x Abu Dhabi, UAETuesday 23 January 2018

As Islamic banking grows, so does the need for standards

No study on financial behaviour in the region can be complete without some reflection on Islamic banking

No study on investor behaviour in the region, or on any financial consumer sample, can be complete without some reflection on the continuing phenomenon of what is called Islamic banking. Only on Sunday, The National reported that the Shariah-compliant market is undergoing a boom in the London financial centre and is predicted to double within five years. The teachings of Islam, like many other religions, encourage the protection of the poor and weak. More than a thousand years ago in Arabia, before Islam grew and flourished, moneylenders would demand not only their money back, but also charge a 50 per cent fee as the price for the loan, and even demand a son's labour for five years. Indeed, the term "loan shark" that is used in other cultures must have been derived from similar outrageous practices.

That was usury, or "Riba" as it is called in Arabic. Islam, to its great credit, immediately forbade Riba for the damage it inflicted on society at large. Religion is such an essential part of the Arabic personality that it is arguably the strongest force that shapes our behaviour. Riba, to us, is truly a bad word; it evokes feelings of helplessness, of deprivation and abuse, of being taken advantage of, and most potently, it signals a flagrant disregard of our religious code.

Somehow, the concepts of the "time value" of money and purchasing power were sadly dropped from our schools and colleges - even though we accepted and benefited from banks and financial institutions in our economies. Centuries of intellectual advances in the field of economics - and the resultant developments in capital market potential - were ignored. It seemed more convenient to reject that invention of western capitalism, interest, and consider it as Riba that takes from the poor and gives to the rich. It became Haram, tainted money, something that a household provider should avoid and never use to feed his children with.

Interest, which is basically the economic rent for borrowing money, was equated with Riba and dismissed without due consideration. One does not need to be an economist to conclude that such an equation does not withstand much investigation. Interest is arrived at in a controlled manner. Market forces - supply and demand - control the price of money, as they do the price of any other commodity. Additionally, central banks, entrusted and empowered by the governments of all nations regardless of religion or orientation, control and monitor interest rates to arrive at a realistic value and either enforce it or influence it. The rate is widely published so any material variation that could lead to abusive usury is easily detected. Usury is randomly priced, unregulated, and not condoned by any government.

The need for a "feel good" product, for a parallel system that defies the Western banking system, has been presented in an Islamic package. Here, as in the rest of the world where Muslims bank, there are many customers and investors who seek the comfort of a Sharia-compliant product, and demand a high level of verification that the product has gone through the due process. But many others simply succumb to the clever labelling.

I wonder how many customers realise that investments into some Islamic funds are not always 100 per cent "Islamic". Some of the terms under which some funds operate state that interest income shall constitute less than a certain percentage of total income, but some interest income is accepted. If interest is Haram, are these fund managers not less than honest in hiding such detail under the Sharia Board stamp?

Vendors of products compensate Sharia Board members for passing judgment on their compliance. Surely such a conflict of interest should not be left ignored by the regulators. Also consider the word Sukuk - now used to describe Islamic structured bonds. The word itself has nothing Islamic or religious about it, it is simply Arabic for a promissory note. Likewise, both Murabaha and Takaful are just Arabic nouns for various commercial or social activities.

Some of the most active and ingenious Islamic product vendors and designers are the global interest-bearing and interest-earning banks that package products under the Islamic brand, again under the guise of a sister concern carrying an Arabic name. Islamic banking today is a business that is now estimated as being worth a trillion dollars. There are some banks that are careful about the equity of their product in terms of representation, pricing, and transparency, but the market remains in urgent need of global accounting standards and price and product transparency. Anees Sultan is a writer and businessman based in Oman