This is an undeniable fact that the link between a well-regulated financial system and the economic growth in a society is integral. Prudent allocation of resources with greater discipline and desired efficiency in a financial system is crucial for ensuring the availability of opportunities to all, increasing productivity, boosting economic development, uplifting the quality of the common man’s life and – as the primary goal – eliminating poverty.
The principles of the Islamic financial system are based on impartiality, transparency, equality, full disclosure, fairness and right of ownership besides sharing success and adversities. The parameters of this system do not provide room for any form of deceit, ambiguity, corruption, non-transparency, monopoly, greed or abuse. Certainly, only a financial system with such noble values can keep at bay any kind of economic adversity in a society.
What is meant by a well-regulated financial system? It is a system where the rules do not need to be bent or new rules are introduced each time a disaster strikes due to some or other system-related obscurity or weakness. It is also a system where justice is upheld in the financial transactions from the outset, and more so the justice is seen to be done in the case of adverse circumstances. Moreover, a well-regulated financial system does not stack the odds heavily against one party but distributes them evenly between the parties.
Did we not see the man-made systems failing us time and again? How many times has the painfully aggregated wealth been stolen or eroded on a global scale due to loopholes in the financial regulations which are then fixed on a post-facto basis? Isn’t it similar to driving a car while looking at the rear mirror? Naturally, a tragedy is bound to happen if one does so.
So how different is the Islamic financial system from the conventional financial system from a regulatory perspective? The first thing we need to know about Islamic finance is that its transactional parameters are cast in stone which have not changed since the 7th century AD. For example, the rudiments of a Mudarabah transaction are the same as it was entered into between two parties 14 centuries ago.
Likewise, the other Shariah nominate contracts have withstood the test of time and no modifications could be brought to them despite the conventional financial system undergoing massive changes over the centuries.
A case in point is the launch of a Sukuk Murabahah facility by a leading western financial institution some years ago which was listed at a bourse and was declared as a tradable instrument. Since a Murabahah transaction culminates in a debt payable by the buyer under the contract and as the debt is not allowed to be traded in Shariah (hence the discounting and factoring of debt is not carried out by Islamic banks), the industry did not approve of the Sukuk and it was rolled back unsubscribed.
So, one thing is settled: there exist robust internal controls, steadfast rules and a transparent modus operandi in all Islamic financing transactions, no matter in which part of the world they are carried out and irrespective of how big or small the amount of the transaction may be. These noble foundations provide inner strength to the Islamic financial system and delivers ready groundwork to an Islamic bank toward a robust governance model.
Imagine if the principles of Islamic financial transactions kept changing with the passage of time or when a crisis happens, today there would be no difference between the conventional and Islamic financial systems.
The most important aspect to note is that in the midst of, and pursuant to, the financial crisis of 2008, none of the Islamic financing principles or transactional parameters were needed to be amended or removed or new ones added. On the other side of the divide, we were inundated with revisions of laws, new rules, restrictions and tighter accounting and reporting norms. Did the world take notice?
Unfortunately or otherwise, in all jurisdictions where Islamic banking is in operation, the tighter controls related to the financial crisis were originally meant for conventional banking but were also applied on Islamic banks without any differentiation. This may be tantamount to curbing the natural flair of Islamic banks or may work in their favor – I will leave it to the readers’ judgment.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next Week: Merging of Shariah governance with corporate governance in Islamic banks.