By Firoz Hamid
Syakh Akram Nadwi from Oxford Islamic Centre in Oxford, in his publication titled “General Framework for Discussion of Islamic Finance wrote “Yet, if using the word ‘Islamic’ before ‘finance’ is to mean anything at all, it should mean the kind of finance that belongs in Islam, the kind that Muslims acting specifically as Muslims engage in when they are producing and exchanging goods and services, and generally building up their individual and collective means of livelihood. Most ordinary Muslims are, I think rightly, suspicious and cautious about accepting the permissibility of many of these instruments. It does not help matters that banks and investment companies run by and for non-Muslims are happy to use these same Islamic financial instruments because it helps them to attract and keep Muslim customers.”
This interview challenges if Islamic Finance has truly serviced the needs of humanity. Has it been the face of solving human tragedies of the 21st Century? Has it elevated the standards of living of humanity – Muslims and non-Muslims alike or has it focused too much on forums and conferences, and served the few who seek a better deal in a financial return.
Has the Industry become out of reach for the general masses in its understanding and ethos with its word games and jargons? Is the Industry changing the way economies are run, and if not why not, given its claims that the financial crises spared the Islamic Finance Industry given its principles of transaction.
Why hasn’t the Industry been able to convince global powers, businesses and institutions to adopt its principles as a global standard if it indeed delivers a “crises free” market? Daud Vicary Abdullah, the president and chief executive officer of INCEIF shares his views.
Daud Vicary Abdullah
Daud Vicary Abdullah’s Views on the industry
The Islamic finance industry has had impressive growth since its inception in 1983 due to a number of reasons, chief among which is to fill an unmet need of Muslims to live according to the worldview of Islam and conduct their economic activities ethically by avoiding forbidden elements and activities. This was complemented by government efforts to facilitate its growth through legal initiatives as well as regulatory oversight and guidance. Over time expectations increased among players and consumers for Islamic finance to meet the variety of financial services supported by market institutions within the industry.
Through a ‘planned’ and evolutionary approach, the industry grew while ensuring that its services were designed without compromising the key elements of shariah (Islamic Law). The intention and effort were in many ways organised and systematic though not perfect at times. The ‘process’ approach is the linchpin of the Malaysian experience where monitoring, reviews and feedbacks of governance framework as well as product development contributed to an increasing acceptance of these services by the community at large. The designing of products and processes may not be perfect, but the intention and the effort including codes and best practices deserve favourable commendation.
1. What drives this industry – ethics, justice or products development for profit making? Has the industry lost sight of the very essence of commerce and trade as stipulated in the Quran and Sunnah to the more pressing issues of bottom line?
The purpose of Islamic finance is to conduct a profitable business in accordance with Shariah as interpreted by those with the authority to provide opinions on such transactions. This is premised within the framework of the political economic system of a market economy with emphasis on shareholders and investors as key players in national development.
Returns to shareholders or investors will determine the industry, the company and the mode of financing to which investors will direct their attention. Expected returns on equity and long-term shareholder value had been the traditional goals of corporate governance in the Malaysian economy. The responsibility to stakeholders is instrumental rather than inclusive.
The above scenario ought to be considered by commentators when judging the effectiveness of the outcome of Islamic Finance. The trend towards an inclusive stakeholder approach to governance may have a significant influence on the governance framework of Malaysia and similar jurisdictions to accommodate other important stakeholders in their governance structure and processes.
For example, the current efforts at explication, understanding and application of Maqasid Shariah (Goals of Shariah) by scholars including those from ISRA and INCEIF is one such attempt to improve on the Shariah approach of elevating best practices beyond compliance into social justice and sustainability. This is where a unified understanding and action among Shariah scholars is required (perhaps through professional associations of Shariah scholars and practitioners) to provide relevant input in enhancing governance frameworks to include a social and ethical approach to business rather than purely using the language of law and economics such as “bottom line through compliance”.
2. What is our purpose in this life?
Shouldn’t the very basis of Islamic Finance be a function of enabling Muslims to become better Muslims? Shouldn’t the industry move beyond labelling and word games towards true engagement of human causes?
The governance framework is dynamic and systematic, as well as encouraging of research and discourse to provide meaningful input into pushing the industry to focus on the next phase of its business in accordance with the expectations of those whose rights and needs are to be respected.
The use of Zakat for human capital development is a move in the right direction as it prepares the industry with competent and trained human resource to move it to the next level. Also new insights into social responsibility and sustainability based on Maqasid Shariah ought to develop practices, processes and policies that extend beyond fiqh rulings and into meaningful strategies.
Shariah Committees or Shariah Advisory Councils may want to either explore or embark on such initiatives without compromising on long-term sustainability. Currently the synthesising of ideas between maqasid and sustainability is fairly limited. This is one area where Islamic finance can be a role model to other businesses in contributing to shared development. Additionally, it is about time that the responsibility for ethics and developing an ethical culture becomes the responsibility of the board of directors. The board should be accountable to disclose their efforts to regulators and shareholders. Only through these initiatives and their evaluation can standards be established for improving ethical awareness and sensitivity based on Islamic values.
3. Prohibition of wealth to be circulated amongst a selected few – This dictates that the poor and needy have a right to the property of those who enjoy a surplus. How does the industry ensure the less privileged are served? Is the Islamic Finance Industry serving to eradicate poverty or is it here to serve a select few?
The globalisation of social responsibility is part of maqasid (goal). It can be conceptually developed and practiced through existing international institutions such as IDB and its affiliates, Fiqh Academies, and Association of Islamic economic scholars and practitioners. It is necessary to have relevant networks that can cooperate effectively in promoting the vision of IDB in achieving its human development goals through training and empowering such initiatives in the poorest regions of the Muslim world.
4. The essence of commerce and trade in Islam – Professor Akram Nadwi writes “Instead of being oriented outwards to the difficulties of Muslims in their everyday lives, they became oriented inwards towards the difficulties within their own work. So, eventually, it became possible to speak of a Hanafi or a Shafi‘i or a Maliki or a Hanbali position on this or that matter. Mercifully, now and again, there arose within the community, clear-sighted and clear-hearted individuals who knew, and who said publicly, that it should be the other way round. An example is Shaykh al-Islam Ibn Taymiyya, who refused to be identified as a Hanbali, and insisted on his identity as a Muslim.”
What is the role of Institutions such as INCEIF in reverting the industry back to the essence of commerce in Islam? How could you influence the industry? What is the role of Malaysia with her aspirations to be a one of the leading hubs of Islamic Finance in making this change?
INCEIF and ISRA among others recognise the need to conduct and publish research on contemporary issues and possibilities in charging future directions of the Islamic Finance industry.
It is also responsible for developing talent through its professional programmes that enables students from the various Muslim countries to share experiences and perspectives in managing financial institutions while being aware of the challenges and constraints of improving governance processes and structures.
Malaysia with its valuable experience in developing the Islamic finance industry can provide training for future professionals and initiate the development of Associations of Islamic professionals as well as the Associations of Shariah scholars that can serve members within and outside the country.
5. Perfecting Commerce by Faith – Imam Ghazali in his writings on trade and commerce calls on turning economic activities into a form of “ihsan” (perfect by the faith – Moving away from the mechanical “ticking the boxes” Industry to one where the Industry serves the people by uplifting their status. There are movements now called “The Fair Trade Commerce” and “The Better World” Shopping Guides that are already doing this. How is the Industry spearheading this? How can this be better implemented and instituted in the Industry?
Ihsan like integrity, excellence, passion, professionalism and other core values of Islamic organisations, must be part and parcel, and better yet, internalised within the culture of organisations and their stakeholders.
Codes of ethics must be aligned to core values and ought to be properly communicated, explained and evaluated based on best practices and standards. The same applies to ihsan. It must be explicated as part of the character of the institution and it must be ‘alive’ and pervasively present in the systems of reward, strategies and staffing of those institutions. A governance approach that requires accountability of the board for disclosure of culture development efforts is one such initiative that ought to be in place if the culture of doing business in Islamic Finance is to be noted for being ethical.
6. Greed in Finance – The Prophet Muhammad (peace be on him) said “An honest and trustworthy merchant will be with the martyrs on the Day of Resurrection.”How has the Islamic Finance Industry led in developing ethical merchants, bankers and a greed-free system?
Developing a dynamic and evolving culture based on the anchor or core values and supported by ethical leadership of the board and well received codes of ethics can go a long way in promoting ethical behaviour in such institutions. It is timely for boards take such responsibilities rather than leaving them to Shariah advisory committees. The language of profits, survival and legal compliance ought to be tampered with the language of vicegerent (khalifah), stewardship, social responsibility, spiritual strength and sustainability.
7. Challenging Global Economic Principles – Has the Islamic Finance Industry actively challenged fundamental global economic principles in the face of the catastrophic collapse of many leading global economies and institutions? Has the Industry been at the forefront in arguing the very essence of commerce in Islam which is based on equity, justice, fairness, mercy and wellbeing for all and not a selected few?
The move towards Islamic derivatives is not without dangers and limitations that can cause serious harm and injustice to society at large. It is therefore imperative that the products are properly designed to assess the needs of and potential harm to stakeholders. Within an inclusive stakeholder approach, initiatives and products must be fit for its purpose from the perspective of stakeholders, not just the management and shareholders.
8. Business Ethics in Islamic Finance – Is the debate on Business Ethics and its true essence being actively deliberated by the industry? Or is the greater focus on products that sell?
There is very limited discussion on business ethics for a number of reasons. Firstly, boards are not required to disclose ethics initiatives to any party. There is also no requirement for the practice to be audited. Secondly, there is a wide gap between talking and practising ethics. This is partly due to the scarcity of cases and literature on Islamic business ethics. Thirdly, compliance is the floor of ethics and compliance is possibly due to instrumental reasons rather than as part of the belief system. It is likely that ethical responsibility is ‘abdicated’ by the board because the Shariah committee is considered more qualified to handle such issues. Shariah governance frameworks ought to incorporate this as part of the responsibilities of the board. The perception that ethics beyond compliance will be costly is reflective of a mindset that sees ethics as an aberration. This cannot be the mindset of directors, officers and managers of Islamic financial institutions.
Firoz Abdul Hamid
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