Islamic Finance in Dilemma: Growing fast vs. "Shariah-Compliance"

Having read throughout the few weeks on how numerous countries are trying to position themselves as the financial hub for Islamic finance given the impressive growth of the industry at 15-20% per year (asset value), I cannot help but wonder if this is a good thing or will this come back to haunt us one day.

Undoubtedly, the growth of an industry whether in terms of assets or the introduction of new innovative products is encouraging, but there are numerous issues still left unanswered.

For one, there are Shariah issues in Bai Inah & Tawarruq considered controversial in some quarters, and perhaps considered the 'norm' in other countries. While the issues of these methods have been on-going for some time, but in my opinion, feasible alternatives to minimize their controversial aspects has been limited (e.g. the use of the LIBOR). Additionally, in the early decades of contemporary Islamic finance, scholars were said to allow some of these methods as a last resort or simply as a case of darurat (emergency), when no other alternatives are available.

Unfortunately, it appears that the darurat is still ongoing in the sense that these controversial mechanism are still the popular choice in banks. But whose fault is it? Is it the banks' fault which merely use these mechanism to maintain the status quo (no pain, no gain/ no collateral, no loan)? Is it the fault of scholars & jurists who cannot find or for lack of trying cannot find an alternative that is feasible? Is it the Muslim community's fault for mere ignorance, leaving the issue of faith in the hands of the bank without being the slightest bit curious on the Islamicity of the products?


The blaming game does not help. No one actually gains at the end.

What is needed, in my opinion, are 2 crucial actions.


1. A need for a 'masterplan'
Ok, perhaps the term 'masterplan' is a bit majestic but the need for the relevant Muslim jurists to come up with a step-by-step or gradual approach in moving forward towards an Islamic financial & economic system that truly serves the socio-economic goals of Islam is desired, if not critical.

Whether it's the OIC or the Fiqh Academy or any other global Islamic organization, I believe that it is time for Muslim financial & Shariah experts to sit down & come up with a timeline, with the sole purpose of identifying alternatives to Bai Inah, Tawarruq & other major issues.

I appreciate the difficulties of this especially in personal financing but certain steps can be done progressively in corporate or commercial financing (e.g. pilot tests on 'innovative' musharakah/ mudarabah). At this stage, you may ask...what innovative musharakah do I mean? At present, I am also still trying to feel my way through in Islamic finance & trying to seek solutions individually, which brings me to my next point.


2. A need to have an effective Islamic finance thinktank
In my limited time studying Islamic finance, I have not come across an Islamic finance thinktank that is truly active & passionately progressive in seeking the 'solutions' I mentioned above.

One person trying to seek feasible alternatives will not be as effective as a group of thinkers applying synergistic value with the same goal or intention in mind. The value of synergy, insya Allah (God willing) can produce thoughts & ideas quicker & more comprehensive than 1 person in an industry that is developing ever so rapidly.

One way for this thinktank to effectively work is to work with other jurists, scholars, economists & financial experts in conferences/seminars/workshops that are action or solution-oriented focusing on one fundamental issue at a time. Certain contemporary conferences, I feel, are so diverse that it appears that the organizers want to maximize the number of attendees. Though this is not a criticism but it does not help the cause of Islamic finance towards promoting socio-economic equity.



When all is said and done, essentially the concern that I have is that with these controversies still looming (and I'm not just referring to Bai Inah but others as well such as the way Sukuk is applied) & with the so-called growth of Islamic finance in mind, these issues will be entrenched in the roots of Islamic finance. It will trouble Islamic finance from within because it will become the 'status quo'. So entrenched will these controversial practices be within banks that changing them or attempting to convince financiers/jurists/those in authority to modify them will be all the more difficult.

At the end of the day, I sincerely hope we will be saved from being at 'war with God & the Prophet (Peace Be Upon Him)' as highlighted in the fourth set of revelations in the Qur'an on riba (interest):


From the Qur'an, Surah al-Baqarah, verse 275-81:

“Those who devour riba will not stand except as stands one whom the Evil one by his touch has driven to madness. That is because they say: ‘sale is like riba’, but Allah has permitted sale and forbidden riba. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah [to judge]. But those who repeat (the offense) are inhabitants of the Fire: they will abide therein (forever).” (2:275)

“God deprives interest of all blessings but blesses charity. He loves not the ungrateful sinner” (2:276)

“Those who believe, performs good deeds, establish prayer and pay the zakat, their reward is with their Lord; neither should they have any fear, nor shall they grieve.” (2:277)

“O believers, fear God, and give up the interest that remains outstanding if you are believers” (2:278)

“If you do not do so, then be sure of being at war with God and his Messenger. But, if you repent, you can have your principal. Neither should you commit injustice nor should you be subjected to it.” (2:279)

“If the debtor is in difficulty, let him respite until it is easier, but if you forego out of charity, it is better for you if you realize.” (2:280)

“And fear the Day when you shall be returned to the Lord and every soul shall be paid in full what it has earned and no one shall be wronged.” (2:281)

Knowledge Is Sought - It Does Not Just Come

I would like to share a segment that I came across recently. It's extracted from 'Hamid, AbdulWahid. 1989. Islam: The Natural Way. London: Muslim Education & Literacy Services.'
It reads:

KNOWLEDGE IS SOUGHT - IT DOES NOT JUST COME

In spite of his youth, 'Abdullah ibn Abbaass, a cousin of the Prophet, became one of the most learned companions. He was only thirteen when the Prophet died.

The collection and study of hadith was one of his many specialisations. It is said that he committed to memory about 1,660 sayings of the Prophet which have been authenticated.

Whenever he heard of someone who knew a hadith which he did not know, he would quickly go to him and record it. He would closely scrutinise whatever he heard and check it against other reports. He would go to as many as thirty companions to verify a single matter.

'Abdullah described what he once did on hearing that a companion of the Prophet knew a hadith unknown to him:

"I went to him during the time of the afternoon siesta and spread my cloak in front of his door. The wind blew dust on me (as I sat waiting for him). If I wished, I could have sought his permission to enter and he would certainly have given me permission. But I preferred to wait on him so that he could be completely refreshed.

Coming out of his house and seeing me in that condition he said:
'O cousin of the Prophet! What's the matter with you? If you had sent for me I would have come to you.'

'I am the one who should come to you, for knowledge is sought - it does not just come,' I said. I asked him about the hadith and learnt from him."

Islamic Finance - Thoughts on Stock Screening in Equity Funds

More often that not, those involved in Islamic finance will admit not all is rosy in Islamic finance...at least not yet. As in all matters of faith be it Islam, Christianity or other major religions, controversies in rulings & practices exist.

Since the resurgence in Islamic finance in the 60s and 70s, Islamic finance has gotten a firm foothold notably in Muslim countries but controversies over certain major practices continue to exist. This includes areas such as Bai Inah and stock market practices, just to name a few. At this juncture, two points come into my mind.

1. As rightly pointed out by numerous scholars, it's easier to play the blaming game to say that a certain practice in Islamic finance is controversial & point out that it is haram. Simply saying something is haram does not help the cause for Islamic finance. The better way is to evaluate or provide a constructive & practical alternative to improve the practice.
2. With this in mind, I wonder if there exists a collective, synergistic body that continuously considers approaches that will make those practices less controversial. It is my understanding that throughout the past few decades since the inception of the contemporary Islamic finance that we know of today, scholars noted that the use of controversial practices are transitional in nature. These are not permanent solutions but rather due to dire situations or darurat, they are tolerated.
   

The point now is to ask ourselves whether we can expedite this transitional period. Again, easier said than done but let's start somewhere. For instance, in the stock screening process used in Islamic stock markets or funds, ratio analysis is one criterion towards evaluating firms for investment. One common ratio is debt ratio, where certain Islamic funds will only invest in firms with a debt ratio of 33% or less.

Would it be beneficial to divide these firms into subcategories or divisions? For simplicity's sake, let's use color-codes & assume debt ratio is the only ratio analyzed; red for firms with a debt ratio of 27-33%, orange for firms with a debt ratio of 21-26% and yellow for firms with a debt ratio of 20% & below. Then allocate more funds for 'yellow' firms, less so for 'orange' firms and even less for 'red' firms. In short, allocation of funds is weighted according to these categories, with preference to firms with minimal debt ratios & other such ratios.

The aim of this approach is to encourage more firms to move towards the 'yellow' category which has the least involvement in interest-based lending. One may argue if firms will actually be motivated to reduce their debt ratio for Islamic fund management. That said, with the growth of Islamic finance at around 15-20% per annum, would it be inconceivable for the funds to grow attractive enough for firms to reduce their debt level & other ratios?

Actually, I believe I have read this approach stated in an article before but I would like to know if it actually had been adopted anywhere. And what are its implication or effect? I would appreciate it if anyone who is aware of this approach to drop me a line.

Wassalam.