Gentrification of Islamic finance - More than just syariah compliance

LONDON - Modern-day Islamic finance began to gain a foothold in Malaysia in 1963 with the establishment of the Hajj Pilgrims Savings Corporation (now known as Lembaga Tabung Haji), which is central to the transformation of a Syariah-based financial system in Malaysia.

Since then, Malaysia has gone through different phases of the development and expansion of the Islamic finance ecosystem following the increasing awareness among Muslims in Malaysia and globally in the 1970s, to integrate Islamic values and traditions into the daily lives of Muslims, including the financial aspects.

From the early 1980s until today, Malaysia saw the establishment of its first Islamic bank, Bank Islam Malaysia Bhd (1983), the first takaful operator, Syarikat Takaful Malaysia Bhd (1984), issuance of the first sukuk (the Shell MDS sukuk in 1990), and the enactment of the Islamic Banking Act 1983, the Government Investment Act 1983, and the Takaful Act 1984 to facilitate Islamic finance operations.

The work continues with the introduction of Guidelines on Syariah Governance Framework for Islamic Finance Institutions by Bank Negara Malaysia (BNM) in the 2001-2010 Financial Sector Masterplan, as well as the establishment of the International Centre for Education in Islamic Finance (INCEIF) and International Syariah Research Academy for Islamic Finance (ISRA) throughout the millennium.

Islamic Finance has been widely accepted

Although Islamic finance is now widely accepted in Malaysia and other countries, according to the chairman of the Malaysia International Islamic Financial Centre (MIFC) Leadership Council Tan Sri Azman Mokhtar, more needs to be done beyond Syariah compliance.

Speaking to BERNAMA after the MIFC-UK Business Forum here last week, Azman said among the main issues facing the society are access to financing, economic inequality, financial empowerment, sustainability i.e. climate change, humanitarian, i.e. labour standards, and migration and refugees.

Azman said Islamic finance can effectively address these issues if it is being done properly.

"Alhamdulillah, (the acceptance of Islamic finance and the establishment of Syariah compliance system) have got us here but it is not enough to get us there, the future pathway for the Islamic finance ecosystem. The world itself is struggling and these issues are universal; they are not just issues associated with Muslims.

"What we are seeing today (at the business forum last week), among others, is the international collaboration. Islam is supposed to be for all of mankind. Although the UK, for example, has many strengths, they are also looking for ideas, and frankly, the kind of ethical direction in which Islam has a big advantage," he said.

Using the S-Curve as a reference, the former Khazanah chief said change is not linear and in a dynamic surrounding, when the S-Curve starts to plateau, it usually means a prelude to a decline.

"Before we decline, which we think is about now, we have to see the second part of the S-Curve, which is what the future is about. So in the language of our report (the Position Paper), we talked about the need for Islah, which means reform and restoration.

Gearing up for the future

Referring to the future S-Curve as the Islah Curve, Azman said the next curve for Islamic finance must endeavour to create a more Syariah-driven, Syariah-outcome and impact system that is closer to the ideals of being anchored on the Maqasid Al-Syariah and related concepts, including moving from a halal ecosystem to a halal and tayyib ecosystem.

"So in the end, we (MLC) highlighted seven principles of change in the Position Paper and we took a pragmatic approach rather than a harsh approach. We all know riba is haram but what are we going to do about it? While it's important to be pragmatic, we also know the technical argument of darurah (emergency) and maslahah (public interest)," he added.

Under the seven principles, the paper outlined 10 themes and shifts needed of what an Islah-curve could look like in terms of pushing the boundaries of current practices. They include increasing equity risk capital formation, broadening and deepening philanthropic capital, greater financial inclusion and access, greater individual and societal empowerment through Islamic finance instruments, harnessing better technology and innovation in Islamic finance and improving talent creation, as well as in capacity and institution building.

"The time has come to be more precise in our articulation of what needs to be done from the structure (point of view). The only thing that could still be a hindrance is the distinction between Islamic and conventional finance; a lot of people have not been able to tell the difference.

Risk and reward

According to Azman, the major distinction in the issue of economy and investment in Islamic finance is risk and reward. By right, there is no such thing as a risk-free investment because a return without risk is technically a riba, which he also said is a form of oppression.

Secondly, the nature of Islamic finance is supportive rather than punitive. Not every financial institution adheres to this, he cautioned, citing HSBC Amanah, which started operating in Malaysia in August 2008 as an example.

"They (the bank) said many HSBC Amanah clients are non-Muslims. Do you know why? They discovered that it looks the same (between conventional and Islamic finance), but when something goes wrong, it's different.

"Because Islamic finance is not punitive, we are supportive. For example, we don't charge penalty interest. Or, if there is an administrative charge, there is a limit. This is the difference. Of course, if everything is smooth, you don't see the difference," he explained.

The third difference is the source and usage of funds, which must be halal, permissible or even more than halal.

Fourth, is the notion of rahmah, which is about mercy and charity.

"Ultimately, Islamic finance in general is a means to help support the real economy. The real economic activity needs to be productive, It cannot be things that cause harm. That is why there is the halal and haram (divide)," he added. - BERNAMA