STANDARDIZATION OF ISLAMIC FINANCE PRACTICES

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.

ISLAMIC FINANCE HAS TO RETURN TO ITS ROOTS

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 be Islamic 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.