By Dr. Rosana Gulzar Mohd

In ‘Islamic’ Banking, we dance around issues as if vying for a Bollywood Oscar. The latest theme, on ‘Sustainability’, is fashioned after the United Nations (UN)’ Sustainability Development Goals (SDG), in concert with other large organisations such as the Islamic Development Bank and the World Bank. While they may seem like a natural fit with goals such as peace, justice and decent work for all, a closer look uncovers a few fundamental flaws. Firstly, while championing social and environmental wellness, we continue to evade the main issue, which is that profit- and loss-sharing, arguably the main tenets of Islamic Banking, have been replaced with tawarruq, which resembles riba in form and spirit. Secondly, and related to the first argument, this concept of ‘Sustainability’ is at odds with the modern financial system. One is about preserving for future generations while the other belies a winner-takes-all mentality. There is a view that like Islamic Banking, ‘Sustainability’ cannot be sustained in Commercial Banks even though several of them, from Singapore to London, have adopted the practices. In Islamic Banks’ (blind) pursuit of Commercial Banking, are we being set up for failure?

In 2015, the UN set the SDGs in consultation with member countries, who are expected to frame their policies in their context up to 2030. A bottoms-up, people-centered approach yielded 17 goals, which include ending poverty and hunger through sustainable agriculture as well as reducing inequality and building inclusive institutions.

Sounds nice? Not until we take a closer look. These goals may remain just talks if we do not address the root causes. The reason why the marriage between ‘Islamic’ Banking and ‘Sustainability’ is going to be challenging is the same as to why some scholars caution the union between it and conventional banking is headed for failure. This is not surprising if we agree that ‘Islamic’ Banking as currently practiced, is not very different from the interest-based, conventional banking it was to replace. Tawarruq and other modifications have allowed ‘Islamic’ Banks to manufacture riba under a thin veil of Islamicity.

Academics such as Thomas Lagoarde-Segot and Bernard Paranque, who chair the ‘Finance Reconsidered’ movement in their university in France, warn that the gap between the current financial system and UN’s sustainable practices is not easily bridged. The modern system is primed for shareholder supremacy by rewarding able individuals for maximising profit. These individual drives mean there is hardly regard for the weak or disadvantaged so unless the state intervenes, there will be disparity in the social, economic and environmental wellbeing of people within society. This, as we have seen in the Middle East, US, UK, Malaysia and most recently, Hong Kong, can be a powerful impetus for protests and political upheavals.

How do we rehabilitate the banks?

Moving from this state of affairs towards new practices which are more compassionate, collective, caring and responsible involve redefining our relationships with each other and with nature. Rather than trying to shape people or things to suit our needs, we need to perhaps start engaging them as a whole to which we belong. A group of scholars thus call for the re-embedding of financial activities within the economic sphere and the economy into the social. This is however made challenging by two obstacles. Firstly is hyper financialisation, which is when financial institutions and markets increase in size and influence by serving mostly themselves. Secondly, is academic finance, which affirm the modern financial system through financial theories and the behaviours that it perpetuates. These two factors thwart the quest for responsible finance.

Banks, both conventional and Islamic, which want to market themselves as the new, compassionate financial institutions, thus first need to show cognisance of the tectonic shifts that are required and then their strategy for changing mindsets from ‘Maximum Profits’ to the 3Ps: People, Planet and Profitability. Else, we will no longer hear about ‘Sustainability’ once people catch wind of the next fashionable tune in banking.

Islamic Banking: Sustainability while tawarruq-ing

In Islamic Banking, the hypocrisy is obvious. Instead of getting to the bottom of why ‘Islamic’ banks in Malaysia are doing more riba-like transactions and less PLS, its central bank and practitioners are choosing to harp on ‘sustainable’ financial practices. As mentioned in my earlier article, evidence from Bank Negara Malaysia’s Financial Stability and Payment Systems Reportsshow that the number of tawarruq transactions have more than doubled between 2014 and 2016 while investment accounts, the face for PLS under IFSA 2013, have been declining as a percentage of total deposits since 2016. This brings to mind a quote by Timur Kuran, a Turkish American economist:

“Islamic banking, in its current form, will go down in history as a mighty deceit based on an operational principle that is simply unfeasible. Islamic banks give and take interest as a matter of course, though under the guise of commissions, fees, penalties or profit shares. The holder of a “halal” credit card pays a penalty on unpaid balances; this penalty is proportionate to the size of the balance, which makes it equivalent to interest.” (Timur Kuran in a 2013 Financial Times interview). 

Islamic Banking indeed needs a rethink. But the fundamental question is not how should we increase financing to mitigate climate change. Neither is it about reducing climate-related risks and their financial impact. The big question is whether Commercial Banking as a model is stifling the ability of genuine Islamic Banking to lift millions out of poverty? Can Islamic Banking help the weak and disadvantaged in society reclaim their dignity by providing the kind of financial resources and know-how that allow them to confidently start small businesses? We do not mean here collateral-backed loans that detail how the banks will be protected from every possible source of loss and how the entrepreneur stands to lose everything, including the shirt on his back, should circumstances change for the worse.

We are talking about peace, justice and decent work for all, remember? So we are talking about how can Islamic Banks get knee-deep in the business withthe entrepreneurs? Indeed how do we provide financing where because the banks also stand to lose should the businesses falter, the bankers, being among the most able in society, help with skills such as strategy and marketing? In short, how do we shift the mindset in banks from winners-take-all to winners-help-all? I would even argue that this mindset of ‘no exploitation, profit only through justifiable means’ is the reason behind the Quran’s prohibition on riba where in 2:275, Allah explicitly states that He allows trade but forbids ribaand we are not to liken the two. So far, ‘Islamic’ Banking has not moved from simulating ribato genuinely financing trade.

Have banks grown a conscience?

Yes, conventional banks, from Singapore to London, have become champions of the  ‘Sustainability’ movement. DBS, the main, state-backed bank in Singapore, claims to champion social entrepreneurship, urge the reduction of waste and help the aged and children through schools. Even HSBC, which is still paying fines related to its currency, bond and interest rate rigging charges, has all the right words in its ‘Sustainability’ website: ‘Committed to communities’, ‘long-running HSBC Water Programme’ and ‘ESG information’ which is where the bank updates its performance on environmental, social and governance issues. But have they truly repented? Will these banks stay the course when these initiatives hit the bottomline, as they surely will? It is not possible to invest manhours and financing capital for the weak and disadvantaged without losing several dimes, be it in terms of upfront or foregone profits. Unless the banks can continue squeezing more from customers, will they, who are already under pressure and laying off staff such as Deutsche Bank, HSBC and Nomura, persevere in their drive for piety? The academics in France, Lagoarde-Segot and Paranque, believe it will be tough.

The move to transplant the ‘Sustainability’ movement on Islamic Banking may thus spell the beginning of the end of ‘Islamic’ Banking as we know it. Even for Conventional Banks, it is a struggle since the outward reforms are not accompanied with an internal mindset change that should have led to more wholesome transformations. For ‘Islamic’ Banking, the impact is worse because it lays bare the hypocrisy of a bank that continues to simulate riba while purporting to abide by the Shariah and seemingly help improve social and environmental wellbeing. I argue that to achieve the SDG goals, more fundamental changes are needed in our financial system.

Academic discourse that goes deep enough in this topic usually hit words like ‘mutual’ and ‘cooperative’. Indeed there has been little merit in imitating the conventional financial system, which at best, gave ‘Islamic’ banks fast growth at the expense of everything else. Given that the values that should have underpinned Islamic Banking centre around mutuality, participativeness, the sharing of profits and losses as well as a care for social welfare, I argue that the Cooperative Banking model is a better fit. In fact, in the right model, Islamic Banking would automatically be sustainable. There are heartening cases in Europe and closer to home, Indonesia that are definitely more worthy of emulation. I will thus discuss, in my next article,  Cooperative Banking as the model for true Islamic Banking.