by PROF DR KHALIQ AHMADI
Strong views were recently expressed by the Muslim Consumers Association of Malaysia that the Islamic banking and finance industry follows the letter but not the spirit of Islam. “Perbankan Islam tiad ‘roh Islam, zalim” (Utusan, Oct 23, 2015) raises some serious concerns of society.
This is despite the fact that “Islamic banking assets grew at an annual rate of 17.6 per cent between 2009 and 2013, and will grow by an average of 19.7 per cent a year in 2018 (The Economist, Sept 13, 2014); Khalid Howladar of Moody’s rating agency, calls this “a landmark year” for Islamic finance, in that it is moving from “a very esoteric asset class to one that’s more… global”.
Islamic finance (IF) is developing at a remarkable pace. Indeed, Islamic banking, with the development of sukuk and the Islamic capital market, wealth management and Takaful, in Malaysia and elsewhere, is trying to offer alternative financing needs of society as opposed to the prevalent ribawi (interest) based system that is full of zulm (oppression and exploitation).
However, Islamic banking is now being accused of operating in a similar fashion as its conventional counterpart, and being skewed to more profit and business-driven interests than serving the real needs of a just society.
The phenomenal growth in Islamic banking and finance (IBF) has placed Malaysia in a prominent position globally. Since its inception slightly more than three decades ago in 1983 when International Islamic University Malaysia (IIUM) was established, it has contributed thousands of experts, to the number of Islamic financial institutions worldwide, which are now employing them.
The IBF institutions have risen from only a few in the 1980s to over 300 today in more than 75 countries. They are concentrated not only in the Middle East and Southeast Asia, but also in Europe and the Americas.
Total assets generated by these talents in this emerging industry worldwide are estimated to exceed US$2 trillion (RM7.8 trillion), and are growing at an estimated 20 per cent a year. That many Islamic banks and financial institutions today seem to be more concerned about sticking to the word rather than the spirit of Islamic finance, is a question raised by society.
I can explain this issue from several perspectives such as (1) form and substance; and (2) Maqasid of Syariah (the objectives of the Syariah). The whole exercise centres on debt financing rather than equity financing, wealth distribution, and so on.
Form over substance: When the legal form is considered fully valid but the substance is totally different. In the context of Islamic finance, some products and services in Islamic banking are deemed valid from a legal perspective, however, their practices are similar to conventional banking in terms of pricing, interest-based benchmarks, the treatment of late payment, and so on. Maqasid al-Syariah: a selling point of Islamic finance is that profit maximisation should not be the only objective of financial institutions and that offering social value should be a part of the value proposition.
Focusing on rather than equity financing: With risk-free debt based modes of finance used predominantly in Islamic finance and priced with same interest based benchmarks, it seems that the practices of Islamic banking are far from the ideals of Islamic economic principles.
It is supposed to involve risk-sharing mudharaba and musharakah (or equity investment contracts) based on profit-and-loss sharing equity financing, whereas in practice, it largely reflects murabaha (or sale at a disclosed profit) based debt financing, with the bank operating as a riskless principal.
As an academic involved in teaching and research in an area of Islamic finance, being the area one feels the need to conform most to the Syariah, or more importantly the Maqasid al-Syariah, and reflects a genuine concern for society.
As IIUM academics have played a successful role and have been in the forefront in contributing to the talent development pool in the IF industry, manpower needs have developed by leaps and bounds to the extent that our graduates and experts have been instrumental in enhancing the growth of the IBF industry’s progress at around 20 per cent annually.
This has ensured our global leadership in research and publications involving Islamic banking and finance. However, from an academic perspective, Islamic banks have skewed their behaviour towards business interests and profit-maximisation, with an over focus on debt-based products and services such as murabahah, tawarruq, and so on, whereas equity-based financings such as mudharabah and musharakah are the least popular.
The heart of Islamic finance involves a risk-sharing spirit, which does not prevail in the practices of contemporary Islamic banks. It, therefore, warrants unsought criticism on an otherwise riba-free financing system, leading to accusations of back-door riba transactions, where the letter, but not the spirit of Islam exists.
If Islamic banks rely on risk-free debt-based contracts, the general public will become increasingly disenchanted with Islamic finance. Therefore, Islamic banks should shy away from debt-based financing, and move towards more equity-based products and services. What are the main challenges of a sustainable system of IBF one can expect when managing Islamic funds that should be addressed by industry?
According to a study by Thomson Reuters, Islamic funds are a US$60 billion industry forecast to grow to at least US$77 billion by 2019, while the latent demand for Islamic funds is projected to grow to US$185 billion.
To achieve this goal, Islamic asset managers need to compete with conventional institutions by providing both attractive yields and a superior level of service quality and product customisation.
The lack of available expertise, compliance with new regulations, investor’s confidence and market conditions are key challenges limiting investment scale and growth for Islamic asset managers.
Special Project Teams were set up under the guidance of Ministry of Higher Education to entrust IIUM experts specifically for Talent Development and Curriculum Development. The Talent Development Team was assigned the task of developing a talent-pool by Training-of-Trainers module development involving relevant expertise on related Islamic Finance Education domains.
Also the Curriculum Development Team was made responsible for developing a comprehensive curriculum in Islamic Finance ranging from a baccalaureate degree up to doctorate levels. International Islamic University Malaysia’s role in this robust financial industry’s talent development is without doubt occupying a central position.
However, with the financial industry led by the central bank on the one hand, and the academia (educationists) on the other, has resulted in no demarcated line or limitations. Unfortunately, we now see that the line between the two is becoming blurred and, to say the least, most confusing, because banking practitioners are taking on educational matters and peripheries into their fold.
The basic question is, of course, should the industry be allowed or disallowed to teach or offer degrees and diplomas? Generally, the answer is no, because they are not degree-awarding authorities, therefore the universities and colleges are the ones that must execute this responsibility by nurturing neutral, but qualified scholars to address the imbalance.
However, what’s stopping banks including central banks, that are supposed to be financial regulators, from becoming a competitor, in order to endorse banking practices that reflect purely business interests in their favour, and form their own universities and colleges?
This is where conflicts of interest occur, that may actually impede neutral education. Will the industry and the academia come to a rationale here? It remains to be seen. However, if the Ministry of Higher Education is wise enough, which I believe they are, perhaps a sort of restraint of trade policy ought to be developed.
Meanwhile, in our view, with regard to conventional institutions setting up Islamic windows elsewhere in the world is another form of conventional camouflage. Specifically, the necessity of a genuine firewall existing between Islamic and conventional funds needs to be dealt with.
The funds of conventional financial institutions mainly come from interest-based financing. In other words, the fund is generated based on the borrowing and lending concept. Then, do you want to mobilise these funds into Islamic banks? I think we have to consider this important point when establishing Islamic windows.
It is also generally believed that their money, via the Islamic windows of conventional banks, could be used to finance activities such as usury, speculating on derivatives, and financing activities that are prohibited in Islam in a collective way, because the division between the conventional bank and the Islamic window is in reality, only an illusion.
Therefore, in my opinion, there should only be exclusive Islamic Banks, and no “Islamic Windows” within conventional banks. The idea is not to complement conventional ribawi based financing, but rather providing an alternative to the conventional banking system.
Other urgent areas, in our opinion, which we need to focus on involves achieving sustainable development by adopting Islamic financing as a tool. The Islamic finance paradigm has always included values such as social wellbeing. The Maqasid al-Syariah is central to any economic decision-making.
It should emphasise on equity along with efficiency in the allocation of resources and distribution of income, such as zakat. Therefore, it is important that Islamic banks not only try to maximise their own welfare, but also try to address the different levels of society by means of proper wealth distribution tools.
Academics and practitioners should jointly focus our energies on important areas, that would take Islamic banking and finance to the next level, in competition against the conventional sector, that needless to say, can invest in unethical yet lucrative investments, and this needs to done, by evaluating the impact and outcome on society and the economy.
This is the major value proposition. The Islamic finance system is value driven wherein an unethical investment is very clearly unjust. However, we cannot deny that Islam recognises the profit maximisation, but not at the cost of human suffering. However, in order to maximise and compete with conventional finance, we cannot ignore the ethical epistemology of Islamic finance.
The existence of Islamic ethical values plays a significant role in guiding permissible business activities conducted in accordance with Syariah compliant principles. The importance of independent Syariah supervision will significantly influence the development of the Islamic capital market.
Therefore, any kind of financial assets must be screened using Islamic ethical criteria involving the Syariah Advisory Council of the Securities Commission Malaysia and Dow Jones criteria for portfolio investment in Muslim countries, which can contribute to their economic development, while bringing potentially attractive returns to investors themselves.
Prof Dr Khaliq Ahmad is the founding president of the International Council of Islamic Finance Educators and dean, Institute of Islamic Banking and Finance, International Islamic University Malaysia, Gombak