As you are aware, last week we embarked upon the Islamic finance knowledge excursion.
In this journey, my first attempt shall be to ‘build the blocks’ by explaining what precisely the economic philosophy of Islam is; why there is stern forbiddance of interest or usury in Islam – even in this modern age when nothing seems possible without it; what the exact nature of ‘money’ in Islam is and why it cannot be classified as a commodity; whether cryptocurrency can play any role in Islamic finance, and, whether it is true that the Islamic financial system is ‘risk akin’ compared to the conventional financial system which is termed as ‘risk-averse’.
Pursuant to building the blocks, we shall examine the Shariah nominate financing and investment contracts and the various parameters specific to each of them, comprehend the important role of Waad (promise) and understand the nature of ‘hybrid structures’ – a combination of two or more Shariah nominate contracts.
Similarly, an important debate shall be held to identify the various risks in an Islamic contract and their mitigation techniques from within the contractual confines since the Shariah principles prohibit eliminating any risk in a contract; however, risk mitigation is permissible with certain conditions.
A very important part of this series shall be to learn how an Islamic bank operates differently compared to its conventional counterpart. I will demonstrate how money from shareholders and depositors enter the Islamic financial institution, how it is deployed and how the resultant profit is distributed or loss is absorbed.
At the height of the learning curve, I shall cover the modes of the Islamic capital market – particularly Sukuk (Islamic bonds) and Islamic asset management – Islamic funds and REITs.
You will also find out that the Islamic financial institutions are better governed compared to their conventional counterparts owing to the requirement of having the additional corporate governance layers which are not found in traditional financial institutions.
My aim throughout the series shall be to avoid using heavy Shariah jargon and adopt simple and easy-to-grasp terms in my explanation so that readers who do not work in the Islamic banking and financial environment, or have never come across any aspect of the system, can also enjoy the contents and comprehend this riveting and fair financial system.
As we go along, readers may start realizing that the Islamic financial system is not necessarily meant for Muslims alone and that it can be adopted by any society since its principles are based on pure ethics and morals which are neutral values and appealing to all and sundry. The system becomes more relevant especially in the wake of the global financial crisis which started in 2008 but keeps haunting the world markets from time to time in different shapes and molds.
What is meant by neutral values? A good example could be the money which is neutral in nature but its application as an interest-bearing loan makes it a non-permissible practice whereas if the same money is deployed as equity, it is acceptable to the three divine faiths.
Switching sides for a purpose
After having been a conventional banker for almost a quarter of a century, I chose to become an Islamic banker in September 2001. It was a tough decision leaving an industry where I had professionally grown, respected and had been fairly comfortable with.
Why did I do that? Well, I gradually grew a prick after handing out biased treatment to a ‘defaulter’ who was a victim of circumstances beyond his control. A successful trader from Dubai until the 1990 invasion of Kuwait by Iraq, the trader lost the Iraqi market for his goods owing to a war-like situation. To add to his woes, his debtors based in Iraq took advantage by stopping to pay him for earlier purchases. This brought the whole business crumbling down due to no fault of the trader.
The standard operating procedures of the conventional bank that I was associated with at the time compelled me to resort to police action based on his dishonored cheques. While the whole process was taking its course, I started wondering what if it was me in his place? Did he intentionally wrong the bank in a criminal manner? Why did the bank not analyze the situation and tried to rescue the hapless trader in that extraordinary situation?
The case proved to be a turning point in my life, convincing me to switch sides for a purpose which I was able to do upon finding the first opportunity.
Sohail Zubairi is an Islamic finance expert and AAOIFI-accredited Shariah advisor and auditor. He can be contacted at [email protected].