Critical review of an article titled "Exploring the distinguishing features of Islamic Banking in Tanzania." Part 1.

As promised in my previous post, this is critical review of the article published by Journal of Islamic Economics, Banking .... Vol-10, No1 January-March, 2014, titled "Exploring the distinguishing features of Islamic Banking in Tanzania" written by Henry Chalu, a lecturer Department of Accounting, UDSM. It is an exploratory study that aimed at describing the the extent to which Islamic banks in Tanzania comply with Islamic principles.

Literature Reviews.

The author used mostly the works of Algaoud and Lewis (2001:38) as well as Olson and Zoubi (2008) to describe religious features of Islamic banking. According to Henry, five religious features of Islamic banking identified by Algaoud and Lewis (2001:38) are; first feature is prohibition of interest(riba) in all transactions. The second feature is that business and investments are undertaken on the basis of halal (legal/permitted) activities. The third feature is that maysir (gambling) is prohibited and transactions should be free from gharar (speculation or unreasonable uncertainty). The fourth feature is that zakat is to be paid by the bank for the benefit of society and all activities should be in line with Islamic principles. Finally, there should be a special Sharia board to supervise and advise the bank on the propriety of the transaction. Henry writes that "Olson and Zoubi (2008) classified these five Islamic features into two main principles that govern Islamic banks: prohibition of interest (riba) regardless of the source or form, and risk-sharing as Islamic banks are required to operate under the PLS arrangement. As such in this study, the overview uses the Olson and Zoubi (2008) features for two reasons: first, the features are more pronounced than others; and second these features incorporate other features identified by Algaoud and Lewis (2001)."

Though there are other religious features beyond the five mentioned above, such as sanctity of contract, prohibition on monopoly practices, underselling, speculative hoarding among others (Iqbal and Van Greuning, 2007) the author justifications for using Olson and Zoubi's two features shows author's bias and lack of comprehensive understanding of these other features which are independent but form part of the whole concept of Islamic Banking theory and practices around the world.

Moreover, the author failed to understand or show bias against other modes such as Murabaha, Ijarah, Musawammah, Qardh among others beyond P/S Sharing modes, i.e Musharaka and Mudharaba. Islamic banking practices all over the world shows that these other modes preoccupy largest share of financing and investment portfolio together with P/S Sharing modes. Hence from theory and practice, is inaccurate to assert that Musharaka and Mudaraba are 'two pillars of Islamic banking and finance.' Henry writes that 'from these two pillars this study developed four criteria that were used to assess the level of Islamic banking services in Tanzania. The four criteria are discussed under the subsequent conceptual framework."

Conceptual Framework.

The basis of the study is based on four features grouped into four criteria and considered to be criteria on Islamic banking 'Islamicity', these are: (i) compliance with Islamic principles of finance; (ii) selection of banks’ customers according to Islamic principles; (iii) structuring of conventional banks to follow Islamic principles; and (iv) competence of SSB. These features were used to determine the extent to which the Islamic banks operating in Tanzania were Sharia-compliant. Based on these features, data was gathered, analysed and presented.

I. Compliance with Islamic Principles. There is no doubt that this is significant criteria for Islamic banks. Based on the Islamic principles, Islamic banks differentiates itelf from conventional banks. This criteria evaluates bank's compliance to Sharia rules and principles governing transactions and code of conduct. Based on this criteria, author highlighted three key issues, one being Sharia compliance itself, second observing Islamic accounting and auditing standards, and third making ethical investment. While the first and the third issue is very real distinguishing feature of all times, the second issue is not except where the regulator recognises those Islamic accounting standards. Therefore, 'observing Islamic accounting and auditing standards as an area for the difference between conventional banking and Islamic banking' should be qualified in the sense that wherever central bank or financial regulations of the country has adopted it for Islamic banks. Otherwise, Islamic financial institutions are required to use the system of accounting standards which is mandated by the financial services regulator of the country in which they are based (Mohammed Amin, 2011).Hence, Islamic banks cannot be victimised by following IFRS as a legal requirement on its Sharia compliance status. Moreover, IFRS’s standards are principles based rather than legal based, which makes them applicable to Islamic finance, provided that concerned states issue the appropriate complementary guidelines and obligations(Kaushiq Kodithodika,2011). AAOIFI accounting standards serves as complementary guidelines for Islamic banks eventhough there are areas of great difference between the two standards.

The author writes "The main difference between international accounting standards and Islamic accounting standards is the definition of the bank’s income. Whereas under international accounting standards the income takes into consideration the interest aspect, under Islamic accounting standards, the definition of income is based on the profit aspect." It is not clear why the author, didnot mention that international accounting standards also takes into account profit aspect as Islamic accounting standard do, is this an error of omission or an effort to exegerrate the difference between the two standards?

II.Selection of banks’ customers according to Islamic principles. Henry writes "Although Islamic banks and Islamic banking windows in conventional banks are there to make profits like any other business, they are considered to foster religious faith. Thus, Islamic banks are expected to make sure that they make extra efforts to have customers who not only understand Islamic principles but who are also devoted followers." These words reminded me of AIG case and its ruling in USA, whereby the insurance company was alleged that AIG’s Shariah compliant business promoted religious doctrine. Thanks to Judge Lawrence Zatkoff who dismissed the case and said the plaintiff did not prove that AIG’s Shariah compliant businesses engaged in religious indoctrination. The decision debunks the prevailing myth that Islamic finance is unacceptable and supports the promotion of Islamic faith, whose image has been tainted by fundamentalists.

Leaving AIG case aside, it is hard to conscience with such allegation to Islamic banks which are open to every one, everywhere in the world. Islamic banks are not in theory nor in practice have ever had customer's screening criteria to establish devoted from non devoted followers of Islam to deal with. Author himself has confessed to this reality when he said "Studies in Islamic banking are diverse and none of them has used selection of banking customers as one of criteria for evaluating the distinguishing features
of Islamic services." Never has and never shall it be because such criteria has no basis in Islamic business law. Hence, it is not because Islamic banks wants to have competitive advantage or expand customer base by having non-muslim as customers, rather it is not supposed to do so in first place by Sharia principles. Islamic banks like conventional banks, have customer's with different motives including those with religious motive and such is not an issue or criteria for being Sharia compliant. For example; a catholic may opt for MKOMBOZI BANK not because it is conventional bank but because it is owned by catholic church, hence such religious motive of such customer cannot be yardstick to allege that MKOMBOZI BANK is for devoted catholic customers or is not owned by catholic church. Hence believing that "if the religious underpinnings of the Islamic banks were to hold, then the provision of banking services will be done to Muslims only " and using it as criteria to evaluate islamicity of Islamic banks falls nothing short of senseless spread of malice.

Long history of banking without Islamic banking, had no doubt prompted a large section of Muslims to prefer Islamic banking than else not only because it meets religious requirements but also because it present a fair value proposition to them and to alot of non-Muslims alike.

To continue..