Sukuk in three jurisdictions, Malaysia, Gulf and Saudi Arabia
When Allah swt declared war on riba humans interpret it as ok to have it fifty fifty. In other words we say it’s ok to begin Islamic banking slowly, let it coexist with conventional banking so that the beauty of Islamic banking will shine through and eventually everyone will convert to it. That’s what we thought and assumed acceptable under Shariah. However a clear interpretation of Shariah does not support such a notion ; what is haram is haram and cannot be condone or allowed to exist in any form or manner.
But being seasoned apologists for our religion for a long, long time we condone riba banking and allow it to exist side by side with Shariah compliant banking. As a result of setting a competitor with many rules, to compete with one who doesn’t have to observe rules diligently observed by the other, we see a mutated version of Islamic banking appearing everywhere, moulded not so much by the demands of Shariah but the demands of unfair competition. In other areas an intransigent conventional market will allow any form of Islamic banking to exist provided the product mirrors what is already acceptable conventionally. Therefore what we see everywhere is Islamic banking in the sense of a wolf in sheep’s clothing. No doubt the wolf’s claws are somewhat trimmed and manicured but that aside it’s still very much a wolf. We face an unbelieving ummah who honestly fails to see very much difference between what is called Islamic banking and its conventional alternative. Righteously we hammer home the illiterate ummah for not seeing the difference between a transaction with a Shariah ‘akad and one without. Without question we are right but deep down we sympathise with their confusion because we know the true Islamic banking is not allowed to flourish. All the wise men in town tell us Mudharabah and Musyarakah which are considered the true proponents of Islamic banking are impractical and only for the dreamers. Extend financing without the ability to take collateral? Allow the customer to pay only when they make profits? Crazy, they sneer. Goes against the grain to their PhD thesis on risk management in banking.
Lets us see the woods from the trees. We have never known any other form of banking until Islamic Banking started making its appearance in the late seventies and early eighties. That bank down the street and what it does is the only form of banking we know. Allowed to flourish unperturbed it has developed into a university of knowledge that holds sway as the truth and only truth in banking. Subjects such as derivatives and risk management derive from this body of knowledge into sophisticated tools to engrain the ‘truth’ and ‘correctness’ of conventional banking further. And with this background we begin to compare and assess the merits of Islamic banking. I remember in my university days many, many moons ago my English university mate tells me he doesn’t like curry very much. When I asked him how he makes his curry he says well I cut the apples into small pieces, boil it with raisins, throw in some curry powder and then gives it a good stir until all seems cooked . I invited him for a meal at the local Indian restaurant and purposefully ordered some curry and rice for my friend. He polished his plate and tells me he is so wrong with curry, it is actually very nice. Now Islamic banking is not much different from this curry story. Islamic banking in a dual banking environment is your curry with apple and raisins boiled in curry powder water; Islamic banking on its own without the existence of conventional banking is your home cooking curry your mother makes. The other illustration is about two people taking a bus trip, one is on vacation , the other is rushing home to see his ailing mother. Now the driver drives at only one speed, but to the guy who’s on vacation he is driving too fast, whilst to the guy who’s worried sick about his mother, the driver is driving too slow. Perceptions colour our judgement. It is also coloured by what we already know and what we, at the time, don’t know. So how do we judge Islamic banking? Do we know that Mudharabah and Musharakah have macro objectives? Do we know that Mudharabah is a tool in the Islamic Economic system meant to rope in idle capital into the economic machine? Do we know that Musharakah is the Islamic Economics answer to a world free of economic recessions and depressions? More pertinently at the individual level, do we care? At the individual level obviously not. If we are looking for a house or car financing most people’s concern is the cheapest form of financing ; they care little if we tell them our Musyarakah house financing will achieve macro objectives for our economy. So who should care if the individuals don’t care. Obviously the answer is the authorities or the government. The next question to ask is are our policy makers aware of the philosophy and hikmah of Islamic banking, in particular Mudharabah and Musyarakah banking. A very honest answer to that question will be a sad no. How many times we see Central Bankers govern Islamic banking with little understanding or sympathy of its hikmah and objectives. It is the vogue now for Central bankers to impose strict risk management practices on Islamic banks with exactly the same rules insisted on conventional banks? Do central bankers see the woods from the trees? Do they see that conventional banking is a “this is my money, pay me back at all costs” system, compared with Islamic banking which tries to implement economic justice between contracting parties and shoulders macro objectives for the bigger economy? Applying strict risk management philosophies, where do Mudharabah and Musyarakah rank? Are they not the conventional risk managers nightmare? So is it right to insist Islamic Banks adopt the same risk management rules as conventional banks, or shouldn’t it be tampered with understanding of the objectives of Islamic banking? Do they believe in the objectives of Islamic banking bearing in mind they were also trained under the conventional system? Are the present captains of Islamic banking they appoint to run Islamic banks today fully aware and versant with the philosophies of Islamic banking? If they aren’t we will witness Islamic banks being flogged to death with conventional philosophies. It will either flourish as a second rate conventional bank wannabe, or if it insists on maintaining its Islamic difference it will be in a continual stupor dying a slow and undiagnosed death. Either way fare thee well Islamic banking objectives, your time is not today.
To extend further from there do people see that an Islamic banking system is merely part of a larger Islamic Economic System operating within the confines of Hudud and Syariah law meant to govern a people to whom the akhirah is the key objective manifold more important than the world we live in today? Until we see Islamic banking within this perspective we will not do justice in any of our judgements on it. Cast it in the manner Shariah meant it to be cast, then pass judgement on its credibility. Failing that we will forever be drowning in fake curry without a lifeboat in sight.
An illustration of the dilemma faced by Islamic banking today can be seen and is well illustrated in Sukuk developments in three jurisdictions, Malaysia, Gulf countries other than Saudi Arabia, and Saudi Arabia. Sukuk for the uninitiated is your Islamic bonds, which is the flavour of the century in financing mega projects in the world today. And no, Islamic Bond is not a converted Sean Connery wearing a white skull cap and holding prayer beads. Islamic Bond is an Islamic capital market instrument which institutions with money to spare buy for investments, and institutions needing money to invest use to raise large sums of money. It is so popular now that even a State in Germany have used it to raise funds to finance local government expenditure. And we hear new Sukuk issues are pending in China and the United States. Malaysia started the ball rolling so to speak in Sukuk Issuance. The KLIA Islamic Bond Issue of RM2.2 billion in 1996 of which this writer pleads guilty to be principally responsible for is said to be the issue that kick started the Sukuk industry in Malaysia. The Guthrie Sukuk pioneered by Bank Islam Labuan, a bit later, launched the birth of international Sukuk throughout the world. It became the precedent used by Sukuk Arrangers throughout the world. However Malaysian Sukuk based on the buying and selling of debt is much objected to in the Middle East. I do not wish to engage in the debate here. Suffice to say each side have its arguments and according to the rules of fiqh the scholars ijtihad in each jurisdiction is correct for that jurisdiction and do not have to be acceptable in other jurisdictions. And for you and me we will not be wronged for relying on our scholars under the principle of taqlid. What I do want to highlight however is the existence of an unheralded group in Malaysian Islamic finance who exudes an exceptionally strong influence unknown to others. When a particular Islamic Finance Product or Syariah interpretation seems quite unwieldy blame is usually thrown on either the Islamic Banker or the Islamic Scholars advising them. Little blame is ever thrown on the legal advisors. However in Malaysia legal advisors or solicitors as they are also known here, have very much say in the shaping of the final version of Islamic Finance products being designed. Their final say as to what is or is not acceptable under Malaysian civil law have stunted many an Islamic Product. What started on the drawing board as a pure and fully compliant Islamic finance product will be forced to go through Shariah short cuts after vetting by the legal advisor. Malaysia, for good or for worse, was left a legacy of a very strong body of law by the British. When Islamic banking came into being in 1983, the Malaysian government tells the Islamic bankers, here is the Islamic Banking Act for you to rely on, but we are not going to amend any other law, you have to work that out yourselves. Any disputes in Islamic banking in Malaysia goes to civil courts not Syariah Courts. That set the tone for Islamic banking in Malaysia, more than anyone can foresee at the time; they not only have to comply with Syariah they also have to comply with every civil law. Do we now see the dilemma of Islamic bankers and Islamic banking in Malaysia? No matter how Syariah compliant they started out with the final say will always be with the legal advisors. Clear contradictions with Syariah will never be allowed by the Syariah Scholars or tolerated by the Islamic bankers but the Islamic banking legal advisors have the talent to drive things into no man’s land, in their aim of balancing compliance with civil law and compliance with Syariah. What results is usually a not so pristine pure product that does not blatantly contradict Syariah nor does not it offend civil law either.
Now how do they fare in the Gulf? This writer is not able to comment on the influence of their civil law on their Islamic banking products. However in Sukuk they have steered clear of the controversy of Malaysian debt Sukuk by some clever structurings using the principle of Musyarakah. It’s a bit long winded compared to Malaysian short cuts but they have managed to structure their Sukuk clearly within the realms of Musyarakah. The only sad thing is having designed such a beautifully Syariah compliant product they make an about turn in some features turning the Musyarakah Sukuk into just another debt Sukuk. I’m referring of course to the inevitably present Purchase Undertaking by the Client and the Profit tanazul by the Sukukholders /Musyarakah partner. Under the concept of the Purchase Undertaking one Musyarakah partner, the Client tells the other Musyarakah partner i.e. the Sukukholders we guarantee this Musyarakah investment is profitable. If it ever makes a loss we undertake to buy your Musyarakah share from you. Now any beginner in Islamic banking fiqh will know you simply cannot guarantee profits in a Musyarakah venture, it goes against the basic principles of Musyarakah. Being a Musyarakah, the Musyarakah partners i.e. the Client and the Sukukholders agree on a profit sharing ratio. Any profits every 6 months are shared according to this ratio. However in return for the concession of the Purchase undertaking given by the Client to the Sukukholders, the Sukukholders must reciprocate. This is done by the tanazul or ‘rebate’ of profits in any 6 months. In other words the Sukukholders agree their return is limited to a percentage plus LIBOR, or any other benchmark they agree on. If their share of the profits exceed LIBOR + x % then the excess profit goes to the other partner i.e. Client. They call this incentive fees for the active partner. Many people find it strange in any Musyarakah for one partner to give away its share of the profits to another partner. Why do they do these things i.e. purchase undertaking and tanazul of profits? Without mincing words this is kowtow to the conventional bond market investors. Much of the people who invest in Sukuk are either conventional bond market investors or Muslim investors who leaves all decision making to conventional advisors. These people tell the Sukuk Arrangers and the Sukuk Issuers, call it what you like, name it what you like, but make sure your Sukuk have these two conventional requirements and we will invest in your Sukuk. Thus we see another example here of conventional people dictating the terms of Islamic instruments. Spare the vitriolic from the Gulf Sukuk Arrangers or the Gulf Sukuk Scholars, the culprits are the conventional bond investors and the conventional bond advisors. For as long as monied Muslim individuals or institutions leave much investment decisions to be made by conventional advisors we will not see truly Syariah compliant capital market instruments coming through to the market. Like most things in Islam things do begin with the ummah. Allah says in the Quran (mafhum) We will not change the destiny of a people until they begin to change themselves.
Lets now turn to Saudi Arabia, the land of gold at the moment. Saudi Arabia started later than most in Islamic Banking and Sukuk. But to their credit they have no pretensions, they are willing to learn from whomever have more experience, in their bid to catch up. However be forewarned they tolerate no short cuts in Syariah interpretation. In this cradle of Islam where courts and judges decides only based on Syariah and where Syariah law is supreme they may lack behind in Islamic banking but it does not mean they will compromise Syariah in its implementation. So forget the Malaysian Sukuk and the Gulf Sukuk, neither is acceptable in Saudi Arabia. They object to Malaysian interpretation based much on the issue of ‘Inah or reflection of riba’. And they find Gulf Sukuk not acceptable based on the contradiction of basic rules of Musyarakah. The battle lines are drawn between the Saudi Scholars and the intransigence of the conventional bond market on the other side. The Saudi scholars will not budge. Its stalemate mate presently although some breaches in the defence were seen recently by two major Sukuk issues of which conservative Saudi Scholars are not happy with. The truly Syariah compliant Saudi Sukuk is in the offing and will come through insyaAllah. Alas in Saudi Arabia Islamic bankers have found a fort where conventional pressures hold no sway. Await the next report from the battle front.
Ayah 278 and 279
“O you who believe! Be afraid of Allâh and give up what remains from Ribâ if you are believers. And if you do not do it, then take a notice of war from Allâh and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly, and you shall not be dealt with unjustly.”
Muhammad Zahid Abdul Aziz
Riyadh, Saudi Arabia.
[Note; The tamed version of this Article (i.e. edited) appeared in The Edge 19 November 2007 courtsey of the Business Editor and my friend Azam Aris.]