Islamic Finance

As our debate draws to an end, the differences between our protagonists remains large, however the voting remains very close. Much will therefore depend on this last round of closing statements.

Before I summarize what has already been said by our debaters in the rebuttal stage, let me highlight Dr. Gerhard Böwering’s very thoughtful guest contribution. He paid much attention to the question of ‘ribā’ in Islamic Finance, particularly, the scholarly analysis of ribā which has gotten somewhat lost today in the more recent approach to the topic and lucrative benefits have been offered to Shari’a advisers hired by banking institutions. Highlighting the challenges faced by Islamic Finance today, Dr. Böwering said, “Three difficulties remain standing, however. First, in the Qur’an ribā is not equivalent with “interest”. Second, the legal tradition of the shari’a differs from contemporary adjustments of its nomenclature. Third, economy and finance have their own built-in laws and rules that religious terminology cannot erase.”

Mr. Muath Mubarak in his rebuttal remarks made a couple of arguments for the motion, starting with highlighting the downsides of the conventional financial system. He did so by giving multiple quotes and examples of renowned personalities in the field. Mr. Mubarak also referred to the sayings of Bible and Quran by quoting verses from both the books about how both of them prohibit ‘interest’ in financial dealings. Touching upon the case of HSBC cutting its Amanah arm two years ago in all the countries except Saudi Arabia and Malaysia, he said, “Meanwhile we have to note that these two countries alone accounted for more than 25% of the total global Islamic banking & finance assets as per the Global Islamic Finance Forum (GIFF -2012) report. So we cannot take HSBC or any other individual bank’s decision as the challenge for the entire industry.” Ending his statement, Mr. Mubarak supported his arguments by referring to the global financial crisis, when he concluded by saying, “Survival and strong surveillance during the global financial crisis in 2009 itself is an endorsement to say that Islamic finance is having the unique features to drive the countries’ economies with utmost richness of social, moral and ethical principles by bringing the balance in wealth distribution to have an efficient tax system.”

Reminding us again about the motion, Prof. Habib Ahmed emphasizes that the debate is not about the ideal visions of Islamic Finance, rather it is about its practice. Moving forward with this view, he explains “There are many instances that show that Islamic financial sector is profit-oriented and has failed to contribute positively to ethical and social objectives (such as environmental, labour relations, issues). Its ‘Islamic’ nature is confined in narrow terms to legalistic Shari’ah compliance only.” Getting back to the impressive performance of Islamic Financial sector during the global financial crisis, Prof. Ahmed believes, “…it is true that Islamic finance fared relatively better than its conventional counterpart during the crisis. However, some argue that this was because Islamic financial sector was small and was not exposed to some of the toxic assets that harmed the conventional financial institutions. They argue that had the crisis occurred 10 years after when it happened, Islamic finance would be in the same situation because the industry was busy creating the replications of the same toxic products that caused the crisis.” Concluding his statement, Prof. Ahmed worries that by replicating the current financial system, Islamic Finance is moving away from its ideals. Thus, “To be able to contribute positively to the economy as envisaged in the ideal model, there is a need to re-orient the direction of the industry from its current practice.”

Prof. Ahmed’s view was also supported by Abu Tahir Haqeeqi, who weighed in heavily by his thoughtful comment. He believes that it is premature to say that Islamic Finance is ready to drive a State’s economic system and while standing by his opinion, Mr. Haqeeqi also asks many related questions to Mr. Muath Mubarak who is defending the motion.

On the other hand, agreeing with Mr. Mubarak’s views, Dr. Shahzadi Pakeeza believes that Islamic Finance has been a substantial global force. Talking about the Shari’a laws derived from Quran, Dr. Pakeeza says, “Sharia law, derived from the Qur'an and Sunnah, has equal applications on financial part too. Notably, Islamic finance has a wider perspective to promote sustainability as a key element of economic life.” Similar views were also shared by Irfana Barveen when she made her arguments for the motion and also Hussain Fahmy who believes all the man-made conventional system is falling apart, hence Islamic Finance will be the ultimate choice.

As the debate enters its closing stage, the voting remains very close with only 2% to separate the two sides. Let’s see what our debaters have to say about their counterpart’s arguments as well as participants’ comments as they try to persuade the audience one last time.

Let me remind ourselves as when Quran was revealed, there were only few people those who accepted it but the Quran was addressing to the entire human kind as an ultimate guidance. The concept of globalisation was first revealed by Quran by sending the messages to all. This was portrayed by many as idealism but as we all know it has been accepted and practiced as the way of life until now. When the Islam was introduced, it was considered as one of the ideal vision but it gave practical solution to every cry of the world by bringing the peace to the minds and world. I believe and I can see the progress of Islamic finance in a similar way, creating the legacy by the ideal vision by giving the practical solutions in many corners around the globe. According to Wikipedia, Thailand's most prevalent religion is Theravada Buddhism (95%), which is an integral part of Thai identity and culture but we do have the Islamic Bank of Thailand which is backed by the government. Why a country with no majority of Muslims should start Islamic Finance?

There is a need for some pre-requisites to drive the Islamic economy in every country and it should be strongly supported by the necessary political, legal, regulatory and other mandates to make the change in citizen’s life without debt traps. This will enable to accept and embrace fully the Islamic economy but some other countries are in the process of making the changes to practice in a constructive manner suiting for their country. But these are not the measurements to say whether Islamic Finance can drive the State’s economy or not. It should be considered based on the richness of Islamic Finance policies and principles and the practical solution what it brings into the economy.

According to Professor Maimul Ahsan Khan in his book “Islamic Financing and Banking: from traditional views to Arab spring”, he says that, it is unbelievable, 1000 year ago Afghan king was the richest person in the world. 700 years ago, a Muslim King from the greater region of Mali was the wealthiest man on the planet. 500 years ago, Muslim rulers in India, Iran and the Ottoman Empire used to view the Europeans as barbaric, uncultured and disorganized. The scenario has changed dramatically during the European colonial period.

In the early centuries of Islamic civilization, Muslim merchants and traders were dominating the international trade by their honesty, integrity and creativity in trade. So Islam was embraced all over the world due to the Muslim Arab traders’ trading system and Muslims history in many countries claims that due to the pureness of the business deals of the Muslim Arab traders were winning the hearts of the fellow countrymen up to the extent of where they requested from Muslim Arab traders to marry their local women and stay in their nation. During the Caliph period, there was no one to accept the Zakat (Mandatory charity) as all were looking for someone else to give away their Zakat. Seven years of financial crisis were managed without any big issues. The introduction of child-benefit policies and the centralized treasury system to look after the affairs of the country fellow men. As we all know, these are few of the historical evidence where the concept of Islamic business and finance have been widely practiced.

Since the inception of Islamic Finance, it has gone through many challenges as any other system to fit into the local climates of the countries whilst having the universal harmonization in practices. The industry still under the spotlight of certain important challenges but it doesn’t mean that it cannot run the state’s economy. There are no other better models in the world to run the economic system including the developed nations struggling to find out the sustainable solution for their economic issues and crisis. We have been blessed to have many PhDs, pundit and experts in the subject matter of economics and finance but none could stop the calamity of the global finance crisis at least once in the past. Looking at the practices of very few institutions those who are not strictly following the beautiful teachings of Islam in their financial dealings we cannot say that the teachings of Islam are an ideal vision or utopia concept. We must take the authentic teachings and do the acid test with the market practices those who are really practicing as per Islamic principles.

As I made a clear statements previously regarding the global financial crisis and the survival of itself is an endorsement for the Islamic Finance. The point to ponder is all about during the last three decades many financial crisis has passed by and Islamic Finance wasn’t affected at all whether it is small in size or not. The global financial crisis hit every business irrespective the size, nature and whether you have got toxic assets or not. The US was under the fire of global financial crisis but job cuts were happening all over the world. During the global financial crisis many Islamic banks, Sukuk and Islamic funds have given birth. However, artificial asset creation is not a job mandate of the Islamic banks even though it is the main day today activity of the conventional economic and financial system.

Islamic finance sector is not fully fledged charitable industry rather it is aiming to make profit in a justice, social, ethical and moral way of conducting business with profit and loss sharing understanding. But Islamic finance has got an integral part as charity which includes mandatory, optional and community based charity programs which Islamic Finance industry will be doing for the sake of the Creator and not to create the brand perception, awareness and to win the Corporate Social responsible (CSR) awards in this world. The Prince of Wales inquired about how Islamic Finance can help to solve the issues of the countries those are affected vulnerably due to the environmental issues from Prime Minister Datuk Seri Najib Razak in their half-hour meeting in the capital of Sri Lanka in conjunction with the Commonwealth Heads of Government (CHOGM) Meeting 2013 (www.bernamanews.com). There is no doubt as how much Islamic Finance is protecting, preserving and encouraging to pass the treasure of natural wealth to the other generations. These environmental related matters are evidenced by the Quran Ayats & Hadith which talks about the air, lands, mountains, sea lives, and insects to planting trees.

Islamic economic system is a not an “Islamic version” of conventional economic system as it differs from fundamental principles and indeed the practices of it is an evidence for it. There is no need for Halalisation for Haram products under any circumstances. There are more serious re-directions and rethinking of the leading way to drive the state’s economy more quicker than expected since it paves the way to have more resilient system with fool-proof unlike the current economic model which are cruel, unjust, unholy and not worthy in following any more.
“1% of the American at the top have already grabbed about 40% of the American wealth” said by Joseph E. Stiglitz – a famous winner of the Nobel prize in Economics & professor of economy argues in his latest book ‘Freefall: America, Free markets and the sinking of world economy’. In another quote he says “Top 1% has the best houses, the best educations, the best doctors and the best life styles but there is one thing that money doesn’t seem bought an understanding that their fate is bound up with the other 99% live throughout the history, this is something that the top 1% eventually do learn. Too late”. There are many other serious problems within the developed nation but they are scared to talk openly due to the market shocks and the individual benefits of the current regime, structures and systems.

Creating the credit bubbles, printing the money and trading in debt are few of the most genius financial practices of the conventional market. Especially trading in debt is a major phenomenon in the world economy today such as securitization, factoring, hedging and many other modern instruments. Furthermore, profiteering, short selling, black market, money laundering, terrorism financing, investment in prohibited business and many other business modes which are against the humanity but all of these nature of the transactions are strongly opposed and strictly prohibited in Islamic Finance.

Finally, I strongly recommend and believe that Islamic Finance is ready to drive the State’s economic system. The need of the hour is to implementing it whole heartedly and addressing the practical issues by taking the guidance from Islam. Because Islamic teachings are divine in spirit and has the power to transform any unjust society or state into a humane community with high standard of living for every walks of life. As we are experiencing the extreme individualism, super ultra consumerism, indirect powerful influence in all directions, modern slavery by the developed nations and unjust treatment by the current economic models are demanding for a more just, viable, sustainable and equitable economic model to drive the states which I believe the Islamic Finance is the only solution as it is the ultimate and divine financial model from Islam.

The pioneers of Islamic economics envisioned that an economy based on Islamic values and principles would strive to fulfill the goals of Shari’ah (maqasid al-Shari’ah) and result in achieving a just and vibrant economy. As the overall aim of Islamic law is to promote welfare or benefit (maslahah) of mankind and prevent harm (mafsadah), they argued that realization of the maqasid would produce a moral economy with a financial system that would serve the needs of not only Muslims but humanity at large. The implication of this vision was that other than fulfilling the legal requirements, an Islamic financial system would be ethical and cater to the social needs of a society. Based on this worldview, the value proposition for the Islamic financial system was that it would entail risk-sharing features and serve all sections of the population thereby bringing about equity, stability and growth.

While it is known that the conventional financial sector has its weaknesses and problems, it is not enough to identify these and claim that Islamic finance will resolve these automatically. One may have the same problems of conventional financial in Islamic finance if it is not governed by an ethical and social compass. For example, Islamic financial institutions can (and do) charge oppressively high rates of returns from the clients using legitimate contracts as the focus of their operations is on profits only.

I agree with Dr. Bowering about the tensions that arise among the contemporary economics/finance principles and Shari’ah. This tension is partly because the built-in laws in contemporary finance are derived from Western economic ethos and are based on an interest based system. This is one of the key problems that Islamic finance faces—it is trying to fit in Shari’ah based finance into one that is based on interest—hence the tension. The process of fitting into the Western financial system is often being done by compromising its own core values. The right way to approach this is to come up with a system that reflects the values and principles of Islamic finance, which is not easy and would require a lot of innovations and investments at different levels. As regards to Dr. Bowering’s view on riba and interest, I think that while there is a minority of scholars who consider these to be different, the majority view is that they are the same. Therefore, there is a need to go back to the foundational issues to come up with an Islamic financial system that reflects the Islamic values and principles.   

Being a part of the moral economy and following the Shari’ah principles, the nature of responsibilities for Islamic firms including Islamic financial institutions is expected to be different. While pursuing the economic goals, Islamic firms have to conform not only to the national laws and statutes, but also to the Islamic law of contracts at the transactions level. In addition, being ethical is required of an Islamic firm, not just expected. Furthermore, it is highly recommendable that the Islamic financial sector performs the social role by serving all sections of the society, including the poor. While there is no data available of the clientele served by the Islamic finance industry, there is a general belief that Islamic finance mostly serves the high net-worth clients and the financial needs of the relatively poor and micro and small entrepreneurs are not met.  

A contemporary issue relates to social responsibility and wider ethical and social concerns. These would include, among others, questions related to environment, human rights, labour rights, etc. To uphold the ethical and social values and produce a positive impact on the economy and society, these issues cannot be ignored by the industry. This is apparent in Islamic mutual funds which use negative screening to weed out sin companies and those not fulfilling certain financial ratios. Unlike many conventional ethical funds, Islamic funds have yet to add positive screening and invest in companies that actively contribute to social and ethical practices.

Moving towards a Shari’ah based Islamic financial system would require resolving problems and instituting reforms at different levels. First, an enabling institutional (legal and regulatory) environment under which Islamic banks operate is necessary. Second, there is a need to move beyond commercial bank format to other alternative organizational formats to achieve legal and social Shari’ah requirements adequately. It is important to recognise that the responsibility of attaining the broader goals of Shari’ah does not lie on Islamic banks only, but on the financial sector as a whole. Ideally, the sector would have a variety of organizations and markets that would provide diverse services fulfilling the social and ethical objectives. For example, there is a need for appropriate microfinance and microtakaful institutions to meet the financial needs of the poor and expansion of venture capital and private equity type firms and efficient stock markets to increase the share of equity based financing. Third, at the individual financial institution or organizational level there is a need to balance the economic, legal, ethical and social elements. Fourth, there is a need have a new approach to innovation and research and development to expand the alternatives of Shari’ah compliant products.  Finally, appropriate Shari’ah based products would require a better Shari’ah governance regime.

In conclusion, being a part of Islamic moral economy the value proposition of the Islamic financial industry is promotion of welfare and development. However, the practice of the Islamic financial industry appears to be focussed primarily on avoiding the legal prohibitions. Ignoring the foundational values and focussing only on legal compliance will strip the industry of its essence and spirit. If the industry fails to promote the foundational values, it will continue to being identified as a ‘prohibition-driven industry’ and fail to claim its uniqueness of being a positive ethical and social force in the economy.

Debaters, guests and users’ statements and comments are their independent thoughts, opinions, beliefs, viewpoints and are not necessarily that of MUSLIM Institute's.