The Global Islamic Finance Forum (GIFF) that took place in October in Kuala Lumpur, Malaysia, demonstrated – once again – the place that Malaysia is occupying in the global Islamic financial world. It also demonstrated the commitment of the Malaysian Government, Bank Negara (BNM) and other relevant institutions to further develop the Islamic Financial Industry (IFI).
Mushtak Parker, the editor of Islamic Banker, pointed out that there are basically two approaches to Islamic finance. First there is a Malaysian approach that is considered as a systematic or comprehensive approach to Islamic finance. In Malaysia, conventional and Islamic finance operate side-by-side with separate (yet similar) rules and regulations that are governing them.
(opens in a new window)The second approach is labelled as the ad hoc approach where neither the government nor the regulator acknowledges the need for a stand-alone Islamic banking and regulatory framework. Furthermore, there is a shortage or absence of enabling laws that facilitate the development of Islamic finance.
There is no doubt that the IFI would not have matured and grown had it not been for the visionary approach taken by Malaysia which is considered by many today as the leader in Islamic finance. The visionary approach and commitments from all sectors and parties involved brought Malaysia to the throne of Islamic finance. On its way up, Malaysia amended relevant laws and created comprehensive regulatory and supervisory frameworks to support its goal of becoming a global Islamic financial hub.
Furthermore, Malaysia took proactive steps in establishing various educational, training and research institutions to meet the industry’s needs for a highly educated and professional workforce.
In fact, the country played a major role in establishing the Organization of the Islamic Conference (OIC) with the first prime minister of Malaysia, the late Tunku Abdul Rahman, serving as its first secretary general. In addition, Malaysia was among the first to start Islamic banking and takaful and it is well-known for its Tabung Haji (Pilgrimage) Fund.
In order for the IFI to grow further, we need to diversify our products and introduce some standardization for them.
During his presentation at the International Shari’ah Scholars Forum a forum held in conjunction with GIFF and organized by ISRA and IRTI Abdulbari Mashal, general manager of Raqaba for Islamic Financial Consultations, said that there is a need for a unification of standards.
Shari’ah scholars present at the forum rejected the idea of standardization and argued that it is not in line with Shari’ah as differences of opinion reflect the beauty of Islam and, as such, they are not threats to the IFI.
The opponents of the standardization within the IFI often say that this process would restrict Shari’ah and thus slow down future development and innovations. Furthermore, they argued that the dynamics of the financial system require an energetic approach to the rising Shari’ah issues within the IFI. With standardization in place they argue the Shari’ah would not be able to meet the needs of the industry.
In my view, their arguments and reasoning against standardization are rather shallow and weak. For example, while every Shari’ah scholar is calling for the unity of the Ummah, they fail to move from words to actions. Aren’t the standardization of the financial products, fatwa issuing principles, and methodologies all ways for uniting the Ummah?
Similarly, they see the standardization as a “close-ended” process that cannot be amended or changed. Proponents of the standardization within the IFI see the standardization as “work in progress”. While there will be certain standardization of already existing products and issues, it does not limit us from introducing new standards or amending the previous ones as the issues and research pop-up. Hence, if the fatwa can be changed in lines with new developments then the same can be done with a standardized approach.
It is an irony that the same Shari’ah scholars who are opposing the standardization admit the turbulences caused by having different fatwas by different parties (institutions).
Differences of opinion among Shari’ah scholars on what is and what is not Shari’ah-compliant hinders the development of the IFI. What they failed to realize is that the IFI will prosper even better and faster if there are standardized rulings on basic products and concepts.
As the IFI attracts more and more people both Muslims and non-Muslims it is important for us to simplify products as much as possible. Currently, many products seem to be more complicated than conventional ones, Glenn Woolley, managing director of Melbourne-based Intrinsic Investment Management, said to The Edge Financial Daily.
It is rightly pointed out that different opinions on similar issues given by different schools of laws may create confusion among the general public as well as among practitioners of Islamic finance. Thus, standardizing the rulings would make it easier for both companies and ordinary people to understand them better.
In brief, what we need for the future prosperity of the IFI is to come up with unified, standardized and comprehensive guidelines. These guidelines will serve as a reference for the Shari’ah advisory board of each and every bank. Furthermore, these guidelines would take into consideration all the restrictions and jurisdictions. Shari’ah advisory boards shall make sure that the core principles are upheld while, at the same time, they will have enough room for accommodating specific requirements demanded by each and every region or jurisdiction.
One good example that can be implemented globally is the approach taken by Bank Negara and its introduction of Shari’ah Parameters. These Shari’ah parameters will serve as guidelines for the industry in order to make it more harmonized and help its growth.
The Malaysian government and BNM achieved tremendous results in Islamic finance and it is up to us to learn from them. Harmonization of practices across the globe may bring about further growth and strength to the Islamic financial industry. Having properly harmonized and standardized products across the globe would benefit the industry as a whole and lead to economies of scale. Standardization of common agreements would save time, efforts and resources, giving the Islamic finance practitioners extra space to focus on much-needed areas such as product development.
In conclusion, while the demand for and interest in Islamic finance is growing worldwide, we have to make sure that new market players are able to comprehend Shari’ah structures used in financial engineering. This can be achieved through unified, standardized and comprehensive guidelines similar to the Shari’ah parameters issued by BNM. United under one umbrella, we shall withstand financial market turbulences and move together towards the same direction, namely the advancement of the IFI. On the other hand, if each and every region, jurisdiction or country plays solo, the industry as a whole may not reach the desired goal.
Edib Smolo is the Founder and CEO of SARAYCON – Saray Consultancy for Socially Responsible & Ethical Finance. Currently, he is an assistant professor of finance at International University of Sarajevo. He has extensive experience in fields of Islamic banking and finance.
He holds a PhD in Islamic finance. He is an expert on Islamic finance and banking. In addition to a large number of scientific papers, he is also the author of the book “Introduction to Islamic Economics and Finance: Theory and Practice” (in Bosnian language) published in 2013.