Conversation with a Journalist

Assalamu ‘Alaikum,

Thank you Emmy. I am delighted you asked me to elaborate.

My views are that of a practitioner cum consultant who recently turned academician doing post graduate studies in Islamic Finance.

Actually the entire issue could be summarised by my recent thesis submitted to the International Islamic University Malaysia, entitled “The Negative Impact of Riba Banking on the Performance of Islamic Banking in a Dual Banking System like Malaysia.”

I am not sure whether the University can release the thesis yet but allow me to summarise as follows:

We are today actually guilty of failing to see Islamic banking in its proper context. To put it simply I posed that the true environment of Islamic banking as expected by the Shariah is that it should be operating in a riba free environment, in a riba free economy. In other words it should be a sole single system operating in an Islamic economy. I put aside the wider environment of Islamic law for the moment.

What we find today is an Islamic banking system enveloped and impacted by the riba banking system operating within a riba driven economy. Practitioners of Islamic banking understand these daily pressures imposed on them by riba banking but often they are not able to articulate the issues to the general public. This is the voice I tried to give them in my thesis.

Let me give a few examples dealt in detail in my thesis.

Collection of Deposits

       Islamic banks use the concept of Mudarabah to collect deposits whereas conventional banks use interest rates. If one understands the concept of Mudarabah one knows that the Islamic bank cannot quote a deposit rate upfront, the return to the deposits will only be known on maturity. In a low liquidity situation conventional banks merely hike interest rates but Islamic banks are helpless to compete.

Inability to sell ethical financing products

Ethical financing products for house financing under parallel Istisna’ for example, requires the Islamic Bank to assume higher risks than conventional housing loans. If the developer abandons a housing project under parallel Istisna the Islamic bank assumes responsibility and will not burden the customer to continue paying for a house they will never own. Under conventional house financing (and incidentally the BBA house financing currently used by Islamic banks) the burden is placed squarely on the customer who will be forced to continue to pay for a house they will never own.

However to offer the ethical product the Islamic banks need to price it higher than the conventional loan as it involves assumption of higher risk. The conventional housing loan is at discounted pricing because the burden of abandoned housing is placed on the customers not the banks. Given such an option to the general public when riba is not made haram to Muslims, society will choose the cheaper but defective conventional product because everyone believes it is always other people and not them who will suffer the abandoned housing problem. They actually take a gamble and are actually saying they are willing to sacrifice x% of society who will suffer from abandoned housing. Under the ethical Parallel Istisna’ financing 0% of society will suffer because Islamic banks will assume responsibility for abandoned housing. Thus we see how the dual system, and not making riba haram for Muslims, impacts Islamic banking negatively.

There are many other examples in my thesis but enough with the above to illustrate the problem. However I would like to clearly state I am not about to absolve the current Islamic bankers either.

Today it is very clear Islamic banking is being practised without reference to Maqasid Shariah or Objectives of Shariah. I wonder whether the Islamic bankers in a position to decide actually know of Maqasid Shariah. In an Islamic economy economic units must work towards achieving the objectives of Shariah. Maqasid Shariah in respect of the economy requires amongst others wealth to be widely distributed and not confined to the wealthy few. A wide distribution of wealth cannot be achieved in an overly debt financing biased Islamic banking system the world find itself in today. In debt financing, preferences are always given to Islamic banking customers who can offer collateral and who have high levels of equity to meet debt equity ratios set by Islamic banks. These debt financing conditions usually marginalise the poor and favour the rich. Thus we see Islamic banks guilty of making the rich richer and the poor poorer.

Celebration of the poor is a hallmark of our Prophet’s s.a.w struggle. We cannot ignore the poor in economic activities. Islam does not believe in the invisible hand as believed by Western Economists to right economic wrongs. Islam demands proactive actions to uplift the plight of the poor and in the context of Islamic banking this translates to emphasis for Islamic microfinance. How many Islamic banks today see Islamic Microfinance as a responsibility they are willing to shoulder? If Islamic banking management are not motivated to do Microfinance we need to ask why, and enquire whether there is a bigger systemic issue at hand.

 From the consumers point of view they need to understand Islamic banks today is not a charitable but a business organisation. Cheap financing may translate to poor returns on deposits; will all of them continue to deposit with Islamic banks in such a scenario?

A conclusion of my thesis is that we can’t afford to ignore the environment Islamic banks operate in. My advice is, understand the environment, know where we want to head to, and get the right people to lead Islamic banking.

Allah knows best.

Muhammad Zahid Abdul Aziz