Sunday, April 26, 2009

ZUBAIR: Clearer definitions of Islamic banking contracts needed

By Zubair Hasan
The call that Ahmad Hidayat Buan, a leading Malaysian religious scholar, recently gave for having clearer definitions of Islamic finance contracts is laudable and timely.
It is laudable because there is urgency to guard against the recurrence of the sort of faux pas on the conflicting court judgments on commodity murabahah transactions in the country and the pronouncements of some top Shariah scholars reversing their earlier rulings on the permissibility on certain types of contracts generated.
It is timely because the haze raised by the controversies has blurred the perception of the common man and created in his mind doubts about the validity of Islamic banking instruments. The call for clearer definitions of contracts is rather symbolic; it draws attention to what at present ails Islamic finance on a wider spectrum. The phase of emphasis on expansion has taken the greater part of our attention and has paid off well.
Islamic finance has made its mark on the global level and attracting mainstream clientele to its folds in an elating fashion. Its share, coverage and potential are all on the rise. Thanks to the commitment and efforts of the country Malaysia has emerged as the largest Islamic bonds market in the world; it had a 37.5% share of the total issuance in 2008.
The financial sector, bonds included, is estimated to be worth US$1 trillion (RM3.59 trillion). To improve upon this achievement the time has come to shift the emphasis from expansion to consolidation; from quantity to quality and from vagueness to clarity. Illustrative is Ahmad's lament that there is no definition of Islamic banking on our statutes. He rightly says that we should not let go round the impression that our laws are mysterious. One such unknown element is the legal position on Islamic windows in the mainstream banks.
They are doubtless encouraged to establish and register exclusive subsidiaries but is there any legal provision barring the opening of new windows or policy to phase out the existing ones? One is not sure. So seems to be the ambiguity on the issue of created creation.
Can or should Islamic banks generate credit deposits the same way as mainstream banks do? If yes, what instruments the central bank would use for control and with what effect or limitations has to be spelled out. According to Ahmad, there is now a proposal for amending the law to compel judges to refer to the national Shariah advisors when handling Islamic finance disputes, which are presently heard in the civil courts of the country.
But Ahmad is opposed to the idea of forcing the judges for such referrals to maintain the independence of the judiciary. Shariah scholars must put there foot down, he says, within the industry boards. But what is the check on such scholars themselves? Their quality of knowledge and character will matter.
I feel that even as individual banks may have their own advisor(s), they must refer to the national body all their new or amended products for clearance.
The national boards must have also knowledgeable economists as members because I have found not a few Shariah experts claiming without substance that they are well versed on the economic side of the issues. The implications of individual contracts at the macro level are at times difficult to grasp even for trained economists.
(Zubair Hasan is the Professor of Islamic Economics and Finance at the Kuala Lumpur-based International Centre for Education in Islamic Finance, INCEIF)

(This comment appeared in The Malaysian Reserve on Apr 27, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

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