Sunday, June 14, 2009

BOOK REVIEWS: Useful guide into the world of Shariah banking

Book: Understanding Islamic Finance
Author: Muhammad Ayub
Publisher: John Wiley & Sons Ltd, 2007 Pages: 516
By Mohammed Obaidullah

This is a new and extremely useful addition to the rapidly expanding literature in the area of Islamic finance. It purports to provide a clear exposition of all the basic building blocks of Islamic finance and of all the major components of the Islamic financial system, such as, Islamic commercial and investment banking, insurance, capital markets and what-haveyou.
The book is encyclopedic in its coverage and is divided into three parts.
Part One, spanning over four chapters, deals with fundamentals. In the very first chapter, the book raises the interest of the reader by questioning conventional wisdom on many issues. It begins with a strong criticism of capitalism and the neoclassical framework, which, as the author puts, is based on greed. The author asserts that this unbridled pursuit of wealth led to an ever-increasing gap between the haves and havenots, with the system exhibiting no discipline in money creation, no, or dubious, care for the weak and oppressed classes, no concern for justice, fair play and equity characterised by unhindered unethical practices (page 4, paral).
The chapter is more journalistic in its content as it makes some sweeping statements without relevant references to theoretical proofs or empirical evidence, and thus, could be a source of discomfort to readers seeking objectivity in the contents. The remaining two chapters in Part One present the framework under which the Islamic financial system is supposed to work.
Chapter 2 aims to highlight the key features that distinguish an Islamic economic system from a conventional one. It begins with a very brief section of the sources of "shancah" norms where the author rightly highlights the principle of "general permissibility" (ibahatul asliyah) in matters of muamalat or that pertain to socio-economic rights and obligations, which means that all acts and things that have not been expressly prohibited by the original sources of sharicah are permissible (page 22, para 3).
The author then moves on to an interesting discussion on the fundamental idea of objectives (maqdsid) of Shariah that according to many should be the basis of all rules, regulations and laws governing Islamic economic and financial system. The balanced approach in highlighting both the rules of fiqh and objectives of Shariah assumes significance in the context of recent debates over whether the former or the latter has been/should be accorded greater emphasis in design of the Islamic financial system.
The author does a commendable balancing act in dealing with fiqhi matters that are often characterised by divergence of views. For most issues, he prefers to present the consensus position as captured in the AAOIFI resolutions. At the same time he does not show any reluctance to exercise his "own" judgment.
Using a critic's lens, however, one finds a rather inadequate discussion on managerial aspects of IFIs. For instance, while the author devotes five chapters exclusively to contractual aspects of Islamic modes of finance, he covers all the institutional and operational aspects of IFIs as well as Islamic financial markets in just one following chapter.
A more detailed discussion on various risk factors confronting IFIs and ways to manage them should have been included. Similarly, the exposition of various concepts and structures could have been made more reader-friendly. A good example: Explain how an IFI operates or is different from a conventional FI with the help of a hypothetical financial statement. The author has no doubt produced an extremely useful work.
The readability and usefulness of each chapter can be enhanced further with the addition of learning objectives at the beginning, summaries at the end, insertion of more diagrams and flow charts, inclusion of more illustrative examples/cases, and perhaps chapter-end exercises. In this form the book can serve as the basic text book for serious students (at Bachelors' or Masters' level) of taught programmes. At the same time, researchers and practitioners of Islamic finance would find it useful.

- Abridged version of the review that appeared in Islamic Economic Studies, Vol.15, January 2008
(This story appeared in The Malaysian Reserve on June 8, 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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