With the rise of political Islam across North Africa in the wake of the Arab Spring uprisings of 2011, Islamic finance is being touted as the solution to decades of unemployment and economic inequality. “We've tried socialism, we've tried capitalism, now we're trying Islam," cried supporters of Mohamed Morsi, when he was elected as Egypt's first Islamist president last June. In Libya and Tunisia, new political movements have pledged to use Islamic principles to right their wayward economies. But some critics, including advocates for the greater use of Islamic finance, believe that a sudden and rigid adherence to Islamic law, known as Shari'a, could dramatically slow down economic recoveries across the region at a time when governments are already struggling to establish stability. With rising unemployment, growing deficits and continued protests, anything less than a quick-turnaround for post-Arab Spring economies could be disastrous, economists warn. “Governments have to prioritise getting economies back in shape before introducing Islamic finance," said Douglas Johnson, chief executive of Codexa, a New York-based investment bank that creates Shari'a-compliant financial products. Egypt, where the Muslim Brotherhood is positioning itself as the most powerful political group in the post-Mubarak era, has become an important test for whether the marriage of Shari'a with a 21st-century country can ameliorate financial and social hardship. The Islamist government has focused on passing new laws to allow the issuance of sukuk, or Islamic bonds, and pledged to centralise zakat, a mandatory charitable giving from Muslims, to better target poverty. While a shift to Islamic finance could bring an economic boost by giving countries access to a huge pool of Islamic investment funds from the oil-producing countries of the Persian Gulf, such as Saudi Arabia, Qatar and the United Arab Emirates, some say Shari'a is out of sync with modern economics and cannot work in today's world without extensive updating. “What passes as Islamic finance is anything but interest-free," said Timur Kuran, a professor of economics and political science at Duke University. Kuran is the author of “The Long Divergence", a book that argues that Arab countries have failed to keep up with the economies of the West because of the rigidity of Islamic law around business and finance. “Shari'a, which is ‘out of date' and has not played an important role for almost two centuries, only serves to add an “Islamic veneer [which] will not improve an economy in any measurable way," Kuran said. Egypt's long-winded negotiations with the International Monetary Fund (IMF) for a $4.8bn loan have shown how an uncompromising adherence to Shari'a can slow down much-needed injections of funds. Clerics and Islamists have dithered over the loan, in part, because the loan comes with a 1.1% interest rate. Shari'a prohibits usury. After an initial reluctance, the Muslim Brotherhood's Freedom and Justice Party recently endorsed the IMF loan and called it Shari'a-friendly. They describe the interest rate as “an administrative fee". But the IMF has distanced itself from any claim that the loan is Shari'a-compliant, saying instead that the terms of the loan are “favourable". Without the funds, Egypt has had to allow the currency to gradually devalue and risk higher inflation, especially for food, provoking a backlash from protesters who believe the government has relegated demands for social justice. The careful deliberations of the Brotherhood and its political arm reflect the group's more pragmatic views of religious doctrine, but also what they see as a tremendous opportunity. About 65% of Egypt's mostly Muslim population do not have bank accounts. By increasing access to Islamic finance, they believe Egypt could gain billions of dollars in new deposits. “Islamic finance is a realistic option especially with demand coming from those who by nature prefer ‘Islamic' solutions regardless of the sector and domain," said Ashraf Serry, one of the Muslim Brotherhood's top economists. Governments across North Africa are also shifting to Islamic finance as a way of reducing deficits. The Tunisian government is trying to diversify and increase its sources of revenues by tapping into Islamic finance and issuing sukuk. Tunisia's newly elected Islamist movement Ennahda, which has led the government after the overthrow of former president Zine El Abidine Ben Ali last year, said the government would ensure that Islamic banks were able to compete on a level playing field with conventional banks and wants Tunisia to become a regional centre for Islamic finance. Critics in Tunisia believe the strategy is more about playing to Ennahda's fervent constituency than wise economic policy. Tunisia's economy has long been a hotspot for foreign investors, especially from Europe, because of its Western-influenced political, economic and legal system. Since protests broke out in 2011, Tunisia's unemployment rate has risen to 18% from 13%, with about 750,000 people out of work. The worsening situation has fuelled arguments that what the country needs is stability, not Shari'a-compliant financial products. “Islamic finance is not really the valuable option here," said Mohamed Araar, a director at the Central Bank of Tunisia. “We need to focus on the main factors hindering development in our economies and remove the label of Islamic finance."
