By Prof Dr Mansor Ibrahim.
While the present IF education may have a long way to go, various issues must be addressed first for it to even move forward.
First: Theoretical Foundations of Islamic Finance.
The theoretical constructs of Islamic finance at present remain descriptive and the understanding of Islamic banking and finance is normally viewed from the lens of conventional finance. A scrutiny of existing IF studies reveals that, with few exceptions, they are predominantly confined to applications of conventional theories to Islamic finance motivated merely by an argument that IF is different. No serious theoretical works have been undertaken except at the early stage of IF in 1980s.
Theories are core foundations of any body of knowledge. Unfortunately, the lack of the theoretical foundations underlying the Islamic finance system has not resulted in increasing emphasis on theoretical IF research and studies. Instead, the focus has been on adapting curriculum content and research focus to the current need of finance industries under the widely-acclaimed motto: “industry relevant”. It is no doubt that being industry relevant is important. However, IF is more in need of finding directions to depart away from the conventional benchmarks and hence the thought leadership. This requires the IF education program to be intensively theoretical and analytical. None of the institutions of higher learning at present can claim that they have theoretical and analytical rigor.
While being industry relevant is important, the absorptive capacity of practitioners in the industry must be raised to the level that they can appreciate the research content of the academia. The priority of the academic is on propelling the IF industry to the next level through cutting-edge research and forward-looking curriculum content. “Practicality” of the research output and education depends on the “knowledge” level of those who want to apply them. Accordingly, there is no such thing as theory – practice divide. Instead, there is KNOWLEDGE divide between the academia and industry. By persistently harping on the words that the works in the academia are too “academic” and hence “not practical” will only mean opportunity lost for the industry. Both must play their respective roles in this KNOWLEDGE divide. It is expected that the academic should be able to articulate issues and provide prescriptions at the level understandable by the industry. The industry must also upgrade its knowledge content too.
A predominant focus on being industry relevant, which is viewed as worthy by some, will only put IF education at tracksides. No progress in its fundamental knowledge content would be forthcoming.
Second: Low Common Denominators.
Ideally, as noted above, the IF curriculum education comprises three bodies of knowledge – Shari’ah, Economics and Finance, and Quantitative Methods. Unfortunately, student intakes to the IF programs are rarely equipped with necessary foundations of all three. In most likelihood, they have pre-requisites in at most two areas.
Further, due to the attraction of Islamic Finance, IF programs have attracted applicants from diverse areas. Thus, it is not surprising that the gaps among students are so wide. In a quantitative class, one may find students with good foundations in mathematics and statistics and students with have minimal knowledge of both. The latter are normally from religious-oriented schools or institutions, which give less emphasis on mathematics and statistics. Then, in Shari’ah courses, one may find those who have no ideas of the Shari’ah and those who are far ahead.
This situation makes teaching extremely difficult. Worse, it creates the temptation for the schools to lower their education levels to the common denominators and, accordingly, the lack of rigor in Islamic finance education. The industry still laments on the lack of IF talent against, ironically, the backdrop of increasing IF graduates produced by universities. The best guess is: the lack of rigor in the IF program make them unfit to the need of the industry.
Third: It is not a Business.
Education is NOT a business. However, in parallel to the fast development and rapid growth of the IF industry, increasing number of especially private institutions of higher learning are introducing Islamic finance degree programs with the back of their mind the business bottom line. Thus, it is not an exaggeration to state that education is now a profit-making business.
It is not wrong to do so since education has the characteristics of both private and public goods. However, it would be unfitting to run education institution in the same way as running a business firm. For one thing, the target horizon of educational institutions cannot be on a yearly basis as in the case of business firms. For another, students are not client and graduates are not products in the business senses.
The positive externalities of education mean that “clients are always right” must not be at the centre. Instead, in the eyesight of the IF education providers should be the assurance that the positive externalities of education are fully realized by the society at large and education should not be carved to cater the need of clients, which at most times, meaning the sacrifice of quality in favour of maintaining “clients”. The quality drop in Australian education is recently attributed to the fact that education has become a business. Education is not a business.
Monday, August 10, 2015
Friday, August 7, 2015
The heartbeat of Islamic banks.
By: Muath Mubarak.
Shariah has been translated as ‘Islamic law’ but in fact Shariah comprises not only Islamic law, it also includes the moralities, ethics and guidelines for a complete way of human life. In the fi eld of Islamic banking and fi nance, Shariah plays a vital role.
Enhancing stakeholder value is the ultimate purpose for any business including Islamic financial institutions (IFIs). Their financial stability and growth are two strategic factors considered by their shareholders and their confidence level is dependent on these main components.
Likewise for an IFI, Shariah compliance is the key and stakeholders are very vigilant about this. IFIs offer Islamic finance services which are expected to be offered within the purview of Shariah irrespective of the region and size of the organization.
Shariah plays a vital role in this young and niche market to be the best alternative fi nancial sector with interestfree economic policies for the nation’s development.
In order to ensure the Shariah compliance of the institutions, a Shariah supervisory board (SSB) comprises Shariah scholars who are experts in advising the management and stakeholders. The SSB’s main function is to ensure the Shariah compliance of the bank including the products and day-to-day operations.
Internationally, the AAOIFI and the Islamic Financial Services Board (IFSB) have issued a number of guidelines and standards.
The requirements for all Islamic banks and financial institutions to carry out business in line with the Shariah rules and guidelines are clearly stated by these regulatory standard sett ing bodies, which have gained global acceptance by different nations.
On a periodic basis, the SSB examines the overall operations and activities of IFIs which will result in the publication of an independent opinion regarding the Shariah compliance of its activities. This exercise is called the Shariah Compliance Audit (SCA). The main objective of the SCA is to ensure that the activities of IFIs do not contravene Shariah principles.
In short, it is a set of activities which are carried out to evaluate the organization’s system, processes, projects, transactions and other procedures, and ensure they adhere to Islamic laws and regulatory requirements of the respective jurisdiction’s law.
This audit can even be carried out based on client requirements for administration, management and client base. The SCA is drawn up according to the financial reporting disclosure standard requirements. Further, it states whether the IFI’s financial statements and other related reports are revealing accurate information for the interested parties and stakeholders.
The modern world’s more complex transactions and modern financial products must undergo a Shariah screening system or rather a purifying system before the SSB can endorse any relevant product.
Shariah supervision may be thought of as the single most important distinction between a conventional and a truly Islamic financial venture. The Shariah compliance framework may include the following important tasks:
1. Ensure the business transactions are fully Shariah compliant.
2. Maintain a system of compliance having special emphasis on Shariah in the light of existing jurisdictional laws, rules, regulations, policies and procedures related to Islamic banks.
3. Uphold the highest transparency and maintain justice.
4. Provide all necessary documents to Shariah compliance offi cials in performance of their functions to ensure Shariah compliance.
5. Hold Shariah audits periodically and ensure all the products and services are adhering to Islamic laws.
6. Provide adequate advice in corporate governance and decision making.
7. The SSB is responsible for educating the interested parties about the Islamic rules and regulation in all activities.
As Shariah supervision is an integral part of the industry, it requires the rating of each entity in order to identify the Shariah compliance rating for them which will attract investors and increase general public confidence.
In order to meet the requirements of Shariah rating, the International Islamic Ratings Agency (IIRA) was established in July 2005 in Bahrain. The main objective of the IIRA is to facilitate the development of regional and national financial markets and to improve their functioning as well as improve the quality of rating agencies. The IIRA is like other credit rating agencies but only the difference is it looks at the Shariah.
The IIRA offers Shariah quality ratings for the assessment of the level of compliance with principles of Shariah and provides rating for all types of issuers and issues.
Shariah is the heartbeat for an IFI and therefore Shariah supervision is not a matter to be taken lightly. The investors and general public confidence, in any sector, are always important considerations.
So every organization must make sure that their institution’s heartbeat is functioning properly to stay alive in the spirit of Shariah, which is the core goal for any IFI.
Shariah has been translated as ‘Islamic law’ but in fact Shariah comprises not only Islamic law, it also includes the moralities, ethics and guidelines for a complete way of human life. In the fi eld of Islamic banking and fi nance, Shariah plays a vital role.
Enhancing stakeholder value is the ultimate purpose for any business including Islamic financial institutions (IFIs). Their financial stability and growth are two strategic factors considered by their shareholders and their confidence level is dependent on these main components.
Likewise for an IFI, Shariah compliance is the key and stakeholders are very vigilant about this. IFIs offer Islamic finance services which are expected to be offered within the purview of Shariah irrespective of the region and size of the organization.
Shariah plays a vital role in this young and niche market to be the best alternative fi nancial sector with interestfree economic policies for the nation’s development.
In order to ensure the Shariah compliance of the institutions, a Shariah supervisory board (SSB) comprises Shariah scholars who are experts in advising the management and stakeholders. The SSB’s main function is to ensure the Shariah compliance of the bank including the products and day-to-day operations.
Internationally, the AAOIFI and the Islamic Financial Services Board (IFSB) have issued a number of guidelines and standards.
The requirements for all Islamic banks and financial institutions to carry out business in line with the Shariah rules and guidelines are clearly stated by these regulatory standard sett ing bodies, which have gained global acceptance by different nations.
On a periodic basis, the SSB examines the overall operations and activities of IFIs which will result in the publication of an independent opinion regarding the Shariah compliance of its activities. This exercise is called the Shariah Compliance Audit (SCA). The main objective of the SCA is to ensure that the activities of IFIs do not contravene Shariah principles.
In short, it is a set of activities which are carried out to evaluate the organization’s system, processes, projects, transactions and other procedures, and ensure they adhere to Islamic laws and regulatory requirements of the respective jurisdiction’s law.
This audit can even be carried out based on client requirements for administration, management and client base. The SCA is drawn up according to the financial reporting disclosure standard requirements. Further, it states whether the IFI’s financial statements and other related reports are revealing accurate information for the interested parties and stakeholders.
The modern world’s more complex transactions and modern financial products must undergo a Shariah screening system or rather a purifying system before the SSB can endorse any relevant product.
Shariah supervision may be thought of as the single most important distinction between a conventional and a truly Islamic financial venture. The Shariah compliance framework may include the following important tasks:
1. Ensure the business transactions are fully Shariah compliant.
2. Maintain a system of compliance having special emphasis on Shariah in the light of existing jurisdictional laws, rules, regulations, policies and procedures related to Islamic banks.
3. Uphold the highest transparency and maintain justice.
4. Provide all necessary documents to Shariah compliance offi cials in performance of their functions to ensure Shariah compliance.
5. Hold Shariah audits periodically and ensure all the products and services are adhering to Islamic laws.
6. Provide adequate advice in corporate governance and decision making.
7. The SSB is responsible for educating the interested parties about the Islamic rules and regulation in all activities.
As Shariah supervision is an integral part of the industry, it requires the rating of each entity in order to identify the Shariah compliance rating for them which will attract investors and increase general public confidence.
In order to meet the requirements of Shariah rating, the International Islamic Ratings Agency (IIRA) was established in July 2005 in Bahrain. The main objective of the IIRA is to facilitate the development of regional and national financial markets and to improve their functioning as well as improve the quality of rating agencies. The IIRA is like other credit rating agencies but only the difference is it looks at the Shariah.
The IIRA offers Shariah quality ratings for the assessment of the level of compliance with principles of Shariah and provides rating for all types of issuers and issues.
Shariah is the heartbeat for an IFI and therefore Shariah supervision is not a matter to be taken lightly. The investors and general public confidence, in any sector, are always important considerations.
So every organization must make sure that their institution’s heartbeat is functioning properly to stay alive in the spirit of Shariah, which is the core goal for any IFI.
Wednesday, August 5, 2015
Developing Islamic microfinance
By: Professor Michael Skully, a professor of banking at Monash University.
Some argue that lending to the poor may have even greater merit than a simple charitable donation. The rationale is that with a loan, the money, when it is returned, can be lent again to others and so the long-term impact on poverty through such lending is much greater. This is a view that would be strongly shared by most microfinance practitioners.
Islamic microfinance institutions (IMFIs) have a marked advantage over their conventional counterparts in that they are well placed to coordinate their efforts with that of local Muslim charities.
So whereas conventional MFIs cannot effectively service the poorest of the poor, IMFIs can do so indirectly in combination with local charities: the latter can meet the living needs and the IMFI can then help the client break from the poverty trap.
As overall Islamic fi nance has become more developed, others have started to revisit microfi nance and identifi ed its significant potential both ethically as an important undertaking and fi nancially as the returns on investment can be considerable. At least part of this new attention can be traced to microfinance’s greater coverage in the world press.
The Islamic Development Bank (IDB) itself allocated specifi c funding for IMFIs. The World Bank’s Consultative Group Against Poverty (CGAP) in August 2008 also recognized Islamic microfi nance as an important, but separate, standing with the release of its “Islamic microfi nance: An emerging market niche” publication. The APEC Advisory Group similarly in 2008 also allocated one of its formal meeting papers to the topic of Islamic microfinance.
There are no doubt many other such examples of mainstream, non-Islamic institutions giving it similar attention. In 2010, for example, CGAP together with the IDB and others sponsored the ‘Islamic Microfinance Challenge’ with a major prize available to the winner.
So in 2011, despite the CGAP title, Islamic microfi nance can hardly be considered a market niche. It has instead become a key aspect of the Islamic finance industry.
These recent IMFI developments differ from those of the past on two counts. The first is that Islamic finance is no longer confined solely to specialist microfinance institutions and the second is the development on international IMFI networks.
On the IMFI front, several Islamic banks have found that microfi nance fi ts well with their own business strategy and gives them a further advantage over their conventional banking competitors. It is therefore perhaps not surprising that Islamic banks were featured strongly in the 2010 CGAP challenge.
Indeed, the Al-Amal Microfi nance Bank (AAMB) from Yemen was the end winner of the US$100,000 prize. In its first two years of operations, AAMB had some 15,000 borrowers and 20,000 savers. Its group and individual financing arrangements have now captured a quarter of Yemen’s microfinance industry.
On the networking front, Islamic microfinance professionals are learning from past mistakes, selecting those models that have worked best, and then seeking refinements to achieve even better results.
The Islamic microfi nance network is now one Islamic example and of course, though not strictly Islamic, the Grameen Foundation could also provide assistance to Muslim clients.
Just as some Islamic banks are starting to expand across national borders, it is hoped that more IMFIs take a similar regional, if not global, approach to facilitating future business.
The importance of this support, while perhaps obvious, should nevertheless be re-stated. In order to escape poverty, people need to increase their income generating capacity and this is normally done through a combination of improved skills and working capital or equipment.
When faced with the choice of continued poverty and paying interest, many may be tempted to borrow. Others, when faced with either paying interest or not borrowing, may select the latter.The CGAP research suggests that some two thirds of the Muslim world’s
microfi nance customers would prefer Islamic microfi nance and perhaps a third (at least in Yemen) would rather go without if none is offered.
So there is certainly a large potential market. As some 72% of the people living in Muslim countries do not use formal financial services, the potential for Islamic finance, particularly Islamic microfi nance, remains very promising and will hopefully attract additional investment accordingly.
Some argue that lending to the poor may have even greater merit than a simple charitable donation. The rationale is that with a loan, the money, when it is returned, can be lent again to others and so the long-term impact on poverty through such lending is much greater. This is a view that would be strongly shared by most microfinance practitioners.
Islamic microfinance institutions (IMFIs) have a marked advantage over their conventional counterparts in that they are well placed to coordinate their efforts with that of local Muslim charities.
So whereas conventional MFIs cannot effectively service the poorest of the poor, IMFIs can do so indirectly in combination with local charities: the latter can meet the living needs and the IMFI can then help the client break from the poverty trap.
As overall Islamic fi nance has become more developed, others have started to revisit microfi nance and identifi ed its significant potential both ethically as an important undertaking and fi nancially as the returns on investment can be considerable. At least part of this new attention can be traced to microfinance’s greater coverage in the world press.
The Islamic Development Bank (IDB) itself allocated specifi c funding for IMFIs. The World Bank’s Consultative Group Against Poverty (CGAP) in August 2008 also recognized Islamic microfi nance as an important, but separate, standing with the release of its “Islamic microfi nance: An emerging market niche” publication. The APEC Advisory Group similarly in 2008 also allocated one of its formal meeting papers to the topic of Islamic microfinance.
There are no doubt many other such examples of mainstream, non-Islamic institutions giving it similar attention. In 2010, for example, CGAP together with the IDB and others sponsored the ‘Islamic Microfinance Challenge’ with a major prize available to the winner.
So in 2011, despite the CGAP title, Islamic microfi nance can hardly be considered a market niche. It has instead become a key aspect of the Islamic finance industry.
These recent IMFI developments differ from those of the past on two counts. The first is that Islamic finance is no longer confined solely to specialist microfinance institutions and the second is the development on international IMFI networks.
On the IMFI front, several Islamic banks have found that microfi nance fi ts well with their own business strategy and gives them a further advantage over their conventional banking competitors. It is therefore perhaps not surprising that Islamic banks were featured strongly in the 2010 CGAP challenge.
Indeed, the Al-Amal Microfi nance Bank (AAMB) from Yemen was the end winner of the US$100,000 prize. In its first two years of operations, AAMB had some 15,000 borrowers and 20,000 savers. Its group and individual financing arrangements have now captured a quarter of Yemen’s microfinance industry.
On the networking front, Islamic microfinance professionals are learning from past mistakes, selecting those models that have worked best, and then seeking refinements to achieve even better results.
The Islamic microfi nance network is now one Islamic example and of course, though not strictly Islamic, the Grameen Foundation could also provide assistance to Muslim clients.
Just as some Islamic banks are starting to expand across national borders, it is hoped that more IMFIs take a similar regional, if not global, approach to facilitating future business.
The importance of this support, while perhaps obvious, should nevertheless be re-stated. In order to escape poverty, people need to increase their income generating capacity and this is normally done through a combination of improved skills and working capital or equipment.
When faced with the choice of continued poverty and paying interest, many may be tempted to borrow. Others, when faced with either paying interest or not borrowing, may select the latter.The CGAP research suggests that some two thirds of the Muslim world’s
microfi nance customers would prefer Islamic microfi nance and perhaps a third (at least in Yemen) would rather go without if none is offered.
So there is certainly a large potential market. As some 72% of the people living in Muslim countries do not use formal financial services, the potential for Islamic finance, particularly Islamic microfi nance, remains very promising and will hopefully attract additional investment accordingly.
Monday, August 3, 2015
Islamic Microfinance: Social and Developmental Expectations
By Mehmet Asutay.
Microfinance has become a critical tool in tackling poverty and aiding development through building the capacity for the poor to enjoygreater self-suffi ciency and sustainability, granting them access to financial services and conceptualizing the poor individual as someone with innate entrepreneurial abilities who can generate jobs, income, and wealth if given access to credit.
Through microfinance, the poor are given the opportunity to become stakeholders in the economy; therefore, enabled and functioning
individuals will be the outcome. Due to this objective function of microfinance, as a development tool it has enjoyed some success.
Consequently, a number of conventional fi nancial institutions and banks now offer microfi nance in supporting business ideas from small projects to housing projects. Despite its success, microfinance has been criticized from an Islamic perspective for getting people into debt due to its fi xed interest charges.
If a project does not yield the expected returns in conventional financing, difficulties can ensue for the borrower. Islamic banking and finance thus, offers a more viable solution as a value oriented fi nancial proposition as part of the Islamic moral economy. Thus, typical Islamic banking and fi nance (IBF) instruments, such as Musharakah and Mudarabah, or institutions such as IBF, but also waqfs (pious foundations), are rather appropriate as providers of microfinance.
Islamic microfi nance fi ts into the asset-based economic paradigm and equity objective of the Islamic moral economy as well as fulfi lling all other expectations. Thus, there is compatibility and complementarity between the objectives and operational mechanism of microfinance and IBF.
Despite having similar objectives, IBFs have not fully appreciated microfinance, which is also a commercially viable undertaking.
However, in recent years there has been movement in this direction, as the successful implementation of Islamic microfinance has shown in countries such as Bangladesh, Indonesia, Yemen, and Syria.
IBF instruments can provide an additional opportunity for microfinance to flourish by giving the entrepreneurial poor access to fi nance in an alternative and dynamic manner. The contractual nature of such products is consistent with the financing nature of microfinance.
Conclusion
A financial system should be able to provide fi nancing to different segments of a given society such that, in addition to fi nancial and economic objectives, social objectives may be served. Since social objectives are an essential part of the Islamic moral economy, it is imperative for IBF to fulfi ll such objectives alongside their business interests.
As a social and moral method of fi nancing, IBF, therefore, should contribute directly to economic and social. This can become possible through social banking and microfi nance, though it should be recalled that the initial experience of IBF in the early 1960s in Egypt was a social bank that was microfinancing-oriented.
Due to the complementarity between IBF and microfinance, there is a need to see further and proactive involvement of IBF and non-banking Islamic institutions to provide Islamic microfinance.
By using the essential methods and instruments outlined here, authentic models of Islamic microfi nance can be developed that will ensure the proactive development and effi cient running of microfinancing, aimed at helping poor individuals and entrepreneurs who are excluded from economic and financial life, can be achieved as expected by the Islamic moral economy by also creating social capital.
Microfinance has become a critical tool in tackling poverty and aiding development through building the capacity for the poor to enjoygreater self-suffi ciency and sustainability, granting them access to financial services and conceptualizing the poor individual as someone with innate entrepreneurial abilities who can generate jobs, income, and wealth if given access to credit.
Through microfinance, the poor are given the opportunity to become stakeholders in the economy; therefore, enabled and functioning
individuals will be the outcome. Due to this objective function of microfinance, as a development tool it has enjoyed some success.
Consequently, a number of conventional fi nancial institutions and banks now offer microfi nance in supporting business ideas from small projects to housing projects. Despite its success, microfinance has been criticized from an Islamic perspective for getting people into debt due to its fi xed interest charges.
If a project does not yield the expected returns in conventional financing, difficulties can ensue for the borrower. Islamic banking and finance thus, offers a more viable solution as a value oriented fi nancial proposition as part of the Islamic moral economy. Thus, typical Islamic banking and fi nance (IBF) instruments, such as Musharakah and Mudarabah, or institutions such as IBF, but also waqfs (pious foundations), are rather appropriate as providers of microfinance.
Islamic microfi nance fi ts into the asset-based economic paradigm and equity objective of the Islamic moral economy as well as fulfi lling all other expectations. Thus, there is compatibility and complementarity between the objectives and operational mechanism of microfinance and IBF.
Despite having similar objectives, IBFs have not fully appreciated microfinance, which is also a commercially viable undertaking.
However, in recent years there has been movement in this direction, as the successful implementation of Islamic microfinance has shown in countries such as Bangladesh, Indonesia, Yemen, and Syria.
IBF instruments can provide an additional opportunity for microfinance to flourish by giving the entrepreneurial poor access to fi nance in an alternative and dynamic manner. The contractual nature of such products is consistent with the financing nature of microfinance.
Conclusion
A financial system should be able to provide fi nancing to different segments of a given society such that, in addition to fi nancial and economic objectives, social objectives may be served. Since social objectives are an essential part of the Islamic moral economy, it is imperative for IBF to fulfi ll such objectives alongside their business interests.
As a social and moral method of fi nancing, IBF, therefore, should contribute directly to economic and social. This can become possible through social banking and microfi nance, though it should be recalled that the initial experience of IBF in the early 1960s in Egypt was a social bank that was microfinancing-oriented.
Due to the complementarity between IBF and microfinance, there is a need to see further and proactive involvement of IBF and non-banking Islamic institutions to provide Islamic microfinance.
By using the essential methods and instruments outlined here, authentic models of Islamic microfi nance can be developed that will ensure the proactive development and effi cient running of microfinancing, aimed at helping poor individuals and entrepreneurs who are excluded from economic and financial life, can be achieved as expected by the Islamic moral economy by also creating social capital.
Book Review: 'Heaven's Bankers' by Harris Irfan
By: Gregor Stuart Hunter
Balancing the altruistic ideals of faith with the need to turn a profit has never been easy: Look no further than the Book of Matthew for an early example of what history's most famous carpenter-cum-rabbi thought of money changers in places of worship. But while Judaism and Christianity historically had strict prohibitions against usury, today it is Muslims who adhere to the most stringent rules regarding finance of the three.
Islamic banking is unique in the world of finance, mostly because of what is prohibited. There are some straightforward bans: No investing in businesses that deal with products considered haram, or forbidden, most commonly pork and alcohol, but also Pop-Tarts (gelatin) and some aftershave (alcohol). Speculative bets are barred, and transactions must be based on real assets, not cash flows. By far the most significant rule is the prohibition on charging interest. The ban is meant to reflect the particular ethical responsibilities bestowed upon financiers: Profits and losses should be shared between debtors and creditors.
Many Muslims believe this risk-sharing approach can help remedy our broken financial system, even if it's difficult to square with mainstream, conventional banking. But a new book by financial industry insider Harris Irfan claims that many of the practitioners of Islamic finance have abandoned this honorable aim in an effort to keep up with the sophisticated tools of Western investment banks.
In "Heaven's Bankers: Inside the Hidden World Of Islamic Finance," Mr. Irfan, an observant Muslim, charts a course from seventh-century Arabia, where Muslim traders invented the precursors to modern checks and trusts while plying the Silk Road, to the 1970s and the establishment of the first Islamic commercial lenders in Dubai, as well as the short-lived "Islamization" of Pakistan's economy. But it's the turbocharged present that is the focus of the book: Islamic banking, otherwise known as Shariah-compliant banking, is now an industry approaching $2 trillion, thanks to soaring trade in emerging markets such as Malaysia and the United Arab Emirates.
Mr. Irfan has been a key player throughout much of this contemporary boom, having co-founded the team at Deutsche Bank that pioneered modern Shariah-compliant derivatives. He became the global head of Islamic finance at Barclays Capital in 2009, and is now a managing director at European Islamic Investment Bank, one of the few U.K.-based Shariah-financing boutiques. The book provides an up-close look at the tactics Western banks, like Deutsche, Goldman Sachs and HSBC,have taken to win over 1.6 billion Muslims world-wide, who for years either had to park their religious principles to participate in the global financial system or accept mediocre returns.
But along the way, Mr. Irfan also provides numerous examples of how Western financiers, determined to win over the faithful, have diluted Shariah standards in pursuit of commercial advantage: Bankers delete the word "interest" from deal documents in favor of Shariah-friendly language; Islamic investors wittingly and unwittingly fund businesses where alcohol and pork products are consumed; and Islamic scholars find their names used to suggest that they had given approval to deals they had never reviewed. In one instance that remains murky, a $2 billion Islamic bond deal by Goldman Sachs was sunk after a fatwa, a religious edict green-lighting a deal, failed to pass muster with skeptical Muslim bankers. Even when Western banks go out of their way to accommodate the faithful, things can border on the surreal. Mr. Irfan describes one comic case in which Deutsche Bank is left pondering how a deal that justifies its Shariah credentials by trading real assets can be completed without clogging up the mailroom with millions of sacks of Egyptian fertilizer for years on end.
It's plain, though, that many Western bankers treat Islam as a nuisance: "I don't care about the Shar-eye-ah stuff!" yells one New York-based banker as a cross-border acquisition deal runs into religious requirements. On the flip side, many Muslims, Mr. Irfan argues, also turn a blind eye. Even while chasing a deal to fund a five-star hotel and gigantic clock tower in Mecca, Deutsche Bank finds some companies prepared to settle for Shariah-lite. "I don't understand why you guys need to overanalyse things," the bankers are told by the finance manager at Saudi Binladin Group, the kingdom's biggest construction company. "Just do the deal. Draft up the docs with a structure that roughly works and print the damn thing." Eventually the company loses patience and the deal folds, but not before Deutsche's reputation in Islamic finance is made—in a city where non-Muslims are forbidden, no less.
The industry remains arcane and poorly understood, and often facing accusations that it is somehow linked to terrorist finance: Saudi Binladin Group will forever be overshadowed by the estranged son who ran a rather prominent terrorist network. Banks "are concerned that trading with Islamic financial institutions might somehow taint their own reputation, as if those institutions must by definition have a greater degree of exposure to laundered terrorist money," Mr. Irfan writes. He might have done more to vigorously confront this prejudice.
Given this book's topic, it will find relatively few readers outside of the financial industry. This is a pity, because aside from opening a window into this fascinating world, Mr. Irfan's career provides a case study in the challenges of balancing profit and principle.
As Mr. Irfan assesses the deals he structured at Western investment banks, he realizes that Shariah isn't ultimately being served by the mainstream banking world. Geert Bossuyt, former head of Deutsche Bank's now shuttered Islamic unit, concedes that perhaps "a bank is not an Islamic concept." But Mr. Irfan concludes that for all Islamic finance's shortcomings, its introspection is a source of strength—so long as it can refrain from the self-congratulatory impulses of Western banking and reassert its social mission. His message ought to be recited by bankers of every creed.
Balancing the altruistic ideals of faith with the need to turn a profit has never been easy: Look no further than the Book of Matthew for an early example of what history's most famous carpenter-cum-rabbi thought of money changers in places of worship. But while Judaism and Christianity historically had strict prohibitions against usury, today it is Muslims who adhere to the most stringent rules regarding finance of the three.
Islamic banking is unique in the world of finance, mostly because of what is prohibited. There are some straightforward bans: No investing in businesses that deal with products considered haram, or forbidden, most commonly pork and alcohol, but also Pop-Tarts (gelatin) and some aftershave (alcohol). Speculative bets are barred, and transactions must be based on real assets, not cash flows. By far the most significant rule is the prohibition on charging interest. The ban is meant to reflect the particular ethical responsibilities bestowed upon financiers: Profits and losses should be shared between debtors and creditors.
Many Muslims believe this risk-sharing approach can help remedy our broken financial system, even if it's difficult to square with mainstream, conventional banking. But a new book by financial industry insider Harris Irfan claims that many of the practitioners of Islamic finance have abandoned this honorable aim in an effort to keep up with the sophisticated tools of Western investment banks.
In "Heaven's Bankers: Inside the Hidden World Of Islamic Finance," Mr. Irfan, an observant Muslim, charts a course from seventh-century Arabia, where Muslim traders invented the precursors to modern checks and trusts while plying the Silk Road, to the 1970s and the establishment of the first Islamic commercial lenders in Dubai, as well as the short-lived "Islamization" of Pakistan's economy. But it's the turbocharged present that is the focus of the book: Islamic banking, otherwise known as Shariah-compliant banking, is now an industry approaching $2 trillion, thanks to soaring trade in emerging markets such as Malaysia and the United Arab Emirates.
Mr. Irfan has been a key player throughout much of this contemporary boom, having co-founded the team at Deutsche Bank that pioneered modern Shariah-compliant derivatives. He became the global head of Islamic finance at Barclays Capital in 2009, and is now a managing director at European Islamic Investment Bank, one of the few U.K.-based Shariah-financing boutiques. The book provides an up-close look at the tactics Western banks, like Deutsche, Goldman Sachs and HSBC,have taken to win over 1.6 billion Muslims world-wide, who for years either had to park their religious principles to participate in the global financial system or accept mediocre returns.
But along the way, Mr. Irfan also provides numerous examples of how Western financiers, determined to win over the faithful, have diluted Shariah standards in pursuit of commercial advantage: Bankers delete the word "interest" from deal documents in favor of Shariah-friendly language; Islamic investors wittingly and unwittingly fund businesses where alcohol and pork products are consumed; and Islamic scholars find their names used to suggest that they had given approval to deals they had never reviewed. In one instance that remains murky, a $2 billion Islamic bond deal by Goldman Sachs was sunk after a fatwa, a religious edict green-lighting a deal, failed to pass muster with skeptical Muslim bankers. Even when Western banks go out of their way to accommodate the faithful, things can border on the surreal. Mr. Irfan describes one comic case in which Deutsche Bank is left pondering how a deal that justifies its Shariah credentials by trading real assets can be completed without clogging up the mailroom with millions of sacks of Egyptian fertilizer for years on end.
It's plain, though, that many Western bankers treat Islam as a nuisance: "I don't care about the Shar-eye-ah stuff!" yells one New York-based banker as a cross-border acquisition deal runs into religious requirements. On the flip side, many Muslims, Mr. Irfan argues, also turn a blind eye. Even while chasing a deal to fund a five-star hotel and gigantic clock tower in Mecca, Deutsche Bank finds some companies prepared to settle for Shariah-lite. "I don't understand why you guys need to overanalyse things," the bankers are told by the finance manager at Saudi Binladin Group, the kingdom's biggest construction company. "Just do the deal. Draft up the docs with a structure that roughly works and print the damn thing." Eventually the company loses patience and the deal folds, but not before Deutsche's reputation in Islamic finance is made—in a city where non-Muslims are forbidden, no less.
The industry remains arcane and poorly understood, and often facing accusations that it is somehow linked to terrorist finance: Saudi Binladin Group will forever be overshadowed by the estranged son who ran a rather prominent terrorist network. Banks "are concerned that trading with Islamic financial institutions might somehow taint their own reputation, as if those institutions must by definition have a greater degree of exposure to laundered terrorist money," Mr. Irfan writes. He might have done more to vigorously confront this prejudice.
Given this book's topic, it will find relatively few readers outside of the financial industry. This is a pity, because aside from opening a window into this fascinating world, Mr. Irfan's career provides a case study in the challenges of balancing profit and principle.
As Mr. Irfan assesses the deals he structured at Western investment banks, he realizes that Shariah isn't ultimately being served by the mainstream banking world. Geert Bossuyt, former head of Deutsche Bank's now shuttered Islamic unit, concedes that perhaps "a bank is not an Islamic concept." But Mr. Irfan concludes that for all Islamic finance's shortcomings, its introspection is a source of strength—so long as it can refrain from the self-congratulatory impulses of Western banking and reassert its social mission. His message ought to be recited by bankers of every creed.
Lacuna in Islamic Finance-Part 1.
By Prof Dr Mansor Ibrahim.
The Islamic Finance (IF) industry has emerged to be an integral part of the global financial scene, landmarked not only by its significant presence in many Muslim countries but also its increasing acceptance in non-Muslim world. Its growth over recent years, estimated to be around 17% per annum over 2010-2014, is nothing short of being spectacular. The robust and resilient performance of IF amidst global financial uncertainties has added further to its praise and potential as a viable alternative system to the existing so-called conventional financial system. Indeed, anecdotal evidence of the IF successes is proliferating and scholarly empirical evidence supportive of the Islamic-based model of finance is increasingly forthcoming.
While one can join in praising the successes of Islamic Finance, one also cannot help but to ponder on three noteworthy observations:
•Theoretically, Islamic Finance differs from conventional finance. In practice, however, there seems to be no discernible difference between them.
•Islamic Finance prospers only in some Muslim countries. Indeed, many Muslim countries have not embraced the Islamic-based finance model.
•Despite its rapid growth, the Islamic Finance size is still marginal as compared to the conventional finance.
The first observation has long been the focus not only of popular discussion but also of scholarly debates under the heading: Is Islamic finance Islamic? It is admitted that Islamic finance particularly Islamic banking is far from achieving its ideal. However, a verdict that it is non-Islamic would be a sheer mistake since transactions in Islamic finance and their underlying contracts are in conformance with the Shariah.
While the issue of Islamic finance being Islamic is important, there are several queries emanating from the above observations: Why has Islamic Finance not progressed to its ideal model and spread throughout all Muslim countries? Why has it remained small relative to conventional finance? Of course, the answers to these questions can be direct and obvious: the Islamic finance industry is still young and finding its way towards its ideal model. However, given the much hype and praises, more is expected from Islamic Finance.
A key question is: Has Islamic finance reached its plateau or is there a lacuna to be filled for the industry to leapfrog forward?
Fundamentally, the progress of the Islamic Finance industry, or any other industry, depends on its products (P), governing institutions (I) and people (P). Dissecting these PIP factors of success can potentially bring light on the lacuna to be filled. Benefiting from conventional counterparts, the Islamic finance is not short of product innovations. Although certain Muslim countries still have issues with their institutional quality and framework to facilitate the progresses of Islamic finance, Malaysia is exemplary in the developments of Islamic regulatory framework and infrastructure. Indeed, Malaysia’s institutional structure for Islamic finance can be adapted by many other countries provided that they have political will to do so. Thus, the real lacuna lies in the workforce of Islamic finance. Yes, it is a cliché to say that education is central to producing Islamic finance talent. But, it is more than the cliché as it relates to the requirements of Islamic finance education. And existing providers of Islamic finance education seem to fall short of providing all essential and necessary parts that construe the Islamic finance education. This lacuna, at present, remains unfilled.
Islamic finance is deep-rooted in Islamic principles or the Shari’ah. Hence, the knowledge of the Shari’ah is crucial in the Islamic finance education. At the same time, given that Islamic finance necessarily faces various sorts of risk and operates competitively in an increasingly integrated financial markets, having analytical ability to manage financial assets and perform and assess financial risk is also critical. This means the Islamic finance education must be the symbiosis of the Shariah knowledge and finance-related analytical skills. It can be further stressed that to leapfrog forward, the Islamic finance industry cannot afford to simply imitate the conventional finance. In this respect, thought leadership is needed. This means that Islamic finance education must encapsulate economic/finance theories and research capability. In short, the ideal Islamic finance education must comprise the Shariah, Quantitative Skills, and Economic and Finance theories equally strongly in depth and coverages without diluting any one of them.
In parallel to the fast-growing Islamic finance industry, more and more institutions of higher learning are offering undergraduate and post-graduate programs in Islamic banking and finance. The existing program structure of IF degrees do comprise these three core fields of knowledge. However, they are not stressed equally strongly in almost all degree programs. Thus, the IF education cannot fill the void of having graduates that are well versed with Shariah, technical knowledge of finance, and theoretical knowledge of economics and finance. Hence, the long-noted problem of “inadequate expertise in IF” continues.
The Islamic Finance (IF) industry has emerged to be an integral part of the global financial scene, landmarked not only by its significant presence in many Muslim countries but also its increasing acceptance in non-Muslim world. Its growth over recent years, estimated to be around 17% per annum over 2010-2014, is nothing short of being spectacular. The robust and resilient performance of IF amidst global financial uncertainties has added further to its praise and potential as a viable alternative system to the existing so-called conventional financial system. Indeed, anecdotal evidence of the IF successes is proliferating and scholarly empirical evidence supportive of the Islamic-based model of finance is increasingly forthcoming.
While one can join in praising the successes of Islamic Finance, one also cannot help but to ponder on three noteworthy observations:
•Theoretically, Islamic Finance differs from conventional finance. In practice, however, there seems to be no discernible difference between them.
•Islamic Finance prospers only in some Muslim countries. Indeed, many Muslim countries have not embraced the Islamic-based finance model.
•Despite its rapid growth, the Islamic Finance size is still marginal as compared to the conventional finance.
The first observation has long been the focus not only of popular discussion but also of scholarly debates under the heading: Is Islamic finance Islamic? It is admitted that Islamic finance particularly Islamic banking is far from achieving its ideal. However, a verdict that it is non-Islamic would be a sheer mistake since transactions in Islamic finance and their underlying contracts are in conformance with the Shariah.
While the issue of Islamic finance being Islamic is important, there are several queries emanating from the above observations: Why has Islamic Finance not progressed to its ideal model and spread throughout all Muslim countries? Why has it remained small relative to conventional finance? Of course, the answers to these questions can be direct and obvious: the Islamic finance industry is still young and finding its way towards its ideal model. However, given the much hype and praises, more is expected from Islamic Finance.
A key question is: Has Islamic finance reached its plateau or is there a lacuna to be filled for the industry to leapfrog forward?
Fundamentally, the progress of the Islamic Finance industry, or any other industry, depends on its products (P), governing institutions (I) and people (P). Dissecting these PIP factors of success can potentially bring light on the lacuna to be filled. Benefiting from conventional counterparts, the Islamic finance is not short of product innovations. Although certain Muslim countries still have issues with their institutional quality and framework to facilitate the progresses of Islamic finance, Malaysia is exemplary in the developments of Islamic regulatory framework and infrastructure. Indeed, Malaysia’s institutional structure for Islamic finance can be adapted by many other countries provided that they have political will to do so. Thus, the real lacuna lies in the workforce of Islamic finance. Yes, it is a cliché to say that education is central to producing Islamic finance talent. But, it is more than the cliché as it relates to the requirements of Islamic finance education. And existing providers of Islamic finance education seem to fall short of providing all essential and necessary parts that construe the Islamic finance education. This lacuna, at present, remains unfilled.
Islamic finance is deep-rooted in Islamic principles or the Shari’ah. Hence, the knowledge of the Shari’ah is crucial in the Islamic finance education. At the same time, given that Islamic finance necessarily faces various sorts of risk and operates competitively in an increasingly integrated financial markets, having analytical ability to manage financial assets and perform and assess financial risk is also critical. This means the Islamic finance education must be the symbiosis of the Shariah knowledge and finance-related analytical skills. It can be further stressed that to leapfrog forward, the Islamic finance industry cannot afford to simply imitate the conventional finance. In this respect, thought leadership is needed. This means that Islamic finance education must encapsulate economic/finance theories and research capability. In short, the ideal Islamic finance education must comprise the Shariah, Quantitative Skills, and Economic and Finance theories equally strongly in depth and coverages without diluting any one of them.
In parallel to the fast-growing Islamic finance industry, more and more institutions of higher learning are offering undergraduate and post-graduate programs in Islamic banking and finance. The existing program structure of IF degrees do comprise these three core fields of knowledge. However, they are not stressed equally strongly in almost all degree programs. Thus, the IF education cannot fill the void of having graduates that are well versed with Shariah, technical knowledge of finance, and theoretical knowledge of economics and finance. Hence, the long-noted problem of “inadequate expertise in IF” continues.
New Books on Islamic Finance and Economics.
June 2015, Professor of Islamic Economics;Zubair Hassan has released two new books :
•Islamic Banking and Finance: An Integrative Approach
•Economics with Islamic Orientation.
Prof Zubair has extensively published books, articles and reviews in reputed academic journals worldwide. Some of these have been translated and published in languages other than English.
The 83-year-old joined the teaching profession in 1957 and has worked at a number of educational institutions in India before coming to Malaysia in 1990. In 2008, he joined INCEIF to teach Islamic economics.
In recognition of his accomplishments and tireless efforts in the promotion of Islamic economics as well as Islamic banking and finance, Prof Zubair was awarded the prestigious Islamic Development Bank (IDB) Prize in Islamic Economics in 2009.
I am looking forward to obtain my copy of each, Insha Allah.
•Islamic Banking and Finance: An Integrative Approach
•Economics with Islamic Orientation.
Prof Zubair has extensively published books, articles and reviews in reputed academic journals worldwide. Some of these have been translated and published in languages other than English.
The 83-year-old joined the teaching profession in 1957 and has worked at a number of educational institutions in India before coming to Malaysia in 1990. In 2008, he joined INCEIF to teach Islamic economics.
In recognition of his accomplishments and tireless efforts in the promotion of Islamic economics as well as Islamic banking and finance, Prof Zubair was awarded the prestigious Islamic Development Bank (IDB) Prize in Islamic Economics in 2009.
I am looking forward to obtain my copy of each, Insha Allah.
Critical review of an article titled "Exploring the distinguishing features of Islamic Banking in Tanzania." Final.
Conceptual Framework-continues.
iii. Structuring banks to follow Islamic principles.
Conventional banks that are interested to offer Islamic financial services have to meet certain conditions as suggested by Sharia scholars in order to distinguish the two business segments. While the relation between the conventional bank and Islamic banks customer's differs, it is not limited to that of a bank and partner as stated by the Author. This faulty may be attributed by the authors bias towards other modes used by Islamic finance such as Wakala investment or Qardh or reverse Tawarruq modes, which expand the relationship beyond a bank and a partner on the liability side. On the Asset side of Islamic banks, the relationship between the bank and customers is diverse depending on the mode of finance employed. For example, under Murabaha mode, before and during sale, the bank is seller and customer is buyer, after sale it is bank-creditor and customer-debtor relationship. This fact negate such generic statements the author made claiming that "...in Islamic banking, customers are regarded as investors and entrepreneurs."
Failure to appreciate diverse relationships that exists in Islamic banks between the bank and customers, lead the author into failure to grasp flexibility of these other modes and their usefulness to mitigate risks such as agency problem. Besides,author alleges that "...the Islamic banks have two types of principal investment account holders (depositors and borrowers i.e. investors and entrepreneurs) and shareholders who have limited information compared to the management on applications of Islamic principles to the bank operations." This is not just incomplete but also shows lack of understanding on the subject author wrote about. Those two investment account holders, technically referred as Restricted and non-resticted investment account holders (depositors) and hence borrowers are not under any of above two categories. Furthermore, Islamic banks also maintain accounts for non-investment account holders.
iv. Competence of Sharia Supervisory Board (SSB).
Competence of SSB members is key ingredient towards Sharia compliance of products offered by Islamic banks and windows. Assessment of competence is crucial for Sharia-compliant status of the bank. However, Khan (2010) contention, though understandable it is nothing apart from hocus-pocus to say that "'most' of the Islamic scholars who are serving on SSBs are rent-seeking scholars, hence becoming mere rubber stamps." Review of profiles of members of SSB sitting in Islamic banks around the globe and even in Tanzania have demostrated required level of Sharia knowledge and experience on Islamic financial matters.
Methodology.
In order to gather evidence on the subject under study, the author uses two commercial banks (with Islamic windows)out of five banks that offer Islamic financial services. While sampling techniques and collection methodology of questinnaire and interview is sound and effective for this study, the author did not specify how many respondent were intended and how many responded and what is the respondents profile.
However, the Author pointed out briefly his respondents to have included member of SSB, Staffs perceived to have relevent experience in Islamic finance, head of departments and Islamic bank's/windows customers.
Anaylsis and Interpretation of Findings.
This is an area where author's bias is most evident. Let us examine his analysis on each criteria.
i. Compliance with Islamic principles of finance.
On all three sub-criterias under this criteria, the results showed majority of respondent's 'Dont Know' (66.7 and above) followed by those who gave positive response(High) and confident that the bank comply with Sharia rules, follow Islamic accounting and auditing standard and make ethical investment (20% and above). Those who gave negative response (low) constitute less than 7 percent under each sub-criteria. With this statistics, you can hardly draw meaningful conclusion on the thesis of the study.
ii. Selection of customers according to Islamic principles.
While in theoretical framework, the author alleged that Islamic banks are more inclined towards seeking customer's who are affilliated with the religion of Islam. The results of his study, has once again proved that customer's joining Islamic bank are not per se motivated by religious reasons but other factors. In this study, 71% compared to 23% did not opt Islamic financial services for religious reasons. If the allegation were true that religious reasons a significant criterion for Sharia compliance within Islamic banks, there will be systematic measures to achieve that. However as has been argued before, such practice has no base in Sharia and cannot be advocated by any scholar who understands Sharia principles.
One of the item that might have resulted into large per centage of customer's engaged in beer business is because the study doesn't describe those respondent were customer's of Islamic window or the onventional banks side. Author writes "However, during interviews with officials from these banks on implementing Islamic banking it emerged that the banks did not open accounts in the Islamic banking window for individuals and companies dealing with cigarettes, alcohol and gambling business."If this is so the case, then very little remains to write more on the flimpsy and shaky response given by respondent(s).
iii. Structuring of conventional banks to follow Islamic principles.
Once again a large portion of respondents asked under different sub-criteria, responded as "Dont Know". This may have been contributed by many factors which however not clear from the study. It appears that there is limited awareness on how conventional banks with Islamic windows implement Islamic banking principles.
Disclosing adequate information is a real challenge for Islamic windows which reports their financials under the conventional banking balance sheet without notes to disclose Islamic windows financial performance. This needs to be addressed by banks and regulator should persuade banks with Islamic windows to disclose such information. This will also enable to trace progress of Islamic banking n the country at ease rather than approaching each bank for such information during research studies or else.
iv. Competence of SSB.
It is not convincing to accept that respondents knows SSB members knowledge level on Islamic jurisprudence. Was it because the questionnaire had "Yes" and "No" option without "Do Know." I argue that this is highly unreliable information that this study has provided on this area. It is more confusing when you find higher positive reponse is given by respondents on members knowledge on Islamic Finance but lower score on members knoweldge of Islamic jurisprudence. I argue that, Islamic Finance is part of Islamic jurisprudence, hence it is not convincing to score high on Islamic Finance and low on jurisprudence.
Conclusion.
This study despite its weaknesses as discussed above, it shows that there is limited knowledge on Islamic banking among the employees of conventional bank's Islamic windows as well as the public which requires continuous measures to address. However, this is not peculiar to such banks in Tanzania, but more likely to be shared in other countries as well such as Kenya but also in countries with advanced Islamic banking such as UAE.
The author has tried to link his study with other studies to justify his findings and analysis, but such other studies need to be considered in their own context which may be very differrent with Tanzanian context. Furthermore, the studies referred have many allegations which are unjustifiable except in particular context which however not made clear by the author. For example, the author writes "These studies contend that Islamic banks are using the Islamic approach to gain advantages over their competitors by becoming more competitive through offering services based on religious financial discipline despite the investment procedures remaining similar to those for conventional banks." The author seems not to see the difference between those studies with what he found as he says; "However, during interviews with officials from these banks on implementing Islamic banking it emerged that the banks did not open accounts in the Islamic banking window for individuals and companies dealing with cigarettes, alcohol and gambling business." Definately, those studies have been proven incorrect in Tanzanian context particularly on investment procedures.
Taking the objective of the study in mind, this study doesn't provide convincing evidence with regards to Sharia non-compliance of Islamic banks (actually the study was based on Islamic Windows), but it contributes to the debate on how to ensure Sharia compliance in conventional banks, shed light on the need to spearhead Islamic banking awareness to the general pubic as well as having in place regulations that might tight hand conventional banks from exploiting Islamic windows for competitive gain per se at the expense of Sharia compliance.
iii. Structuring banks to follow Islamic principles.
Conventional banks that are interested to offer Islamic financial services have to meet certain conditions as suggested by Sharia scholars in order to distinguish the two business segments. While the relation between the conventional bank and Islamic banks customer's differs, it is not limited to that of a bank and partner as stated by the Author. This faulty may be attributed by the authors bias towards other modes used by Islamic finance such as Wakala investment or Qardh or reverse Tawarruq modes, which expand the relationship beyond a bank and a partner on the liability side. On the Asset side of Islamic banks, the relationship between the bank and customers is diverse depending on the mode of finance employed. For example, under Murabaha mode, before and during sale, the bank is seller and customer is buyer, after sale it is bank-creditor and customer-debtor relationship. This fact negate such generic statements the author made claiming that "...in Islamic banking, customers are regarded as investors and entrepreneurs."
Failure to appreciate diverse relationships that exists in Islamic banks between the bank and customers, lead the author into failure to grasp flexibility of these other modes and their usefulness to mitigate risks such as agency problem. Besides,author alleges that "...the Islamic banks have two types of principal investment account holders (depositors and borrowers i.e. investors and entrepreneurs) and shareholders who have limited information compared to the management on applications of Islamic principles to the bank operations." This is not just incomplete but also shows lack of understanding on the subject author wrote about. Those two investment account holders, technically referred as Restricted and non-resticted investment account holders (depositors) and hence borrowers are not under any of above two categories. Furthermore, Islamic banks also maintain accounts for non-investment account holders.
iv. Competence of Sharia Supervisory Board (SSB).
Competence of SSB members is key ingredient towards Sharia compliance of products offered by Islamic banks and windows. Assessment of competence is crucial for Sharia-compliant status of the bank. However, Khan (2010) contention, though understandable it is nothing apart from hocus-pocus to say that "'most' of the Islamic scholars who are serving on SSBs are rent-seeking scholars, hence becoming mere rubber stamps." Review of profiles of members of SSB sitting in Islamic banks around the globe and even in Tanzania have demostrated required level of Sharia knowledge and experience on Islamic financial matters.
Methodology.
In order to gather evidence on the subject under study, the author uses two commercial banks (with Islamic windows)out of five banks that offer Islamic financial services. While sampling techniques and collection methodology of questinnaire and interview is sound and effective for this study, the author did not specify how many respondent were intended and how many responded and what is the respondents profile.
However, the Author pointed out briefly his respondents to have included member of SSB, Staffs perceived to have relevent experience in Islamic finance, head of departments and Islamic bank's/windows customers.
Anaylsis and Interpretation of Findings.
This is an area where author's bias is most evident. Let us examine his analysis on each criteria.
i. Compliance with Islamic principles of finance.
On all three sub-criterias under this criteria, the results showed majority of respondent's 'Dont Know' (66.7 and above) followed by those who gave positive response(High) and confident that the bank comply with Sharia rules, follow Islamic accounting and auditing standard and make ethical investment (20% and above). Those who gave negative response (low) constitute less than 7 percent under each sub-criteria. With this statistics, you can hardly draw meaningful conclusion on the thesis of the study.
ii. Selection of customers according to Islamic principles.
While in theoretical framework, the author alleged that Islamic banks are more inclined towards seeking customer's who are affilliated with the religion of Islam. The results of his study, has once again proved that customer's joining Islamic bank are not per se motivated by religious reasons but other factors. In this study, 71% compared to 23% did not opt Islamic financial services for religious reasons. If the allegation were true that religious reasons a significant criterion for Sharia compliance within Islamic banks, there will be systematic measures to achieve that. However as has been argued before, such practice has no base in Sharia and cannot be advocated by any scholar who understands Sharia principles.
One of the item that might have resulted into large per centage of customer's engaged in beer business is because the study doesn't describe those respondent were customer's of Islamic window or the onventional banks side. Author writes "However, during interviews with officials from these banks on implementing Islamic banking it emerged that the banks did not open accounts in the Islamic banking window for individuals and companies dealing with cigarettes, alcohol and gambling business."If this is so the case, then very little remains to write more on the flimpsy and shaky response given by respondent(s).
iii. Structuring of conventional banks to follow Islamic principles.
Once again a large portion of respondents asked under different sub-criteria, responded as "Dont Know". This may have been contributed by many factors which however not clear from the study. It appears that there is limited awareness on how conventional banks with Islamic windows implement Islamic banking principles.
Disclosing adequate information is a real challenge for Islamic windows which reports their financials under the conventional banking balance sheet without notes to disclose Islamic windows financial performance. This needs to be addressed by banks and regulator should persuade banks with Islamic windows to disclose such information. This will also enable to trace progress of Islamic banking n the country at ease rather than approaching each bank for such information during research studies or else.
iv. Competence of SSB.
It is not convincing to accept that respondents knows SSB members knowledge level on Islamic jurisprudence. Was it because the questionnaire had "Yes" and "No" option without "Do Know." I argue that this is highly unreliable information that this study has provided on this area. It is more confusing when you find higher positive reponse is given by respondents on members knowledge on Islamic Finance but lower score on members knoweldge of Islamic jurisprudence. I argue that, Islamic Finance is part of Islamic jurisprudence, hence it is not convincing to score high on Islamic Finance and low on jurisprudence.
Conclusion.
This study despite its weaknesses as discussed above, it shows that there is limited knowledge on Islamic banking among the employees of conventional bank's Islamic windows as well as the public which requires continuous measures to address. However, this is not peculiar to such banks in Tanzania, but more likely to be shared in other countries as well such as Kenya but also in countries with advanced Islamic banking such as UAE.
The author has tried to link his study with other studies to justify his findings and analysis, but such other studies need to be considered in their own context which may be very differrent with Tanzanian context. Furthermore, the studies referred have many allegations which are unjustifiable except in particular context which however not made clear by the author. For example, the author writes "These studies contend that Islamic banks are using the Islamic approach to gain advantages over their competitors by becoming more competitive through offering services based on religious financial discipline despite the investment procedures remaining similar to those for conventional banks." The author seems not to see the difference between those studies with what he found as he says; "However, during interviews with officials from these banks on implementing Islamic banking it emerged that the banks did not open accounts in the Islamic banking window for individuals and companies dealing with cigarettes, alcohol and gambling business." Definately, those studies have been proven incorrect in Tanzanian context particularly on investment procedures.
Taking the objective of the study in mind, this study doesn't provide convincing evidence with regards to Sharia non-compliance of Islamic banks (actually the study was based on Islamic Windows), but it contributes to the debate on how to ensure Sharia compliance in conventional banks, shed light on the need to spearhead Islamic banking awareness to the general pubic as well as having in place regulations that might tight hand conventional banks from exploiting Islamic windows for competitive gain per se at the expense of Sharia compliance.
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