Identity Crisis For Islamic Finance

Identity crisis for Islamic finance | The National
12/4/14, 5:09 PM
Islamic finance is gaining popularity, but there are also several challenges facing the segment. There is a general feeling
that Islamic banks are modelled on conventional banks. Lee Hoagland / The National
Identity crisis for Islamic finance

Adam Bouyamourn
November 24, 2014 Updated: November 24, 2014 04:46 PM

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Islamic finance is flourishing as corporate and retail demand booms, but

some question whether the industry is abandoning the values that inspired it.
The industry I work in, am immensely attached to, and want to be a force
for social good and social change is, in some respects, being hijacked, says
Harris Irfan, managing director of the European Islamic Investment Bank,
and author of Heavens Bankers.
Government and private

initiatives boost Britains
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Islamic finance is struggling to differentiate itself both in terms of product

and culture, he said.
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Professor Habib Ahmed, Sharjah chair of Islamic economics and finance at

Durham University, agrees. Theres a difference between the theory of
Islamic finance and the practice.
Call for unification of

Sharia banking standards
In theory, Islamic finance is based on Sharia, Prof Ahmed says. But when
we look at the practice, there is a general feeling that Islamic banks are
modelled on conventional banks, with the objective of making profit.
Topics: Islamic finance
The prohibition on Riba, or interest earned outside of commercial activity,
http://www.thenational.ae/business/banking/identity-crisis-for-islamic-finance
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12/4/14, 5:09 PM
bars Islamic banks from earning money from increments charged on loans
and deposits.
Sharia prohibits Gharar speculation or gambling and requires that all
transactions are based on the real exchange of goods and services. It also
says that individuals should not take advantage of significant informational
asymmetries, or exploit those with weaker bargaining positions.
These principles are alien to most conventional banks.
In 2007, Muhammad Taqi Usmani, chairman of the Accounting and Auditing
Organisation for Islamic Financial Institutions (AAOIFI), based in Bahrain
and the closest thing the Islamic finance world has to a central standards
authority, said that around 85 per cent of sukuk as then designed did not
comply with Sharia.
The problem was that returns on sukuk al musharaka should vary with the
market value of the underlying asset. A musharaka contract sees parties
pool money to invest in a profit-sharing enterprise.
But because the sukuk al musharaka behaved like a conventional bond with
a guaranteed rate of return, Mr Usmani argued that it was not a genuine
profit-sharing enterprise, and so not Sharia-compliant.
Mr Usmanis intervention led to a precipitous decline in the popularity of the
sukuk al musharaka. Issuers now prefer the sukuk al ijara, where underlying
assets are transferred to a trust, with rental incomes deriving from beneficial
ownership accruing to the sukuk holder.
While the products have changed, the worries have not.
One paper from the Islamic Sharia Research Academy showed that, of a
sample of 560 sukuk, only 11 involved the transfer of an asset off the issuing
companys balance sheet to the sukuk holder a necessary step for the
transfer of usufruct, and legal rights.
If you look at early experiments in Islamic finance, they were as much social
experiments as economic experiments, says Mr Irfan. The hope was that
Islamic finance would be about trading in the real economy, and with assetbacked products.
Although the products are certified as being Sharia-compliant, you end up
with too many that look like their conventional equivalents, he says.
Commercial pressures and the need for Islamic equivalents of tools used by
conventional banks have forced Islamic banks to compromise, Prof Ahmed
says.
Islamic banks are modelled on conventional banks, which are debt-based
institutions, he says. The organisational format is such that you cant do
anything other than debt-based lending.
Clients of Islamic banks often dont see any difference between Islamic and
conventional banks.
Yet Sharia emphasises equity-based transactions. This means Islamic banks
should more closely resemble venture capital firms or merchant banks,
instead of modern retail banks, Mr Irfan argues.
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Commercial pressures force Islamic banks to compromise between principle

and the needs of a modern retail bank. For example, Islamic banks cannot
tap the money market for day-to-day liquidity operations, because most
money market products are not asset-based.
Whether Islamic or conventional, retail banks need to make their accounts
tally at the end of the day or face technical default.
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