamic Studies.
Attractive salaries. tax free. according to qualification and length of
experience. Benefits includP-:
• Annual paid vac.ation
• Air tickets from base to contract base
• Two months' annual paid vacation.
P1ease send detailed C.V. plus photocop,e:S ot Qualificauons and certificates. address
and telephone number to:
i
'
AHM AD AL SHAWi
SAUDI EDUCATIONAL OFFICE
29 BELGRAVE SQUARE
LONDON SW1 X BOB
quoting the reference A$/AA/MS Teachers· Vacancies on the envelape.
crca1e credit volumes - some credits will
not require full non-interesr bearing
rc~ervcs. such as expon credits. housing
and e quipment finance. Bankers fc:ir that
the svs1cm will continue to rcstri(t and dis•
ton lhcir lending business because non·
interest-bearing deposits will continue 10
pcnali~ the fastest growing banks.
There are few legal barriers to 1he
establishment o( subsidiaries or branches
of foreign banks. The Credit Establish·
mcnt Committee must approve 1hem and
i i gcner.:Jlly docs if 1hc country in which
lhe foreign paren1 is based permits French·
banks. Some banks from countries that do
not grant reciprocity have however set up
branches in Paris.
The primary authorisation to foreign
banks for operation in F rance is given by
the Counscil Nationalc due Credit
(CNC). The application for operation in
France is submincd 10 the CNC on be ha.If
of the applicant by the As.socia1ion Fran~
caisc des Banqucs (AFB).
Oocumcn1s rcquined include a d4.!S.Crip1ion of foreign banks (including recent
financial statements). its activi1ics in its
home countrv and abroad. reasons for
cstabHshing Operations in France. the
nature and srructUre of itS operation and
how it will contribute to improving the
performance of the French cconom~·. a
description of capital s tructure . descriptions of operations. its form. number of
employees and their identification. the
qualifications and professional c,cpe:ricncc
vf th~ perso ns cmplo~c<l. r'i1l:t11c-i:il pro11.·c·
uon:) of the Of>'!rauon for its first three
years. and a s1atcmcnt on whether reciprocal rights exist for e stablishing French
banks seeking 10 operate in the home
country of the rorcign bank.
The application must also contain a
~uu1milmcnt to foUo\;, 1:;, :cco~:uin: ;:rocedures required by banks opera1ing in
France. and a fo rmal request for registra•
tion on the list of official!y au1horiscd
banks.
Foreign banks arc generally small. bur
they perform the vi13I func1ion of providing the numerous connections needed bv
foreign companies s~cking financing iO
France. foreign banks also give advice on
how to take advantage of local capital
resources. A foreign bank does not us ually furnish the bulk of a French subsidiary·s financing requirements itsdf.
Instead. the bank provides loan 1-ua rantcC! o r t:.l:::s f'.:l:t ::-, :he c.·u11,t".!!ly·.. ;,;:::nk·
ing pool.
President Mincrr.1nd .1nd his m inisters
now pay lip service 10 the idea of lessening
state control throughout the economy in
order to speed up and improve decision
making. This is needed <specially in an
area like banking. vit:1lly affected by
worldwide compctiti\'e pressures caused
by financial m:ukc1 d-.:rcgulation anc.J 1hc
introduction of sophistic:ucJ elccnonics
systems.
FebnJary 1985/Jumada Al·Oola
Arat,;a
S3
to ch:\ner either a b ranch of an Islamic
bank. so there is no precedent on which to
rlraw guidance ... Any method of opera•
tions approved for Islamic institutions
would have to be deemed acceptable for
the US banking system as a whole, therefore. the implications for our entire banking system.. would be very great. An
Islamic Federal Credit Union might have
more problems. as these institutions have
much more rigid restrictions on their
scope of lending than banks ... Equity
lending for such institutions at the feder•
ally licensed level is prohibited," accord·
ing to cuncnt law.
One alternative that mjg.ht be worth a
try , according to Schoua, is what have
recently developed as non-bank banks.
"Some scope for applying Islamic finan·
cial principles may exist on one or the
other side of the equation.·· it was noted .
In this regard. however. quid action
might be required because ··t= in the
Congress arc working to eliminate all non-
! tSLAMIC FINANCE
Why the word 'bank' should
go out of the window
Muhammad Tahir. in this report on the First Conference on
Islamic Banking and Finance in the United States. explains why
he believes that "to call an Islamic institution a bank is... to
approach the very verge of heresy"
~ The message was clear a1 the 1st Con~ fcrencc on Islamic Banking and
Finance held at the WeStbury Hotel in
New York City last December: while
Islamic money will be welcomed in the
United States, those who believe that
there is a role for Islamic banks in this
country will. be disappointed.
"A bank operating procedure which
specifically seeks to pass investment risk
tunitics for Islamic finance than any other
market in the world." While the concept
of "banks taking equity positions is totally
alien to our (America's) banking system."
he sugge$ted an alternative route which
might be approved by the FDIC , that
..bank operations involve only activities
like leasing (murabaha) and export/
import financing (mudharaba), then the
chances for FDIC insurance would be
A group discus.ion et the New York
eotd9t'et1Ce
to the depositors would seem to run
directly counter to the intent of the FDIC
standards for in.surabili1y, .. slated Charles
Schotta. deputy ass.istarit secretary of the
Treasury for Arabian Peninsula Affairs.
h.\ $·.:r1c l;'i A•··.:~ and Ar.ii:-rican !:, .. oktrs :a:
tht conference. organised joiudy by 1he
Management l:.xchanie and the Middle
East Association (London). Other such
conferences have been held in London
and Paris to educate western b ankers on
the development of the new Jslamk bank•
ing system.
Schoua did. however. remind the par.
ticipants that the "US financial marke1 is
both deep and wide and. therefore. I
believe 1hat it offers more kinds of oppor64
Arabia Feb,ua,y 1985/Jumada AI-Oo&a
I
enhanced somewhat.·· However. even in bank banks ...
this case. the bank "s capital would have to
Another avenue of approach to the
be "adequate 10 provide a restrve against , problem of Islamic fi nance might be on
the extra risk an Islamic bank would incur : the "equity investment side as a venture
by taking title to the exports or imports 'i c.apital firm and/or an investment
Juring rhe (',)ursc of thl! tr:tnsaction ...
:tdviser... Here au1ht>f11v wo•tlJ r,..~:: f;-vrn
In establishing .in JslJmic bank 1n the the hands of the Treasu;y to the S1.:cvn::::~
US ... ,he question would <'trtainly arise and Exchange Commission . Schott3 then
about securing a domestic deposit base reminded the participants that then "the
with paying interest ." Schona said. While forces of the market place would
this is no problem in the ~fiddle East. he scrucinise an Islamic-based insritution
!teemed 10 be questioning 14·hcther rherc wich regard 10 rhc economics and opera,were enough Muslims in the US who were
ing proc.edvres involved by determining
willing to live by their reli~ious conviction its ultimate financial acceptance.··
chat usury is prohibited u, th~m.
Another speaker 31 the co nference IA'as
Schotta <lid note h.> 1h~ 3udicncc chat Terrance Carlson. ;m American attorney
··th e Comptroller has nl'\'"'r h.:1J a request based in Lund\ln with Gibson . Dunn and
l
•
Crutcher. who has since 1981 handled I
over S3bn in runds acco rding 10 Islamic
principles. He dealt with the problems
, inherent in writing a contract '"that would
both protect our client's religious preferences and blend well with the western
commercial world.·· Bans on trading and
speculating in currencies, gold and silver.
has in manv instances made it difficult or
imponible io put a deal together.
Carl$0n reminded Americans that one
big problem that they will face in attempt·
ing to deal in [slamic finance is the fact
that. "you cannot assume. just because
you have attended a conference. or read
an article. or spoken to a friend of vours
who has done a tn.nsaction with a diffc.
rent Islamic institution. that vou know
what all these principles are:· ·There are
basic differences within the Islamic com·
munity 3nd ..·we arc going to have to be
open-minded and accept that these di!ferences exist." according to Carlson.
Carl.s on. did, however. remind his lis,
tcners that Islamic financing does work.
and that it cannot be dismissed as just
another passing "lad." "What we need
are some flexible thinking people who are
willing to work to make the Islamic inveS· US Treasury man cnaries Schona
tors and the western world meet,'' and Islamic "cenuc" an Islamic "nightclub".
perhaps Islamic finance will enjoy general would be run out of town in a flash .
Although the centre may serve as a type of
acceptance in the years to come.
In Carlson·s view. Islamic bankers can "nightclub"' where only .. halal'" activi1ies
go a long way toward helping to generate are permitted. the entire idea and concept
... this acceptance by just sitting down and of a nightclub is so alien and repugnanl to
· .. issuing a written document covering the Islamic belief that no one would attemot
fundamentals that they can agree upon.·· m suegest 1ha1 we can establish a " nh?ht,
Such a document would not only help wes- club'' that will meet th~ standards or
terners who want to en,er the Islamic mar· Islamic law.
Yet. according 10 established and
ket . but it would be ··invaluable to western
regulators. who cannot reaHsticaUy face ac-c epted Islamic thought. usury. the main
the difficult issues of how to regulate activity of a conventional b3nk. is a m3jOr
Islamic banking and finance until there is , sin. ranking according to some, next to
1 some basic undcr5t:tnding ot what is to be : idolntry. In the recently published bo()k,
regulated ," So far. regulators have lound I The World's Mone.v. Michael Moffill
it easier to sav no. as the central bank of 1 notes. "in one important sense. it is no
England recently did. rather than sit down accident that banking :and finance flourish
and discuss principle_ with these new in an atmosphere of economic decline.
Islamic banks.
The business or banks is making loans ...
Carlson asked the question. should The financial svstem look5 like an inverted
Islamic financial institutions even call pyramiU that iS tottering in the wind. This
themselves "banks" and their trans.actions . game c:an g.o on ror a time. maybe a long
"loans." Although the question was asked I time. but not forever. Ultimately all this
from only the ··regulatory and tax aspect." p:iper represents claims on real goods and
perhaps. it is time that Muslims ask them- >.:-rvices. Production must go up or the
selves this question from an Islamic paper is no good." To ,all an Islamic
'. perspective.
1 institution a bank is. in the opinion of this
Islamic ..centres"' have become on : humblt" Jnd othc:rwisc uneducated Mus·
. :.:Slab11shcd hmUma, k lhroughoul 1he ; i1rn. h) approach to ti,e:- , cry verge of
· western world where groups of Muslims heresy.
If the Quranic verse. Surah II . verse
live and work. Many or these runction as
social centres. places where Muslims can ~76. which reads. "Allah hath blighted
meet after work. enjoy dinner together. usury and made almsgiving: fruitful,'' is
and participate in other forms of ''halar· correct. then the world's conventional
entertainment, other than Quranic read· b.lnking system is doomed . Do Muslims
ings and prayer.
really want to be a port oi .l system that
One might say that many of these • God has condemned·? One ol the oldest
. centres serve as an Islamic alternative to a ! Islamic financial instituti,,n> is the noted
' 1nore conventional ··nightclub". Yet. rht · Kuwait Finance House. Par'i.lrming many
;oviuslim who would suggest calling his
the hal.il runctions 1h.11 ranks nonm11ly
II
I
. ,,t'
perform. the Kuwait Finance House has
gained respect in Kuwait and throughout
the world. without misrepresenting itself
as an "Islamic bank."
Muslims must ultimatclv deal with this
question. If our goal is shOrr, term and we
really only desire an opportunity to con•
trol part of our destiny that is locked into
the grips or modern financial and money
markets. creating ··Islamic banks" may
give us a measure of immedii:11c relief.
However. if we sincere Iv believe that
Islam offers a legitimate a.ticrnativc to the
materialism and capitalistic nature of the
West and the st3tic state controi oi rornmunism in the East. then. it is important
that we start now to create institutions that
reflect this new image o( ourselves.
By taking the initiative. Muslims will
not only :ivoid any potential confrontation
with the powers that be in the United
States Treas.urv andtor the Office o( the
Comptroller. they will be able to find protection under those laws which otherwise
provide for and promote free enterprise.
U we start now. we can educate a whole
new generation of mankind. to accept a
new world order where it is as unnccCMary
to set foot in a bank in order to live a full
.aM.i prosperou~ life. a.) it i:, unnecessary
now to set foot into a nightclub in order to
enjoy a dinner wirh your family.
It was quite apparent at the 1st Confer·
cnce on Islamic Banking and Finance that
the educational process is only beginning.
At present . it is possible to throw away the
term ''bank" in referring to Islamic financial instilutions. It just might help to facilitate the general understanding of what
Jsl;;imic economics is all about.
.WuhammJd TJhir
Fet>ruarv 1985'Jumase e·oo1e
1
Aragia
85
11. the president to declare his belief that
I.....-INTERVIEW
- - - - - - - - - - - - - - - ' · FIBS has "betrayed the Region·· and was
whole .
It is true that we started initially by engaginstrumental in precipitating the famine ing in operations with a quick return. but
there by "buying up stocks of grain and that was the only way we could have estabreselling it at exorbitant prices.·· This was lished the credibility of Islamic banking.
taken up as the main story in all the gov- ,
We started with Su£I0m authorised
ernment-controlled media. and for days capital. of which only a quarter was paid
aiter the talk in the street and the media , up. Would these people have liked us to
wasofthe"evilbank"whichmanipulated have put this Su£2.5m in one or another
··the food of the people.··
long-term project and wait ten years for it
The bank responded by publishing its to brine some return? It had to generate
The very success of Faisal
statistics. It turned out that the amount of some profit that same year so that the
Islamic Bank Sudan has led to sorghum purchases funded by the bank shareholders could be convinced to pay
dircctlv or on behalf of its clients the second instalment when due. And that
rumours and accusations that
amounted to no more than 3 per cent of was just what we did. We distributed subthe bank has manipulated food the total harvest that year. The bank stantial dividends the first vear and that
claimed that the scarcity and soaring attracted a lot of people. ·
stocks. Arabia fills in the
prices occurred only after it had sold all its But if this reasoning is agreed upon,
background and interviews
, stocks bv June 1984 - it had entered the shouldn't it also be asked what the Islamic
FIBS general manager Dr El
market in Januarv 1984- and had sold all banks, and particularly FIBS are doing
its stocks within ~n average of two months now that thev are more mature?
Bagir Mudawi
after purchase. Some ~purchases were We have pla;·ed an important role in help- 1
ing the economv. In addition to the three
~ One could see the storm brewing for made directly on behalf of government
~ years. The revolution created by the agencies. The resale of most FIBS stocks objectives referred to previously. which
emergence of Faisal Islamic Bank Sudan \\:-as at between Su£30 and Su£35 a sack. we have achieved. we have helped the
has shaken Sudanese societv to its founda- Shortly after these stocks ran out. prices economv in manv other wavs. most
tions and upset many po~erful people. shot to over Su£100 a sack of grain. The remarkably in assisting exports. Before
With the government declaration in bank is now suing one government-owned Islamic banking the export sector was
December of the official end of western- newspaper for ··malicious and distorted beset with problems and very unprofitable. We entered this field and participated
style banking and the establishment of the rc!porting" of the case.
When I met Dr El Baqir Mudawi. the with entrepreneurs with full responsibility
first ever totally Islamic banking system.
the seven-year history of FIBS appears in general manaeer of FIBS in Istanbul. in case of loss. This encouraeed manv who
perspective to be an epic of singular ihere were ma'rty questions regarding the would have otherwise fou~d the condibank that needed answcrin2.
tions of riba banks too severe in view of
achievement.
FIBS started in 1977 with a paid-up cap- In the face or the severe criticism to which the high risk and the need for guarantees.
ital of Su£:?.5m - now with a capital of FIBS is now subject, haven't you round it Within two years we were financing 50 peA·
Su£100m. it stands out as the lareest necessary to re-e,·aluate your position and cent of the country's exports. We have
capitalised bank in Sudan. Its success-has ask ir there wasn't indeed something created new exports and new markets,
especially sorghum and oil seeds. Fifty per
lent credihilitv to Islamic economic ideals wrong?
and paved the way for Islamisation in When we started. we were faced with cent of the foreign exchange we earn we
three problems: Sudan had an acute shor- turn over to the central bank. As a result.
Sudan.
Yet the bank was not for evervbodv an taee of foreign currencv reserves; there the foreign exchange profile of the counideal bank. From the start. it ~pset· the w;s an urgent need to ~oo foreign inves- i try has greatly improved.
We have also financed imports of oil,
balance of forces in the economv and tors: and we had to establish the credibilthreatened the power of the dominant itv of Islamic hanking. We srarted as wheat flour. medicine!>. "p.11e parts and
economic class. Its policy of easy credit pioneers. so had to finlour way slowly by raw materials for industry.
with minimum guarantees created a new trial and error. In five ~ears we have It appears from what you have said that
class of economic entrepreneurs who only achieved phenomenal growth. more pro- this very positive aspect of your operations
have talent. rather than inherited status or nounced for being in a de\·cloping coun- is the clear reason for the widespread disfamily connections. as their asset. This try. We now have Su£60m paid-up capital satisraction. You have opened up opporcreated bitterness on both sides of the and Su£40m reserve capital - 60 per cent tunities that were not there before. The
traditional banks work with the already
fence: the dominant class resented the of this is foreign capital.
power of the "upstarts." while those who
Our success has drawn many others to well-otT, so most people don't reel they
couldn't make it discerned favouritism the field. Several new Islamic banks and have an automatic right for support and
Islamic investment companies have been don't feel shut otT when they are not given
and a deliberate denial of opportunities.
it. But you, on the contrary, have opened
Rumours spread. and the murmurs established with foreign participation.
started to become more audible. The go\'- FIBS has now become a locus of confi- up the chance for practically everybody to
ernment-controlled press took up the dence for foreign investors. :,,;o week pas- become a millionaire and vou couldn't
issue: finally hints popped up in the pres1- _,cs without our being visited by foreign
make enough or them. Th~s everybody
dem 's ,,peechcs. His allusion!> SL'L•n busines~ people waut;ng to do bu:.i111:s~ "·ho applied !or tinanc" feels that he hi.:, a
became more and more direct. The mes- with us. We have also established our cre- right that could not be denied.
sage was clear: lkhwan are using the bank dibility internationally and are regularly I must stress that we haven't made any
as a power hasc. They'd better desist from invited to share our pioneering experi- millionaires. Some customers of ours were
already millionaires when they came to us.
their attempts to use it as a political ences in numerous international forums.
It has been our policy to work more intenweapon ... or else.
But people still question the nature or your
The climax came last December. when participation. They see it as restricted to sivelv wi'th the artisans and low-income
the governor of the drought-stricken short-term finance, especially or trade,
people. and these have done very well
Western Region of Kordofan (who was which brings easy mone~·. but unlike with us. We supplied some carpenters or
himself under severe criticism for hoard- industry or agriculture does not contribute ironsmiths with tools and they soon
ing relief) emerged from a meeting \\l!h to the development or the country as a became employers. We have distributed
Revea Ii ng
the truth
b ehind FIBS?
1
1
1
66
Arabia February 1985/Jumada AI-Oola
sewing machines to many households and
many came within a year to buy one or two
more. We sell tractors to farmers on instalments. Last vear the season failed. so
we haven't asked them to pay nor do we
increase the instalments or the profit
because of this. We have imported timber
for the Union of Carpenters and raw
materials for the Union of Ironsmiths to
distribute to their members bv instalments. We have also bought .milk and
other foodstuffs for the cooperative.
These are just a few of our sociallvoriented activities. There are more. such
as studentships, grants and donations. We
have bought vehicles, at a cost of
Su£4.2m. for the government to use as
ambulances and so on.
Still there remains the question of the full
role an Islamic bank can play now that all
banks in Sudan have become Islamic.
Our bank cannot be t>xpected to solve the
problems of the country in two or three
years. We have many constraints. We are
I the largest capitalised bank. but the Bank
quantities which could be produced were
I of Sudan allows us a credit ceiling of less not yet determined fully. but he added
' than a fourth of some other banks. Yer we
that Hunt Oil Company of the US had
are singled out for the blame and alone , informed his government that oil was
saddled with the responsibility of develop- · available in commercial and exportable
ment. People ask what we have done to
quantities. His country planned to build
industrv and so on. but whv don't thev ask ' an oil refinery and set up a pipeline.
the Industrial Bank, the Agricultural
240km long. extending from the two oilBank or the Real Estate Bank the same
fields to the Red Sea. in addition to the
question? These banks were set up
installation of the necessarv infrastructure
expressly to work in these fields.
for the exploration of oil'. Several comWe must not be required to do the job panics would be invited to tender for the
of the state. We are only a private bank. contracts.
though many people tend to forget that.
The statement made bv the North
, We had to work slowly, starting first by
Yemeni president was considered as offi• building the infrastructure of Islamic cial confirmation of rumours in the
· banking which is now the basis of the
Yemeni capital and in US oil circles a few
whole banking system in the country.
months prior to the discovery. made by
Then we had to ease gradually into more r the American company Hunt Oil Yemen.
risky operations as detailed before.
a joint venture with the National Yemeni
However. if these constraints were to be
Oil Company.
removed and we receive the full support of
Hunt Oil Company announced last
the Central Bank. then I see no reason
summer that it discovered the first oilwell
why all the expectations the people have
in Yemen within a concession-held area of
of us couldn"t be fulfilled.
12.600 square km covering Ma"ri"b AlJauf Basin in the northeast. The oilwell
initially produced 7.800 barrels per day.
1
==============================~~=.
NEWS AND PROJECTS
I
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Slow growth
for 1980s
, ARAB economic development slowed
down sharply from the start of this decade
as compared to the pattern of development realised during the 1970s.
The Arab Economic Development
Report, prepared by experts of the Arab
Fund in addition to the secretariat-general
of the Arab League. estimated that the
Arab national product amounted to
:ilmost ~42'.'!bri in 19~'.: - equal to three
times the national product in 1975. However. growth has been modest during the
eighties in contrast with the pattern of
growth in the seventies - the average
annual rate of erowth for 1980-82 was 1.2
per cent. againit 23. l per cent for the second half of the 1970s.
The Gross Domestic Product of Arab
countries amounted to almost $418.4bn in
1982. This figure was expected to be
$395.4bn, in 1982. in contrast with
$54.5bn in 1973 and Sl5l.4bn in 1975.
The report, part of which was prepared
hv the Arab Fund ior E~onomic and
Social Devclopmc,11 . .::t:rih11ted tht: diffc1ence between the national product and the
Arab domestic product to, in the main.
government control of oil production. the
reduction of income flow outside the Arab
world, particularly the revenues of the
multinational oil companies, and fluctuating Arab currencies. Another factor was
the weakening development performance
which characterised most of the
economics of the Arab non-Opec countries as a result of the rise in the balance of
payments deficit for goods and services in
some Arab countries, thus leading to additional borrowings from the outside world
and the accumulation of debts. Besides.
there was a sharp drop in oil exports from
the Arab oil-producing countries and a
rise in imports in the 1980s.
Factors influencing Arab economies
were reviewed in the report. most important of which was inflation. This was basically due to internal causes. mainly the
expansion in government spending due to
the increasing oil revenues of oil producing countries or the continuing depenJenee on the ban kine svstem oi most nonoil producing countries. The Arab
economies were also affected by foreign
inflationary pressures as a result of the rise
in prices of most imports and their increasing quantity. due to the rapid increase in
irrational consumption costs.
The report added that the effect of inflation on growth varied from one Arab
country to another. It quoted the exampies of Bahrain. where the real growth of
national productamounted to6percent in
1982 but 19. 9 per cent for Qatar: Jordan
5.8 per cent and Egypt -4 per cent.
Oil find in
North Yemen
PRESIDENT of Yemen Arab Republic
Colonel Ali Abdullah Saleh has declared
that oil has been discovered in his countrv
in large quantities. and it could
exported within two years.
Colonel Saleh said that the reserves of
the two fields discovered so far and the
he
II
but output increased to 10.000 barrels.
IDB agrees
its projects
THE Islamic Development Bank (lDB).
at the end of the 74th session of its executive board held in Jeddah. gave approval
for the financing of three trade operations
; and four development projects in favour
; of member countries of the bank at a total
cost of $43.57m.
The three trade operations include the
purchase of oil for Jordan at a cost of
$20111. the purchase of CClttc.1 :hr~ad~ f"r
Tunisia at $4m. and Sl2m-worth of iute
for Snia from Baneladesh.
Io"B also decided to finance an operation covering the purchase of three barges
for the Libyan Arab Company and Marine
Resources of Mauritania at a cost of
$6. 9m. in addition to participation in the
capital of Electrical Welding of Senegal to
the sum of $106.000 and $163.000 for Mala
! ·Chemical and Medicinal Products Com: pany Limited of Bangladesh. IDB also
offered
technical assistance worth
S--404.000 for the preparation of a feasibility study for a road project in Sit·rr:1 Leone
liuking Kenenia i,, the f ... Jt with Ziinmi in
the south.
Other aereements signed included the
financing ;r a foreign tr;de transaction for
the import of jute worth S11 m for Iraq: the
financing of S4m-worth of equipment to
set up a white cement industry in
Hyderabad. Pakistan: the purchase of
equipment for the third phase of the
Oman government's gas network for
$14m; the financing of a foreign trade
operation for the purchase. at S35m. of
I
Top executives of the Copenhagen
intermediate indus trial goods for Algeria:
and the financina. to the sum of S35m . of branch of the International Islamic Bank
a foreign uade oi,er:ition £or the purchase recently visited Kuwait. They met the
of crude oil for Pakisian. Tot• I IDB , bank's Kuwaiti board members and
financing in favour or Pakistan since the · shareholders and acquainted Kuwaiti
investors with the bank's activities in
beginning of 1-IOSAH amounts to S58.3m.
Denmark.
The 118 is a subsidiary of the Luxem•
bourg-based Islamic Banking System. a
holding company which has exl"'ns lrom
1he Islamic world and western countries.
It is not directly involved in banking oper·
ations but oper::ues through affiliate
THE Kuwait Finance House ls contribut·
institutions in London, Copenhagen and
ing in its own way to bed up the Kuwaiti
Switzerland.
economy. in particular in the investment
sector. said one or the House's top offi•
Tho Kuwait Ministry of Auqaf contri·
butes SI.Sm to the bank but is not repcials Faisal Abdul AzizAl·Zamil rccentJv.
r..ented on its board . The bank. as well as
The House had formed a KD9.7m real
its co nstituent panel in Denmark. is pres·
esta1e ponfolio shared by busine,.s.,men in
ided over by the Kuwaiti amir's adviser
the form or restricted deposits - this
Abdul Rahman Salem Al-Attcqi.
ponfolio is composed or a number of real
Ahmed Buzee Al· Yassin. chairman of ,
est ate investments yielding K0878.196
the Kuwait Finance House. has said that
annuallv.
the capita l of the proposed Interna tional
The ,col est ate ponfolio has been a sue"
Islamic Bank will be S500m. out of which
ccss. and some other financial establish·
S2S0m has so far been subscribed. He.said
mcnts arc thinking of sening up similar
S!"'cialiscd portfolios in real estate. 1 the bank's fo unders will meet soon to dis·
cuss a study completed by a technical com·
industrial . agricultural and other invest•
mince which includes the basic rules and
ment aetivities.
Financial
news, Kuwait
regulations and also aims an; objectives.
The bank may be locateq in Kuwait
because of lack of restriction c'" economic
ac.tivity and movement of captral. allowing
the ban.k more flexibility in nw,ving capital
and providing more investlflCOt oppor·
tunitics. Moreover. Kuwajl docs not
impose taxe-s on revenues of tcuwaiti com·
panics. The founding committee has so far
held four meetings in Jeddal!. Madinah,
Cai10 and Kuwait.
New Islamic
Insurance co
SHARIKAT Takaful . a Malaysian
Islamic insurance company. is to be
launched soon with a paid-up capital of
S4.2m . Bank Islam will hold SI percent o r
the company's equity. 1he rest will l>e held
by the state religious affairs councils . state
Baitulmal. Islamic foundations and other
similar bodies.
Bank Islam. now opening its founh
branch in Malaysia. has been asked to
make preparations for the establishment
of the Islamic insurance company.
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lotldon SWIA IEF
e :Ol·I00-4t11
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LUMP SUM INVESTMENT
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O "--"'
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e
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- - - " " ' uas 1,000,000,000
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