Kabir Hassan, M. (2012), "Editorial", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 5 No. 4. https://doi.org/10.1108/imefm.2012.35205daa.001Download as .RIS
Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
Article Type: Editorial From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 5, Issue 4
The success of Islamic financial system largely depends upon having specific elements and features that are different from those of conventional finance and that are acceptable in Islamic norms. These elements and features that define and set rules that governing and guiding Islamic finance as to other aspects of human life is referred to as Sharia. Though Islamic finance produces same products as conventional system, the Islamic products remain within the guideline of Sharia. Sharia compliance of financial products aims to ensure credibility of the product offered by Islamic financial institution as well as differentiating between Islamic financing from conventional. The implementation of Sharia though seems to bring under control individual behavior in many respects; they are not supposed to hamper innovation. There is widespread thought especially from non-Muslim society that with interest ruled out in Islamic finance it is difficult for one to make money using Islamic products. This thought is not tenable as Islamic finance provides several means of making money and profit through buying and selling of lawful goods and services. Indeed the compliance of Sharia is more likely to be inspirational of making money than constraints as Islamic products are less risky compared to conventional financial products.
While invention is encouraged within Islamic framework, it should not, however, be used as a means of circumventing the objectives of Sharīcah injunctions. Thus, in the past two decades, Islamic financial system experienced resourcefulness of many products such as ijara (leasing agreement), murabaha, Islamic micro financing and Islamic derivatives just to mention a few that create better product structuring which are essential for growth and development of Islamic finance. The Sharia principles and rulings imply the ultimate wisdom of Allah (s.w.t.), and their observance, therefore, will only improve human life. If innovation or engineering results in a financial product that appears to get around an otherwise prohibited financial contract, it would not be considered desirable and acceptable.
Islamic teachings, in general, provide the right environment for valuable creativity and innovation. The Qur’ān frequently emphasizes reflecting and pondering upon signs of truth, and condemns those who blindly follow the inherited culture that often contradicts the facts. To put it briefly, financial engineering and innovation in Islamic finance will strike a balance between creativity and conformity with the normative standards of Sharīcah. Accordingly, for Islamic financial system to develop, it needs to take recompense of the innovative products.
There might be differences in view and understanding of Islamic commands relating to economic and financial acquaintances that might hold back the advancement of the Islamic financial industry. Nevertheless, if these differences are taken positively and treated within the generally agreed upon principles, it provides a fertile environment for innovation and creativity. The differences in views and opinions for interpretation and implementation of Shariah objectives and principles relating to Islamic finance development need to be taken as an advantage rather than a constraint for the growth of the industry. Hence, the formulation and implication of the maqasid Shariah (the Shariah objectives) is of most important for analogical reasoning that permit enthusiasm and inventiveness. Regrettably, the absence of this dimension, objectives and maquased al-Shariah, raises the risk of crumbling of Shariah orders, leading to improper and fragile development of the industry.
There is no consensus between Muslim worlds on the permissibility of the same product as Islamic scholars (ulama) are differed in their approach to the recognition of the maqasid Shariah. Therefore, the acceptability of the product much depends on Shariah experts of the country concerned. The differing of ulama opinion and views on Shariah need not be a problem as such unless these differences become commercialized, and shareholders start pressing their boards to follow the least restrictive fatwa. In this environment, Gresham’s law applies: less restrictive fatwas drive out more restrictive ones.
Without taking objectives of Shariah into consideration in issuing fatwas, these differences intensify the effect of Gresham’s law, and thus might lead to degeneration of the Islamic finance industry into a shallow cover of conventional finance.
The challenge that facing Islamic financial engineers today is to make a distinction between products that fulfil the objectives of Shariah and those that are not. This task requires a strong knowledge of Shariah rulings and principles. Developing of new products in Islam is not forbidden, and in fact, it is encouraged as long as the new products do not violate objectives of Shariah and they are ingenious and productive.
The absence of systematic and well-defined process in Islamic financial institutions for developing new products is an important challenge to the product innovation in Islamic finance. The development of the new product in Islamic finance need to realise the maqasid Shariah as the Islamic financial system should help the economy grow. Product development is a complicated process. Due to a lack of qualified manpower in Islamic finance, new products are introduced by way of imitation of conventional banks. Regrettably in many cases major conventional banks take the lead in developing Islamic products. As the environment in such institutions is not Islamic by design, these products most likely become shallow adaptation of conventional products, instead of pure value-adding financial products consistent with Islamic norms. Since these big banks are major players in international markets, they effectively become the leaders of the Islamic financial industry.
The entrance of international banks into Islamic financial market necessitates the need for development of Islamic financial products following the rules, policy and regulation that govern the Islamic finance, not of conventional finance. Singing Islamic finance song while playing conventional rules of the game is a losing proposition, and it will eventually smear wrong impression about Islamic values and credibility.
We need to emphasize for new products in the Islamic financial industry because product development is in the very core of Islamic financial system. While emphasizing the need for new product development, we must realize that products do not operate in vacuum, and it is institutions that implement them. The structure of the markets and institutions decides the set of products relevant to their activities and objectives. For example, pure equity investment is more suitable to venture capital and investment banks than to commercial banks. The existence and development of specialized institutions, like venture capital micro finance, mutual funds, leasing companies, etc. not only make the industry more diversified, but also allows for more creative and Shariah-based financial products. As a result, the Islamic financial industry will become more dynamic and economic growth-oriented.
In the first essay, Omar Farooq makes available a significant appraisal of the subject matter of zulm (injustice/exploitation) in light of the Islamic finance literature and the general attitude and approach of the Islamic finance industry and its advocates. Aiming at expanding theoretical and empirical knowledge about Islamic finance and banking movement, and the role of profit in business, the author presents a critical analysis of the role of riba, interest and profit in wider meaning of injustice and exploitation. Because of the behavior of the Islamic finance industry, it seems that the industry’s current practices are either neutral to the issue of injustice/exploitation or mirrors the tendencies of the conventional finance. Additionally, when comparing the manipulative role of interest and profit, the latter seems to be more consequential than generally understood and acknowledged. Empirical research should identify the nature of exploitation in the contemporary world and point out how the current Islamic finance practices minimizes question of exploitation. Islamic finance and banking movement should be in sync with the maqasid of Shariah to minimize zulma (injustice/exploitation) in the society. The author critically examines for the first time the riba-interest reductionism, by focusing on the industry being away from exploitation in general and the relationship between profit and exploitation in particular.
In the second paper, Faruk Balli and Elsayed Mousa Elsamadisy tests a model of currency in circulation (CIC) for the State of Qatar with daily and weekly data. They compare the forecasting performance of typical linear forecasting models, namely the regression model and the seasonal ARIMA model and they find that the seasonal ARIMA model performs better in forecasting CIC particularly for short horizons (Al-Suwailem and Kabir Hassan, 2011).
The third paper by Sartini Wardiwiyono investigates the implementation of internal control system for financing activities practiced by Baitul Maal Wat Tamwil (BMT), a special micro finance organization, in Indonesia. The author introduces the concept of internal control system and formulates internal control system for Islamic financing. The paper uses primary data collected by direct survey using questionnaires. The findings of the study show that rank of the implementation of internal control system for financing activities practiced by BMT follow the following sequence:
information and communication;
risk assessment; and
The author also finds that the implementation of authorization and consultation with the Shariah Supervisory Board is low in Indonesia. There is a lack of scholars’ attention on the implementation of internal control especially for Islamic micro financing.
In the fourth paper, Ameer Rashid, Radiah Othman, and Nurmazilah Mahzan critically examine the shortcomings of the compliance of the full-fledged Islamic banks with the Bank Negara Malaysia disclosure guidelines related to the profit sharing investment accounts (PSIAs). The findings of the paper reveals that only two out of five full-fledged Islamic banks followed BNM guidelines which are based on the idea of self-regulation. The authors develop a checklist of disclosure items and check out whether the sample banks would adopt these new disclosure items. The findings show that these banks do not disclose policies, procedures, product design and structure; profit allocation basis, methodology of calculating profit attributable to investment account holders (IAHs). Nevertheless, disclosure related to Shari’ah compliance was given to a reasonable extent. It is intriguing that full-fledged Islamic banks do not provide comprehensive disclosure related to profit sharing investment accounts because such disclosure is not mandatory; while foreign full-fledged Islamic banks provide such disclosure voluntarily. The reasons for non-transparency and disclosure are lack of expertise, outdated information system structure, and shortage of support and highly trained staff. In concluding statement, this paper proposes new disclosure guidelines, which incorporate transparency, appropriateness, and timeliness to reduce information asymmetry and enhance governance disclosure.
In the final paper of this issue, Saeed Akbar, Syed Zulfiqar Ali Shah and Shahin Kalmadi evaluates user perceptions of Islamic banking practices in the UK. To explore the understandings and perceptions of customers about Islamic banking practices in the UK, the authors run an online questionnaire survey. The survey was conducted through a closed-ended structured questionnaire. The authors argue that Islamic banking has always been advertised as different and distinct from conventional banking. This is mainly due to the prohibition of interest and emphasis on achieving social economic responsibility in society. However, in practice, Islamic banking practices in the UK seem to be far away from its paradigmatic version. The overall findings of this study suggest that Islamic banking in the UK is not fully aligned with the paradigmatic version of Islamic finance. The respondents generally agree with the view that the principle of profit and loss sharing element represents the true spirit of Islamic banking practices, but they are unsure about the full benefits of this system. There is a high expectation among the respondents about the commitment and strong welfare role of Islamic banks in society. Research, effective marketing and generating more awareness among the users of Islamic finance and banking, it is possible to achieve more from the Islamic banking paradigm. This study is relevant both to Muslims and the banking regulators in the UK, as many conventional banks are now offering Islamic products and services alongside their routine interest based transactions. Regulators need to understand the real nature of such practices by both Islamic and conventional banks and should establish a uniform regulatory framework so that users of Islamic finance are properly treated in the UK.
M. Kabir Hassan
Al-Suwailem, S. and Kabir Hassan, M. (2011), “An islamic perspective of financial engineering”, in Kabir Hassan, M. and Mahlknecht, M. (Eds), Islamic Capital Markets: Products and Strategies, Chapter 18, Wiley, London