As we are leaving 2016 and looking back to where Islamic finance was, one incident took place in 2009 in the boardroom of the Central Bank of Bahrain brought back the memory of how people perceived Islamic banks. DR HURRIYAH EL ISLAMY walks us through on what transpired.
A CEO of one leading institution asked this question: “Do you seriously believe that there is Islamic banking; that it is not just changing the label?” My response was “yes” but there was no opportunity to elaborate on that as the meeting was about to commence. He was not the first person to ask such a question. Back then, at the hearing of my affiliation to an Islamic bank, people often posed similar questions. Today, more than seven years later, we do not hear people asking such questions, not anymore. But there’s this open secret, the talk in the marketplace, that people question if Islamic banks truly offer products which are 100% in line with Shariah and if they operate the business in the manner that makes them truly Islamic banks.
Review of 2016
The year 2016 has not been an easy year for the global economy as well as the Islamic finance industry. Falling oil prices had affected the economy in Islamic finance core markets and Islamic finance players had rightly been more prudent in undertaking the business. Both the regulators and the industry were looking at improving the governance. New players and some other countries from emerging Islamic finance markets have introduced or are looking into introducing new laws or regulations to regulate Islamic finance. These include the UK, Uganda, Kenya and India.
The Central Bank of England issued a consultation paper in February 2016 on establishing Shariah compliant liquidity facilities. Its primary focus at this stage is to assess the feasibility of establishing Shariah compliant deposit facilities. In Uganda, the parliament passed the Financial Institutions (Amendment) Bill 2015. In effect, the Financial Institutions Act has been amended and introduced Islamic banking as a system of banking consistent with Islamic law and guided by Islamic economics.
Recently, the Kenyan National Treasury commissioned for the development of Islamic finance policy. Kenya has also set up the Islamic Finance Project Management Office which is expected to put in place a national Shariah governance framework to guarantee standards and compliance with Shariah provisions including a cross-cutting financial sector National Shariah Supervisory Board.
The Reserve Bank of India, in its annual report issued on the 29th August 2016, proposed to “explore the modalities of introducing interest-free banking products in India in consultation with the government” in order to mainstream “some sections of the Indian society (that) have remained financially excluded for religious reasons”. Some ASEAN countries introduced more policies and in the Middle East, regulators are looking at the feasibility of introducing new policies on Islamic finance.
The Central Bank of Malaysia has issued a policy on compliance on the 10th May 2016 that will be of effect from the 1st January 2017. In Indonesia, while the authority is looking at the feasibility of having an Islamic financial services law, the government has set up the Komite Keuangan Syariah Nasional (National Committee on Islamic Finance) led by the president of Indonesia. In May 2016, the UAE cabinet approved the proposal to form a new Shariah authority with the mandate to set standards on Islamic finance products and to oversee the Islamic finance sectors including to approve Islamic finance products, set rules and principles for Islamic finance transactions.
On the 1st September 2016, the Central Bank of Bahrain issued a consultation paper proposing a Shariah governance module containing rules related to Shariah governance within the Kingdom of Bahrain. The standard-setting body is also looking at issuing a new standard on a central Shariah board with the hope that this will contribute toward better Shariah governance of both the institutions as well as the state of Shariah compliancy at the national level.
Preview of 2017
How about 2017? Mirror, mirror on the wall, who is the most compliant of them all? We may wish that would be a question Islamic finance players would ask themselves. It’s not about winning an award for being the most compliant institution and it’s not about the form. The emphasis should be in the substance. It’s about seriously doing Islamic finance business and doing it right. It’s about not compromising the Shariah values in favor of catching numbers. It’s about having the right people for the jobs and training the existing ones so each and every one of them will appreciate what Islamic finance truly is.
Unlike the conventional institutions, Shariah is the parameter that all Islamic finance players must observe. We should move from just making sure we do not violate Shariah to trying to offer true economic values in line with Shariah. The regulator should be more ready to facilitate Islamic finance as a better way of banking, for example, by not restricting its activities nor imposing an accounting and reporting treatment the way it does on conventional institutions for the former does not operate solely on the basis of loan-taking/giving the way the latter do.
The Islamic finance industry should stop thinking in the conventional way of doing business but rather embrace Shariah principles that could be more effective in value creation and wealth distribution. By stopping on mimicking conventional products, the Islamic finance industry will gain the public’s confidence too. 2017 should be the year Islamic finance players pay more attention to making the industry more Shariah compliant, to improve Shariah governance and to truly adopt the very essence of the industry, ie be true to Shariah.
To instill public confidence – that’s homework for the regulator and the industry. Nevertheless, it takes all the three, ie the regulator, the industry and the public to play their respective roles for Islamic finance to flourish. The regulator to better regulate and provide the incentives to create a level playing field or better still to promote Islamic finance; the industry to discipline itself and to offer values to serve the Maqasid Shariah in undertaking the business and the public to better understand Islamic finance and to give it a fair chance.