Bank Negara Malaysia (BNM) had signed an MoU on 26 February 2009, with the UK Trade and Investment (UKTI) to establish a collaborative framework to promote co-operation in the field of Islamic finance. This will pave the way for Malaysia and United Kingdom to strengthen co-operation in the development of talent, expertise, business linkages and infrastructure support in islamic finance.
This is indeed good news as it reflects the commitment to further develop the Islamic finance industry in the United Kingdom and Malaysia.
Sir Andrew Cahn, the Chief Executive Officer of UKTI has rightly mentioned in the news conference, " As conventional liquidity has become difficult to come by, companies are looking for alternative financial options, thus helping Islamic finance become part of the mainstream international finance market."
This is another article worth commenting - see Finding the middle ground. The article was from Islamic Finance Asia (Feb/Mar 2009 issue). For the information of all, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has been set up to set standards to be followed by Islamic Financial Institutions to streamline and provide standardization of Islamic finance practices and build the confidence of customers and other stakeholders while promoting the sustainable growth of the industry. As I've commented in my earlier post, not many organizations and/or countries wish to adopt the standards issued by AAOIFI.
However, I disagree with some of the panelists in the article -standards should be set up even if the industry is still new. Islam does not restrict what you want to do provided the act is within the parameters of Shariah. Now, the parameters are unclear - they depend on interpretation of each Shariah scholar sitting in the Shariah Board - this should not be the way. As a result, you can see that certain "Islamic product" like Bai Bithaman Ajil (in Malaysia) is not being accepted in the Middle East.
Therefore, standardization is a requirement. Now, it is a matter of adoption of these available standards by the organizations/countries - this is the main problem.
When I first read this article Islamic finance has much to learn from the West, I felt a sense of regret that the author quoted the US as having "more shariah compliant financing" mechanism than practiced by Islamic banks in Islamic countries. I quoted here the basis for his argument - "American venture capital groups annually provide about $25bn in capital financing to entrepreneurs, scientists and engineers with new ideas. As a consequence of the availability of this type of financing the venture capital industry in the US has given birth and nurtured scores of Silicon Valley companies, including modern day icons such as HP, Cisco, Intel, Sun Micro Systems, Apple, Netscape, Ebay, and Google. All were created in the past 30 years or so from ideas grounded in science and technology. Scientists and engineers came up with the ideas, innovations and inventions while the venture capital industry provided the capital on a partnership basis. Millions of new jobs have been created as a result."
I believe the correct phrase would beIslamic finance has to go back to its roots (even the article's author wrote that the west's renaissance partly came as a result of learning from the Islamic world).Islam encourages development and abhors hoarding and idle of wealth, thus, encourages investments. True, the most popular mode of Islamic financing now is murabaha (cost plus), but there are Islamic financial institutions who have made the necessary steps to opt for other Islamic modes of financing e.g. musyarakah, which is a form of partnership (profit and loss sharing).
I would like to reiterate that we (especially the Muslims) must give Islamic finance a chance - major revamps need to be made so as they are able to compete with their conventional counterparts. The hardest part to make this a reality is - to obtain the consensus of all for standardization of shariah rulings.
There are many conventions and/or seminars on Islamic finance taking place every month in all parts of the world - changes can be seen, however, it is not at a rate that we hoped. Every Muslim has a duty to contribute (no matter how small a contribution) to ensure that Islamic finance (or Islam in general) is no longer being ridiculed by others.Islam is our religion and we must stand united to guard it at all cost.
Governments worldwide are struggling to manage the global financial crisis, with no end to the downturn in sight. But at least so far, one sector has been unscathed: the $1 trillion-and-growing business of Shariah-compliant banking.
That’s right, Shariah. The same combination of medieval Islamic law and modern post-colonialism that makes the terrorist clique supposedly so hateful of Western freedoms. Where finance is concerned, most muftis—Islamic religious scholars—agree that God prohibits charging any amount of interest on loans. Trading debt and risky speculation are off-limits too, as is investment in immoral enterprises like gambling, prostitution, and war profiteering. Transactions should be highly transparent and risk, as well as return, should be shared by all parties. You can’t trap people into owing more than they can pay. Basically, most everything that caused the current mess isn’t allowed. “Given their constraints, they actually don’t hold any conventional debt or conventional mortgages,” explains Samuel Hayes, emeritus professor of investment banking at Harvard. “They don’t have any of these derivatives or outright subprime loans. There’s no doubt that they have weathered this better than the conventional banks.”
From the view of Islamic law, writes Umar Chapra, a leading economist in Saudi Arabia, “while economic growth is essential, it is not sufficient for attaining real human well-being.” Rather, we depend on “spiritual health at the core of human consciousness, and justice and fair play at all levels of human interaction.” Much more than a business model for specialty banks, he and many others believe that Islamic economics offers a much wider vision. The conventional view of the homo economicus—super-rational, selfish utility maximizer—dehumanizes people, denying the divine stamp on our nature. A truly Islamic economic theory, they believe, should restructure consumer preferences, ensuring that basic necessities are plentiful and luxuries come only after everyone is provided for. People should feel motivated to work by knowing that they share equitably in the produce of their labors. Shariah guidelines for inheritance distribute wealth among families in ways that prevents too much accumulation. More than an economics in the usual “dismal science” sense, this is a comprehensive rulebook for playing well with others. It also claims its authority from God.
The theory has something in mind for governments as well. They are responsible for administering the zakat tax, one of the Five Pillars of Islam. Though often translated as “almsgiving,” it literally means “that which purifies.” These funds should be directed primarily toward redistributive purposes, to soften the market’s burden on the poor. However, they can also be used to fund religious causes, a fact which medieval regimes sometimes used to usurp zakat funds for expansionary warfare. But modern Islamic economists, by and large, discourage military spending wherever possible.
(Article was extracted from International Financial Law Review - author : Simon Crompton)
Lawyers in Islamic finance firmly believe that if company financing had been done entirely along shariah lines, this financial crisis would not have happened.
Panelists from western banks argued that there was nothing wrong with the due diligence that went into local companies when they issued conventional debt. Islamic debt would not have fared any better.
The argument for shariah was put by one speaker particularly strongly, who said: "Islamic finance has been mixed and matched with conventional debt in companies’ financing, with the result that none of them are really Islamic. Even the Islamic parts of their debt have been watered down and adapted to conventional structures."
When asked whether he really thought that the world would not have had a financial collapse under Islamic financial law, he replied: "Yes, absolutely. Islamic debt is about investment; conventional debt is about trading money for its own sake. Islamic law would have prevented the kind of leverage ratios we saw in Dubai."
Dubai real estate company Nakheel became the focus for the discussion, as it had both Islamic and conventional funding and has seen its spreads widen dramatically as investors refuse to buy the debt for fear of it going bust.
A speaker from a western bank disagreed with the Islamic lawyers. "Let’s get this straight," he said. "Everyone that invested in Nakheel knew they were exposed to big real estate risk. They knew the projects that Nakheel had lined up. They knew how it was plowing the profits of one project into another; it was all over the papers.
"There was big real estate risk in a market obviously driven by expectations. But they did their due diligence and took the gamble. They weren’t stupid." He carried on the point out that given the growth predictions for Nakheel at the time it issued most of its debt, the leverage ratio was no higher than any other real estate company anywhere else in the world.
No one disagreed that Islamic finance has become disconnected from its foundations. Rather than being involved from the very start of a deal, it is sometimes brought in at the last minute for a rubber stamp. One straightforward Islamic structure is not picked at the beginning – instead the company’s needs are shoehorned into a tweaked or adjusted structure.
One speaker referred to it as Islamic beer. "You go to the imam and get ask him whether it is compliant with shariah to tie a rope to a door handle. Then you ask him whether it is compliant to lie on the floor. Then to tie a beer bottle to the rope. When someone walks in, the bottle tips over and you happen to be lying there with your mouth open. That is Islamic beer."
He continued: "We must give Islamic finance a chance. We must keep it pure and start over again with companies, making sure all financing is compliant. The rest of the world has a lot to learn from shariah, but only if it remains consistent."
A speaker from the floor agreed. He argued that local investors in the Gulf had just become capitalistic, picking whichever type of financing happened to give greater returns. There was no concern over shariah compliance.
With the number of companies in trouble in the Gulf, particularly in Dubai, this could be the perfect opportunity for Islamic lawyers to get their way and restructure corporate debt along entirely Islamic lines.
My comment :
Islamic finance despite having its origins 1,400 years ago, was only commercially practiced in the last 3-4 decades ago. Yes, we must give it a chance - to purify and start again, while ensuring its compliance to shariah rom the very beginning and safeguarding it against manipulation and intervention from its conventional counterparts. This time around, there should be control and standardization - after all, Islam is one religion and there should only be one shariah guide (that should be obtained by consensus by all jurists) for the interest of the ummah.
The idea of using Islamic gold dinar was first mooted in 2001 by Malaysia's ex-premier (Tun Dr Mahathir Mohammed). He proposed a new currency that would be used initially for international trade between Muslim nations, i.e., the islamic gold dinar and it was defined as 4.25 grams of 24 carat (100%) gold. He promoted the concept on the basis of its economic merits as a stable unit of account and also as a political symbol to create greater unity between Islamic nations. The purported purpose of this move would be to reduce dependence on the United States dollar as a reserve currency, and to establish a non-debt-backed currency in accord with Islamic law against the charging of interest.
The return to the gold standard is supported by many followers of the Austrian School of Economics, Objectivists and libertarians largely because they object to the role of the government in issuing fiat currency through central banks.
Few lawmakers today advocate a return to the gold standard, other than adherents of the Austrian school and some supply-siders. However, many prominent economists have expressed sympathy with a hard currency basis, and have argued against fiat money, including former US Federal Reserve Chairman Alan Greenspan (himself a former Objectivist). Greenspan famously argued the case for returning to a gold standard in his 1966 paper "Gold and Economic Freedom", in which he described supporters of fiat currencies as "welfare statists" hell-bent on using monetary printing presses to finance deficit spending. He has argued that the fiat money system of today has retained the favorable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place. The current global monetary system relies on the US dollar as a reserve currency by which major transactions, such as the price of gold itself, are measured. Currency instabilities, inconvertibility and credit access restriction are a few reasons why the current system has been criticized.
Taking the 1997 Malaysian economic and financial crisis as an example, it shows that the fundamental cause of business cycles, unemployment and inflation is rooted in some of the features of the present day financial system, namely fiat money, fractional reserve requirements and interests rates. It then shows how these features also indirectly bring about many social problems to such an extent that they threaten the culture and sovereignty of nations. Even Islamic banks cannot truly operate on Islamic principles in the present system.
Most Islamic financial products are tied to the market interest rate - the very thing they are supposed to avoid. A return to a gold payment system - like the Islamic dinar - could solve many of the woes of today's economic system. The return is not only desirable from the economic, political, social and religious perspectives, but also urgent in the present era of globalization and existing world recession, besides providing a conducive environment for Islamic economics, banking and finance to flourish.
The following articles are important to strengthen our understanding on the issues at hand :
Remember my earlier post on the issue of Wadiah versus Qard? Well, my lecturer did provide a case study to substantiate the issue, which I have reproduced here :
Al-Zubayr Ibn Al-Awwam was a Companion of the Prophet Muhammad s.a.w., and one of the ten who were promised paradise. People always wanted to deposit their money with him (wadiah) for his honesty. If he took it as wadiah, his liability would be fault-based had the money been lost while in his custody - which means, that with no negligence or wongful doing on his part, the owner could not sue him for the loss. Neither could the owner sue him for loss due to factors beyond human ability to guard against natural hazards or disasters.
However, he could not utilize the wadiah for his own purposes as a trustee because wadiah is only for safekeeping.
What he did was asking the people to deposit the money with him as qard/loan instead of as wadiah. Now, his shariah legal position has changed to that of a borrower. As a borrower, he assumed the duty to repay the owner in whatever circumstances. He also assumed ownership over the money and risk of loss was transferred to him. As such, it was legitimate for him to utilize the fund for his own purposes.
It was reported that he managed to make nearly 3 million dinars in the venture : this was halal return based on risk for return principle.
Point to note : Benefit to Al Zubayr (as borrower) a) He can use the money any way he likes
Benefit to the lender (the depositors) a) Full guarantee of payment by borrower (in whatever circumstances)
The Qard principle, if used in the Islamic banking system for savings and current accounts, proves to be a win-win situation for all parties.
**The ten people promised paradise (Arabic: Al-Asharatu Mubashshirun or Al-Mobashareen Bel-Jannah) are : The Rightly Guided Caliphs or The Righteous Caliphs ( transliteration: ) is a term used in both Sunni and Shia Islam to refer to the rightly guided Caliphs prophesised in the famous tradition, Hold firmly to my example (sunnah) and that of the Rightly Guided Caliphs (Ibn Majah, Abu Dawood). ...
The Kuala Lumpur-based Islamic Financial Services Board (IFSB), an umbrella group for Islamic financial regulators, said it had adopted guidelines to promote transparency for investors of collective investment schemes.
It also released rules on capital requirements for Islamic institutions involved in Islamic bond issuance and real estate investments.
IFSB's regulations are not binding on the sector and compliance is voluntary, as is the case with those issued by other Islamic finance industry bodies.
As at January 2009, IFSB had 178 members including the International Monetary Fund, World Bank, Bank for International Settlements and Islamic Development Bank.
The full guidelines are available at IFSB's website at www.ifsb.org
I extracted the information from BNM (hope, it is beneficial to strengthen our understanding )
Bai Al Inah (sell and buy back) is a contract which involves selling and buying of an asset where a seller will sell the asset to a buyer on a cash basis and subsequently will buy the same asset on a deferred payment basis at mark up price. It can also be applied when a seller sells the asset to a buyer on a deferred basis and will later buy back the same asset on a cash basis with a price which is lower than the deferred price. This product is not accepted in the Middle East countries.
Ijarah (leasing) refers to a contract under which the lessor leases equipment, building or other facilities to a client at an agreed rental rate and pre-determined lease period upon the aqad (contract). The ownership of the leased equipment remains in the hand of a lessor.
Mudharabah (profit-sharing) is acontract which is made between two parties to finance a business venture. The parties are a capital provider or an investor who solely provides the capital and an entrepreneur who solely manages the project. If the venture is profitable, the profit will be distributed based on a pre-agreed ratio. In the event of business loss, the loss shall be borne solely by a provider of the capital.
Murabaha (cost plus) refers to a contract of a sale and purchase transaction of an asset whereby the cost and profit margin (mark-up) are made known and agreed by all parties involved. The settlement for the purchase can be settled either on a deferred lump sum or installments basis, will be specified in the agreement.
Qardhul Hassan (benevolent loan) is a contract of loan between two parties on the basis of social welfare or to fulfill a short-term financial need of the borrower. The amount of repayment must be equivalent to the amount borrowed. It is however the borrower may choose to pay more than the amount borrowed as long as it is not stated or agreed at the point of contract.
Rahnu (collateralised borrowing) is equivalent to the conventional colleteralised borrowing. It refers to an arrangement whereby a valuable asset is placed as collateral to raise funding. The amount borrowed must be equal with the collateral rendered. The collateral may be transferred to lender in the event of default. To get the principal back the lender will sells the collateral and take the principal amount. Any excessive amount must be returned to the borrower.
Wadiah (savings with guarantee) is a trust concept which refers to the deposits or valuable goods that have been kept with a depository agent. The depository agent will safeguard and provide guarantee to the principle of the deposits or valuable goods. With permission from the depositors, depository agent may invest the deposit to earn some returns. However, the depositors are not entitled to any share of the returns but the depository agent may give a gift (hibah) to the depositors as a token of appreciation.
When I was studying for my Masters Degree a few years back, I took up a course in Islamic Banking and Finance. My lecturer is a prominent academician and an industry expert in Islamic banking (having served in the Islamic Banking Division of a local bank for nearly 2 decades). Being a person with minimal knowledge in Islamic banking and for my further understanding of the concept of Wadiah, I raised a question on the concept of Wadiah on savings accounts – since Wadiah means safekeeping and the Bank acts as a Trustee for the deposits, they should not invest the depositors’ monies as ownership of the deposits still lies with each individual depositors.
My lecturer gave me an explanation that was not very satisfactory and so I did some research on this very concept and for knowledge purposes, I reproduced a comprehensive (but short) write up on wadiah (courtesy ofhttp://wadiah.com) :
Wadiah or safekeeping is an instrument that allows a person to keep the wealth or assets belonging to oneself with another person for safekeeping purposes. In the legal sense, it signifies a thing entrusted to the care of another. The proprietor of the thing is known as mudi’ (depositor), the person entrusted with it is known as wadi’ or mustawda’ (custodian) and the deposited asset is wadiah. The concept of wadiah is not specifically mentioned in the Holy Quran. However, as far as safekeeping which is closely related to trust is concerned, there are some indications on this concept, which can be observed in the following verses:
·“Those who are faithfully true to their trusts (amanah) and to their covenants” 23:8
·“Verily, Allah commands that you should render back the trusts to those, to whom they are due” 4:58
In the Sunnah, Al-Bayhaqi narrated that ‘A’ishah said on the occasion of the Prophet’s (pbuh) migration to Medina (Hijrah), “The Messenger of Allah asked ‘Ali to take his place in Makkah in order to deliver the deposited things to their owners.”Moreover, the Prophet (pbuh) is reported to have said: “Return the trust to those who entrusted you, and do not betray those who betrayed you.” (Abu Dawood and Tirmidhi).
Therefore, premised on the above, all Muslim jurists unanimously agree on the permissibility of Wadiah.
There are 2 types of wadiah :
·Wadiah Wadiah based on custodianship (wadiah yad al-amanah)
The actual nature of wadiah as started earlier is amanah (custodianship) where it is charitable and divinely rewarded. The custodian shall keep the deposit as if he is keeping and taking care of his own property. As an amanah contract, this type of wadiah does not impose any liability on the custodian in normal cases of loss or damage except in the case of negligence or wrongful doings (fault-based).
·Wadiah with Guarantee (wadiah yad al-Dhamanah)
It is a combination of two contracts which are safekeeping (wadiah) and the guarantee (Damman) contract. Dhamanah contract when attached to the wadiah contract, converts the concept of wadiah to guaranteed safe custody. The custodian is entitled to use the deposited item for trading or other purposes, irrespective of the consent of the depositor as he is guaranteeing the return of the deposit and is liable for any damage or loss. The custodian has a right to any income derived from the utilization of the deposited asset. Since the custodian owns the profit, he may dispose it as he wishes and may give some portions of the profit as a gift (hibah) to the depositor.
The same issue cropped up when I attended my Islamic law of contract class this morning – my lecturer raised the issue that if the Bank wants to invest the deposits made by the depositors, they should use a contract of qard (loan) instead of wadiah. After all, in qard, ownership and risk of loss and returns are transferred to the borrower (in this case, the Bank) and at the same time, the lender (the depositors) are ensured of the return of the deposits. The borrower (i.e., the Bank) has a legal duty to repay to the lender the money that they borrow (the actual deposit), and therefore, the interest of the depositors are safeguarded at all times.
This makes me think that if Islam has made it easy for the Bank to use the contract of qard (for money lending) why do we need another concept of Wadiah yad al-Dhamanah for our savings or even current accounts???
My next question is – is Malaysia the only country that opts to use of Wadiah yad al-Dhamanah concept for our savings and current account?
What if a depositor does not wish his savings to be used for investment purposes? Will he not be entertained by the Bank? As it is right now, when a person opens an account with a Bank, we are to sign opening of account agreement(s) that is/are unilateral in nature – is this just? Or is it only beneficial to one party? What happens to mutual consent of terms and conditions in the agreement?
Hhhhmmmm, too many unanswered questions here – I leave you to ponder ……
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