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Redefining Islamic finance


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OPTIMISTS will hail the fact that finally, after a mushroom growth in Pakistan of Islamic and other banks offering Sharia-compliant services and products, a debate has finally been generated about the viability and genuine adherence to religious teachings of these products and services.

An indicator of how this very important debate has begun to enter the mainstream was published in this newspaper some time ago in which the legitimacy of the interest-free financial instruments proffered by these banks was questioned. It was argued that an economic transaction would be considered riba- (interest) free if it avoids the multiplier mode of money-making, profit-taking and capital creation.

But the questioning of claims made by financial institutions, Islamic or otherwise, which purport to offer interest-free banking and products apparently styled according to the Sharia is not a phenomenon confined to Pakistan. With the Islamic finance sector termed as the fastest-growing segment of the global finance industry, religious and financial experts, in tandem, are making more and more queries about the authenticity, according to religious scriptures, of the financial services on display.

A widely held view is that since the Sharia dictates pure Islamic values and provides direction to religious goals, perhaps if Islamic banks were to adhere to these basics they could end up playing a much bigger role in the new frontier of banking and finance.

The generic term here becomes ‘contextual’ banking but, in reality, the bigger picture appears to provide for a healthy future for Islamic finance, if, of course, its basic principles are followed, in the key markets of the future: Africa, Asia and the Far East.

Some experts are of the opinion, though, that the issue plaguing Islamic finance today is not that the industry is not realising its ideal (tayyib) but the concern that even the halal is being diluted. They point out that, just as in conventional finance, Islamic finance also sees many cases where the transactions claim to be legitimate but may be considered unethical. The key here would be the creation of a business model that is truly Sharia-based — not merely tagged as ‘Sharia-compliant’.

But the problem may not rest entirely with financial institutions. A widely held belief questions why individual governments do not endorse holistic frameworks designed to help the Islamic finance industry expand in a sustainable manner. Some blame is also apportioned to politicians and policymakers with critics questioning if they even understand the true meaning of Islamic finance.

Even within the world of Islamic finance, many inconsistencies in the legal, accounting, regulatory and fiscal frameworks have been pointed out by experts, who point to a heavy industry reliance on exemptions which they term as being ad hoc.

Additionally, most Islamic banks appear to function in a tax-free environment and regulators have sometimes been thought to be influenced by political agendas, or by the presence of dignitaries acting as directors.

In market-driven countries, say experts, Sharia governance can be an issue and that across the board there is a need for some regulatory oversight for Sharia governance. Unfortunately, most Sharia boards appear to only have a role limited to certifying certain products; they still do not have industry-wide standards. This would appear to be particularly true in Pakistan where the line between so-called Sharia-compliant banking and products and conventional financial options has become increasingly blurry.

Islamic finance experts across the world ask a very relevant question concerning this state of affairs. Does the Islamic finance mission need to be restated? In order to achieve this a completely new strategy would have to be devised. A more transparent Sharia-governance structure could lead to a more forward-looking corporate approach for Islamic financial institutions. And this could, in turn, help this sector to clearly define corporate targets for social responsibility. There could be a concerted effort to ensure that these targets are completely aligned with Islamic principles and that the integrity of these principles is not compromised. Unfortunately, as appears to be evident from the current state of affairs, most Islamic financial institutions seem bent upon trying to justify their actions through what can only be termed sketchy Sharia guidelines tailored to suit their needs.

No thought is given to the important concepts of personal social responsibility or corporate social responsibility — both key and indispensable components of Islamic teachings. And no planning seems to have been put in place to attempt to overhaul the state of affairs.

Perhaps if the Islamic finance sector worldwide were to evolve a definite vision that truly focuses on the socio-religious implications of its financial instruments, it would help to create definitive change not just in the Muslim world but far beyond.

After all, this sector has no shortage of funds. A recent report by the Deloitte Middle East Islamic Knowledge Centre states that Saudi Arabia, one of the main contributors to the global Islamic finance industry, has an estimated $94bn in Islamic finance assets. According to the report, these Saudi assets represent 26 per cent of total GCC Islamic finance assets and 8.2 per cent of global Islamic finance assets.

So there is no question about the lack of finances. But in order to bring about the kind of lasting change that the Islamic finance sector aspires towards, these statistics will need to be backed up by genuine dedication and the will to design, create and implement this revolution.

The writer is the CEO of the World Congress of Muslim Philanthropists.

The views expressed by this writer and commenters below do not necessarily reflect the views and policies of the Dawn Media Group.

Comments (7) Closed

Syed Aug 24, 2012 11:33pm
How do we popularize Islamic finance? How do tax rental income? Or, do we tax the vlue of the assest that generates rental income? Islamic finance has lots of potential but the mainstream needs to be educated about it. Also, Islamic banks need to invest in both Muslim and non-Muslim countries where jobs are needed.
Socrates Aug 24, 2012 10:46pm
In the World of PURE Islamic Finance there should be no Currency because every form of currency is in fact a Promissory Note, a debt instrument.
MONAYEM CHOWDHURY Aug 24, 2012 10:20am
Generalities should be backed with some concrete facts. What financial products are blurry and why? We may avoid interest-based transactions, but can we do away with the concept of interest?
Sultan khan Aug 24, 2012 07:18am
Unable to understand the difference between ' sharia-based' and 'sharia compliant'. The writer ought to have clarified his point of view by giving concrete examples.
RAO Aug 24, 2012 01:21pm
The writer does not explain how all this "sharia based activity " really works. Is there a magical principle that makes it so unique or are there hidden costs? Can you get something out of nothing? Does it force a person to be a Muslim or can it be extended to all others too? The author's writing is so wishy-washy!
A. Salma Aug 24, 2012 04:49pm
Can get financing for my 'water' car through an Islamic sharia finance firm?
Adnan Aug 24, 2012 04:48pm
I guess its going to take some time to have completely sharia based system but until then we should go ahead and support. In West some people doubt its legitimacy and therefore end up doing haram...which is undoubtedly haram. The way we trust doctors, engineers and other professionals in their respective fields we should also respect people of knowledge when it comes to religion. Most of these products are designed after strict scrutiny and therefore declared Halal.