19th December 2011

Introduction Ideals and Reality Risk Management Standardization Way forward

Introduction
Global financial crisis 2007-2009 had brought the Islamic Finance industry into a limelight as a possible alternative. However it is not totally immune as it has been hit as well. Indicate a possible correlation between these two type finances as it is operate within the same conventional system and is governed by the same rule of games. Islamic Finance built upon distinctive and unique characteristics which are based upon certain principles underlined by Shariah
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Ideal and reality

Emphasis on superiority of equity-based and risk-sharing modes of finance. Current practices differ from this ideal system to great extent. Fixed-return-cum-debt-based financial instruments dominate the market. Risk-sharing element almost eliminated from the system. Mimicking the conventional counterparts.

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Issues, challenges and future of Islamic Finance within conventional finance

Ideal and reality (cont)

Differences lie in the technicalities and legal forms.

Substance is the same.

Reason for dominance of debt-based finance:
Lack of trust among people Weak institutions Poor protection of property and investors rights Weak enforcement of contract

Risk-sharing instruments are trust-intensive.

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Issues, challenges and future of Islamic Finance within conventional finance

Ideal and reality (cont)

Disparity between ideal and reality known as disparity between theory and practice. Suggestion to overcome:
Fundamentals researches to be carried out. More thorough theoretical research within the discipline. Initiative to educate both the industry and the clients

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Issues, challenges and future of Islamic Finance within conventional finance

Risk Management
Future cannot be known with certainty.

Examples of uncertainty in trading:

Sale of unborn calf. Sale of non existent commodity.

Best done if the risk is shared among all those involved. Law of large numbers just as actuarial table but is not applicable to risk in of price changes.

Gambling and risk shifting against price is prohibited.

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Risk Management (cont)

Scientific research and technology an example the ability of society to absorb immense risks and uncertainty.
Patient and licensing policies Grants to universities

Sharing risk against trading with the view of making profit.

Three (3) components to make comprehensive reform:

Moral rejuvenation Market regulation to free it from monopoly and other anti social elements State regulations to secure desirable goals through public sector

Necessary to interact with international monetary and fiscal institution.

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Standardization
Different interpretations of Shariah among Shariah Scholars on Shariah-compliant. Urgently needed for:
Vocabulary of Islamic Finance Financial instruments and their documentation Pricing formula

Unified, standardised and comprehenvise guidelines which will serve as a reference for each and every bank

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Way forward
Finding way out from the pitfalls entrenched in the conventional financial arrangements especially debtbased instruments. Modern capitalist finance succeeded in shaping the political system to serve its ends:
Money in persons reaching position of power. Lobbyist influencing decision makers Subservience of media and universities towards financially vested interest

Posses political challenge in replacing debt-based system with participatory systems.

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Way forward (cont)

Fresh vision should consider the realities of the globalised world (i.e. internet, genetic science, economics and technological advance). Islams universal moral teachings and the binding glue of tawhid should guide us in forging alliance with the seekers of a spiritually inspired and morally informed living style, insofar as money and finance are concerned. Necessitate fresh reading of Islamic history that focus on life-beautifying values.

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Way forward (cont)

Islamic finance is operating in the arena of conventional interest-based system. Replication or mirrors of conventional instruments. Jeopardizing the objective of Islamic commercial law. Shariah Scholars need to interpret the whole text in its totality by looking at the maqasid al-shariah.

The focus of Islamic financial instruments should be realigned with the substance and maqasid al-shariah and not merely be shariah compliant.
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References
ISRA (2011), Islamic Financial System Principles and Operations, Kuala Lumpur: Pearson Iqbal, Z. & Mirakhor, A. (2007), An Introduction to Islamic Finance: Theory and Practice. Singapore: John Wiley & Sons Sayyid Tahir (2003), Current Issues in the Practice of Islamic Banking

Sayyid Tahir (2003), Future of Islamic Banking

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