SHARIAH COMPLIANT VERSUS SHARIAH BASED

I am always intrigued by the following : Shariah compliant versus Shariah based Islamic Finance Institutions. The fascination came to greater heights when there were reports floating around that said that the income from the operations of Al Rajhi Bank (Malaysia) Berhad (ARBM) was not consolidated with its parent company in Saudi Arabia (a very abnormal stand). This issue became a case study in my Accounting class last semester – very interesting indeed.

Let me start from the beginning…. ARBM was softly launched in October 2006 and was officially launched by Malaysia’s Prime Minister in February 2007. ARBM is posed to be a major retail bank (as opposed to KFH) like its parent company and targets retail customers and set up a lot of branches and ATMs in major cities in Malaysia. They focus on personal financing, before taking on home and vehicle financing. All types of financing are via Bai Bithaman Ajil, which followed the tawarruq concept.

It is a well known fact that most Middle East banks use the tawarruq concept and still maintain that the mode of financing is Shariah compliant, but what actually happened to the operations of ARBM until its parent company made a drastic decision as mentioned above?

Let us go back to the main issue here – what is the difference between shariah compliance and shariah based?

In order for a financial product to be Shariah compliant, it needs to satisfy, at a minimum, the criteria of Shariah law regarding the avoidance of Riba (interest), Maysir (gambling) and Gharar (uncertainty). Once these are satisfied and the bank obtains Shariah Supervisory Board approval, the product or structure can be marketed as Shariah compliant. As far as conventional banks are concerned, this is where Shariah compliance stops. It does not constrain the bank from employing non-Islamically raised funds to invest in Islamic structures.

A fully Shariah-based bank takes the compliance with Shariah law a step further. Not only do individual products have to meet all requirements but also all operations within the bank are required to be compliant with Shariah law. This extends to contracts with suppliers, rental contracts and labour contracts. The bank is completely set up to work in line with the ethical framework of Shariah, which makes it more likely to be able to structure all products to meet the requirements. In addition, there is no co-mingling of conventional and Islamically raised funds, since all funds are raised in line with Shariah requirements.

Going back to the ARBM’s case, those in Malaysia – you judge for yourself ……