Issue Ten

Making money work for society

Resources could be allocated more effectively by having the central bank provide interest-free loans and the banking system being paid for the administration, argues Rodney Shakespeare A new way forward has been developing that is profoundly Islamic yet is also capable of being taken up by non-Islamic societies. Indeed, it is really a question of who, Muslim or non-Muslim, will first grasp the benefits of the new thinking and so give a lead to the rest of the world. To understand the new thinking, it is important to recognise that the banking system creates money out of nothing, adds interest (which is not the same thing as administration cost) and, in its lending, does not serve the purposes of the economy, let alone the purposes of society. With that recognition in mind, now consider the fundamental requirements of a modern Islam. These include a unicity concept of overall vision and distinctiveness, free markets, private property, widespread ownership of productive capital, economic efficiency, social and economic justice, no inflation, no interest, a direct connection between the money supply and the real economy, and an ethical ethos. Yet the present system of 'free market' finance capitalism is deficient in all of the requirements, even though many are extolled in free market rhetoric and propaganda.

Show me the way

Professor Malik Muhammad M Al-Awan charts a course for Islamic bankers to greater efficiencies and more competitive products that attract more consumers. One of the main planks in the industry's development, he writes, will be a centralised Shariah board. There has been criticism of Islamic banking, insurance and leasing products perceived as not truly free from riba. The criticism centres on higher transaction costs consumers are stuck with because of their religious preference for Islamic products. Some have gone so far as to argue that typical Islamic finance products are actually more ribaw than conventional products. Leading Shariah scholars are being blamed for this malaise in the industry which, in spite of its phenomenal growth worldwide, is a fraction of the size of conventional finance. Their traditional postulation that all categories of interest in conventional finance constitute riba and are, therefore, haram has led to simplistic exercises in interest substitution with inefficient and higher priced solutions that not only challenge the intelligence of most consumers but also have been unable to generate long-term customer loyalty. Most banks are perceived to have milked the Islamic ìbrand nameî to its limit, and some are beginning to face declining market shares. This is not healthy for the growth of this promising industry, and unnecessary costs need to be curtailed. For example, it is claimed that typical Islamic leasing products are more cumbersome and expensive compared with their conventional counterparts, and most profit and loss accounts have proven less advantageous to consumers. Islamic banks generally have failed to pass on to consumers their profit gains in recent years. What were sold as 'partnership' alternatives compared with fixed interest products are far from partnerships or equitable profit distributions. Therefore, it is not unusual for some critics to claim that Islamic banks are deviating from the spirit of Islam and from the true objectives of Shariah (Maqasid-e-Shariah).

Communicate your messages clearly

Even an inherently good product like takaful needs to have its features and benefits communicated, writes Bassel Hanbali Takaful providers are among the Islamic financial services institutions increasingly recognised for market-driven initiatives, credibility and strategic growth. Generally, the development of the Islamic system of financial services offers more than one billion Muslims the opportunity to help plan their financial future. The principle of takaful is to provide protection to those who need it most, a principle in line with the fundamental tenets of Islam. Takaful is built on the principles of compensation and shared responsibilities among the community to provide quality of life for all and to uphold the dignity of individuals, families and society. There is a greater awareness, from every social class, of the need for insurance. Combined with a religious/cultural resistance towards conventional insurance makes takaful the preferred option. To take advantage of this positive climate, takaful providers need to approach the market most professionally. This gives the chance to call on the need for communication, with the public, the end-user and institutions to deliver a common message, which is: individuals need to plan for and manage their financial destinies utilising methods that comply with Shariah principles. The supplied takaful products, the employed distribution channels and the Shariah rules and legal regulations adhered to must be communicated and understood by everyone. If finanical professionals do not employ the appropriate communication tools and work as a force together, they will not produce the social and economic benefits that they seek for our world. Products alone are not the answer. Financial professionals should always remind themselves that financial products of any kind are sold and not bought. This means that they have to communicate the right message to educate our market.

Location, location, location...

The attractions of Dubai as a location for Islamic finance are manifold, writes Khalid Yousaf Dubai is fast becoming a global centre for the US$280bn+ Islamic finance industry. This is partly due to the establishment of the Dubai International Financial Centre (DIFC), which offers an internationally recognised regulatory and supervisory environment that provides credibility for Islamic finance institutions and Islamic investors. The DIFC aims to be the Middle Eastís premier financial centre. Situated at the heart of a region of 42 countries with more than two billion people and a combined GDP of US$1.8 trillion, estimates put the total wealth of the regionís high net worth individuals at more than US$1.5 trillion. Significantly, in excess of US$1.8 trillion of regional assets are invested outside the region. Against this background, the DIFC is well positioned to attract major players in the global Islamic finance industry. The Dubai government has established the DIFC as an onshore financial centre with the aim of creating a financial community similar to that of New York, London or Hong Kong. The visionary leadership of HH Sheikh Mohammed, the crown prince of Dubai, was the force behind the formation of the DIFC, whose catalytic role will boost economic growth and development in the region. DIFC-licensed institutions will benefit from a renewable 50-year tax holiday, 100% foreign ownership and no restrictions on foreign exchange or capital/profit repatriation.

Building dual financial systems

The emerging dual financial system in the Gulf needs a rule of law orientation, says Amr Daoud Marar Anyone keeping abreast with the emerging financial activities in the Middle East would conclude that Islamic financial services are gaining more recognition. The trend In the Gulf Co-operation Council (GCC) states, the focus of this article, is the development of Islamic finance alongside conventional finance—that is, a system alongside a system. This dual model, introduced by Malaysia in 1983, is being followed by the GCC states. Hence, it seems that developing and maintaining a dual financial system has become a policy objective for some GCC states in their shift towards a market economy. The adoption of the dual model has been justified religiously as a strategy prior to Islamicising the whole financial sector. In developing this dual model, however, the instrumental use of the law should not be undermined. Generally, the law is an instrument to achieve a countryís economic goals. All economic policies would prove fruitless if they operated in a legal vacuum or within a legal system that does not accommodate them or is inconsistent with their application. To meet a country’s development needs and to accommodate any new economic policy, legal reforms are important to facilitate effectively the implementation of economic policy. Hence, in developing a market-led dual financial system, a rule of law legal system is necessary.

Social corporate policy

Complying with Shariah principles and mirroring good business practices are not dissimilar, writes Mufti Barkatulla. Such thinking will help maintain long-term prosperity for future generations Quality or quantity has always been a contentious notion. In today’s business environment, practical considerations take centre stage instead of philosophical rationale. Islamic perspective is crystal clear: "God loves that, when you do something, accomplish it to perfection", because attention is drawn in the Qurían to the level of perfection in the natural creation. The Shariah-compliant business and financial services sector has come a long way in the past three decades. It is growing both in volume and complexity at a steady rate. Research and development is intensifying into devising ever-more-Shariah-compliant products and services. We are well placed now to pay attention to the qualitative aspects of both providers and consumers of Shariah-compliant services. Compliance is required not only at product inception and in design and marketing, but also in the whole process of delivery, execution, conclusion and maturity of transactions. Quality assurance covers all activities from design, development, production, servicing and documentation. As it is observed in the following sections, not only actions are subject to compliance but also motivations and intentions. Notwithstanding classic and modern theories of general equilibrium, the corporate world is indeed re-engineering business models and processes. Corporate social responsibility and ethical guidelines for corporate governance are steps in positive directions. Customer relationship management is strategic business philosophy and processes are rooted in Shariah. Collaborative customer relationship management, is equated to partner relationship management.