According to Nafis Alam and Professor Bala Shanmugan of Monash University in Islamic Finance news, Vol. 4, issue 6, page 9, the article by Muhammad Saleem in the Financial Times of the 19th January had “left Islamic bankers aghast.” Unfortunately, a search of the newspaper’s website has produced but one response from a US academician. As at the 25th February, no replies from any Islamic bankers could be found. Thus it would be good if the learned academicians from Monash University could justify their observation of the Islamic bankers’ shocked reaction. It would be good to know if the Islamic bankers were actually listening and responding to the critics.
At any rate, a reading of Saleem’s article reveals that the former banker is actually urging Islamic bankers “to move away from the deceptive modes of financing they currently use and step towards the American style of venture capital” so that “the Islamic banks can practice real Islamic finance while helping the Islamic community to rediscover its tradition of invention and innovation.”
Saleem observed that despite having a 30-year history and current assets of US$300 billion, “the Islamic banks have not created any new jobs (other than their own employment), financed new inventions or innovations or made the Islamic communities more just and equitable.” And, for hundreds of years – from AD1100 until now, the Islamic world has not been making advances in science and technology. Primarily due to the unavailability of risk capital, opined Saleem.
I say that if Nafis and Professor Bala have found Mr Saleem a little impatient, perhaps it is because Mr Saleem was concerned with the state of the Muslim world in regards to science and technology and the slow progress of the Islamic bankers to intermediate between the inventors and the capital owners. Nevertheless, Islamic finance is a struggle to establish a just monetary system and a sense of urgency is actually a prerequisite for progress. Thus, Brother Saleem, thank you for the timely reminder to our Islamic bankers. “Remind men in case the reminder profits them” (87:9).
Now, I would like to raise issue against some of the views of Nafis and Professor Bala.
Our learned academicians said that “Islamic finance is a form of socially responsible banking, from an Islamic perspective, no doubt.” This flows from their view that Islamic finance is an institution with profit-motivated objectives armed with ethical parameters.
First, Islamic finance is NOT a form of socially responsible banking and Shariah is NOT a set of ethical parameters. Ethical theories and parameters are the products of human minds, while Shariah is divine guidance. To agree with Nafis and Professor Bala is to underrate the role of Shariah – being primarily from the Quran and the Sunnah – in the formation and development of Islamic finance.
Socially responsible banking rose to prominence when the US Congress in 1977 passed the Community Reinvestment Act (CRA), which was created to encourage banks to meet the credit needs of their local communities. Thus socially responsible banking is all about lending direction and has no theoretical framework. In fact, there were many problems with the CRA ratings and compliance that were imposed on banks. On the other hand, Islamic finance is grounded in Shariah and has specific objectives for society. Foremost amongst these is the prohibition of riba. Islamic finance does not see banks as playing merely an intermediary role, but also the role of a trading house. The trading rules were laid out by the Prophet himself and enumerated by the scholars hundreds of years ago. A scholarly study of Fiqh ul-muamalat will readily testify to this fact.
One cannot begin to define what Islamic finance is if the basics of riba al-fadl and riba an-nasiah are not understood.
Our learned academicians also say that: “For hundreds of years the world used interest as the price of money, but with the advent of Islamic finance, Shariah insists upon dismissing interest without proposing a watertight alternative. The profit and loss-sharing solution has too many loop holes and is yet to be perfected.”
In this instance, profit and loss sharing (PLS) solutions – Mudarabah and Musharakah modes of partnership – are NOT alternatives in fixing the price of money. In Islamic finance, the price of money cannot be fixed. To fix means one has committed riba an-nasiah.
PLS solutions are actually risk-sharing mechanisms between fund providers and entrepreneurs. A prerequisite in Mudarabah and Musharakah is the fixing of PLS ratios at the onset. Ratios are fixed but not the quantum of profit.
Thus, to view PLS schemes as alternatives in fixing the price of money is simply wrong and cannot be left unchecked in Islamic finance. Islamic scholars laid out the basic rules of Mudarabah and Musharakah hundreds of years ago. In their quest for profit, the challenge for Islamic bankers is to adhere to the rules and to trade with honor.