Has Islamic finance contributed to the public good?
By MUSHTAK PARKER | ARAB NEWS Available at: http://arabnews.com/economy/islamicfinance/article323928.ece
OXFORD: In the aftermath of the global financial crisis, one of the major criticisms has been the disconnection between banking and the real economy. One perceived manifestation is the single-minded pursuit of shareholder value and individual enrichment driven by a culture of wanton greed, instead of the traditional function of banking as financing entrepreneurial projects for the good of the real economy.
At the stately surroundings of Ditchley House in Oxford in England last week, the Securities Commission of Malaysia (SC), the securities regulator and the Oxford Centre for Islamic Studies (OCIS), organized a timely roundtable on “Islamic Finance and the Public Good,” which given the faith ethos of Islamic finance should be a common feature on the conference circuit purporting to serve the industry instead of the gratuitous marketing platforms which they often offer in return for sponsorship.
The roundtable was by invitation only and gathered some of the top thinkers and market players in global Islamic finance. They included Nik Ramlah, managing director, Securities Commission Malaysia; Nazir Razak, group CEO, CIMB Group, one of Malaysia’s largest banking groups; Farhan Nizami, director, Oxford Centre for Islamic Studies; Ann Pettifor, executive director, Advocacy International; Mukhtar Hussein, Global CEO, HSBC Amanah; Mohd Daud Bakar, a prominent Shariah adviser who serves on several boards; Muhammad Faiz Azmi, global head Islamic finance, PricewaterhouseCoopers; Qudeer Latif, partner Clifford Chance, LLP; David Vicary, chairman, Global Islamic Finance Group, Deloitte; Nicholas Foster, senior lecturer in Islamic commercial law, SOAS, London University; Rafe Haneef, CEO, HSBC Amanah Malaysia; Iqbal Khan, CEO, Fajr Capital; Professors Volker Nienhaus and Simon Archer of Reading University; and Professor Hashim Kamali of the International Institute of advanced Islamic studies.
In his special address, Raja Nazrin Shah, the crown prince of Perak State in Malaysia and ambassador-at-large of the Malaysia International Islamic Financial Centre (MIFC), reminded that in Islamic finance, consideration of the public good is inherent in the Maqasid Shariah (the objectives of the Shariah). “The Shariah seeks to establish justice, eliminate prejudice and alleviate hardship. The prohibition of riba (interest), for instance, serves to ensure that Islamic financial transactions promote real, as opposed to artificial, wealth creation. Therefore, it serves the public good. On the other hand, the artificial creation and transfer of wealth through so-called ‘toxic products’ do not serve the public good. Such activity can have catastrophic consequences as demonstrated during the financial crisis,” he explained.
The concept of Maslaha (the public good) is another testament of the close link between Islamic finance, fiqh (jurisprudence) and the public good, and partly based on the saying of the Prophet Muhammad (peace be upon him) that “no harm should be caused to another nor shall any harm be caused in return for harm.”
In her opening speech, Zarinah Anwar, chairman of the Securities Commission Malaysia, reminded that Islamic finance like any other industry must create a distinctive value proposition that meets the needs of its customers. To a certain extent, Islamic finance has managed to transcend religious, political and geographical boundaries and today serves not only the needs of Muslims but is also gaining the interest and acceptance of non-Muslims.
She warned that there are challenges that could pose threats to the entire value chain. Islamic finance products have had universal appeal due to its ability to replicate its conventional counterparts. But replication has its dangers. “Replicating the conventional banking products means that the industry is importing the same issues and concerns faced by conventional finance. Conventional finance recognizes debt as the basis of all financing structures whilst Islamic finance has risk participation as its cornerstone. Blending the two, which has been the popular practice, has to some extent diminished the value and the spirit of the Shariah. As a consequence, we see increasing legal uncertainties and concerns over investor protection. But there is also a school of thought that says a close resemblance is permissible,” she explained.
Chairman Zarinah called for the virtues of Islamic finance to be unlocked further. Public good, ethics, shared values, governance, real and tangible contributions to the economy hold the key to innovation and growth. “Profits involving a higher social purpose and objective,” she maintained, “represent values that will create not just economic returns but also comply with universal ethical standards. Putting all these in place will strengthen the universality and acceptability of Islamic Finance, enabling it to offer a distinctive value proposition.”
Professor Kamali explained that Islamic finance has provided sufficient evidence that the Shariah has enormous potential to contribute to the public good. One manifestation is the proscription on investments in speculative derivatives and transactions such as CDOs, which were the bane of market capitalism in the recent financial crisis. The concept of Maslaha, he added, is not confined to Islamic finance per se, but also to wider governance, governments and public life, although the application of Maslaha must be genuine, all-inclusive and have no conflicts with Shariah injunctions.
Professor Nienhaus raised some searching questions relating to what Maslaha or the concept of public good actually means in practice, especially in the context of Islamic finance. He noted that Islamic banking follows the conventional structure of fractional reserve banking (FRB) which implies that banks guarantee the nominal value of deposits and keep only a fractional reserve and use the rest for financing etc.
This, he lamented, is a pity because the world in the aftermath of the financial crisis is looking for a system that is more stable, sustainable and efficient.
He alluded to the changing concept of investment from involvement in entrepreneurial projects in the real economy to the contemporary placement of funds in the financial sector. This has diverted liquidity from the real sector and has earned the financial sector huge profits, disturbingly not by financing the real economy.
Professor Nienhaus warned that Islamic finance and the academic debate should also be in a socio-economic context. In this respect, there should be better communication between Shariah scholars and Islamic economists, especially in the context of the debate on Maslaha. He warned that there are too many replications of conventional financial instruments which have serve to undermine the very ethos of Islamic finance. Even the document on the Islamic equivalent to repurchase contracts (Repos) issued for public consultation by the International Islamic Financial Market (IIFM) in Bahrain, talks about this as a functional equivalent of Riba (interest). This cannot be appropriate for the Islamic finance industry to move in the right direction.
It was refreshing to see Islamic bankers on the roundtable acknowledge that there is huge dissatisfaction with the performance of the Islamic finance industry. The industry, they contended, started as a Shariah-compliant one with the hope that it would progress to a Shariah-based industry. This unfortunately has not happened.
Some of the bankers called for a reversion to the Glass-Steagalls era when we had the separation of the commercial banks from the investment banks/asset management companies. Perhaps, the future concentration could be on a much more defined asset management mutual fund model. For instance there could be dedicated Mudarabas for agriculture, infrastructure, education etc. This will help the Islamic finance industry to achieve Maqasid Al-Shariah (the objectives of the Shariah) in a much more reasonable way. However, others maintained that Islamic finance cannot compete with conventional finance in the provision of cheap credit and leveraging. As such, there is no future for the Islamic finance industry model as long as this persists. Another stressed that it is the very nature of the banking model that chases shareholder value that has led to certain behavior, which in turn has given rise to expectations. As such, the public good needs to be defined by and in terms of these expectations.
Ann Pettifor stressed that public good is not an abstract concept. The banking system, in fact, is a public good just as clean water is. Public good is steeped in socio-economic evolution, and the price that has been paid in its name is colossal. She suggested that society has to claim back the banking system as a public good especially in the aftermath of the global financial crisis. Although how we practically can do this is open to debate. The contention is that society has allowed bankers to hijack the public good for personal private gain and greed.
But who are the guardians of the public good? The bankers seem to suggest that it is the regulators. This suggestion may be flawed. If we consider the maxim that it is financial engineering that drives innovation, and innovation that drives regulation, then the responsibilities of bankers become self-evident. In the recent global financial crisis, for instance, regulators had no idea about the complexities of the credit debt obligations (CDOs) and the complex derivatives, that nearly brought about the collapse of the global financial system, let alone how to regulate them.