Second of several parts
Abdulazeem Abozaid
Islamic Finance faces challenges related to lack of proper and effective Sharia governance. Since inception, this self-regulated industry has had no supervision or intervention of indisputably independent authorities.
The Bahrain based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), a regulatory authority from within the industry, has introduced a standard for ‘Tawarruq’ though this product has been ruled as categorically unlawful by the Fiqh Academy; the largest representative of the cotemporary Sharia scholars!
The Islamic Financial Service Board (IFSB), another regulatory authority from within the industry, has dodged the issue of setting governance rules for Sharia boards to weed out the unqualified Sharia supervisory board members (Aljarhi 2009).
Thus, self-regulation of this industry has proved to be unpractical and unreliable.
The intervention of central banks has also proved unsuccessful, because the core problem faced by Islamic banking is credibility of its products and their resemblance to the conventional banking products.
Central banks will not be pleased with Islamic banks offering genuinely Islamic products, because these products will then inherently carry different business risks.
Therefore, a balanced Sharia regulation is required, and the full independence of any potential Sharia regulatory authorities from the Islamic financial institutions is a prerequisite.
Basic Elements
Sharia governance involves a variety of issues but Islamic Banking Products and Sharia Control are of great importance.
Islamic Banking Products
What necessitates subjecting Islamic banking and finance products to Sharia governance is the invasion of many controversial products and unjustified conflict in endorsing the products. The same Islamic banking or financial product could be deemed lawful and permissible in one bank but unlawful and as conducive to Riba (usury/interest) in another! This is simply due to the differences in the views of each bank’s Sharia board.
It is true that the traditional Fiqh (Islamic law) schools had differed in many areas of Islamic law, but never had their differences reached this level of clash and conflict, especially in Riba-related matters.
Schools of Islamic law differ in validating certain Riba-related transactions to the extent of the ability of such transactions to produce its legal consequences.
But they never differed in deeming the permissibility (non-sinfulness) of the contract conditional on the spirit of the contract or the intention of the contractors.
Un-Islamic concepts
Furthermore, some of what was perceived in the early stage of Islamic finance as ‘Un-Islamic’ due to its essence in blatant conflict with the principles of the Sharia entered later the sphere of Islamic Finance and received Sharia endorsement in some institutions. Examples can be found in the many derivatives that attracted the attention of many Sharia advisory firms to process them and turn them into allegedly Sharia-compliant speculating instruments!
Some concessions
Some Islamic financial institutions have loosened their earlier rules.
For instance, the 30% benchmark set for the assets-composition ratio of the tradable assets to the total assets (for Sukuk or stocks to be tradable), has been reduced in more recent standards to 10%.
The 5% benchmark set for the income generated from operating unlawful activities in stock trading or Real Estate Investment Trusts (REITs) has been increased to 10% (Abozaid, 2012)! This subjective and unjustifiable leniency towards Islamic Finance rules has raised more doubts as it became evident to the public that such rules were groundless and lacked textual evidences.
Fatwas conflict
Hence, the conflict of fatwas pertaining to Islamic Banking and Finance products and their instability have created confusion in the minds of the public and triggered some suspicions over their legitimacy.
Based on recent surveys, a wide spectrum of Muslims refrain from dealing with Islamic banks altogether or avoid some of their services for the said reasons.
Others, and they constitute the majority, deal with Islamic banks not out of confidence in them but rather as a commission, the lesser of the two evils, the other evil being conventional banks.
In fact, the intellectual discourse on Islamic banking reflects deep disappointment, concern and increasing resentment. Most of the writings on Islamic Banking and Finance critically address issues like the ethics and morality of Islamic banking.
Several academic institutions have introduced courses on Islamic Finance and the general objectives (Maqasid) of the Sharia critically review the performance of Islamic Finance in light of the established objectives and philosophy of Islamic law.
Resentment voiced
Resentment and concern over the ethical performance of Islamic banking and Finance are more evidently manifested in a variety of themes for academic conferences on Islamic Banking and Finance in recent times.
Among these is ‘The Social Responsibility of Islamic Banking & Finance,’ which indicates a huge perplexity among the educated class. The belief is that if Islamic Banking products had been technically labeled Sharia compliant, then there is something beyond the Sharia technical requirements in Finance.
It is the essence and spirit of this Finance, which until now has been far from achieving the social justice believed to be imbedded in the Islamic economics system.
With the increasing contrast and conflict in endorsing Islamic financial products from one side, and with the increasing resentment of the public towards such disorder, standardisation of Islamic banking products has become critical to restore and maintain the credibility of Islamic banking and finance.
Abdulazeem Abozaid is Associate Professor of Islamic Finance Programme at Qatar Foundation, Qatar. The above is the Second of several parts of the Paper that he presented at the 11th Conference of Western Economic Association International hosted by Victoria University and Massey University at Te Papa Museum, Wellington from January 8 to 11, 2015. Emails: aabozaid@qfis.edu.qa; abozaid.abdulazeem@gmail.com
