He is right that timing has played a big part in the success of Islamic finance, but I would argue that rather than being a 'victim' of timing, Islamic finance benefited from having its growth period recently. Had Islamic finance developed earlier, it would have had the opportunity to make similar foolish bets as the conventional financial industry. It would have also developed ways to get exposure to the real estate boom in the US and parts of Europe and given the penchant before the crisis to develop ever more complicated structures (to be the 'first' this or that), there might have even been Islamic CDOs (although probably not Islamic synthetic CDOs).
And even without the use of CDOs there were plenty of examples of Islamic investment banks that blew themselves up using leveraged bets on real estate (e.g. Gulf Investment House or Arcapita, not to mention many smaller Kuwaiti Islamic investment banks). And Shouler does give room to this argument by saying: "In the Gulf, while the tenets of Islamic finance helped spare its institutions from certain exposures, they were still, like others, especially vulnerable to real estate."
Where his argument gets things right is on the current prospects for Islamic finance and sukuk refinancings in particular quoting Dr. Massoud Janekeh, head of Capital Markets at BLME: " 'Markets expected a wall of maturities in 2012,' he said, but the refinancing that has actually occurred is 'a huge endorsement' of confidence in the sector and region."
I would not go so far as to say it has been a 'huge endorsement' because of companies like Arcapita which sits in bankruptcy and Dana Gas, which still faces a tricky maturity date coming up for its $1 billion sukuk.
Where there may be some room for progress in the future is mentioned in a passage where Shouler quotes Faisal Aqil, Deputy CEO, Consumer Wealth Management, Emirates Islamic Bank and Dubai Bank, "Partnerships between banks and their customers that include the essential concept of profit/loss sharing have been “one of the main factors that helped Islamic banks withstand the widespread effects” of the crisis, he says, so that Islamic finance is perceived increasingly as a “credible substitute” for conventional banking business."
There are possibilities in the future to create debt alternatives that have partnership features and shared profit connected to shared risk which I described in my latest newsletter. However, looking backwards, it is factually incorrect to say that profit and loss sharing have impacted Islamic banks' ability to survive the crisis because for the most part, they do not use profit-and-loss sharing products (murabaha and ijara, which replicate conventional debt structures in their economic outcome are much, much more common).
Shouler concludes with something that I wish would be true, but is unfortunately not the world we live in within Islamic finance:
Ultimately, Janekeh draws a parallel between the lessons of the crisis generally and the specific characteristics that Islamic finance brings. Though it is still a niche sector, IF “will contribute with its simplified structures and ethical dimension” to the aftermath, he argues. “If you look at the global initiatives, you will see many of these features.”There are many things that I can say about Islamic finance that give hope for its future as an alternative for conventional finance, but 'simplicity' is not one of them. There are places where there could be more simplicity (e.g. post-AAOIFI ruling mudaraba sukuk) where assets with stable distributions could be pooled to create a product that offered an alternative to conventional bonds. However, this is not the direction the industry is going. Instead the product mix (and sukuk in particular) are becoming increasingly complex instruments, although thankfully not as complex as some of the pre-financial crisis issuance like the Nakheel Pre-IPO convertible sukuk.
The Islamic finance industry should aspire to greater simplicity and find areas like SME financing or agriculture financing where it can make a positive impact, or trade finance where it can offer an alternative to conventional finance that makes use of the classical contracts more in line with their classical uses (rather than using them as building blocks in complex structured finance transactions). Trying to rewrite the history of the financial crisis and the way that Islamic banks operate is the wrong way to promote Islamic finance as a viable alternative to conventional finance. Fortunately, there are better ways that Islamic finance can contribute to the market especially now that public opinion of conventional financial services are near their low point. That should be the focus.