ISLAMIC BANKING AND FINANCE AT CROSSROADS

By Professor Humayon Dar

 

There are two important papers written by the late Dr. Ziauddin Ahmad and Dr. Zubair Hasan on the topic, “Islamic Banking at the Crossroads”. The first paper was published in 1989 and the second was published in 2005. Both papers show their dissatisfaction with Islamic banking and finance on the grounds that it is over-leveraged and relies on fixed return modes of financing rather than profit loss sharing.

Furthermore Dr. Ziauddin Ahmad clearly stated that Islamic banking and finance should fulfil the following two criteria: [a] it should be conducted without transgressing any prescriptions of Shari’a; and [b] It should help in achieving the socio-economic objectives of an Islamic society. 10 years after the second paper, we find that fixed return modes of financing like murabaha, salam and ijara have established themselves as legitimate practices in Islamic banking and finance. However, social responsibility remains a major concern that has increasingly engulfed Islamic banking and finance. Many observers of Islamic banking and finance argue that it is not sufficiently socially responsible. Is it true? Or is it just an over-emphasis on a minor problem?

There are the likes of Dr. Adnan Chilwan, Group CEO of Dubai Islamic Bank, who contend that they remain committed to social responsibility but they don’t have to blow a trumpet. There are others who believe that they don’t have to refer to the Western notion of social responsibility. A proponent of this view is Iyad Al Asali, General Manager and CEO of Islamic International Arab Bank in Jordan. In December 2016, I had a brief discussion with him in his office in Amman, Jordan, when he shared his “new” definition of corporate social responsibility, which, according to him, was corporate social responsibility as a form of corporate self-regulation integrated into a business model. According to him, a business is socially responsible if it does things right.

Adnan Fasih heads Islamic banking group of Habib Bank AG Zurich. He also has some interesting ideas about using benevolent loans as part of corporate social responsibility of Islamic financial institutions. I tend to agree with the likes of Ayad Al Asali and Adnan Fasih. They are consistent with the leaders like Iqbal Khan who has been arguing that Islamic banks should strive to serve communities rather   than focusing on the conventional approach of capturing market shares.

Dr. Chilwan also seems to be on the same page. The only difference of opinion is whether charity should be discrete or announced. Mainstream consulting firms, however, are all out to convince Islamic banks that they have to follow the market trends. In this endeavour, they are even suggesting, rather forcefully, that Islamic banks should change their nomenclature to drop the world “Islamic” and should focus on serving the mainstream market segments. This is nothing but creating pessimism towards Islamic communities.

Changing the names of Islamic banks to some neutral brands implies that “Islamic” market does not have future. This means nothing but suggesting that future of Islamic banking is outside Muslim communities. This is a very dangerous proposition that will bring Islamic banks into deep waters away from their home grounds. Even a child can see the benefits of playing on home turfs. The mainstream consulting firms are advising Islamic banks to leave their home grounds and play on alien lands, using secular rules.

Islamic banks must show their commitment to Muslim communities. This would mean popularising a new lifestyle amongst Islamic bankers. Commitment to lower segments of the society is a must. Those who argue for a “Tesla” model for Islamic banking must not forget that Islamic communities do not need Teslas; rather they need tractors. Financing tractors by Islamic banks in agrarian economies will bring far more benefits than financing Tesla cars. The elitist culture is not consistent with Islamic banking. Simplicity, humility and prudence are the characteristics that will bring increasing business to Islamic banks.

To show their commitment to wider stakeholders, Islamic banks must beef up their involvement in social activities. This involves doing simple things in a meaningful way. For example, every new Islamic banking branch could have budget for distributing free food amongst the poor and the destitute. This suggests that Islamic banks must embed the model of food banks in their branch operations. This charitable approach also has commercial benefits. It will allow Islamic banks to win hearts and souls of people who will prove to be their most loyal customers. This will bring its own benefits in the form of blessings of Allah, as He has promised in the Holy Quran in the following verse.

“The example of those who spend their wealth in the way of Allah is like a seed which grows seven spikes, in each spike is a hundred grains. Allah multiplies His reward for whom He wills, for Allah is vast and knowing.” (Al-Baqarah, 2:261).

So, we must pause for a while before we work on a new strategy for growth and expansion of Islamic banking and finance. There are always two paths in front of us. We are always at crossroads – there is one way that is recommended by Allah and there is always another opposite path. The two paths lead to two different directions. The choice is ours which way we wish to go. Let us see what path Islamic banking and finance chooses for its further expansion and growth. We are still at the crossroads, as has always been the case.

Islamic banking and finance must aim at promoting a pattern of growth best suited for eradication of poverty, equitable distribution of income and wealth, and sufficient gainful employment. If Islamic banks and financial institutions choose this path, this will lead towards a just monetary system, as propounded by the likes of Muhammad Umar Chapra, arguably the greatest Islamic economist of our times. Indeed such an outcome will be truly socially responsible!

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