Islamic Finance, Petrodollar Recycling, and Economic Development: A Report on the Panel Discussion

The Islamic Finance Project organized a panel discussion on November 18, 2009, held at Harvard Law School, entitled “Islamic Finance, Petrodollar Recycling, and Economic Development.” The goal of the discussion was to expand the dialogue on Islamic Finance to include a more critical analysis of its effect on the global economy and how its role may evolve in the future to address modern development issues. To facilitate a holistic discussion, experts from various fields were invited to share their perspectives and cross-comment on the speaker’s report. The ensuing debate featured a lively exchange of ideas between the panelists and the engaged audience. The focal point of the discussion was a paper presented by Mahmoud El-Gamal, Professor and Chair of the Department of Economics at Rice University. El-Gamal’s report was based on the findings of his previous book, Islamic Finance: Law, Economics, and Practice (Cambridge University Press, 2006), as well as research he is currently conducting to develop into a forthcoming book and multiple papers. Drawing on the historical correlation he has observed between petrodollars and credit crises, El-Gamal believes we are currently at a vital crossroad for determining the future of Islamic Finance in the international economy, as rates of population growth are poised to outstrip the capacity for oil. He argued that Islamic Finance, though based on noble objectives in principle, is reduced to legal arbitrage in practice. The approach historically taken towards Islamic Finance, which he terms “the Arab-Pakistani model,” is concerned with morally regulating the operations of individual businessmen rather than promoting economic growth at the macro-level and distributing resources in accordance with Islamic principles of social justice. To avoid the credit crises this approach has twice led us to in the past, El-Gamal emphasized the need for economic cooperation amongst Middle Eastern states. As the region with the most potential to drive global economic growth, he demonstrated that Islamic Finance practiced through the “Malaysian model” could facilitate economic growth by encouraging otherwise divergent economies to coordinate their long-term industrial plans. This regional cooperation would include differentiating national exports in order to integrate, counter-investing funds so that growth is not procyclical, and creating credit unions through the RoscA model of lending similar to that of Grameen Bank.