Are our banks broken?

25 September 2013

So much has been written about the misconduct of banks in recent years; it is genuinely difficult to think of a subject which has occupied more of the media’s time. But why has this happened? Is it, as some would argue, because a few high profile individuals were allowed to take too many risks or is something else, more fundamental at the root of the problem?

Tim Sinclair, Head of Marketing for Islamic Bank of Britain argues that maybe the current system of banking is to blame:

“Our banks are a product of the system that they operate in. Instead of asking whether our banks are good, we should be asking ‘is the system of banking we use good?’

There is certainly good evidence that the existing system is flawed. Much has been debated about the toxic assets that caused the recent banking crisis, the culture of excessive bonuses and the ‘casino banking’ practices of some big banks. Do we not need to examine alternatives, and, diversify the forms of banking that we rely on?

What if, instead, the system were based and backed by real tangible assets? Wouldn’t this create a more stable foundation for the finance sector and eliminate the need for risky speculative practices? What if the bank worked in partnership with its customers, sharing the risk and reward, towards a mutually profitable end? And wouldn’t it be a good idea for banks to be regulated by an independent ethics committee to ensure that its operations, products and structure were genuinely ‘good’, not just for customers but for society as a whole?

Surely this would make for a sustainable system that promoted a stable economic environment and used physical assets, rather than highly leveraged ones, to generate growth. Furthermore, with a risk-sharing approach, prudent decisions would be made by both the customer and the bank.

The Islamic system of finance already follows these principles. I would suggest that there is a lot conventional finance can learn from this model.”

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