Islamic finance at crossroads

by Alfean Hardy
The Islamic finance sector, both locally and abroad, is now at a crossroad and is facing the possibility of not being able to present itself as an alternative to the conventional financial system, said KPMG executive director John Lee. In a presentation at the Malaysian Corporate Conference 2009 in Kuala Lumpur last week, Lee said that the global sector was in good shape, with excess liquidity and good growth rates.
"It's still recording good growth rates in spite of the global financial turmoil that we've been seeing. In Malaysia, we've seen tremendous growth rates as well, registering an over 20% growth rate.
"However, a lot of this (locally) has been because of the displacement of conventional banking rather than creating a new market. It's about market share, taking from the conventional rather than growing new market share. So we have to see this growth rate with some scepticism. "There's (also) been a number of people who have been saying that, if we'd had more Islamic finance, we would not be seeing what we've been seeing in the markets to some extent," Lee said.
"Also, we didn't see a lot of collapse of, or issues with, Islamic banks resulting from the global financial turmoil. "We have to be careful about saying that, (in the case of banks collapsing/being affected), it's not because they were insulated, better managed or smarter. It was simply that a lot of them were not exposed to toxic assets, that's all," he added.
Lee, who was involved in KPMG's report entitled "Growth and diversification in Islamic finance" released in 2007, added that the industry was now at point where the market was no longer in its infancy but was maturing.
"The risk of maturing is, where do we go (from here)? The risk, in my opinion, is that it's converging with conventional finance and not diverging from conventional finance.
"Initially, it was important for (the industry) to have some similarity with conventional financing. Because of familiarity, a conventional mirror was an asset but if we continue down that path, the fear is that we'll be converging with conventional. And my argument will be, why bother then?" he said. Lee said he would like to see the industry undergo a divergence from conventional finance, noting that the whole idea was one of alternative finance — to create a market that provides an alternative space to conventional banking.
"But, if it moves along the path I've seen, it's going to be a lot more convergence, to have more Shariah-compliant as opposed to Shariah-based products. A lot of the instruments out there (now) are Shariah-compliant products rather than Shariah-based products," he added.
At a question and answer session later, International Shariah Research Academy (Isra) associate researcher Shabnam Mohamad Mokhtar said economists have argued that Shariah-compliant products were conventional products that have been Islamised while Shariah-based products were those that truly originated from the Shariah perspective.
"If you go by that argument, if you go into murabahah, which is a sales transaction, and if you go into ijarah, which is a lease transaction, aren't these in the conventional space (as well)? "If you look at the Prophet's approach, he never differentiated between Shariah-compliant and Shariah-based. It's still the same contract. "If the contracts had any Shariah contradiction, he would take out the contradiction and it would be Islamised," she added.
Shabnam said the issue here was one of innovation and frustration in the market about the Islamising of conventional products.
"Consumers, however, understand the conventional and their demand is for (Islamic products) that are on par with conventional products, thus the supply from the banks is going that way.
"But, when you take the venture capitalist approach, then that is truly the Shariah way. Isra is looking at this but it's a matter of educating the industry," she said.