“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.

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.

Difference 1

The basic difference between Islamic Banking and conventional banking is the contractual relationship. This fundamental difference posed a totally different outlook on what happens after that. The contract between a customer and a conventional bank is simple; a loan where interest is charged upon. But look at an Islamic contract. It is much more complex, 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.

Difference 2

There is a huge layer of governance surrounding an Islamic Banking proposition. Whatever features that it offers, it goes through strict scrutiny by the regulators as well as the independent 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 committee will be held solely by the committee themselves, therefore there is a huge responsibility to ensure their decisions have take 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 my be clear and without any doubt to its validity.

Difference 3

The deployment of Islamic Banking funds is not for charity. It is still a business that needs to be sustained by investing in 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.

Difference 4

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 to ensure 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.

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, where it has become increasingly difficult to separate truth from fact.

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”.

There really is a difference between Islamic Banking and conventional banking, and there are some of us trying very hard to make a difference in the compulsion towards riba’.

My earlier posting on roughly the same conversation:

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