Post By: David (Daud) Vicary (Abdullah)
Islamic Finance and the Public Good
Greater synergy needed between the Halal and the Islamic Finance Industries
In the preface to our Book, Entitled “Islamic Finance – Why It Makes Sense”, my co-author, Keon Chee, and I expressed two, equally, important objectives for writing the book.
1. First was a desire to help people understand how Islamic Finance transactions work by taking an approach based on the fact that most people do not understand how conventional transactions work , and by explaining both sets.
2. Our second and equally important objective was to help the reader to appreciate the very quintessential principle of Islamic Finance.
It is that of fairness – in all interactions with people, family, business partners, non-Muslims and the community.
In a post crisis world, much more attention to Islamic Finance has been given by the world of conventional finance in order to learn some lessons regarding the alleviation of need and the stabilization of economies.
However, there is still much work to be done.
Not only in the field of Islamic Finance, where as an industry, we must participate in projects that are for the benefit of the real economy and the Public Good, but also in aligning with the Global Halal Industry, to ensure that a homogenous view of Shariah values and benefits can be represented to the world at large.
In some ways, this is still about perception. … or rather misperceptions about Islam, Islamic Finance and Halal.
Much of the conventional world has an unclear or incorrect view as to what Islam represents and prefers to follow the diatribes of the “gutter press” because it is more convenient to do so.
Many Muslims themselves are uncertain as to the values of Islam and do not have enough ammunition at their disposal to refute the allegations and negative comments made by some of the world around them.
If only there were clearer Brand Values and Global Standards that could be communicated consistently and clearly.
Let me digress, for a moment, and highlight a situation.
Brazil is the largest exporter of Halal foodstuffs to the Muslim world and wants to protect its Global Number One status. As a result, sincere and detailed thought has been going into this in Brazil over the last couple of years. The conclusion is that the entire supply chain should be Halal. That means not just the food processing, slaughtering part, but also the capital, funding and finance part. In other words, Shariah finance should be used to finance working capital and to raise funds for capital projects. In that way, Brazil believes, that they will enhance their appeal to the Muslim World.
All of this strikes me as being eminently sensible, so long as the Muslim world actually recognizes the value of what is being done. Sadly, from a Finance perspective in the GCC, only 14% of financing raised is Shariah compliant.
There is certainly room for improvement here!
There is also, however, the question of the Halal Values with regards to ethics, cleanliness, health etc. How well are they understood?
From my point of view, NOT VERY WELL!
Some people may have some ideas regarding the slaughtering of meat products and Halal food, but beyond that I am not so sure what is really understood with regard to the world of cosmetics and other household goods.
Is it not time, therefore, to do what the Global Islamic Finance Industry has being doing for a decade or more and recognize the value of Global standards and start pushing towards them? This will help raise awareness, stimulate debate, and also give people a sense of what the values are and why they are important to all humanity.
If further alignment between the Islamic Finance and Halal industry’s is to be achieved, I am fairly certain it is going to be achieved in two areas.
- One, which I have already mentioned, is regarding Global Standards.
- The second leads on from the Brazilian example. Surely to be represented as Halal the entire process needs to be Halal.
Therefore Halal products need to be financed in a Halal way. This will both stimulate the industry to grow to the next level and also ensure that negative perceptions regarding Islam can be altered, by demonstrating that the whole process is covered end to end and the overall objectives of Shariah are being fulfilled.
There is much to do and not a moment to lose.
Post By:Beata Paxford PhD is a senior lawyer in Warsaw law firm. She is responsible for banking and corporate matters. She specialises also in Islamic finance, being the author of many articles devoted to the issue, and being the speaker at banking conferences.
2010 has proved to be a year of changes in the banking and finance industry. The propositions of the so-called Basel III were announced as well as the need for common European supervision. Furthermore, the Larosiere Report confirmed the necessity to create a more-unified financial market that will – its authors hope – lead to greater industry stability.
Looking at it on global level, though, it’s worth asking if there is a need for common global Islamic supervision and changes in the regulatory area.
The proposed amendments to the hitherto banking regulatory policies have come as a result of the credit crunch and the crisis on the market of financial instruments. It was said that the breakdown on the housing market connected with complicated derivate structures led to a decrease in public trust in financial companies and thus regulatory institutions. Hence, the need for a European and global common regulatory policy appeared. A policy that would not only strengthen the national regulator but would also create a demand for a common regulatory institution. However, one should ruminate over the real need for such a legalised solution and should ask whether another bunch of provisions will solve the problem.
Many articles devoted to the issue of Islamic finance have addressed the problem of ethics, citing the concept as long forgotten in conventional banking. Some authors arguing that not adhering to moral principles along with the ever-present greed would lead to a crisis. Nevertheless, such opinions could be seen as oversimplified and lacking in deeper analysis. What should be looked into, though, is the issue of a common regulatory institution for the global banking and finance industry and the place of Islamic finance in the global regulatory policy, and the possibility to connect the regulatory provisions and the ethical values of Islamic finance for the institutions that deal in this industry.
Islamic finance boasts three regulatory bodies. There is the Islamic Financial Services Board, the Accounting and Auditing Islamic Finance Institution and the International Islamic Rating Agency. These institutions aim to create a set of unified standards in Islamic finance. Each one has a Sharia board to verify compliance issues. However, none of them has legal capacity to bind the institutions into complying with its standards. These bodies exist on an international level. They are composed of financial institutions, such as private banks, and also organisations such as the World bank. Thanks to such a wide array of members, the regulatory bodies for IF can tackle chosen issues both from a global and a domestic perspective. They can also analyse and compare the functioning of certain types of financial instruments in global banking and in Islamic one.
What should be taken into account is the need to set such regulatory standards that would be both Sharia-compliant and modern in light of the ever-changing banking sector.
First of all, the standards should be unified. That means that the Islamic Finance regulatory bodies should set the same standards for the same type of financial instruments (e.g. tawarruq, istisna etc.). Likewise, the fatwas issued by Sharia scholars employed by the Islamic Finance institutions or engaged in Islamic Finance transactions should not be contradictory to the standards set by the respective bodies. Otherwise, the Islamic finance & banking sector will be seen as not credible and, therefore, not competitive.
However, one should not forget that there are different schools of Sharia, each one with a different approach towards the Holy tenets of the religion. This might influence opinions issued by scholars employed on Sharia boards of Islamic Finance institutions. The same refers to members of Sharia boards working in non-Islamic states, such as the UK or France. The interpretation of a given transaction in respect of its Sharia compliance should not contradict the general standards issued by regulatory bodies. Furthermore, it should not differ to far from the standards and fatwas applied by Islamic Finance institutions that operate in Islamic countries.
Islamic finance & banking is a growing sector, on its way to becoming a constant fixture in global banking. It cannot afford to lose its credibility, particularly in terms of Sharia compliance. The situation, where, in a non-Islamic country, a certain transaction is deemed as a Sharia complaint one, while the same transaction is viewed as haram in an Islamic country, should not happen. The industry must speak with one voice, with the same set of rules and prohibitions. This will give Islamic finance & banking the strength and appeal it needs.
For instance, AAOIFI issued the Sharia Standards concerning Sukuk. It explicitly states that Sharia Supervisory Boards should, prior to issuing a fatwa in respect of a transaction, carefully review all relevant contracts and documents related to the transaction. A halal transaction should comply with Sharia on all levels, including the purpose of the transaction, its participants and the transfer of assets. Sukuk has to be owned by Sukuk holders with all the rights and obligations of ownership in real assets. Hence, short sales in terms of Sukuk would be not permissible. The question of ownership and its transfer is a crucial one. Sukuk transactions must be both Sharia compliant and reliable, not allowing for derivative-backed transactions or naked short sales.
Likewise, the Islamic International Rational Agency intends to provide credible ranking for Islamic Finance institutions. It offers a Sharia Quality Rating, which aims to give an unbiased assessment of the Sharia-compliance operation of an institution or a transaction. Contrary to standard rating agencies, which verify solvency and debt-management issues, the IIRA wishes to provide measurement tools that check the observance of Sharia according to Fiqh. This includes a check-up on the capital, mixing of capitals (in the case of Islamic Windows), procedures and transactions conducted by the institution.
Following the AAOIFI standard, an Islamic Finance institution can provide its clients with the best service – satisfying their religious and economic needs. One must remember that pious Muslims want to use Islamic Finance institutions and want to conduct their business. They want to make sure, though, that the Islamic Finance institution complies with the rules. They also want to have the same standards for the same transactions regardless of the country in which it is taking place.
Discussing regulatory issues, one should look at European changes in banking- and finance-compliance policy. The latest global crisis badly hit certain European Union member states. Losses stemming from uncontrolled banking operations undermined the trustworthiness of European financial institutions. New policies were needed. The EU issued the MIFID directive in respect of financial instruments, addressing the issue of derivatives. There has been a PSD directive, issued to increase the safety of payment. Moreover, new proposals on risk management were prepared by the Basel Banking Supervisory Committee, known as Basel III. IF institutions that operate on the EU market have to comply with EU law. Nevertheless, are these European regulations of any help to the global Islamic finance industry?
In the author’s opinion, the Islamic finance & banking sector needs to be aware of the legal and economic tendencies taking place in Europe. This, however, does not mean that the Islamic Finance industry should implement all the rules. The banking and finance sector operates on different levels in Islamic states – from poorer countries such as Pakistan to affluent Saudi Arabia. This includes the level of cash payments, non-cash transactions, project finance and PPP projects. There are also economic differences to be taken into consideration when comparing Islamic countries with Europe. Furthermore, the Islamic Finance industry has not been struck so deeply by the financial crises, hence it does not need to undertake such measures, in particular in respect of risk management and liquidity.
However, the author believes there should be co-operation between the Islamic regulatory bodies and those in the EU. It could benefit the whole community, and the clients of financial institutions.
The need for one voice for Islamic finance compliance is not to be undermined. It should be the first aim for the Islamic Finance regulatory bodies in the upcoming years. Islamic Finance should become an immanent part of global banking, and setting equal measures for its participants should be of utmost importance.
By Bernardo Vizcaino, CAIA
The following article was first published in the Opalesque Islamic Finance Intelligence – Fifteenth Issue (see reference link) and is reprinted here with permission.
It seems that Islamic finance is getting a makeover. Recently there have been various (some light-hearted) attempts to dissect Islamic finance: from comparing Islamic finance to every-day items, tongue-in-cheek forecasting of industry developments, clever use of soccer metaphors, to berating the much-hyped self-congratulation that we periodically witness in conferences and industry events. This kind of commentary, taken as a whole, hints to a desire to revisit the message of Islamic finance and how this is communicated.
One of our contributors recently inquired about who had coined the term Islamic finance, and this led to discussions surrounding the first forays into Islamic Economics and looking further back to the early days of Muslim commerce.Almost simultaneously I had been asked to provide feedback to one of the above-mentioned questionnaires, one of them asking us to identify what everyday items best resembled Islamic finance. The latter was an intriguing exercise since it was effectively reaching out to our subconscious perception of the industry.
These were intriguing queries, looking at the origins of Islamic finance (exactly where it came from) and the characteristics we ascribe to this industry (metaphorically speaking that is). Overall, these and many other approaches carry a common denominator, they are all trying to make the topic more accessible to the masses.
Perhaps the definition of Islamic finance is too eccentric for a lay person, in other words it doesn’t make sense except to those who are already familiar with Islamic finance in the first place. Furthermore, it appears that there is no standard definition of Islamic finance (some are even circular – making reference to Islamic banking… what good is that!) and all of them lack simplicity (often degenerating into multi-paragraphed expositions).
Naturally, the core of Islamic finance is Shariah, but once again it does not lend itself for easy assimilation by newcomers. Then again, there have been many qualities ascribed to Islamic finance: borrowing from ethical and sustainable finance, focusing on the interest-free and participatory nature of its products, to the socially responsible and community engagement role of its member banks. All of these terms are valid, but there is yet to be a definition that is all-encompassing.
Perhaps the message is not being communicated effectively, not reaching or catering to the right audience (specifically those weird people outside of the industry which we will refer to from now on as “consumers”). Yes consumers are the ultimate audience, and as we see discussions gravitate around the definition it is equally important to observe how such definitions are being delivered.
Even a cursory survey of industry portals yields very few definitions of Islamic finance or Islamic banking, presumably because they are such obvious terms that they don’t require an introduction. However, communicating what is Islamic finance could use novel tools and some lateral-thinking. Sometimes metaphor, symbolism, and even parody can help illustrate the inner-workings of the industry.
Perhaps it matters little what we consider to be the ‘correct’ definition of Islamic finance. Notice my attempt to avoid offering a definition (attribute this to laziness if you will). It might be that what needs to be redefined is the focus of the industry. The most important concern is not a few sentences or a nominal description, but rather to engage more people and broaden the appeal of Islamic finance – beyond the limited walls of a few service providers. Definitions are useful, but they are of little use if the industry keeps talking to itself.
Your feedback and comments are very important to us, please feel free to contact us by using the comments facility.
- EPL for Islamic Finance (benefitpoint.wordpress.com)
- E.P.L. in Islamic Finance: EDUCATION – How & What (benefitpoint.wordpress.com)
- Tackling Operational Issues faced by Islamic Banks – Mufti Ehsan Waquar Ahmed, Shariah Advisor UBL Ameen Islamic Banking, in discussion with Furqan Ayub in program “Live Wire InFocus” on Business Plus. (benefitpoint.wordpress.com)