Banks have traditionally played the role of safe custodians of funds for people. This is an essential role to ensure that people have the discipline of saving their funds and planning for their future.
This traditional role of safe custodian faced a reality check during the 2008 financial crisis prompting state level bailouts of financial institutions which consequently resulted in massive reform measures to strengthen the regulation, supervision and risk management of the banking sector globally.
However, in the middle of the tightening regulations on banking, Islamic financial institutions should not lose sight of an important component of Islamic finance and that is the importance of wise financial planning and wealth management.
The necessity for planning has been well documented in human history. A nice story which is documented in the holy Quran goes as follows: “He (Yusuf) said: You shall sow for seven years continuously, then, what you reap leave it in its ear except a little of which you eat. Then, there shall come after that seven years of hardship which shall eat away all that you have beforehand laid up in store for them, except a little of what you shall have preserved. Then there will come after that a year in which people shall have rain and in which they shall press (grapes).” (Quran 12: 47-49).
The story goes that in ancient Egyptian society, the certainty of seven years of good harvest followed by seven years of draught was foretold by the Prophet Yusuf. Subsequently, the king of Egypt believed Yusuf’s interpretation of his dream and put Yusuf in charge of the state treasury. An action plan was executed and the society survived the hard times that came to pass. This clearly indicates that a person needs to work and earn a good living, manage their wealth, plan for the future and spend wisely.
From a Maqasid Al-Shariah point of view, the role of banking can be seen to support the Shariah objective of protection of wealth. As such, in the context of Islamic finance, we can hypothesise that the role of Islamic financial institutions is to develop products that allow for the people, Muslims or non-Muslims alike, to have a better life and civilisation through saving and investing while avoiding the prohibited Riba’ or usurious practices and other harmful and wasteful practices.
One of the first acts of instilling economic discipline by the Prophet Muhammad (pbuh) was to stop the practice of taking usury which was very prevalent during the Jahilliyah times. This was, wisely, done gradu- ally in four phases of the revelation of Quranic verses. This was essential because Riba’ or usury was and still remains among the core elements that destroyed civilisations.
Despite the prohibitions in Quranic revelations, the present global financial system continues to be deeply rooted in usury through the preva- lence of interest-linked debt-based transactions. It is today so deeply rooted in economic systems of nations such that even the tax system incentivises debt by way of tax deductibility for corporations, but such incentives are not accorded to returns from equity investments.
A McKinsey Global Institute report released in February 2015 highlighted that debt relative to gross domestic product (GDP) is now higher in most nations than it was before the 2008 global financial crisis. Since 2007, global debt has grown by US$57 tril- lion (RM217.17 trillion), raising the ratio of debt to GDP by 17%. Govern- ment debt continued to rise. So have household and corporate debt in many countries. These higher levels of debt threaten financial stability and pose a greater risk of a crisis.
On that score, Islamic finance needs to be careful not to allow its growth to be supported by overindul- gence of debt-based transactions. In its 2015 edition of the Islamic Financial Services Industry Stability Report, the Islamic Financial Services Board (IFSB) reported that the global Islamic financial services industry’s assets are estimated to be worth US$1.87 trillion, an impressive 17% compound annual growth rate over five years, yet the composition of “takaful contributions” and “Islamic fund assets” has largely remained stagnant year-on-year at only a touch above 5%.
The takaful and Islamic fund assets components are seen as the sub-sectors of the financial system where the focus of the products is towards financial planning and wealth crea- tion. The “banking assets” and “sukuk outstanding” assets ie which largely consist of debt-based instru- ments, form the remaining 95% of total Islamic finance industry’s assets.
It is due to this fact, that the intro- duction of guidelines on investment account by the Bank Negara Malaysia in March 2014, is an important deve- lopment in the present Islamic finance landscape. It allows an Islamic bank to offer an investment intermediation function towards wealth creation and wealth management. It offers an alter- native source of funds to businesses and entrepreneurs to fund the diverse financing needs of the economy. It also allows financial inclusion by capturing a wider segment of society to be involved in the financial sector and productive sectors of the real economy.
Syed Alwi is the executive VP, Corporate Services Division, at Bank Muamalat Malaysia Bhd. The views expressed here are entirely his own.
[This article by Syed Alwi Mohamed Sultan from Bank Muamalat Malaysia Bhd appeared under his column, Thoughts on Islamic Finance, in The Malaysian Reserve on 27 July 2015]
