The Risks of Risk Management
A Class Paper on Risks Associated with Islamic Financial Institutions (IFIs) [UIAM]
by Muhammad Zahid Abdul Aziz
In my view the biggest risk associated with IFIs is the risk of non compliance with Syariah. This risk is not just a subset of so many risks faced by the IFI but it is a risk that permeates every aspect of the IFI’s being as an entity. Let’s tackle the issue from the top, the risk of misinterpreting the shape and form of an IFI truly endorsed by Syariah. In our rush to have an alternative Financial System generally and an Islamic Financial Institution in particular we never truly addressed the philosophy, the epistemology and the ontology of the new knowledge we are about to create for it is in indeed a knowledge we are about to create in as much as it is a new financial system.
All things Islamic the basic foundation must be the Quran and the Sunnah. We ignored the Quran and the Sunnah on our first day of work on this mission. Sure we have the Quran and the Sunnah by our side, in our words, in our policies, in our legislations, all the way but we never asked the basic question of what is the type of institution endorsed by the Quran and Sunnah?! We looked at the world around us and took this animal called a bank created by a system Allah and His messenger has declared war on. Do we take the plans and foundations of a whorehouse to build a mosque? Most certainly not! But we have no qualms to taking the plans and foundations of a financial whorehouse to build our dream of a Syariah compliant institution. We are learned in the school of Fiqh, we know all about al 'asl ibahah as the founding maxim for our approach. To take things as we find as originally permissible until we find parts which aren’t permissible and to change things to make them permissible. But surely the Fathers of the Majelle who came up with this maxim must have contemplated a less obnoxious situation for al 'asl ibahah to operate in. Surely we cannot walk into a winery which sells both grape juice and wine and declare on the principle of al 'asl ibahah that we may sit merrily with the wine drinkers drinking grape juice while they consume wine?! Is the door of ijtihad really closed? I long for the scholar who have the courage to extend the qiyas of not sitting with wine drinkers to not sitting with the eaters of riba. The illah is too clear and compelling.
So we chose the institution Allah and His Messenger has declared war on, as our role model for our Islamic Financial Institution. Role model indeed, for how many times have we not heard the Islamic institutions being admonished for not being as robust as the conventional institutions, by people no less than the regulators. Aah the regulators, our bastion of hope to guide us through the sea of darkness till it dawn on many they are as abjectly clueless of the mission we are on as their very own regulators. Trained in the breeding of horses they are expected to help us in the breeding of camels. Is it any surprise that by the day our camels are beginning to look more and more like horses? Trained to supervise institutions who has turned risk transfer to customers into a fine art, we look at them for guidance on how to deal with institutions whose sine qua non is the assumption of risks. If these institutions under supervision are merely traders or restaurateurs the misconception would be limited and confined. But these are financial institutions which form the backbone of the economy and in the intricate and complex nature of things whatever is decided for these conventional institutions have a direct effect on our equally conventional economy. So it is no surprise to us that our regulators pay more importance on the consequential effects on the economy than to pursue the ideals of a Syariah banking system they may or may not understand. This gives us a glimpse of the enormity of our task; the Islamic banking system is a mere symptom in the scheme of things. An overhaul of the economy and law is the true prerequisite of a functional Islamic banking system. But we continue with the pretence, in the hope that one day, somehow, a spiritual apocalypse of the current conventional system will deliver us the fertile ground to sow our dreams.
Until then we will continue to risk manage our Islamic Financial Institutions in a manner which is perversion to their cause. Risk assumptions under the equity and equitable principles of Mudharabah and Musyarakah is their battle cry but we tell them to transform themselves into clones of their riba cousins and focus only on debt financing. If not how else can one describe a risk weightage for Mudarabah and Musyarakah which is higher than an unsecured conventional loan? How does one in one breath say we promote Islamic Banking but at the same time make it impossible for them to achieve their true calling?
When the essence of the institution is wrong it is hardly surprising that sores and pus appear in other parts of its body. We have profit sharing mudharabah deposits unashamedly declared as liabilities in the accounts of the IFI’s. We have BBA financing for houses which is the epitome of nightmare for Islamic banking customers when the developer abandons the project. Jumhur ulama says only two exceptions are allowed for assets not to exist at point of sale but our kitab of clever risk management says there is another exception. We have treasury transactions which flies in the face of the basic rukun of buy and sell; when informed it is wrong we are served with a convoluted alternative which many are too embarassed to announce as Syariah compliant.
We have financing and capital market instruments which are barely distinguishable from their conventional equivalents. We have Shariah scholars hoisted as banking experts and banking experts ignored for not being scholars, delivering a happy situation for the munafiqqun that sometimes plagued our industry.
These are the risks of fundamentally wrong risk management. Allah give us strength, lest we tire of shouting to the wind.