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14 August 2012

ISLAMIC FINANCE: Commitment and belief

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INSIGHTS: Mushtak Parker on what makes a successful Islamic banker and institution

By Rushdi Siddiqui

Will the "truth" set Islamic banking free from the "cheer-leading reins" that may be holding it back from authenticity-cum-innovation?

Today, Mushtak Parker provides his insights on a successful Islamic banker and institution and some of the milestones of the industry.

Question: You have been in Islamic finance (IF) for more than three decades and you have seen people come and go. What are the attributes of a successful Islamic banker?

Mushtak: True. I have seen many top Islamic bankers come and go in 37 years, but I have yet to see a complete Islamic finance industry banker. Some of them have been better than others, having two or more of the attributes that make a good Islamic banker. The foremost one is a commitment and belief in Islamic finance and its efficacy especially in the pursuit of Maqasid Al-syariah (objectives of the syariah). It is no use being an Islamic banker and not believe in the ethos of the system.

In fact, I have known two Islamic bankers inter alia, who were CEOs of their institutions - one who admitted to me that he did not believe in this "Islamic banking lark" and was just in it for the money, and the other one who is on record revealing that he knew nothing of Islamic banking and was "learning on the job". So much so for the caliber of the shareholders and the board of directors appointing them.

It also follows that a good Islamic banker is one who has a sound knowledge of banking and financial principles per se and a reasonable knowledge of Islamic financial principles, contracts and of Fiqh Al Muamalat (Islamic law relating to financial transactions). In this way, the Islamic banker can engage on a fairly level playing field with his syariah advisories and his banking colleagues.

Very often the bankers put the syariah scholars on a pedestal because of their limited knowledge of the principles of Islamic finance, which means the engagement is one-sided and limited. A good Islamic banker is also one who has good leadership skills and who is a good people manager. He should also be able to navigate between the various stakeholders - from the regulators to the shareholders to the staff and the customers.

Perhaps, above all he or she has to have a vision for the institution and the industry; and a sound strategy and business plan for the short, medium and long terms for the institution. This incorporates accessibility to stakeholders; continuous education; and an appreciation of the ever changing regulatory, market and social landscape of the banking and finance industry. In an ideal world, it would be great if the Islamic banker, like any other banker, realises that banking and finance should serve the economy and society, and not vice versa as we have seen over the last few decades.

I know CEOs of Islamic banks, who insist that their first priority (and loyalty) is to their shareholders in the pursuit of EVA (shareholder value) and of course profits. The rest, including syariah governance and compliance, is secondary. Maybe the attributes I suggest are too lofty, but I would like to think that they should be the ones to which Islamic bankers, especially the current and next generation should strive for.

Question: The same question for Islamic finance institutions and industry bodies?

Mushtak: The basic requirement of any financial institution is its status of incorporation. This must be through authorisation by the relevant banking regulator and under the provisions of the banking law. For an Islamic financial institution (IFI), it is imperative that the enabling legislation should be a dedicated separate standalone law, which could be a segment of the general banking law.

The law, however, should recognise the specificities of Islamic banking and finance. Unfortunately, there are still many Islamic banks that are not authorised or licenced under a dedicated Islamic law including notably all the Islamic banks in Saudi Arabia and more recently in Oman. The erstwhile governor of SAMA (the Saudi Arabian Monetary Agency), Muhammed Al-Jasser, used to dismiss the requirement of a dedicated Islamic banking law as he did for the importance of a full sovereign Saudi sukuk to set the true benchmark for Saudi risk and therefore pricing.

I can appreciate the political and religious sensitivities regarding Islamic banking in the Kingdom, but for a regulator, to stress merely the risk characteristics of financial products and their mitigation and live in denial about the specificities of Islamic finance, reveals how far Saudi Arabia still needs to go in terms of refining their Islamic banking legal and regulatory framework and architecture.

Abdicating Responsibility?

Unfortunately, multilateral industry bodies such as the Islamic Financial Services Board (IFSB) have abdicated their responsibility to push this vital agenda by hiding behind the fact that its mandate is only to issue prudential and supervisory standards for the industry. Surely the core standard should be an "authorisation standard" for IFIs which would be the basis for the concomitant prudential and supervisory standards.

Ironically, IFSB guidelines does stress the need for a dedicated standalone enabling legislation that incorporates the special characteristics of Islamic banking. In many ways the quality of an IFI reflects the quality of the enabling legislation and its regulator.

A note on ownership of IFIs. Sometimes government ownership of IFIs through golden shares may be justified, but there has to be a recognition that this is unsustainable over the long term. One can argue that the Malaysian government's handholding of Bank Islam Malaysia Berhad for more than two decades by restricting the opening of the market to both domestic and foreign competitors, may have delayed the growth of the sector in the country.

In other words, had the government opened up the sector say in the 1990s, the Malaysian Islamic banking industry may have been even in a more advanced stage today than it is.

Question: There have been a number of high profile IF milestones in the last two decades. What are the high flyers and flops?

Mushtak: It depends how you define milestone. If it is an achievement or target or innovation, then you have to ask to what extent has it made a difference in a given market or financial system or society. This is where the problem lies.

The milestones in Islamic finance have been benign in some respect; parochial in other respects - very few have touched the global financial system and begin to change the riba-based and profit maximsation "at any cost" mindset of the conventional bankers. A poignant reminder is the conspicuous absence of a considered, intellectual, theoretical-based response by Muslim economists, regulators, syariah advisories and Islamic bankers to the 2008 global financial crisis and the excesses of market capitalism (some call it casino capitalism).

A very prominent Catholic Academic in ethics and finance at a prestigious London University college recently told me that she is very reluctant to engage on Islamic banking and finance with her Muslim counterparts because all they do is proselytise about the glory of Islam and Islamic finance, and seem incapable of having an intellectual and theological discourse on topics such as usury and market excesses, and the failure of both religious establishments and governments in curbing such excesses.

Definitions aside, the three most important achievements of the contemporary Islamic finance movement is its phenomenal growth in terms of geographic expansion; its market size of an estimated US$1.5 trillion (RM4.68 trillion) in just 35 years, although this must be put in perspective given that Islamic finance assets constitute a mere one to two per cent of global financial assets; and the fact that Islamic financial contracts such as commodity murabaha (the vanilla type), ijara and sukuk are now internationally-accepted and established products.

However, any belief that this makes Islamic finance mainstream in the global financial system should be dispelled immediately. To achieve this milestone will take another generation or two or a seismic change in the mindset of the potentially important game-changers in Islamic finance such as Saudi Arabia, Turkey, Iran, Egypt and Indonesia. At the same time, the impressive growth of the sukuk market and human capital development, especially in Malaysia augurs well for the future.

Failure

In contrast, the biggest failure is the failure to articulate the Islamic system of financial intermediation beyond the "realm of the converted". Islamic finance should be on the agenda at the top table at the G8 and the G20 summits; and at the World Bank/IMF and Basle Committee deliberations, and not at some side event.

Here Saudi Arabia, Turkey and Indonesia, the three Muslim countries in the G20, have spectacularly failed to even consider discussing a potential role for the Islamic financial system in contributing to global growth and financial stability.

Other flops (as you call it) include a largely fragmented global Islamic financial system and architecture despite attempts through the establishment of industry bodies such as the IFSB and the Accounting and Auditing Organisation for Islamic Financial Institutions to show otherwise; fragmented, erratic and in many instances a non-existent regulatory and legal framework of enabling regulation and laws to facilitate Islamic finance; a very slow pace of product innovation; and perhaps the most damaging is the short-termism of both shareholders, the institutions they own and investors, which has seen the industry fester in short-term risk and products such as murabaha and Bai Bithaman Ajil for the last three decades.

This ironically has had a pernicious effect on product innovation in some instances. For instance, if you try to get a Malaysian Islamic bank to migrate to the diminishing musharaka as the basis for their mortgage finance as opposed to the BBA, you will have an uphill battle. Many Malaysian Islamic bankers will argue: "Why tamper with a tried and tested product" and "Why spend new money to develop new products in this area?"

This misses the point, because ultimately it is the Malaysian customer that loses out because he/she is denied the choice of a potentially more suitable, flexible and cost-effective product. So much so for financial and social inclusion. There are a surfeit of other examples relating to countries in the GCC and elsewhere.

Discourse Disappointment

Perhaps a core disappointment is the lack of frank and open discourse between syariah advisories and between them and the regulators and other stakeholders in general. In the ancient times, a robust discourse on the basis of Ijtihad was the norm, including in matters relating to Fqh Al-Muamalat.

Today, too many syariah advisories prefer to sit on the fence; or to refuse to engage with or counter an opinion of another syariah advisory; or remain selective in when and what they say. There is a strong argument for universal regulation of syariah advisories in Islamic finance.

[Rushdi Siddiqui is Global Head of Islamic Finance and OIC Countries at Thomson Reuters. He can be contacted at rushdi.siddiqui@thomson reuters.com

(Courtesy: Business Times, Malaysia)

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