RUSHDI: The political challenge confronting Islamic finance

Answer: Fear, concern, uncertainty, oppression, de-coupling from global finance, convergence between ‘church’ and state, favouring one religion, law of unintended consequences, and so on.

QUES TION: What do pre-Arab Spring Muslim countries like Egypt, Libya and Tunisia have in common in with the Group of 20 (G-20) democratic, super-power countries like the US, India, Russia, China, France, and even Australia? The fear Islamic finance will favour other religions over others and would ‘undo’ the separation between ‘church (mosque) and state,’ while furthering the cause of extremists resulting in ‘oppression’ and decoupling the country from the interest rate based global financial system.

(Yes, there are community-based initiatives in these G-20 countries, but they have capital limitations, hence, expansion challenges beyond their localities. Yes, the UK has five Financial Services Authority (FSA) approved Islamic banks, including the only depositing taking bank, Islamic Bank of Britain, however, it required two capital rescue efforts. Thus, it seems the obvious connection between Muslims and Islamic finance still needs more work, better research reports, surveys, understanding and interpretation.)

The Arab spring is passing or has passed and Islamic finance is still about media sound bites and ‘paid-for’ country reports (on potential) in these countries. Furthermore, the cheerleaders of the movement continue to proclaim that it will reach US$2 trillion (RM6.54 trillion) by the end of 2014 due to the above countries involvement.

At one level, the cheerleaders are more dangerous than the anti-Shariah movement for Islamic finance, because the former create unreasonable high expectations which the (social) media and conferences perpetuate.

To get initial traction of Islamic finance in “concerned” Muslim and non-Muslim countries requires practical approaches with real world examples and the involvement of the “trusted” stakeholders.

Practical Approach

The script must entail the following:

1. Islamic finance is not about religion, but about justice, equity, financial inclusion, and stewardship of the planet. But, Islamic banks, with bias towards real estate financing, are not signatory to carbon, equator or climate principles! Furthermore, Islamic finance, as practiced today, is about the bankable, as there is very little Islamic micro-finance, crowd funding, venture capital or small and medium enterprise financing.

2. As it’s not about religion, then there should be a rebranding exercise. Sh Saleh Kamel, one of the pioneers of Islamic finance, recently stated it should be called “ethical” finance, but that may imply all others are unethical. It may be better to call it “Participation Finance,” like in Turkey, as it goes to the substance. Furthermore, Dubai-based Noor Islamic Bank changed its name to Noor Bank as part of its “evolution”, implies getting new customers. Finally, not one financial entity in Saudi Arabia has “Islam” or “Islamic” in its title.

3. Islamic finance must try to fit into existing regulatory infrastructure, as lobbying to amend laws opens the door to unintended consequences, especially in election years in the west. For example, it may be wiser to have easy victories, i.e., mutual funds, venture capital/private equity financing, before embarking on a deposit taking licensed Islamic bank. Furthermore, in tax jurisdictions, like the UK, regulations have become more accommodating, hence, a neutral playing field for, say, Islamic mortgages.

4. The example of Islamic finance in the UK needs to be better utilised to demystify it in the west. To date, the emphasis, in places like India, has been that there are five FSA approved Islamic banks in the UK, while important, it’s not compelling.

What needs to be emphasised is Islamic finance has been in the UK since the early 1980s, and first Islamic bank opened operations in 2004, and "all is still secular and the Queen is well". To date, in the UK:

a. There is still separation between church and state

b. The UK is still a vitally important global hub for finance, and it includes Islamic finance as part of its global offering. For example, Prime Minister David Cameron, at the World Islamic Economic Forum, restated UK’s ambition for Islamic finance to be on par with Malaysia, the United Arab Emirates, and Bahrain, and announced a £200 million (RM1.08 billion) sukuk issuance for 2014.

c. There is no favouritism towards Islam

d. The constitution remains the same and the word “Shariah” does not appear, and “stoning”and “cutting off limbs” is not part of the penal code.

e. There has been no forced mass conversions to Islam


5. Where are the Imams in Islamic finance? They, as gatekeepers to the community, are more trusted than Shariah scholars by the locals! It must be understood, finance, like politics, is all local!

6. Malaysia may not be the suitable example for Islamic finance for almost all countries! Why? Malaysia has had a patient approach to Islamic finance (from 1983), and it has had a top/ down and bottom/up approach with successive prime ministers! Many countries are in a hurry and believe Malaysia’s model can be cut and pasted on their shores! This is when the law of unintended consequences rears its ugly head!

7. The Islamic finance industry MUST establish a professional public relations (PR) firm as an investment in its future. The industry has established industry bodies, like Accounting and Auditing Organisation for Islamic Financial Institutions and Islamic Financial Services Board, to educate and make aware, and an industry supported PR firm would serve the same purpose plus more. As the industry moves beyond its traditional shores, it will encounter stiff headwinds of ‘unreason-ability,’ hence, damage control will be more important than the press releases on opening branches, launching products, establishing new banks, sukuk league tables, or awards winners at conferences.

The proposed PR firm, working with industry experts, could host a conference where all the anti-Shariah people are invited to present their evidence on the alleged evils of Islamic finance. It could also invite representatives from countries where Islamic finance is seen as allegedly catering to extremists to present their evidence!

Conclusion

"One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors." — Plato. Islamic finance, do you have a political game?

[Rushdi Siddiqui, a former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ED of a (halal) US-based agro-food company]

THE MALAYSIAN RESERVE, 13 January 2014