Lacuna in Islamic Finance-Final

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.