Finance & Banking


Despite having undergone ‘a four-stage evolution’,
composed of the early years (1975-1991); the era of
globalization (1991-2001); the post-9/11 period; and an
era after the 2008 recession, the Islamic financial services
industry is still perceived to have failed to deliver on its
promises of fairness, equity, and inclusion. As such, this has
been due to the industrialisation along with its inevitable
commercialisation along the way.

Rightly so, the contemporary age of Islamic financial
engineering, that has been characterised by a greater
reliance on plugging ‘classical Islamic financial contracts’
into an Anglo-Saxon banking model and a conventional
securitization technique in Sukuk issuance, has made
Islamic finance appear to be no different from its
conventional counterpart. Such an era, which commenced
in the mid-nineties has been considerably exacerbated by
the introduction of the following. First, the wa’ad technique
(especially double wa’ad) applied to Islamic financial
contracts. The white paper by Deutsche Bank in 2007 was
perhaps the first documented articulation on the use of
double wa’ad in contemporary Islamic financial engineering.
Second, the deployment of a commodity Murabaha through
the use of tawarruq for both liquidity management and
personal financing purposes. Third, the operationalisation
of the concept of beneficial ownership and the extension
of the khulta (mixture) principle to the field of commercial
transactions, of which Islamic capital market through sukuk
issuance has undoubtedly been the great beneficiary of the
implementation of such concepts. These three components
have altered the profile or body of Islamic financial contracts
resulting in the financialization of the entire Islamic financial
services industry.

In the process, one of the unpreventable outcomes is a
‘shift’ in the natural domain of the contract; from initially
being classified as a benevolent contract to now being a
commercial contract. One example is the kafalah contract
upon which a fee is now permissible. This is possible
since, in contemporary practice, kafalah has essentially
been moulded into ‘shirkatul wujuh’ using the principle of
tab’iyyah or subordination.

Financialization, as Palley (2007) contends, is a process
whereby financial markets and financial institutions gain
greater influence over economic policy and economic
outcomes leading to a supreme superiority of the financial
sector over the real sector. The consequential impacts
of this process would be, an elevated significance of the
financial sector relative to the real sector; income transfer
from the real sector to the financial sector; increase income
inequality; and propagation of debt creation instead of
wealth creation.

Having said the above, it has become clear that under the
existing commercial institutional set-up, reducing inequalities
and being more inclusive has never been the ultimate ‘natural’
objective of Islamic financial institutions; hence, it may not
necessarily be attainable.

Nowadays, where the innovations are characterised by the use
of Artificial Intelligence (AI), FinTech, and Internet of Things (IoT),
or collectively known as the Fourth Industrial Revolution, Islamic
finance being in its 5th phase of development is encountered
with situations where such innovations are creating substantial
displacements in industry and employment in major economies
around the globe.

It is imperative; therefore, that Islamic finance has no other
choice but to change. Furthermore, there is also a genuine
demand and opportunity to redirect innovations towards services
and products that create more economic opportunities, jobs and
financial inclusion for those who have been on the sidelines of
the Islamic finance revolution. Coincidentally, we are witnessing
the propagation of Environmental, Social and Governance
(ESG) discourse; which refers to the three central factors in
measuring the sustainability and ethical impact of an investment
in a company or business combined with the proliferation of the
immense potential of Islamic Social Finance. The terminology
‘Islamic Social Finance’ itself was only prominently introduced in
2014 by the Islamic Research and Training Institute through its
Islamic Social Finance Report.

A change in the look and direction of the industry is needed.
Malaysia’s recent movement of Value-Based Intermediation
in Islamic finance can be considered evidence of such change.
Another one is the issuance of Khazanah Sustainable and
Responsible Investment (SRI) sukuk. Waqf linked sukuk is
another breakthrough championed by the Ministry of Finance
Indonesia in partnership with Badan Wakaf Indonesia (BWI) and
Bank Indonesia.

It is becoming apparent that the drivers of change are no
longer driven by an entirely profit geared motive, rather they are
emphasising upon creating social and environmental impact. In
other words, it is an admission that the deviations caused by the
operation of Islamic finance in relation to the expected or aspired
paradigmatic knowledge, theory and institutional emergence have
to be corrected. One way to do that is through the introduction of
ESG, Impact Investing, and Islamic Social Finance.

More importantly, in the wake of the industrial revolution 4.0
that is somewhat synonymous with the use of technology and
digitalization; we could perhaps hope it would pave the way for
Islamic finance to be more appealing for not only its inclusivity
but also the ubiquity of its fundamental principles as an ethical,
socially responsible, and fair system of finance for not only the
Muslims but other communities as well.

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