Redefining Islamic finance
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
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.