Conventional, Islamic Finance Can Co-exist: Economists

Conventional and Islamic finance may co-operate or even compete to produce the best outcome for common projects such as the provision of cheap banking for the world's poor or for investment in environmental undertakings, say two eminent economists.

Ajit Singh, Emeritus Professor of Economics at the University of Cambridge, UK and Tan Sri Andrew Sheng, president of Hong Kong-based Fung Corporation, said at a public lecture here today that co-operation between these two systems is not only feasible but also desirable.

The lecture, themed "Continuing a Legacy in Monetary and Financial Economics", was organised by The Tun Ismail Ali Chair, Universiti Malaya here.

In their paper on "Islamic Finance: Conceptual and Analytical Issues From the Perspective of Conventional Economics", Singh and Sheng, the fifth and third holders of the chair respectively, said there are areas in widening access to finance which may be more desirable under the Islamic system because of its ethical basis of funding.

However, they argued, conventional finance, because of its use of debt, is likely to have a faster, but more unstable, growth than Islamic finance.

Each system has its strengths and weaknesses and one can easily co-exist with the other to benefit mankind, they said.

They also noted that it is possible to run an efficient economic system of the Islamic kind, which has no interest payments but allows profits on capital and enterprise.

Such a system, based totally on equity finance, is completely viable and may in fact be more stable than a part-debt financed by the conventional system, they added.

Conventional economics legitimately uses interest rates -- zero, negative and positive rates -- for its analysis of relevant economic conditions, but the authors said there is little evidence to show that financial liberalisation necessarily leads to high interest rates which in turn generate high savings, investments and economic growth.

But the highly successful East Asian countries employed low, even negative rates rather than high interest rates during their industrialisation, they said.