By Dr Zulkifli Hasan
SHARIAH scholars in Islamic finance are frequently put in a dilemma position. They have been accused upside down with numerous allegations even without any basis. During early implementation of Islamic finance, Shariah scholars were alleged to have formed an alliance with Islamic capitalists to create a new market for Islamic finance sector.
In this instance, the Islamic banks were guided by those well-paid clerics and always issued rulings according to their needs. In fact, since 1980s, many of the scholars have been accused of being bankers’ window dressing and of overstretching the rules of Shariah to provide easy fatwas to Islamic financial institutions.
Lately, it is quite surprising that the scholars have been criticised even by Islamic bankers. The myth of alliance between Islamic bankers and Shariah scholars seems to be no longer relevant. One of the critics refers to an allegation where the Islamic financial market globally has been invaded by Shariah scholar wannabes, a new term introduced to refer to the so-called unqualified Shariah scholars.
Infiltration of Islamic Banks
These Shariah scholar wannabes have infiltrated Islamic banks, regulatory authorities and Shariah governing bodies without due consideration to stakeholders value. Much more serious is where the criticism includes allegations of changing the meaning of Quranic verses and Hadith by those Shariah scholar wannabes.
Caution and criticism are mostly welcomed and in fact warranted but not baseless allegations and wrongful accusations. Constructive criticisms particularly on the governance issue in Islamic financial institutions will surely contribute to the development of Islamic finance industry. The unqualified criticisms will lead the industry nowhere and in fact hinder its development and negate the public confidence.
Considering the significance of this issue, this article attempts to address several misconceptions about Islamic finance even by the so-called truly Islamic finance practitioners with the aim of providing a basic understanding and removing any inaccurate or unfounded prejudice.
1. Islamic finance is purely a commercial transaction: Islamic finance concept is grounded in ethics, values and norms. As Islamic finance is not pure commercial transaction and not only confined to nominate contracts, Islamic financial institutions therefore should be commercially and morally oriented entities. Islamic finance assumes a moral based value proposition which offers solutions for the economic and financial problems. These moral and ethical value systems require that the decisionmaking process in Islamic finance must not be solely based on efficiency and equity but must have social and ethical dimensions.
2. Stakeholders value confines to shareholders interest: The stakeholder value orientation is not only concern for shareholders but also to protect all the stakeholders’ interests and rights. The stakeholders value, conceptually, requires Islamic financial institutions to balance the corporate goal of maximising the profit with the duty to uphold the principle of social justice and maqasid Shariah and this entails the notion of protecting the interests and rights of all stakeholders within the Shariah rules. Even the Basel Committee for Banking Supervision on “Enhancing Corporate Governance for Banking Organisations”, expands the term “stakeholders” to include employees, customers, depositors, suppliers, supervisors, government and the community.
Not only that, the Organisation for Economic Cooperation and Development further classifies the stakeholders into shareholders, internal stakeholders (employees and labour unions), operational partners (customers, suppliers, creditors and contractors), and the social community (state authorities, trade union, non-governmental organisations and civil society).
3. The true meaning of Bay is sale and it has no element of risk: Islamic finance is gharar-free, maysir-free and riba-free, but not risk-free. Since Islamic financial products and services are designed based on different nominate contracts, it is erroneous and would be a sheer misconception to say that Islamic finance is risk-free or less risky. Moral and Ethical Dimensions Furthermore, Islamic financial products and services should have moral and ethical dimensions and therefore any transaction should be embedded in real economy which offers an alternative financing paradigm. At this point, the conceptual framework of Islamic finance suggests that it should be more than financialisation of the nominate contracts. Islamic financial institutions should take necessary risks equitably and not simply shifting the liability unfairly to the customer. In other words, Islamic finance should represent a holistic approach to financing not only bankable customers but also to allocate certain funds for non-bankable and underprivileged people as part of its social responsibility to the society and ummah.
4. Islamic financial institutions are purely profit oriented entities: Based on its epistemological dimension, Islamic finance is actually a society oriented financing proposition as it aims to serve the community, ummah and not solely to the markets. Islamic finance must not be confined within profit-driven orientation but it should also address issues on economic and sustainable development, social justice and social investing oriented principles. With reference to several empirical studies, the current Islamic finance practices on the other hand do not indicate positive correlation with human development index scores. Surprisingly, the corporate social responsibility performance of Islamic financial institutions also has been rather weak and poor as compared to its conventional counterpart. This position demands Islamic financial institutions to seriously reevaluate and review their current practices and future direction.
5. Shariah scholar wannabes infiltrated the industry’s wellbeing: The critics on the roles of Shariah scholars are always blown out of proportion and over-exaggerated. Undeniably, Shariah scholars, either senior or young scholars or conservative or pragmatic scholars have their own unique contribution to the industry’s wellbeing but their approaches may be different. This should not be the reason of denying their significant contribution. The “conservative” scholars may view the legitimacy of Islamic financial products and services to be based on the legal and mechanistic aspects of Shariah. The products and services are classified as lawful and Shariah-compliant or Shariah-based if they meet the conditions of a valid muamalat transaction after going through the ordinary process of usul al fiqh.
On the other hand, the “pragmatic” scholars admit that Islamic finance should not confine their function by solely emphasising the fiqh aspect. The “pragmatic” scholars acknowledged that Islamic financial products and services should not only be valid and lawful, must fulfill the spirit of maqasid Shariah but must also be ethical and uphold the Islamic values.
Allegations Misleading
The critics upon Shariah scholars of either being banker’s window dressing or invasion of the scholar wannabes are actually misleading. These allegations to a certain extent will negatively influence the Islamic finance industry as they are not supported with any empirical evidence. Rather than discussing these unnecessary issues, the Islamic finance discourse should actually be focusing on its fundamental principles and how to ensure its sustainability. It is important to critically evaluate the performance of Islamic financial institutions against their foundational base and at the same time to maintain its positive development.
The existing practices of Islamic finance so far have failed to establish a distinct identity or to draw a clear demarcation line with conventional banks. In fact, with several corporate failures of Islamic financial institutions, such as the closures of Ihlas Finance House in Turkey, the Islamic Bank of South Africa and the Islamic Investment Co of Egypt, and corporate difficulties, as in the case of the Dubai Islamic Bank, and Bank Islam Malaysia Bhd, Islamic finance is clearly not immune from the crisis. Islamic finance must learn from the history and take lesson from previous financial crisis. We do not want to hear that the only lesson that Islamic financial institutions have learned is that they never learn.
Dr Zulkifli Hasan is a senior lecturer at Shariah and Law faculty of Islamic Science University of Malaysia. He is a Shariah committee member of Affin Islamic Bank Bhd and also sits in the committee member for the Association of Shariah Advisors. Opinions expressed in this article are his personal views. This article appeared in the Feb 25, 2013 issue of The Malaysian Reserve
[The Malaysian Reserve, Feb 25, 2013]
