Capital Adequacy Ratio

IBRC100

Page to full collection of articles appearing in the Borneo Posts

While I like to think that I know a sizeable amount of Islamic Banking regulatory literature, I have to admit to procrastinate when it comes to the “ratios in Islamic Banking”. It started with the Liquidity Coverage Ratio guidelines issued about 2 years ago, and also the Capital Adequacy Framework for Islamic Banks, which I promised myself to read by September. And all I know about the Tier 1 Capital is that this capital allows you to continue business in event of losses while Tier 2 Capital is used in a winding up scenario. I know where my gap in knowledge for this topic.

So, finding this little gem written by  Dr Hanudin on the above is a real treat. Reminds me that there is still a whole topic to be digested and written about. Below is the extract, and you can find the full article in his page on this website. (Click Here)

Understanding CAR in the context of Islamic banking

Published by The Borneo Post (Sabah), 19th June 2017

By Dr Hanudin Amin

Extract:

BANK capital serves as a liquid bulwark to warrant the smooth operations of both Islamic and conventional banks, turning the banks into a better likelihood of endurance in the banking market. In general, a bank capital is viewed as the source of funds provided by the owners of the bank, which acts as a cushion to thwart a bank failure’s occurrence.

         This week I draw your attention pertinent to capital adequacy ratio (CAR) in the context of Islamic banking. For this purpose, three questions are answered using an analytical technique: Question #1 – What is meant by the term CAR?  Question #2 – What makes CAR’s components? Question #3 – Does an Islamic bank have a better CAR?

 By definition, CAR is a measure of the amount of the capital owned by the bank that typically captures Tier 1 Capital and Tier 2 Capital and are divided by risk-weighted asset (RWA). CAR plainly acts as an enabler to protect depositors of CASAFA (i.e. current account, savings account & fixed account) in which their deposits are principally guaranteed for consumer protection. In addition, CASAFA is also subject to Malaysia Deposit Insurance Corporation’s (MDIC) protection up to MYR 250,000 limit per account includes both the principal amount of a deposit and the interest/return, separately applied to Islamic and conventional deposits.

For the full article, click on the following link: Understanding CAR in the context of Islamic banking – Borneo Post 19th June 2017

Go to Dr Hanudin’s page : click here

Happy reading & have a good remaining Ramadhan ahead.

Real Cost of Tawarruq

Recently, the topic of Tawarruq & Commodity Murabahah has been popular in the industry as both BNM and Shariah scholar have been asking operational questions on the implementation of Tawarruq arrangement in the industry. It seems, even with the Policy Documents, there are still some divergence in terms of operations and understanding of the minimum Shariah requirements for Tawarruq. Each financial institutions have their own operational abilities and processes that differs from one another; to have a standardised platform may be a bigger challenge than imagined.

The rise of Tawarruq in recent years should really not be a surprise to many observers. We are seeing that most financial institutions in Malaysia now consider a Tawarruq structure a “must have”, because there really is no options as other Banks also deals in it. It has become norm, and while scholars might take a view that Tawarruq should be a “last resort” option, there have been so much effort invested into making Tawarruq an efficient machine. Just take a look at the Bursa Suq Al Sila and what it is capable today.

Question : Is it Cash or Committed Limit?

The latest consideration of Tawarruq is on the treatment of Tawarruq funds after the transaction. What is it exactly and how is it been managed within the Bank, with the Capital Adequacy Framework for Islamic Banks (CAFIB) implemented a few years ago (latest update this year 2017). In particular, when a customer is approved a certain limit (let’s say $1,000,000) and a single Tawarruq is done for $1,000,000 for the line (instead of multiple small Tawarruq for each usage of the amount within the $1,000,000 limit), where does the money goes, and what is it exactly in the eyes of Sharia?

To clarify, upon the completion of Tawarruq, real money of $1,000,000 is generated. Cash. It is not a “line” in the conventional terms, but it is money (actual cash) now belonging to the customer. He can draw out the money anytime.

But the practice is that the money is kept in the Bank’s books unless requested by the Customer, and by keeping this the Bank will give a “rebate” on the money kept in the Bank, similar treatment as if a “principal payment” is made (although it is re-drawable). In the meantime, the Bank utilises the money (taken as principal payment made) for its own banking business activities.

The question that I believe we will have to eventually address are on the following:

  1. The Tawarruq is done on a single transaction for the full amount, therefore it is a full release of capital (i.e. fully funded). As such, it should have a “capital charge” consideration if it is not fully utilised by the customer. Bank has released fully the funds to customer (therefore Bank should be entitled to earn a full profit on the amount). The formula for profit would be $1,000,000 x Profit Rate – Cost of Capital. Note the Cost of Capital is on the full amount.
  2. Then, the subsequent mechanism instead is as follows: since the customer did not fully utilise the funds, the customer is given a “rebate”. For example the customer only uses $50,000 of the $1,000,000. The formula for rebate is that ($1,000,000 less $50,000 = $950,000) x Profit Rate x period unutilised. Banks earn full Profit Rate on $50,000 and gives rebate based on $950,000.
  3. Of course, Banks will utilise the $950,000 meanwhile but at what I imagine are for short-term instruments because the $950,000 is customer’s money (i.e. committed amount) and can be requested at anytime. Bank needs the funds to be as liquid as possible. So the Bank do not earn a lot from this “short term investment”.
  4. Also, there is concurrent discussion as to when the amount is kept and used by the Bank, what is the underlying contract used for this “unutilised, principal payment which is drawable on demand” amount? Is it kept by the Bank as Qard (loan), Wadiah (safekeeping), Amanah (trust) or can it be taken as Tawarruq deposit (monetised obligation) or Mudharaba (investments)? Different Banks have differing views on this, but I suspect BNM is trying to standardise this understanding and practice.
  5. But more importantly, while the Bank is giving customers “rebate” on the amount they do not utilise (but committed by the Bank), is there also “rebate” on Cost of Capital then? It seems unfair when it doesn’t. Tawarruq proceeds are deemed fully drawdown (based on full amount) and incurs full Capital Charge but is earning returns based on “only” the utilised amount. The rebate formula is very specific, and it does not contain the amount for “rebate” Capital Charge.

In the conventional Banking world, this is not so much of an issue. Their approach is simple: if the amount is “committed” to the customer, 2 things will happen:

  1. Once the amount is drawdown i.e. utilised by the customer (lets say $50,000 utilised of the $1,000,000), then full price is charged on the $50,000
  2. On the amount unutilised i.e. $950,000 the Bank will charge a “Commitment Fee” of 1.0% per annum (or any negotiated rate) on the unutilised (but committed) portion. While 1.0% per annum do not usually cover the full Capital Charge on the $950,000 it somewhat compensates the charge as the Bank (because $950,000 is still a “limit” and not Cash payout) can still use the unutilised amount in its day to day banking activities i.e. investment in short term financial instruments.

Scholars generally do not agree with the concept of Commitment Fees, and there is specific BNM guidelines prohibiting the charge of Commitment Fees in these specific scenarios.

The Capital Charge factor

I still think there is a disconnect somewhere that while we aim to achieve the same end result by the practice of Ibra’ i.e. “Rebate”, but with Capital Cost coming into play, it may eventually seem that the cost of running an Islamic Banking business can be higher than a conventional Bank. It really depends on how we interpret the guidelines and the treatment on Tawarruq especially the single Tawarruq structure where the full amount is transacted i.e. whether it is a full Capital Charge or otherwise.

I know what BNM usually advise i.e. it is a full Capital Charge. But this concurrently means, without Commitment Fees on the unutilised Customer portion, it may result in extra costs for the Bank. Now I am not suggesting we introduce Commitment Fees for Islamic Banking; this idea of Commitment Fees is a conventional banking concept for recovering opportunity costs, which may not sit well under Shariah consideration.

But in the world we operate today (where each $$$ is risk weighted to a cost), this translates to “Actual Costs” incurred by the Bank, based on the interpretation for the “single full amount Tawarruq transaction”. And Shariah may want to consider this as it is a real “Actual Costs” and not opportunity costs. By letting the money sit still, the Bank incur real, actual costs which is not recoverable as per guidelines. It may have started as “recovering opportunity costs” but if you really think about it, this is above opportunity costs. Maybe in the conventional space, they may even revise Commitment Fees to recover BOTH Opportunity Costs as well as Capital Charge.

So, my question is this: should both the industry and Shariah scholars re-look at the basis of Commitment Fees (in the context of how Tawarruq works), or re-think about the “Rebate” mechanism and perhaps have an adjusted formula to factor in a “Rebate on the Capital Charge”?

Can Shariah consider this mechanism to recover a real cost incurred by an Islamic Bank?

In the meantime, Happy Ramadhan to all, and may you have blessed month ahead.

Religiosity

Sometimes, as a practitioner, we wonder what motivates a person to subscribe to Islamic Banking products. Is it really based on the attractive features of a product, trying out something new, or is there an ingrained desire to subscribe to a Sharia compliant product? I know many non-Muslims subscribe to Islamic Banking products based on the intrinsic benefits afforded by the products, such as a more fairer penalty terms, transparent fees and charges, and flexibility in settling the accounts early.

But what of Muslims? How can we understand the triggers that encourage a Muslim to subscribe to a Sharia-compliant product?

I came across this writing by Dr Hanudin Amin which mentions a term that I hardly hear in the industry; Religiosity. It refers to the conceptual level of a person’s “piousness” to be marked into different levels (index), and he aptly split it into 3 general categories i.e. 1) Pious Religious, 2) Moderately Religious, and 3) Off-Hand Religious. His paper suggests that the Pious Religious group tends to accept Islamic Banking products more compared to other groups (in his study it’s focused on Home Financing-i). It also proposes that perhaps it is worthwhile to consider packaging Islamic Banking products based on the different levels of “Religiosity” to better appeal to them. This may indeed widen the scope for acceptance as products may be perceived differently by different people, although essentially it is the same product.

To read a bit more on the study, do have a read on the research below.

RELIGIOSITY INDEX FOR ISLAMIC HOME FINANCING IN SABAH

By Dr Hanudin Amin*

Excerpt :Earlier muslim scholars have supported the finding that a consumer’s religiosity has a significant effect on consumption in a muslim context (e.g. Elgari, 1990). Someone who approaches an Islamic bank for a mortgage is endowed with a certain level of iman. Bendjilali (1995) believes that choosing interest-free financing is blessed by Allah (SWT), hence it is rewarded. Bendjilali (1995) points out that:  “A muslim consumer who approaches the Islamic bank to get a loan for a real transaction to be financed through murabaha mode is endowed with a certain level of iman. The degree of iman will indicate the degree of compliance to the Shariah”.

For full Article, click on this link.

Tell us what you think. Should Islamic Banking products designed to a specific level of religiosity or can the one-size-fits-all approach appeal to everybody? Comments appreciated.

*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at hanudin@ums.edu.my

Malaysian Business : Revival

We Are Back!

That was the rebirth issue of the Malaysian Business in April 2017.

Malaysian BusinessThis magazine was one of my main reading requirements when I was still a relationship manager for Business Banking and Commercial Banking way back in the early 2000’s. It gave me some insights for my daily conversation with customers. Nowadays I hardly read an actual magazine; all been replaced by this thing called Mobile Phone. So it was a surprise to see this magazine making a comeback.
Acquired by the Amanie group owned by Datuk Dr Daud Bakar, I was expecting the contents to be Islamic Banking-heavy. But I think in keeping with the original spirit of its readership, it is Malaysian Business as usual (no pun intended!). There are some contents on Islamic Banking and Services, and I guess the editors are taking it one subject at a time.

Ahmad FaizalSo I spoke to my trusted counterpart, Ahmad Faizal (pic), to ask his opinion on the magazine and his thoughts on the comeback. The common magazines come to mind; Personal Money and TheEdge. Simply because of the established contents and great stories that grab attention. Malaysian Business needs to benchmark itself to these magazines. Especially during times that there is insufficient readerships of physical magazines. Faizal also observed that there is no emphasis on Islamic Banking, which may well be a differentiation factor. Faizal also have fond memories for Islamic Banker magazine edited by Mushtak Parker. Many new information covered in the magazine for example the latest structure of deals etc. and hoping that Malaysian Business adopt certain areas based on this magazine.

Early days yet. I love the rebirth, and hope to have more. Heard the May issue is out.  Gotta get it. Click on the picture below to go to www.malaysian-business.com & happy reading!

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[Excerpt from Datuk Dr Daud Bakar FB page]

Revival of Malaysian Business Magazine – Amanie Media – New Editor in Chief

DDDBI am happy to share with you that we have launched Malaysia’s Premier Business Magazine in April 2017.

First published in 1972, the magazine, now to be published by new owner Amanie Media Sdn Bhd with founder and renowned Global Entrepreneur and Shariah scholar Datuk Dr Mohd Daud Bakar as the Editor in Chief, is set to hit the news-stands in April 2017.

With the theme of Hope for The Malaysian Nation, Malaysian Business is on a mission to be at the forefront of motivational and inspiring business establishments’ stories. From financial advice for start-up companies to success stories from millionaire business founders, Malaysian Business aims to help readers at enlivening their passion and business goals in life.

The magazine spans on a range of business topics, technology insights, business culture, personal financing tips as well as stories of successful entrepreneurs who share secrets of their success from the ground up.

Sections in the magazine will include:

  • Trending Facts and News – Highlights of International and Local News
  • Corporate and Market Capital Roundup – review on latest market updates
  • MB Preneur – Stories from the Unsung Heroes of SME’s
  • Walking down Memory Lane – Stories on how we can recreate success histories
  • Reader’s Page – Pour your thoughts out, we want to hear from you!
  • After Biz – an insight into the latest gadgets, automotive and trends

Come and join our network of trade leaders and key players by subscribing to Malaysian Business!

Islamic Banking Operating Model

For the past few months, there have been some earnest discussions on whether Islamic Banking is operating under the right model or type of institutions. Comments by prominent scholars on the suitability of certain Islamic contracts in a financial institution sparked debate on the types that are suitable for operating Islamic contracts. Before I attempt to also put my piece in the mix, there were also questions asked to me on which of the existing models can actually be the right fit. There is still confusion on the types of institutions operating in the market.

Before we look deeper, it is worthwhile to recap the available models in Malaysia.

THE ISLAMIC WINDOW OPERATING MODEL

We  have to start somewhere. Islamic Windows as a starting point, provides the best opportunity to build capabilities at the lowest costs while the business is being developed. The intention is to identify the requirements for system and invest minimally to assess feasibility and operational gaps. This allows the Bank to build the infrastructure at an acceptable pace. This is also a pre-cursor to further/larger infrastructure investments if there is a decision to expand the business into a subsidiary.

This model relies on the existing conventional infrastructure where all the processes, operations, sales, channels, finance, branches, compliance, audit and all functions are provided by the conventional bank. It is a leverage model where the Islamic Banking Windows are more like a “manufacturer” of products. Islamic Banking Windows churn out the products and services (like a factory), and delivers them to the conventional team as part of the suite of products offered by the conventional bank. In such structure, Islamic Banking Windows are just a “segment” of products on offer. Just like Corporate Banking products. Commercial Banking products. Wholesale Banking products. Private Banking products. Retail Banking products… and Islamic Banking products.

The advantage of this model is the low set-up cost. The business rides on existing infrastructure and hires specialists in each function. There is no need to set up a different branch as those Islamic products are sold directly by the existing branches and channels sales team. Balance Sheet discloses Islamic Banking Window performance as part of the Notes to the Account. Shareholders’ Capital, however must be separately allocated, accounting ledgers managed separately and the Single Customer Exposure Limit (SCEL) will be 25% of the allocated Capital. A head of Islamic Banking Windows will report directly to the conventional banking CEO, where business decisions are made.

Not many banks operates under the Islamic Banking Windows model. The main reason is the lack of product range i.e. competing with conventional banking products of the same branch, and the small scale of business limited to its SCEL, and no autonomy of business decision which must be aligned with conventional products.

THE ISLAMIC SUBSIDIARY  MODEL

Islamic Subsidiary rides on the strength of the Parent Bank, which is the conventional bank. The model used is still a leveraged model, but the Islamic Subsidiary can choose which services or function they want to “outsource” to the conventional bank (at a fee chargeback, of course). The idea of a Subsidiary is to be independent, so all cost consideration must be taken into account. Decision to open Islamic Banking Branches can also be made, and BNM supports this expansion via Islamic Banking Branches.

However, being a Subsidiary Bank can also be a burden to set-up. A differentiated system or process or operation team requires cash for its set-up. At the early stages, such investment cash will be limited, and when cash is available for investment, the development of the Subsidiary Bank must then align with the conventional bank. So it can be a chicken and egg situation where to expand you need to earn but to earn you need to expand (and spend).

Most of the conventional banks offers Islamic products via Islamic Banking Subsidiary. The main advantage is that decisions are autonomous in a Subsidiary, there is more control of marketing and sales and branches, and the Bank (as an independent entity) can chart its own course. However, there will still be influence from the parent (as the majority shareholder) and the products and services offered are generally aligned to the products and services offered by the parents. The SCEL for Subsidiaries are also dependent on the strategy of the parent Bank, where it can choose to invest heavily or adequately for the operations of its subsidiary.

FULL FLEDGED ISLAMIC BANKS

These are standalone banks that generally are not under any conventional banking influence. The products and services may be consistent with the offerings in the market, but it is not an obligation to follow. In theory, Full Fledged Islamic Banks have the capacity to offer new-to-market products, based on the approvals obtained from Shariah Committees and BNM.

There is room for innovation and experimentation of new structures via Full Fledged Islamic Banks, although they must still governed by the financial ratios and controls for other types of banks and financial institutions, using conventional measuring tape which could lead to a “penalty” cost for doing business.

For example, a debt based home financing based on Tawarruq will incur a capital charge of 50%-100% but in a Musyaraka Financing, that capital charge will cost 100%-400% which will be an “expensive” proposition simply because it is measured against conventional financial ratios.

Personally, I believe Full Fledged Islamic Banks should follow a different set of financial ratios catered to reflect the type of risks an Islamic Bank CAN take, should the Islamic Bank look to offer products such as Mudaraba, Musyaraka, Istisna’ or even Salam. To allow for pure innovation, the financial ratios and treatment of capital and assessment of risks should be differentiated to reflect the nature of the products offered. While Basel requirements can be used as benchmark to ensure stability, an “Islamic” Basel will be even more meaningful where it can fully address all the real risks faced by Islamic Banks deploying Profit Loss Sharing (PLS) and equity-based structures such as Mudaraba and Musyaraka. Slowly, BNM is recognising these differences for measurement and has taken small steps to differentiate, such as the introduction of treatment of Investment Accounts (IA), the Liquidity Coverage Ratio (LCR) treatment, Capital Adequacy Framework for Islamic Banks (CAFIB), and the removal of Reserve Funds (reserves from paying of dividends) from Islamic Banks recently. It is my sincere hope to one day see an “Islamic” section in future Basel releases as well.

The main challenge for a Full Fledge Islamic Bank, is the costs of building the franchise from ground zero. To compete with a conventional bank, the Islamic Bank must invest similarly in its infrastructure and achieve operational efficiency and scale as soonest as possible. The payback period and Return on Investment and Return on Equity remains important for long term sustainability. SCEL is dependant on how big the Bank intends to grow. Another key consideration is the ability for the Islamic Bank to build a strong source of cheap deposits for the funding requirements.

NOTE

Of course there are other structures that can be attributed as Islamic Financial institutions such as cooperatives, development banks, and investment banks. But the most common are the above variations and these structures fit into strategies identified by the bank. In most cases, BNM prefers to see development coming from the Full Fledged Islamic Banks and Subsidiaries. These should be the drivers for the growth of Islamic Banking.

Wallahualam

The Wayang Kulit of Islamic Finance: Book Review

Islamic Finance in The Global EconomyIslamic Finance has seen many criticisms for the past decades, ranging from whether the right model was introduced in the first place, to questions on the mirroring of conventional products into islamic alternatives, accusations of Hilah and back-door riba, suitability of certain contracts in the banking space, and even the end accomplishment of the Maqasid of Sharia via a financial intermediary model.

Practitioners and regulators (including Sharia scholars) have been hard at work to address these issues (which the public seems to assume we are not aware of in the first place!!!). To a certain extent, a lot of the issues have been / are being addressed (whether to its full satisfaction or otherwise), but it is also important to be able to sit and identify areas where further improvements can be made.

Ms Rosana has become an avid observer of Islamic Finance practices and its shortfall, and found literatures that she hopes to bring forward into the constructive discussion with the industry. Her review today covers the book by Ibrahim Warde : Islamic Finance in the Global Economy (2010).

Review by Rosana Gulzar (Excerpt)

This book by Ibrahim Warde, a US academic, is among a few in the genre of political economy of Islamic finance. Although a much needed subject, it is hardly discussed in classrooms apparently due to political sensitivities. That may be the reason why this book stands out in its contribution but it can also very well stand on its own merits. The content is refreshingly intellectual, critical and direct. But even as I find it to be the most enlightening book I have read on the subject, I wish for more.

The question is, what is ‘political economy’? Or what does the subject cover? It is a fascinating field of economics which goes beyond the simple study of processes. Instead of describing production and trade as if they operate in silos or the often used phrase in economics, ceteris parabus (assuming all else stay constant – seriously, which world is that?), the study of ‘political economy’ combines theories from political science and sociology to bring about a fuller and more realistic perspective on how a country is run. A branch of political economics even draws from other academic areas such as culture and history. This definition from Investopedia is to me, the most appealing though it is arguably not the most reliable source: “International political economy is ultimately concerned with how political forces like states, individual actors, and institutions shape systems through global economic interactions and how such actions effect political structures and outcomes”.

The study of political economy is vital, I argue, in Islamic finance because how does one begin to understand a phenomenon without a frank discussion on the forces shaping it. To borrow from the Indonesians, who are the real dalangs (puppeteers) in this wayang kulit (traditional puppet-show)? Who are pulling the strings? As Warde says, “Quantity, not quality, is the defining feature of writings on Islamic finance. The recent boom in Islamic finance has resulted in a flood of writings that add very little to our understanding of a complex and multifaceted phenomenon. Overall, scholarship is marred by four flaws: the ‘authorised’ nature and pre-ordained conclusions of a significant portion of it; narrow geographic focus and lack of comparative analysis; reductionism (religious, financial, and legal); and faulty assumptions about the relation between theory and practice (p. 8).” In short, we have barely scratched the surface.

TO READ FULL COMMENTARY ON THE BOOK, CLICK ON THIS LINK

TO GO TO MS ROSANA GULZAR PAGE, CLICK ON THIS LINK 

To have an open and honest discussion, do have a read a give us your thoughts, especially on the political economy aspect of Islamic Finance. Comments and feedback welcome.

“Gotong Royong” Bank?

To the uninitiated, the term “gotong-royong” means cooperation in Bahasa Malaysia. It is a concept where the community may come together to assist its community members without expectation of returns. In Malaysia, this is a community event to achieve a certain purpose for example a village wedding.

But how about having a “gotong-royong” Bank? Ms Rozana Gulzar, who contributed an earlier article on this site, made this interesting proposition that while the current Islamic Finance system set-up based on the conventional banking model is working sufficiently, a different model of banking may provide a closer structure espoused under the Maqasid of Shariah (Objectives of Shariah). A more inclusive and less profit driven model? It may provide a refreshing alternative to the existing financial system. Maybe not as a full 100% replacement of the existing models (where it caters for a large scope of requirements) but to complement and complete the Islamic Banking financial infrastructure.

Read about what she wrote below, as well as her earlier writings on this site.


DOWNLOAD : Cooperative Banking as the Solution for Islamic Banking Woes (pdf)

Excerpt from Rosana’s being cooperative:

While there are some differences in the models of cooperative banks in various regions of the world, a basic common feature is that they are owned by members, who in turn tend to be their depositors and borrowers. That’s mutuality built right into the system. This form of ownership then sets the tone for a business model that is more Islamic than ‘Islamic’ commercial banks. For example, because cooperative banks are owned by members who may be their borrowers, profit maximisation is not the main objective. Their raison d’être is in fact to charge reasonable enough rates so that those who cannot get financing from blood-sucking commercial banks can do so through the cooperative banks. And yes, they are not Islamic in form but I think they are more Islamic in spirit.

Bankers of cooperative banks are also known to have close relationships with their customers. A Turkish German once told me that his neighbourhood banker would come regularly for tea. When he notices a child in the household is old enough for a bank account of his own, the banker will ask the parents if he should indeed open one for him. Germany by the way is home to the largest network of cooperative and savings banks in the world. This close relationship has important implications. One it answers a call by some quarters for a move towards relationship-based banking as opposed to the transactions-based frenzy that characterises commercial banking and has been blamed for the crises. Secondly, it addresses a key issue that has been plaguing Islamic finance since its modern birth: How to implement profit and loss sharing (PLS) contracts such as musharakah and mudarabah which are at the heart of an ideal Islamic financial system when early attempts failed due to moral hazard and adverse selection issues.


Additionally, she makes a call to academia to rise to the occasion of re-looking the existing model and having more research to support the building of the new model. She throws the challenge that the road is still long and hard and only the ones who are able to persevere will make a difference.


DOWNLOAD : Islamic Finance Academia – We Can Do Better (pdf)

Excerpt from Rosana’s war cry to Academia:

Firstly, we need to address the controversies. Islamic finance is suffering from a dichotomy between theory and practice. What is taught in schools is a world away from what is being practiced. While ‘Islamic’ bankers keep an almost sole focus on producing the best ROE for shareholders, at the obvious expense of social welfare, Islamic finance professors go on and on about the ideals that shape this form of finance, oblivious to the divergence in practice. It is thus not surprising that the ‘solutions’ they come up with have no semblance to reality. I keep thinking, ‘We are not yet in jannah so how will this work in the real world?’

To come up with better solutions, I think we need to first face facts. Don’t gloss over them. I would prefer an honest (and mature) discussion of how we have gone wrong in Islamic finance and how to address them. This obviously needs rigor in thought and analysis. And critical thinking. Just because someone is from the IMF or World Bank does not mean he knows what he is saying or his intentions are purer than pure. We still need to evaluate the rigor of his arguments. On the other end, those who do not understand Islamic finance need to keep silent. The problem in Islamic finance is that we have many talking heads who really sound like empty vessels. And you know what they say about empty vessels right? (They make the most noise).


I like to make the same challenge to my staff as well; 90% of the practices we see today are derived from decisions, opinion and fatwa made in mid 1990s and has been taken as Urf (custom) and not challenged anymore… but we should re-look at some of them (especially with standing controversies) and see if current regulations and Shariah Advisory Council resolutions and product thinking and market development can offer a better solution. Doesn’t Islamic Banking allow for intelligent discussion to always evolve into something better? Just because it has now become Urf, it does not mean there is no better solution and be happy with the status quo. There’s always room for improvements to this 30 year old industry.

The purpose of this website is to encourage constructive discussions and perhaps find a better solution to the existing ones. Let’s have your views on these topics. Have a read of Rosana’s writing and I know she appreciates honest feedback on her work. Do spend that time reading, and your comments may perhaps resonate in someone’s mind and change the world.

To go to Rosana’s page, click here.

Popular Islamic Finance Terms

While Islamic Banking in general has been codified since early 1980’s in Malaysia, the familiarity to Islamic Banking or Finance terms remain a challenge. Terms like Mudarabah or Musyarakah or Wakalah remains difficult to remember but also it’s meaning have been lost to many, although there has been many attempts to communicate the various glossaries already available.

This makes the layman to go back to something more familiar, in most cases it is conventional banking, simply because of the ingrained understanding of conventional banking terms and terminologies. Some become “allergic” to Islamic terms simply because of the fear of failing to explain and understand the “arabic” terms. It does seem a daunting task to remember the terms, and understand what they mean.

So, I picked up a simple slide from a friend from IBFIM ie Haji Razli Ramli (his introduction available here in this website – click here) and made it into  a simple slide.

Get familiar with the terms for Islamic Finance, the easy way. Click on this 1-minute video. Share this video with friends. Know the meaning of those Arabic word. It’s quick and simple. In both English and Bahasa Malaysia. Comments are also appreciated.

Also, you can download the file into your desktop or mobile at the following links:

Share out to your friends. Thank you.

 

Is Islamic Finance Suffering from the Wrong Model of Implementation?

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One of the things that attract me to maintain this website on Islamic Banking is the opportunity to interact and share ideas with the various practitioners and academicians in the industry. There are many discussion topics and we intend to bring such discussions to the open table as constructive as possible. Interaction with Ms Rosana is always interesting as she dare explore the Islamic Banking model itself, making comparison to other similar models in the market across geographies. And I do share some of her views on the industry, and I have written about it to some extend in my earlier postings. What is interesting about Ms Rosana is that she is taking the discussion a necessary step further in evaluating the existing Banking model, as to whether it is the right model to begin with. She has written a short discourse on this topic and looking to explore in-depth its implication in the near future.

She welcomes constructive feedback, comment and discussion points for this posting and hopes to decide on the next step forward gauging from your kind response. Do read and give us your opinion and comments. Thank you.

Is Islamic Finance Suffering from the Wrong Model of Implementation?

By Rosana Gulzar Mohd

In this blog’s latest post ‘Disruption: Islamic contracts’, there holds an imminent danger. The Islamic banks in Malaysia are not so much inching towards becoming just like the interest-based conventional banks they were supposed to replace but in fact, running towards them. Even as the industry celebrates its trillion size assets and formerly astronomical growth, there lies a darker truth. In a recent class I taught on the dichotomy between Islamic banking theory and practice, a participant, a new ‘Islamic’ banker, came up to me and wanted to discuss commodity murabaha. She said her team had just tabled the product for the bank’s approval but she did not feel comfortable. The head of the Shariah committee also seemed disappointed. His comment, according to her, was that we no longer need Shariah advisers. The industry only needs commodity murabaha experts now.

Post-IFSA 2013 which fines and jails CEOs and everyone above and below for any wrongdoing and a flurry of policy documents telling banks how to implement Shariah contracts, ‘Islamic’ banks in Malaysia are seeking refuge in tawarruq. Musharakah and mudarabah? All that is left of profit and loss sharing contracts, which some scholars say are at the heart of the ideal Islamic financial system, is the policy documents by Bank Negara Malaysia (BNM). I would be pleasantly surprised if anyone can show me a bank which is genuinely implementing them. The supposed mudarabah-based products brought on by IFSA, namely the investment accounts and the IA platform, are currently being mutilated to look almost like any guaranteed and fixed return deposit. The IAP, I believe, are unlikely to be successful for laughable reasons.

When commercial banking, with its inherent tendencies for excesses, profit maximisation and desensitisation to social welfare, is the problem, how does crowdfunding through commercial banks become the solution? Won’t the banks still look for credit-worthy companies with an almost guaranteed future to fund? Who then takes care of the small and medium-sized entrepreneurs who are also seeking financing? Are not the SMEs the backbones of the economy? Not to mention, where is the upholding of Islamic values such as justice, equitability and social well-being? Granted there are other organisations in Malaysia meant to help the lower incomes and SMEs but why do ‘Islamic’ banks call themselves ‘Islamic’ if they are far from embodying the ideal values in Shariah? Unfortunately, this sad state of affairs extends to other parts of Islamic finance such as takaful (apparently ‘Islamic’ insurance), sukuk, the other beauty pageant contestant in this parade, and other capital market products such as interest rate, oh wait, ‘profit’ rate swaps.

How did BNM envision the success of IFSA with no changes to the current environment? We are still in a dual system where ‘Islamic’ banks are pitted head-to-head against interest-based conventional banks. ‘Islamic’ assets are still only a quarter of the entire system despite the country allowing all sorts of controversial contracts such as bai al dayn, bai al inah and the one that takes the cake, tawarruq. Where are the educational campaigns to explain to customers this shift in the industry that the central bank expects to happen?

When customers, including ‘Muslims’, have been accustomed to deposit guarantees and fixed returns their whole lives, how do banks suddenly sell them an ‘investment account’ that promises neither? Is it any surprise that conventional bankers are using this as a selling point? They are telling customers to avoid ‘Islamic’ products because there are no guarantees. Theirs still do. When the chiefs of ‘Islamic’ banks themselves seem cloudy in their understanding of the new regulations, how did BNM envision people on the street, who are banking with its ‘Islamic’ banks, to embrace the changes? A deputy director unfortunately got defensive when I asked. Other central bankers claimed ignorance because they “are not from that department”.

While BNM seems keen to reform the industry, perhaps the answer it has been looking for is that the Islamic finance industry, and within it, Islamic banking, has been built the wrong way. Trying to make it work in the commercial banking space is what has led to the frequent comment that it is like squeezing a square peg into a round hole. Commercial banking, with its profit maximisation mantra and desensitisation to social welfare, is antithetical to the Shariah ideals of justice, equitability and social well-being as embodied in the maqasid. And isn’t it the one that has been leading the world from one crisis to another? Why then are we so busy emulating them? Isn’t it time the powers that be wake up and face facts?

So why did all the big organisations in Islamic finance, from the global standard-setters such as AAOIFI and IFSB to each country’s central banks and each ‘Islamic’ banks’ Shariah committees condone these practices? Perhaps because they were the easiest thing to do and allows for a fast build if the intention is to grab fame and fortune through one’s achievements in Islamic finance. The countless Islamic finance awards and conferences and the effusive back slapping there are testaments to this. Bankers are such happy people.

So what is the solution? I believe it is cooperative banking. The true, genuine type practiced in Europe and not the ones in Muslim countries because they are largely used to fund political cronies and thus suffer from questionable management and corruption. My next article will thus explain cooperative banking, how the model works and why they are a better fit for Islamic finance than the current commercial banking model. In the meantime, I look forward to your thoughts. Students of Islamic finance intuitively get it when I explain these arguments while some practitioners acquiesce (quietly agree). Another group reminds me of this statement in a book by Upton Sinclair, who ironically was also an investigative journalist (uncovers scandals and corruption) as I was in my former life and whose solution to the 1930s Depression in California is to create cooperative ventures for the unemployed. The idea, to his surprise, received wide support but his bid to run as governor was waylaid, according to him, by the oppositions’ “dirty tricks”. He wrote this statement in his book about the political adventure, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” The reaction of the other group of bankers brings to mind this quote.

What do you think about her assessment and commentary on the Islamic Banking model? Do give us your feedback in the comment box. Thank you.

Check out her other contributions in the following page : Writings Rozana Gulzar Mohd 

Disruption : Islamic Contracts

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Under IFSA 2013, it is no longer about Product Innovation. It is about Product Compliance.

2 weeks ago I had a session with some bright individuals discussing the Islamic contracts commonly used in Corporate Banking financing structures. We went through almost all the available Islamic financing contracts such as Murabaha, Ijara, Musyaraka and Mudharaba, where I highlighted that all these contracts now have their own Policy Document issued by Bank Negara Malaysia (BNM). The Policy Documents, in my opinion, are a concise version of a lot of Sharia regulations and great reading source. It becomes a reference point where management roles and responsibilities are outlined, operational behaviour laid down, and theoretical basis is justified and explained.

It is a matter of time, I told the participants, that these Policy Documents are taken in their full context and finally developed into a comprehensive structure with clear compliance to Sharia requirements. We, as Islamic Bankers, are in for an exciting period of development where we will have a chance to develop “real” Islamic banking contracts.

The moment I said that, I realised it is NOT TRUE!!!

THE IMPACT OF IFSA 2013

The popular belief is that IFSA 2013 is meant to realign all the Islamic Banking regulations in the Islamic Banking Act, Takaful Act and various major guidelines into a single overarching Act. IFSA 2013  consolidates the various practices into more clarity and re-classification of concepts. However, the perception that Islamic Banking in Malaysia as an innovative development hub would no longer hold true. “Innovation” was the key thinking and pride-point prior to IFSA 2013; now I believe the right word is “Compliance”.

163170_477596024332_7522334_nWhen we first started the Islamic Banking journey in late 1990’s and early 2000s, BNM encouraged a lot of product innovation from Banks as there were no existing guidelines. We looked at the various structures that provides the desired outcomes and discussed with Shariah Committee on the design and component of products without breaching Sharia rules. BNM was supportive on us developing these “innovative” products. Some may have been controversial (such as Bai Inah, Bay Ad Dayn, Wadiah and Bai Bithaman Ajil) but it encourages discussions alongside the mantra that “whatever is not explicitly prohibited, is permissible“. Sometimes we were forced to think outside of the box, especially for sophisticated products mirroring conventional. We also received support from Sharia Committees whom temporarily approved “innovative” products with the understanding that over time, a better solution were developed as replacements.

Now with the issuance of the Policy Documents, such innovation becomes limited. Innovation is now ring-fenced around compliance to Shariah rules (either from regulators or internal Shariah Committee), and the Banks are expected to follow these rules to the letter. Breaches to these rules becomes the responsibility of the Bank’s Shariah Committee and detailed deliberation is greatly expected to provide the solution. Compliance first; if it is not covered in the documents, it probably cannot be done without a lot of effort.

CHOOSING THE SIMPLEST ALTERNATIVE

With compliance now being the vogue vocabulary with BNM, Banks had to look hard to the Policy Documents to ensure the requirements are identified and gaps filled for fear of breaches or fines. The gap analysis falls into the line whether “are we complying to the requirements?” and not “how do we do this without it becoming a gap or compliance issue?”. Both Shariah and Bank’s Product teams would now look on how to comply with Policy Documents instead of using the Policy Documents as a reference to develop a product.

What I noticed since 2014 is the obsession to comply with Islamic contract requirements, and if the team feels it is difficult to comply, the next logical step is to avoid such contract altogether and seek an alternative contract which is easier to comply with. For example, the Murabaha Policy Document issued in 2014. I have to say it is a beautiful document, and outlines the requirements for Murabaha Purchase Orderer (MPO) that reflects the full Sharia requirements of ownership transfers, risk taking, profit and management of actual assets.

These requirements, which in the eyes of many Banks, may be difficult to fully comply with due to many reasons: shortage of expertise, systems infrastructures limitation, people understanding, complicated processes, operational risks, credit issues and fund management requirements. Instead of the risk of breaching the Policy Documents, Banks opt for something less “complicated” which offers “similar” structure. The default solution is Tawarruq Arrangement i.e. Commodity Murabaha.

Or, the teams looks at Ijara Policy Document. It outlines further the roles and responsibilities of lessor and lessee, while the asset remained in the Bank’s ownership throughout the lease tenure. Again, if a roadblock occurs where a Bank cannot fully comply… Tawarruq Arrangement provides a quick solution. With very defined rules outlined in Tawarruq Policy Documents, the Banks are confident that offering Tawarruq will not breach any guidelines.

Tawarruq, therefore becomes the default Islamic contract in the market. When I asked the participants during case-studies to the question “What contracts should be used for this structure?”, the answers are unanimous “Tawarruq”. And they are not wrong.

DISRUPTION IN ISLAMIC CONTRACTS

155228_469014969332_6259944_nMaking Tawarruq as the “all-problems-solved” structure is having an unfortunate result to the industry. While the issuance of the Policy Documents as a reference was to galvanise the development of various Islamic contracts, the Banks have an easy way out in Tawarruq. Now, the rest of the contracts are in danger of being sidelined in favour of continuous development in Tawarruq.

For example, the Home Financing product which had evolved from BBA in the 1980s to Diminishing Musharaka in the 2000s. When BBA was introduced, practitioners and Sharia teams identified several practical issues that over a period of time needed to be resolved such as ownership transfer, rights to sell, and sale of properties under construction. These issues led to the development of Diminishing Musharaka as an alternative solution.

But with Diminishing Musharaka, there are still operational and legal issues that have yet to be resolved until today. For example, the “right” contract to be used for period of construction, the application of Ijara and the extensive outlining of Wakalah roles and responsibilities. Failure to understand the issues and provide real solutions puts the Bank at risk. There are also legal infrastructures that have yet to be addressed such as land joint-ownership by the Bank (as a partner), and different practices of land offices for the registration of Bank as a partner. These are roadblocks (and credit risks) to the Banks to take the structure further.

THE DOUBLE-EDGE SWORD OF TAWARRUQ

25547_378676189332_2665364_nMalaysia is in danger where I foresee that one day the industry itself will became the absolute global expert in Tawarruq and Commodity Murabaha. With Bursa Suq Al Sila as the leading commodity trading platform for the country, backed by the government (as a national bourse), the Tawarruq structure is expected to evolve into an efficient Islamic-structure engine. The processes of Commodity Murabaha will become seamless, and may even integrate into a Bank’s core banking system, the operation for buying and selling commodity will become commonplace and familiar, and this will result in effective processing, awareness of Shariah risks, compliance to trading requirements and well as reduction in overall operational risks.

Banks will one day become so well versed in Tawarruq, they will question the need for other types of Islamic contract, where they may not able to fully comply with.

With such development, more and more:

  1. capital investments will be made into perfecting the Tawarruq infrastructure, and Banks will also be able to comply with BNM requirements by investing in human capital familiar with Tawarruq.
  2. product structures will be developed around Tawarruq and once these products are established, it will be difficult to unwind as a prefered product simply due to the ease of the Tawarruq contract requirements.
  3. variations and hybrid products will be introduced based on Tawarruq, or containing elements of Tawarruq to solve “difficult scenarios” for compliance.

We will one day have an innovative and world class Tawarruq product, but no development in the other major Islamic contracts. Innovation will stall and Banks will choose quick returns and operational ease of Tawarruq. It is a dilemma of the industry where it is heading to “one” major solution for almost all “sale-based products”.

It is unfortunate if Banks chose to abandon the other contract alternatives, where such contracts will never reach its full operational and theoretical potential.

Hoping that a Bank will take the lead to develop products based on all the various Policy Documents instead of relying on only Tawarruq and its variations. The industry needs expansion and enhancement and by focusing on only Tawarruq, the industry will not be able to explore exciting products and expand its horizon. The Policy Documents, as beautifully written as they are, may tragically one day just becomes an academic relic issued by BNM.

Wallahualam.

Earlier writings on Tawarruq and Commodity Murabahah:

  1. Reliance on Commodity Murabahah
  2. Financing : Commodity Murabahah and Tawarruq

Interesting article in LinkedIn

EBOOK : Alternative Financial System Islamic (Halal) Finance – IBFIM

One of the ongoing efforts that some of us have is to figure out how we provide greater access of Islamic Banking to the mass market. This includes not just to Muslim readers, either here in Malaysia or other global countries, but also to access non-Muslims readers as well. And to do that in their mother tongue will be the ideal method as it will provide familiarity and ease in understanding on what is being communicated.

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Click picture to Download PDF

Realising this, the Islamic Banking and Finance Institute of Malaysia (IBFIM) has just launched a book in Mandarin Chinese titled “Alternative Financial System Islamic (Halal) Finance” with the hope of providing greater understanding on the concepts, rationales and practices of Islamic Banking and Finance. This is in line with IBFIM’s mandate from Bank Negara Malaysia to produce a pool of talent whom will be competent in Islamic Banking issues and practices. Also, IBFIM currently offer courses for various technical levels for the purpose of raising knowledge and awareness toward Islamic Banking in the industry. Over a period of time, IBFIM has become one of the knowledge leaders  and recognised internationally as a place where practical advisory can be obtained.

I have spoken to the folks at IBFIM about posting this book on this site and I am grateful they have consented, for the benefits of readers. Unfortunately I am not able to comment on the book (as I am not a Chinese reader) but I sincerely hope the book helps to provide some insight towards the mysteries of Islamic Banking.

To get a Hardcopy of this book, do get in touch with IBFIM directly at their website www.ibfim.com or look out for their various events nationwide.

To download the PDF copy, please click on this link: (Click Here)

ALTERNATIVE FINANCIAL SYSTEM ISLAMIC (HALAL) FINANCE

Thank you IBFIM for this great effort.

 

 

 

Employee Provident Fund – Becoming Shariah Compliant

Simpanan Shariah

8th August 2016 was the date the Employee Provident Funds (EPF) in Malaysia announced the opening of its registration counters to move t he existing funds into Shariah-compliant Employee Provident funds.

The response was monumental where people came to line up to register since 7 am and lines can be seen snaking out of the offices. People had to come personally to sign the conversion form (which includes Agency appointments as part of the Aqad) and agree to the terms. There’s great relief that finally there is a Shariah compliant fund for contributors, although it will not happen immediately. Conversion starts 1 January 2017.

As to date, about 45,000 people have signed the conversion.

But many questions still arise from whether EPF will really pull it off. As usual, the suspicions and sarcasms arise on the whole process of “complying with Shariah” and what is required. The common questions are whether they have the infrastructure to manage such a big fund in an Islamic market which is perceived to be not that huge. Can it support the whole fund, or will any excess funds not invested in Islamic instruments “flow” back to the mixed market?

I am sure EPF have able fund managers. But I am surprised to hear questions whether EPF is really going “Islamic” or just another ploy to hoodwink the public. Questions such as, do they really know which company is Shariah compliant, are the Shariah Advisors reliable, do they just advice or do they have any authority or power to influence the investment strategies of EPF to comply. Can we trust them?

Before I write further, I have to say that the Shariah Advisory Committee of EPF consist of 5 heavyweights in the industry. Dr Aznan, Dr Akram, Dr Zahar, Dr Engku and Dr Kamaruzaman. Someone implied that they will eventually cave in to organisational pressure when “tough investment decisions” have to be made, but this comment do not fully appreciate the role of SAC in any Islamic Financial institutions. The SAC has a huge responsibility to ensure the operations of the funds are Shariah compliant, the income is Shariah compliant, and the distribution of dividends are Shariah compliant. Consistently. Continuously. Automatically.

So what is the process that usually happens in an Islamic Financial Institution (IFI)? How influential are the SAC to the operations of an IFI? I cannot fully vouch for EPF but the governance framework should be consistent throughout the industry. The following is what usually happens in the process of determining Shariah compliance investments for EPF to enter into, and the control processes to ensure it remains Shairah compliant.

Shariah Compliant Investment Selection, Deployment, and Dividend Distribution.

In general, the SAC and IFI must start to build a framework that meets the Shariah rules to invest and deploy these Islamic funds. The following steps usually applies:

  1. The IFI first start identifying Shariah compliant counters, companies and investments that meets the criteria set by the SAC. There are several benchmark in the market that guides these criteria such as the Securities Commission criteria for Shariah Compliant Companies, BNM listing of Shariah Prohibited Activities, or even using the Accepted Bills-i which lists non-Shariah compliant goods (if a company trades in these goods). Based on the above, the benchmark of what is acceptable is decided by SAC. Deliberated and discussed. SAC will also decide whether to follow market benchmark or adopt a more stricter stance than the market.
  2. For mixed counters or companies, SAC will also decide on an acceptable benchmarks. For example, companies which has more than 5% clearly non-Shariah compliant activities are excluded from the “approved” listing. If the activities are not clearly identifiable, the “unidentifiable” activities should not be more than 20% of all the company’s activities. Different IFI adopts different benchmarks. Looking at EPF SAC, it is likely the benchmarks are stricter.
  3. An Investment Mandate, based on the rules defined by SAC above is then formulated to outline the type of acceptable counters/companies/investment, the deployment strategy, the monitoring and reporting requirements, escalation processes, calculation and declaration of income, distribution of dividends and finally the financial disclosures.
  4. The Investment Mandate should be guiding instructions for Treasury to follow in managing the funds. Based on the mandate, Treasury finds the companies/counters/investments that meet the criteria and manage the funds accordingly.
  5. The list of the investments / companies are reviewed regularly to ensure they still remain as Shariah compliant throughout the investment period. Any companies that fall out of the criteria will be removed from the lists. Any non-compliant incidences will be escalated to the SAC.
  6. On an interim basis, Internal Audit (reporting to Board of Directors) and Shariah Review (reporting to SAC) will do their periodic audits to ensure that the Shariah parameters are always met and adhered to. Any incidences of non-Shariah compliant investments will be tabled to SAC for a decision. The decision will be whether to exit the investment, make rectification, or worse case scenario, deem the investment non-Compliant and remove the dividends received from the pool and pay them out to charity.
  7. At the end of the investment period (declaration dates), the SAC will look at the financial results, the investments made, the exclusion of non-Shariah compliant income/dividend, and overall operations of the funds. Once satisfied, the SAC signs off and income/dividend may then be distributed.

In short, the SAC not only outline the mandate for Shariah compliant investments, they are also responsible in the various aspects of the management of the funds to ensure what is paid out are “clean” dividends not tarnished by non-Shariah compliant components. There is a huge responsibility for the SAC towards the general public who rely on them to formulate the right investment mandate for them. I don’t envy such position; the burden is great but I have to say EPF had it right by appointing such heavyweights to their SAC.

May Islamic EPF continue to be a choice that is taken by the public. Wallahualam

For a full collection of the videos on Shariah Compliant EPF, click on this link: EPF-I http://www.kwsp.gov.my/shariah/videos.html

 

German Banks: More Islamic than Islamic Banks?

In one of my engagements a couple of years ago,  I had the fortune to present my views on the Islamic Banking industry and its challenges in front of an audience in INCEIF. One of the bright participants there had subsequently proceeded to complete her MSc Research and recently gotten in touch with me. I had a read of what she had published, and it is a remarkable piece of academia. I have since asked for her permission to publish it on this site, for the benefits of other readers. Good food for thought.

Thank you Ms Rosana Gulzar Mohd, for your allowance to this request.

Overall, I find the research quite enlightening and overall accurate. It is also a good reminder of what we still need to achieve to ensure Islamic Banking remains focused and strong for the foreseeable future. Happy reading and do give your constructive feedback on the paper for our discussion.
Note : Ms Rosana was a student from INCEIF : The Global University of Islamic Finance and recently finished her MSc thesis concluding that a) Islamic banks are not really ‘Islamic’ and b) the recommendations for reforms. The analysis centres on the industry in Malaysia. She is keen to pursue her PhD. (Click this link for alternate site to download research)
Middle East Institute – National University of Singapore
Abstract:
This study, which compares the German system with Malaysia in the hope of improving Islamic finance, uncovers four paradoxes. Germany is chosen because its focus on mutuality and small enterprises, at the expense of profit maximisation, not only embodies the Shariah principles of justice and social welfare but also makes the system more stable. The banks’ profitability and stability between 2006 and 2014 are compared. This covers their performances before, during and after the global financial crisis. The indicators used are the banks’ return on average equity (ROAE), return on average asset (ROAA) and net loan to deposits and short-term funding. While this study finds that Malaysian banks, including Islamic ones, are indeed significantly more profitable and efficient than German banks, it uncovers four paradoxes. Firstly, it is ironical that Malaysian commercial banks are less aggressive than the Germans in their loans-to-deposit ratio. Secondly, the profitability of Malaysian development financial institutions (DFIs) and banking cooperatives are comparable, if not higher, than its commercial banks. Thirdly, the ROAE for Malaysian banking cooperatives rose 41% during the 2008 crisis when other banks’ fell. The last paradox is that while Malaysian commercial banks seem prudent in their lending, the DFIs and banking cooperatives are leveraged to an alarming extent. This study concludes with two reform recommendations: a rethink of the economic drivers in Malaysia and a sprucing up of the DFIs and cooperatives’ balance sheets towards national standards.

Types of Murabahah

One of the common questions I get with regards to the Murabahah Standards issued by BNM is on the types of Murabahah covered under the standards. Murabahah is essentially a Sale of goods (cost plus profit) where there is a “deferred” element which validates the profit earned arising from the sale transaction. To understand the difference, it is key to analyse the “deferred” elements, and the risks associated to the deferment.

Essentially, there are two types of deferment in a Murabahah i.e.:

1. Deferment arising from future/deferred settlement of Sale Price – This is the most common form of Murabahah where risks to the Seller is minimised by the almost immediate transfer of ownership of the goods.

Murabahah Deferred Sale

This is generally used for debt creation where the Seller (usually a Bank in the case of financing products) purchase goods into its ownership and quickly Sells the goods to the Buyer (usually customer) where the Sale Price (inclusive of profit) is concluded with the future settlement terms agreed. Once the debt creation is completed, the ownership transfers from the Seller to the Buyer and the Buyer will start to make payments on the agreed Sale Price.

All risks on the goods (valuation, pricing, ownership) are transferred quickly from Seller to Buyer; the Seller only holds the credit risk of the debt i.e. the risk that the Buyer may not able to pay the Sale price at the future date as agreed.

This category of Murabaha is generally classified as a Debt-Based structure where the Bank only holds the Credit Risks (Valuation Risks is held by the Customer).

2. Deferment arising from future delivery of goods sold – This structure is more riskier than the earlier mentioned deferment of Sale Price settlement. Deferment of delivery of goods means the Seller purchases the goods now but do not enter into a Sale transaction with the Buyer until much later.

Murabahah Deferred Delivery

Instead, the Seller holds the ownership of the goods for a period of time and enters into a contract at an agreed future date. The Seller will carry the ownership risks and valuation risks until the goods are sold at the Sale Price (inclusive of profit). Once the Buyer enters the contract, the ownership of goods is transferred on settlement of the Sale Price at spot (either a Murabahah arrangement or Musawamah Simple Sale transaction).

Due to the riskier nature of the above, the Buyer is usually required to undertake to enter into the Sale contract (via Letter of Undertaking in favour of the Seller).  On then the Seller procure the goods from Supplier, creating a legal obligation on the Buyer to complete the sale at the agreed future delivery date, even if the Buyer decides not to complete the Murabahah transaction (default on the arrangement). By this undertaking, the Buyer takes on the pricing risks as at the date of Sale transaction; the price of goods on the open market may be higher or lower than the contracted Sale Price.

Additionally, with the Letter of Undertaking, the risks on the Seller is mitigated, resulting the credit risk of the Buyer to be similar/equivalent to the “debt” structure of Murabahah arising from deferment of Sale Price.

This arrangement is commonly referred to in the market as “Murabahah Purchase Order” or MPO where the Seller will only proceed to purchase goods to hold it for a period of time with the surety of the Letter of Undertaking as a risk mitigant. This category of Murabaha can be classified as either an Equity-Based structure (if the Bank choose to hold the ownership until sale i.e. open to valuation risks without a Letter of Undertaking) or a Debt-Based structure (where the Bank executes the Letter of Undertaking and effectively transferring the valuation risks to the customer).

Both the structures are sufficiently addressed in the Murabahah Standards issued in 2013.

 

Best Wishes for Ramadhan

It has been quite some time since I last posted here and I do apologise for that. I have recently joined a new organisation at the moment heavily in the midst of launching an Islamic Banking proposition to their customers. Safe to say that the amount of work is monumental but launching an Islamic proposition is always the good fight for me. We expect then “live date” to be sometime July 2016 and hopefully I will have a bit more time thereafter to finally complete the various drafts laying in my box.

So in the meantime, I have added the various guidelines issued by BNM these past few months into my repository. The guidelines issued lately by BNM as follows:

  1. Wa`d Concept Paper (11 April 2016)
  2. Statutory Reserve Requirements (26 January 2016)
  3. Financial Reporting for Islamic Banking Institutions (05 May 2016)

But nonetheless, I would like to take the opportunity to wish my friends, colleagues, subscribers, supporters and casual visitors the best of Ramadhan’s blessings. May we all have good tidings and good health for the many years ahead of us all.

Ramadhan Kareem, and please accept my humble thanks for visiting.

New Ethica Institute Handbook

I have always had admiration for these guys ever since they published their handbook in 2013 for general reading. It has some interesting articles as well as explanation on Islamic Banking contracts, samples of the contracts itself and Meezan Bank’s Guide to Islamic Banking, which I always find useful as a reference. As for their website, I go there for the Shariah fatwas and the Q&As, which discusses latest concerns in Islamic Banking.

So I quickly signed up for the free webinar scheduled for this week and found that I was not able to sign up as there were only 500 places for it available. Sigh, but anyway better luck next time. But at the same time I am given the link to the latest pre-launch handbook, presumably an update of the free handbook they issued in 2013 (click this link to go to that earlier posting)

Hopefully you can benefit and share the ebook with your friends as well. Do visit their website at http://www.ethicainstitute.com/ as there are many interesting stuff there. This includes “Ask an Islamic Finance Question” and “Search Islamic Finance Q&A”.  Check it out!!!

 

Happy reading and have a blessed year ahead in 2016. Wasalam.

 

Life as an Islamic Product Developer

Recently I have been asked on the function of developing Islamic products for the Bank, from one keen graduate looking to start a career in the industry. The graduate was not confident in the future of the industry and was seeking some advice.

 As a career choice, Islamic Banking remains a good option for many reasons. In my view, the industry is still a growing space, with discussions and researches still being done and far from finished. Slowly scholars are going to the forefront, and arguments on structures are becoming more sophisticated. So, it is an exciting time to be in the industry.
But how about product development itself? Is it worthwhile to enter this fray?

Life as an Islamic Banking product developer is not easy. Simply because not many knows what we are doing, and what it takes to be one. I always viewed being a product developer is as hard as being an imam in a community; you hold on your shoulders the responsibility of launching a product that the community must trust to be Shariah compliant. There is no heavier burden than this, and you must be willing to shoulder this responsibility. Not everyone willingly do this.

Eye of the Storm Product Developer

But being a product developer has its intrinsic advantages. Rarely a position in the Bank affords you access to all types of functions. As a developer who have to design, develop and launch an effective and successful product, you need to engage ALL parties in the Bank as your product needs to flow throughout the organisation. The detail involved is enormous and you are expected to be an expert in most of the touch points. Hard questions are asked by stakeholders in the Bank, and you are expected to be able to satisfactorily answer these. They won’t sign off the approvals if you fail this.

That’s why sometimes it takes a long time to develop and launch a product. Many people criticise us for being slow, unresponsive or too technical. But to reach the stage we can satisfy all parties, including Shariah Committees and Central Bank, a product will just remain a concept that is not developed and launched if we do not have a capable team that interacts effectively with all stakeholders.

In addition, Product Development requires us to be experts in various fields after a product is launched. This includes after sales support and damage control, especially if there were mistakes made, misselling of a feature or just general queries by customers. We also have to continue ensuring Shariah requirements are being met, as well as balancing the business requirements (which is generally profit driven).

Life is not easy here, despite appearances. It takes a lot of grit to survive as a developer, and you do need a certain amount toughness to handle the day to day tasks. But the rewards are great as it builds you into a competent and wholesome expert in the field after a few years. Patience is also needed and so is hard work.

To all the graduating students out there, do your best in the industry and fight this good fight. There is a bright future out there, as bright as you want it to be.

Presentation on Careers in Islamic Banking

VideoBlog : Islamic Finance

One of my ultimate dream is to have VideoBlogs for this site. I have dreamt it for quite some time but it has been hard to find the opportunity to create one according to what I envision. InshaAllah that day will come, although I am not sure I am photogenic enough to be on “TV”.

CDIFBut a friend has managed to realise that vision. Hussain Kureshi whom became an acquaintance a couple of years ago, took that bold step to make a difference. He self-produced a series on Islamic Finance, following the launch of his book (Contracts and Deals in Islamic Finance) and I must say I am impressed.

So when Hussain asked me if he can feature his VideoBlogs on this site, it was my absolute honour to have it. Please do visit and take a listen to the various topics he has elaborated upon. As at yesterday, there’s already 20 VideoBlogs (YouTube) that you can go through. Looking forward to more additions in the future.

Click on the picture of the book to go to the VideoBlog page. Happy listening.

Types of Sukuk

One of the topics that I hardly write about are Sukuk (islamic Bonds). Unfortunately, I am not greatly involved in many Sukuk deals, either by design or exposure. In my line of work, I get to see the legal documents, but somewhat uninvolved when it comes to actual structuring. There are many, many experts in the field so I will not even attempt to pretend what they do is easy.

IMG_3424

But I did come across this interesting presentation on the types of Sukuk. A presentation I saw on Linkedin by Camille Paldi on the Types of Sukuk provides an excellent introduction to the subject. With her permission, I attached herewith the presentation on Sukuk in pdf for your easy download.

Click here to read Types of Sukuk (PDF format)

Also, I notice Camille Paldi writes (via her presentation slides) a massive amount of literature on Islamic Banking, which is a trove of information for someone who seeks it. Do have a read on her other presentations as well.

Happy reading.

Most Commonly Used Islamic Banking Contracts

It is reaching the end of the year and I thought it will be good to have a quick look on how many Islamic Banking contracts that we have in and around the industry. Granted, I might miss some of the contracts as there are many banks offering hybrids nowadays. I do apologise for such shortfall, and will endeavour to update this chart as often as possible, should there be some interesting and new contracts being introduced in the Islamic Banking industry.

Common Islamic Contracts

For pdf, please click here

In general, common Islamic Banking contracts can be segregated into a few categories:

  • Gratuitous Contracts

These types of contracts are typically unilateral in nature where the contracts do not require mutual consent to be applied. It is just a one-way arrangement where one party provides a product or service based on mandates or scope of work and is at discretion to vary the terms without requiring the other party to specifically accept the changes. For example, the Hibah contract (Gift). One party provides the gift, and the other party receives the gift. It should be on a unilateral / discretionary basis by it not being “promissory”.

Another example is the contract of Qard (Loan). One party lends money to the other party, and the other party (borrower) undertakes to pay back the loan (original amount) when required by the lending party, without any expectation of additional return. But the other party (borrower) can pay more than the original amount (by way of Gift) but is not obliged to, and such additional gift do not require the borrower to obtain “consent” from the lender to be given. It is simply the payment of the loan, and any other gift (which is not obligatory). Such “gifts” avoid the definition of Riba’ by being not promissory.

Under gratuitous contracts, the Aqad is not greatly necessary (it being unilateral) but it will be ideal for all parties if an Aqad can be concluded upon.

  • Trading Contracts

Trading or transactional contracts are debt-based contracts. Very similar in nature and intention to a conventional loan, but requires specific Islamic contract to be perfectly executed to avoid riba’. Such contracts greatly involves the participation of 2 parties (sometimes 3 or multiple parties) and there is a defined Aqad executed to finalised the terms and conditions to the contract. These terms are to be defined and agreed upon within the Ijab/Qabul period for all parties to accept. Once accepted, any proposed further changes captured in the Aqad must be accepted by all parties by mutual consent.

A common example will be a Murabaha financing transaction, where the terms and conditions are agreed up-front in a bilateral agreement. A purchase price is discussed, together with the profit amount, selling price and the settlement tenure. Ownership of the asset (used as an underlying asset for the Murabaha) is also moved between the parties, and transactional sequence is observed. Any changes that is proposed outside the Aqad majlis will require approval and consent by all parties.

A Leasing contract is also deemed a bilateral contract although the owner of the asset has the right to unilaterally increase or revise the rental amount of the asset under hire / rental, the person who lease that asset will also have a right to remain in or exit out of the leasing arrangement, thus making it bilateral (where there is also a material change in the terms and conditions.

The perfection of Aqad holds great importance to Transactional Contracts to ensure the validity of the transactions.

  • Investment Contracts

These types of contracts deals more on equity and corresponding returns in the subject matter. It follows the concept of investment where such equity-based structures takes on the risks of the investments, and concentrate on the concept of entrepreneurship and risk-sharing. In such contracts, where there is an element of trust, bilateral arrangements are strictly adhered to. Changes to the terms and conditions requires explicit consent especially from the party that is in a disadvantageous position.

The most popular of these contracts is the Mudharabah, which is used in many depository products. However, although this is technically a deposit, these deposits must be utilised or deployed into economic transaction for the purpose of generating a return on the capital i.e. in this case, the Mudharabah deposit. Once profit is recognised (if ever…) then the profit must be distributed to the customers based on the agreed Mudharabah profit sharing ratios. The Bank, usually acting as a Mudharib (fund manager / entrepreneur) , will behave as a pure entrepreneur with the customer (as Rab Ul Mal), acting as the fund provider with the possibility that the investments is not up-to-market returns which can result in both loss in profit and loss of principal (principal not guaranteed).

Another example. Under a Musharakah structure, there  is even more defined roles that the all parties must take and agree under a bilateral arrangement. With Musharakah, each party will be required to contribute equity (or capital) and even contribute expertise into the partnership venture to ensure profit can be made. All terms and conditions are captured as part of the important Aqad. Any profits declared will be shared according to equity ratio or agreed profit sharing ratio, and any losses shall also be shared amongst partners, usually based on equity ratio or equity contribution.

  • Supporting Contracts

Supporting contracts are often important because they act to complete many aspects of services, products and banking. Many supporting contracts are created to cater mostly for specific situation and most of it requires proper Aqad as well. Such contracts are also considered a facility to provide specific outcomes for the customer. It also falls into a bilateral arrangement.

Popular contracts include the contract of Kafalah (guarantee) where a person can enter into a Kafalah to secure a financing facility by providing a letter of guarantee. Other contracts include Rahn (mortgage or pawn broking) that has specific terms to the arrangements, Hamish Jiddiyyah (security deposit) or even Wakalah (Agency for services)

  • Contractual Arrangements

Contractual Arrangement are not necessarily contracts on its own, but can be construed as a combination of contracts to achieve a certain objective. The arrangement itself is not legally binding, but what is inside those arrangements are usually standalone valid Islamic Banking contracts.

Take for example the contractual arrangement of Tawarruq. Inside a Tawarruq arrangement, it consists of several standalone Islamic Banking contracts. Firstly there is the contract of Wakalah (Agency) to purchase the commodities on behalf of the transacting party. Secondly, there is the contract of Commodity Murabahah where the commodities purchased will be sold at a Sale Price to the purchasing party. Once the Commodity ownership is transferred into the purchasing party, the purchasing party can make an offer to another party as a Musawamah (simple sale) to obtain the desired cash.

Other contractual arrangement is the arrangement for Wa’ad (Promise) usually used for FX transactions. A Wa’ad itself is not binding, but it can be enforced upon certain events where eventually an exchange can be made (Sarf) or even a Commodity Murabahah is executed to deliver certain obligations.

Again, these are not exhaustive list of contracts, and can easily be expanded in a short period of time. Innovations are done everyday, and it will be a matter of time until critical mass will push a contract to the forefront. I hope to keep updating this list more in the coming years.

Wallahualam.

Overview of the Sukuk Market, Forecast Study in 2015

Found this on the internet. A good overview of the Sukuk market.

OVERVIEW OF THE SUKUK MARKET, FORECAST STUDY IN 2015 Redha Al Ansari Senior Islamic Capital Markets Specialist Thomson Reuters.

Source: ⚡Presentation ‘OVERVIEW OF THE SUKUK MARKET, FORECAST STUDY IN 2015 Redha Al Ansari Senior Islamic Capital Markets Specialist Thomson Reuters.’

 

The Difference Between Islamic Banking Financing and Conventional Banking Loans

I know the title of this post is a mouthful, but I am insisting on the title. Simply because today I came across another round of bashing by individuals on Islamic Banking. Again, the contention is that Islamic Banking is no different from conventional banking; worse still it is claimed that Islamic Banking is more detrimental than conventional banking. How can this be? I watched the video and aghast by the level of ignorance to the nature of Islamic Banking. And gauging from the response by the rest of the audience, it seems that the audience themselves knows no better.

It seems that a lot of individuals are still unconvinced about Islamic Banking. Furthermore, the impression that it is worst-off than conventional banking needs to be addressed. Islamic Banking, while on the surface is still banking, but it is built on a totally different foundation. There are significant difference which is brought about by a single requirement; Shariah-compliance.

THE STRUCTURE 

The basic difference between Islamic Banking and conventional banking is the structure of how the Bank is set up. For a conventional banking, the purpose of set up is to collect deposit and to give loans. This is the shareholders understanding of what it should be. 2 very distinct function ie Collect Deposit and Give Loans, and the arrangement is managed by a Treasury function which tries to balance the returns to shareholders’ funds.

Conventional Banking Structure (Diff)

But what is Islamic Structure then? In essence, how an Islamic Bank is supposed to be set up is based on the theory of “Sources and Application of Funds”. There should be a single flow between the deposits and the financing / investment use of funds; this means there is no distinct function. It is a single function where customer deposits or investment pool is used to fund financing portfolio or deploy into investment instruments, from which returns are derived and recognise. Once the returns are determined, these returns are “shared” between the Bank and the customers (deposit/investment). This “Profit Loss Sharing” structure demands a different way of managing the Bank, although not all Islamic Banks are able to successfully pull this off 100% (especially when the Islamic Banks are still under the parentage of a conventional bank).

Islamic Banking Structure (Diff)

In my personal view, the structure of an Islamic Bank is most suited if it is built around the Mudharabah structure. It fits perfectly on how the Bank is to be managed. It should be the backbone of any Islamic Banks, where the set-up is linked end to end resulting in sharing of actual returns arising from a Shariah-compliant financing/investment activity.

Finally, the processes in an Islamic Bank and conventional Bank are also different, simply due to the structure of which it has been set up. There is a broader requirement for oversight and research required to ensure the Islamic products and services meets Shariah requirements. A lot more layers to comply with, a lot more details needed.

Islamic Banking Diff (Structure)

THE SHARIAH COMMITTEE

Shariah Committee is the most important difference between an Islamic Banking business and conventional Banks. It provides an oversight accountability in ensuring that all the operations of an Islamic Bank is consistent with the rules of Shariah.

Shariah Committee (Diff)

There is a huge layer of governance surrounding an Islamic Banking proposition. Whatever features that it offers, it goes through regulatory oversight by the Shariah Advisory Council of BNM, and stricter scrutiny  by the Shariah Committee whom are not under the jurisdiction of the Bank but reports directly to the Board of Directors. The decisions (or “fatwa”) given by the Shariah Committee will be held solely by the committee themselves, therefore there is a huge responsibility for them. The Shariah Committee must ensure their decisions have taken into account all requirements of justice, customer protection, compliance to Sharia, interpretation to customary civil practices as well as practicality of implementation. In short, decisions must be clear, defensible and without any doubt to its validity.

SUSTAINABLE MAQASID OF SHARIA

In Islamic Banking, matters really are determined by intentions. And the intention is to ensure the Maqasid (Objectives) of Shariah are met.

Maqasid

These Objectives are a key consideration in setting up an Islamic Banking operation. But it does not mean the operation of Islamic Banking and the deployment of its funds are for charitable purposes. It is still a business that needs to be sustained by investing in Sharia-compliant economic activities, therefore it is misleading to assume Islamic Banking is a holistic endeavor that “should not charge interest” or merely to “provide assistance to the ummah”. There are costs for running an Islamic Banking business, and as far as possible it should be at par to the costs of running a conventional banking business. Returns on Shareholder capital is also important to ensure that capital is continued to be invested into Islamic Banking for it to grow. With growth comes the ability to continue supporting the ummah. The key word is sustainable banking. You cannot grow or even survive if you are not competitive.

THE PRODUCT & CONTRACTUAL RELATIONSHIP

Designing and launching an Islamic product is not easy. The amount of work that needs to be done in relation to the fundamental difference between an Islamic Bank and conventional Bank. The fundamental difference is the totally different outlook on what happens after entering a contract. The contract between a customer and a conventional bank is simple; a loan where interest is charged upon over a period of time.

Key Diff - Product (Example)

But look at an Islamic contract. It is much more complex structure, but once determined, it really makes total sense. The contract defines the relationship, the relationship defines the responsibilities and subject matter, the subject matter defines the sequencing and ownership requirements for the use in an economic transaction, the transaction defines the rewards and returns on the completion of the contractual obligation. Cause and effect, risks and compensating return, action and rewards.

What usually confounds practitioners (whom are not well versed in Islamic Banking contracts) are the level of detail. Some may consider the issues discussed in an Islamic Banking forum as “petty” but others expressed amazement in the level on consideration undertaken during discussions. For example, an Islamic Banking forum would discuss the nature of loan (Qard) and responsibilities of Qard, conditions of Qard, transferability of Qard, conclusion of a Qard Aqad (offer and acceptance), dissolution of Qard and implications of Qard when attached to other Islamic contract. This level of discussion is missing from the conventional banking space where in their view is that a loan is an amount given to customer where it is to be repaid back with interest.

OVERALL SUMMARY OF DIFFERENCES

There really are differences between Islamic Banking and conventional banking, and there are some of us trying very hard to make a difference in the compulsion towards Riba’. As a summary, below are some quick differences I have compiled from my earlier days in the industry on the differences between the models.

Difference 1

Difference 2

Difference 3

Difference 4

DNA OF ISLAMIC BANKS

For me, the main difference between Islamic Banking and conventional banking is that the concept of justice to customer is not regulatory driven; it is conceptually driven by the idea of Islamic Banking itself. A lot of conventional banking practices are developed to maximize returns while minimizing risk, and risk-transference is a key consideration for conventional banks. Regulators have to be vigilant in ensuring conventional banking toe the line to protect customer’s interests.

Islamic Banking, in its DNA is intended more than just being profitable. It is meant to be providing service to support the activities of the ummah (Muamalat) defined within Shariah-compliant transactions. There are specific rules that must be followed; breach of these rules means the penalties are non-negotiable i.e. whatever returns gained from these breaches must be given to charity. Care and consideration is a must. Justice and fairplay is always important in a decision by Shariah Committee. Release of customers burden is a priority.

AVOIDING FITNAH

Many customers still lack knowledge of what Islamic Banking is all about. They collate biased and misleading information from truncated and unverified sources on the internet, facebook postings that intends to be malicious rather than presenting the true picture, and comments by individuals who make generalized comments on their experience which may well be isolated cases due to misinformation, misunderstanding or just plain ignorance to the fact. And yet these comments are sensationalized, made viral and deemed to be the absolute truth without further exploration or verification.

Cut and paste seems to be the easy way forward. Yet people forget the discipline that is practiced by the companions of the Prophet; you must verify the information by determining it all the way to the source of the information, up to naming the individuals who made the first comments, and deciding whether the individuals are trustworthy and of good standing. This discipline is lost in this world of over-abundance of unverified information in the social media where direct accountability is undetermined, and it has become increasingly difficult to separate untruth from fact.

I had always advised friends and critics alike to be careful of what they “recommend” when dealing with Islamic Banking due to the huge responsibility of such recommendations. If they are ready to criticise Islamic Banking as “same as conventional” or “open to back-door riba” without full understanding of what it really is, they should be ready to take responsibility for that. If their basis of stating as such is based on “viral whastsapp message” or “comments by third party islamic practitioners” or “explaination by insiders in the industry” or “commentary by blogs”, I do appreciate if we as practitioners can be provided with these “sources” for us to verify its accuracy. Many times I find the comments are based on partial information, taken out of context, outdated writings or information as well as just being malicious without proper basis or discussion. Some are not even Shariah related or relevant to Islamic Banking practices, just operational and processes defects.

Do think of the implications: Should a person make such comments that “Don’t take Islamic Banking products because it is not really Islamic and there is a lot of trickery to it”, and the person listening to that comment thinks “Owh then there is no difference between Islamic product and conventional riba banks’ product” and proceeded to take Riba-based loan products, the implication is that the person who made the comment had directly influenced another person, in my view, in making a wrong and sinful decision. Will that person be responsible for this act of “pushing another Muslim into taking Riba products”? It is a heavy burden to take, not just immediate but in the hereafter. So be careful when a person makes that comment.

And to imagine what will happen when the person who took the Riba product commented to another person (and another) that someone commented that “there is no difference between Islamic Banking and Riba Banking…” . It will become a tree with a massive root, grown by the single seed of the original “defective” comment by the first person.

MashaAllah

Hopefully those doubtful questions on Islamic Banking should be directed to Islamic scholars, Islamic banking practitioners or relevant academicians with stature, knowledge and qualifications before the ummah believes and spread untruth that will, in the end, become a disservice to the religion of Islam by spreading “fitnah”.

ISLAMIC BANKING IS EVOLVING

Evolution

Granted, Islamic Banking is a 30 year old structure, with many building blocks are still in progress. But it has not stopped evolving to existing times as and when new regulations and Shariah decisions comes into discussion. It is not perfect yet, but practitioners are aware of the difficulties of meeting all the requirements without enhancements and considerations to practicality. There is a misguided assumption that academia are aware of all the shortfall of Islamic Banking practices and the industry had turned a blind eye to these. Nothing can be further than the truth. Islamic bankers, Shariah Committees and BNM are well aware of all of the issues raised by academia as well as other practitioners, with the benefit of global awareness as well. In truth, practitioners know more of the issues they faced on a day-to-day basis, as compared to academia where some of the issues had already been resolved by the industry but not made known to academia.

Criticisms are always welcome, but ideally it should be constructive on how to improve. It is a heavy responsibility to ensure the differences between Islamic Banking (based on Shariah) and conventional banking (based on lending) are managed diligently. It is an on-going evolution that I am confident one day will reach its apex. Ideas are welcome and proposed solutions considered in earnest. And as I have always said to my product team; If you’re not part of the solution, then you are part of the problem. So, let’s be the solution that we had always wanted.

Wallahualam

My earlier postings on similar conversation:

  1. Consequence for Choosing Islamic Banking
  2. Shariah Banking in Malaysia
  3. Conversations on Islamic Banking in Malaysia
  4. Choosing the Right Options

maxresdefaultMore videos at Islamic Bankers Resource Centre on YouTube