Islamic finance is experiencing a resurgence in the Arab world as a result of the economic recession, according to Alex MacGillivray, senior partner at AccountAbility, one of the co-authors of a new report entitled Responsible Competitiveness in the Arab World 2009.
There’s a new buzz in the Arab world about Islamic finance, which tended to have a reputation of being “nice” yet offering “lower returns”, he says.
Today, argues MacGillivray, Islamic finance is being viewed as a safer and better bet for investors than the “Western casino style” of financial investment.
“It’s not just steady - it’s outperformed a lot of Western banks and therefore the sort of idea that Arabic versions of financial management were kind of dozy but required for good Muslims - that preconceived notion has been disproved. So the essays in the report from financial houses Abraaj and National Commercial Bank are quite ‘gung ho’ about the role Islamic finance can play, and about the role the Arabic version of corporate governance can play.”
“So where many Western investors would have said a year ago, ‘well governance is a bit lacking and they are a bit risk adverse compared to Western finance’ - you won’t hear that now.”
“And put that together with Saudi Arabia joining the G20 as an active player in global leadership and you see quite a different image coming out of the Arab world. They want to be part of the solution.”
The report contains analysis of Arab issues and opportunities, as well as essays on pressing challenges from seven sustainability leaders.
AccountAbility, a non-profit global think-tank, argues that evidence from more than 100 countries indicates that successful economies are those in which competitiveness, sustainability and business responsibility go hand in hand.
The report is published every two years, and this time, it has expanded its coverage to 15 Arab countries. It looks at responsible leadership within the business sector, at what policy makers within government are doing to create a climate that helps businesses be responsible and also looks at what civil society is doing to put pressure on government and business to be responsible.
It says its key finding is that responsible competitiveness in the Arab World shows a strong positive correlation with all the main measures of national competitiveness, such as the World Economic Forum’s Growth Competitiveness Index and the World Bank/International Finance Corporation’s ‘Ease of Doing Business’ index.
The findings also indicate that, in general, globally and for the region, specifically, countries with a responsible business climate also tend to have a competitive advantage.
The report singles out seven key responsible competitiveness drivers in the Arab World. These are responsible business climate, environmental policy, labour policy, governance, product and service innovation, talent and engaged stakeholders.
Top of the Arab Responsible Competitiveness Index is the United Arab Emirates, followed by Qatar, Kuwait, Lebanon, Bahrain, Oman, Jordan, Egypt, Tunisia, Saudi Arabia, Morocco, Algeria, Syria, Yemen and Mauritania.
According to AccountAbility, in terms of policy drivers, the UAE, Saudi Arabia and Bahrain are taking a lead in reforming policies and enforcing regulation.
Kuwait, Lebanon and Egypt are examples of countries engaging with international standards and promoting good corporate governance, the report says.
Qatar, Morocco and Jordan, according to the researchers, are enhancing their work-readiness skills, improving social infrastructure, providing microfinance and engaging the media.
“Part of the purpose of this report is to try to show that there is a menu for people to draw from all across the region - Mauritania has some quite interesting initiatives of bringing women into politics,” MacGillivray explains. “Although it is a very poor country and off to the extreme west of the Arab world, people could learn from that.”
The Arab world and low carbon solutions
MacGillivray concedes, however, there are topics that parts of the Arab world are not so enthusiastic about - such as low carbon solutions. But he says he is pleased there is nevertheless some discussion about the subject.
“What you find is that, where some of the major oil producers may not see anything in it for them at all, you also have countries like Egypt which are going to be very vulnerable to climate change - they have large amounts of land and populations that are going to be displaced by sea level rise - and don’t have energy security.”
“So you actually have a group of countries in the Arab world who are very interested in renewable energy and in dealing early with climate change to reduce the impacts of sea level rise. So there is a discussion that can happen there.”
Abu Dhabi has embarked on building the world’s first carbon-neutral, zero-waste city, called Masdar. It will be powered primarily by solar energy and house 50,000 people. There will be no cars, and residents will commute via ‘travel pods’ that run on magnetic tracks. It is a good example, states MacGillivray, of an Arab country looking ahead - trying to plan for 50 years in the future.
The masterplan for Masdar has been drawn up by the British architectural firm Foster + Partners and, according to MacGillivray, while there have been attempts in some parts of the world to build green cities, you would really struggle to find one in an OECD country.
The Abu Dhabi initiative has caused quite a stir in the region. MacGillivray points out that, due to competitiveness and peer pressure in the Arab world, when there is a good initiative, it does have a big impact.
Nevertheless, for the oil-producing countries, he maintains that an important question remains whether they can envisage the pathway to a future low-carbon economy, where they are not left sitting on huge reserves of oil they cannot sell in 30 years’ time.
“How would you engage the oil producing countries in climate change negotiations in Copenhagen? That’s a big issue. There’s a tendency among climate negotiators to think it’s an unwinnable proposition.”
And yet, he says, when you look at an economy such as Saudi Arabia’s it actually has a very significant non-oil sector which includes a big financial centre and a large food processing industry.
The role of civil society
Civil society is regarded as a really important driver of responsible competitiveness and this is now acknowledged in the Arab world, according to MacGillivray.
He says research by AccountAbility and others indicate that countries with strong civil societies are able to get the best out of business and also have a good policy environment.
“You get countries where there is more heat than light in relations between NGOs and business - in some countries in Europe there isn’t an effective partnership between NGOs, business and government. You get a kind of stand-off position - particularly in Brussels, where things are quite adversarial and don’t necessarily lead to much innovation.”
“But, in general, the evidence is that the stronger civil society, the more pressure goes on business and the more they are forced to innovate. And the more vibrant civil society is, the more business is able to listen to what consumers really want.
MacGillivray says that even in countries which do not have much in the way of civil society, foundations have been set up by ruling families or philanthropists that act a bit like non-governmental organisations.
Talent, gender, education and leadership
The Arab World wants to be innovative and is looking to develop education in the region, asserts MacGillivray, but it’s not going to be easy “to really scale this up.”
“It’s great to see INSEAD in the region. There are a number of other management schools getting engaged - MIT has a partnership with the Masdar initiative in Abu Dhabi and Thunderbird is interested in doing stuff.”
“There is real interest there and Arab management students get a lot from studying internationally and they would also get a lot from having more home-grown offerings as well.”
For example, Jordan’s Queen Rania is engaged in a drive related to education, focusing on children in primary schools and then secondary, through to tertiary education, and management training.
The region already offers a lot of examples of leadership, MacGillivray says. There are also good case studies of Arab entrepreneurship and initiatives.
Gender equality is another issue - or as MacGillivray puts it - a “missed opportunity” in the Arab world which has all sorts of knock-on effects throughout society.
“In most countries this is a big problem, actually. You can’t sit in London and patronise the Arab world about poor gender equality, given how far from being equal it is here (in the UK),” he says.
But he points out, progress is underway in various countries and, he says, there are not many examples of where there is no progress are all.
Peace in the Middle East?
But the shadow hanging over the whole region is, of course, the faltering peace process in the Middle East.
He says ruefully: “You need peace to embed any of this responsible competitiveness. If there was a conflict in 12 months’ time, then a lot of these gains would go. And this would not, again, become a central agenda very quickly. So that’s the camel on the table - that’s the big one.”
The report, Responsible Competitiveness in the Arab World 2009, was led by Alex MacGillivray and Simon Zadek at AccountAbility and Darin Rovere at Sustainability Excellent Arabia.The foreword to the report is by Queen Rania Al Abdullah of Jordan.
The report was supported by the Arab Sustainability Leadership Group and sponsors included Abraaj, Aramex, JorAmCo and HBS.