islamic financial products and services: personal …€¦ · 2009-2013. • shari’ah compliant...

ISLAMICFINANCIALPRODUCTSANDSERVICES:PERSONALREFLECTION

Zulkifli Hasan

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Contents

•  Introduc+on•  IslamicFinanceUpdates•  IslamicFinancialProductsBetweenAspira+onandReality•  Challenges•  TheWayForward•  ConcludingRemarks

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•  GlobalIslamicbankingassetsreachUSD2trillion(17%averageannualgrowthandIslamicfinancewillbeabletoMpUSD6.5trillionbytheyear2020).

•  Islamicbankinggrowth:1.9MmeshigherthanconvenMonal2009-2013.

•  Shari’ahcompliantfundsuffereddifficulMesin4yearsduetolackofinnovaMon(USD584bnin2015/USD2.4bnin2014).(Sukukissuance$50billionin2016($63.5billionin2015).

•  DespitethegrowthandtransformaMon,therearenumerouscriMcismsonthecurrentpracMceofIslamicfinance,whichhaveledtoseriesofquesMonsastothedisMncMvenessofIslamicfinancewithitsconvenMonalcounterpartsandthegrowingfrustraMonontheethicalissuesbeyondthelegalrealmofShari’ah-compliance. 3

Introduction

Islamic Finance Updates

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“EverythingthatlapsesoutfromjusMceintoinjusMce,andfrommercyintoitsopposite,andfrommaslahahtomafsadah,andfromwisdomintothefrivolous,doesnotbelongtoShari’ah,evenifitisinductedintoitbyinterpretaMon”(Ibnal-Qayyim).

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2015

MarketShare Customers TotalAssets

4Marketswith30%MarketShare

Lessthan100millioncustomers(2.5bnnobank’saccount,1bnyouthacrossOIC)

2trillion(GlobalfinancialassetUSD300trillion)

2021

20marketswith40-50%MarketShare

250millioncustomers

9trillion

Islamic Bank Share of Total Assets & Deposits

Country Assets% Deposits%

SaudiArabia 48.9 N/A

Kuwait 44.6 47.3

Bahrain 27.7 47.8

Qatar 23.6 35.7

UAE 21.4 32.8Pakistan 9.5 11.4Turkey 5.9 7.1

Indonesia 5.5 11.4

Malaysia

Sectors Achievement

IslamicBanking

28%(Target40%2020)7outofthe8majorbankshaveyettoreach40%.

Thedeclineinannualgrowthratefromadouble-digitin2011(24.2%)to8.2%in2016

Takaful 14.6%(7.5bn)

Sukuk Marketshareof52.6%(USD183.8bn)oftotalGlobalissuances

•  ThetotalnumberofShari’ahscholarsreached952covering652IFIsinmorethan46countries.

•  75%withinthetop10countries(MalaysiaBangladeshIndonesiaKuwaitSaudiArabiaBahrainSudanUAEPakistanOman)

•  41%intheGCCregion.•  26%SouthEastAsia•  16%inSouthAsia•  11%inMENAna+ons•  2%Europe

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PresentNumberofScholars

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Shari’ahScholarsAroundtheWorld

Countries NumberMalaysia 203Bangladesh 173Indonesia 131Kuwait 70SaudiArabia 68Sudan 60Bahrain 60UAE 57Pakistan 43Oman 32Qatar 30

HighConcentra5ononFewScholars

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• 10Shari’ahscholarsserveinapproximately497IFIsrepresen+ng76%thetotalIFIswithShari’ahboards.• 3scholarswiththehighestnumberofboardmembershipsserveabout40%ofIFIsglobally.• Thenumberofins+tu+onsincreasesandtheamountofworkincreases.• Thereisdeficiencyofabout1700Shari’ahboardmembers,wherebyitisexpectedthattherequirementforShari’ahscholarswillriseto3000innext5yearsif5%growthisassumedinthenumberofIFIs.• SuccessionPlan–Seriousac+onrequired• PerformanceAssessment(Collec+ve&Individually)

IslamicFinancialProductsandServixes:BetweenAspiraMonandReality

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A study by Beloufi et al (2015) on 40 researchesbetween 1983-2013 found a significant divergencebetweenthetheoryandprac+ceofIslamicfinance.

•  “Iwouldliketotellyou,inallfrankness,thatifIweretostartalloveragain, I would not choose the bank as a framework for theapplica+on of Islamic teachings in the field of economy andinvestment.Iwouldlookforanotherframework,whichisfullyinlinewiththeShari’ahprinciplesregula+nginvestment.Thisisduetothefactthatwehavenotbeensa+sfiedwithtakingonlythenameofthebank but also its basic concept, namely, that it is a financialintermediary. So, we have not been able to find for our financialins+tu+onsaconceptandapadern,whichgoesbeyondtheissueoffinancial intermediary. This has led to the fact that the preferredinvestmentpaiernsof Islamicbankshavebecomeamixofa loanandaninvestment.Itisamix,whichhasmostofthecharacterisMcsofariba-basedloanandtheflawsoftheWesterncapitalistsystem.It fails tohighlightthefeaturesof Islamic investmentbasedonrisk-sharingandreal investment. Itdoesnotrecognizetheguaranteeofthecapitaloritsreturn.”

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SheikhSalehKamel

•  STAGE1:FocusonhowtomigrateMuslimfromprac+cingriba.Thefocuswastofindhalalsolu+onbyreplica+ngcertainfeaturesofconven+onalproductwithsomehiyaltoquicklymigratetheprac+cefromriba.

•  STAGE2:FocusontobegenuinelybasedonShari’ahbyremovingexcessivehiyalintheirprac+ce.

•  STAGE3:ConcernwiththeTAYYIBdimensionofhavinga“goodandresponsiblefinance”.Thepermissibilityofatransac+onwillnotonlydependonthepillarsofavalidcontractbutalsoonthevalues,ethics,outcomeorconsequencesofthetransac+ons.

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StagesofIslamicFinance

IslamicFinanceisMorethanFinancialContract

Tenet-BoundFundamentalstenetsderivedfromShari’ah

Principles-BoundConceptisgroundedonethicsandvaluesProhibiMonofriba,ghararandmaysirGreatertransparency

Real-economyLinkedAsset-backedtransac+onswithinvestmentsinreal,durableassetsMoneyisnotacommodityProhibi+onofexcessiveleverage

Society-ServiceServingcommuni+es,notmarketsSafetynetmechanismsforthepoor

KeyDifferences

Iran SudanandKSA SouthAsia GCCandEurope

SouthEastAsia

Mazhab Syiah SunniMaliki(Sudan)Hanbali(KSA)

SunniHanafi SunniHanbali SunniShafii

ShariahGovernance

Centralised Centralised(Sudan)Self-governed(KSA)

Centralisedandself-governed

Self-governedexceptUAE

Centralised

Shariahcontracts

Equityandleasebased

TawarruqrestrictedforliquidityEquityandSalamandnocreditcardandcashline(Sudan)

TawarruqrestrictedforliquidityMMandIjarahRunningMusharakah

TawarruqwidelyappliedLargeIjarahPropertyfinancing

BayalInahandBayalDaynandTawarruqwidelyappliedSmallEquity

DerivaMves - Notacceptable Forhedgingonlybasedonwa’donly

Forhedgingonlybutbasedonwa’d,wakalah,CM.egIPRSandIjarahRentalSwap

IMFReport2017

•  Islamicbanking(IB)conMnuestogrowrapidly,insizeandcomplexity,posingachallengetosupervisoryauthoriMesandcentralbanks.

•  ProgresshasbeenslowindevelopingIB’sliquiditymanagementandmoneymarkets.

•  hybridfinancialproductsinIBhaveemergedthatreplicateaspectsofconvenMonalfinanceinanIBcontext,raisingfinancialstabilityconcerns.

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PartnershipBasedContracts

•  Mudharabah•  Musharakah•  ThetotalaggregatefinancingofIslamicbankingsysteminMalaysiathroughmusharakahandmudharabahcontributedonly6%ofthetotalaggregatefinancing.

•  Highriskofinvestment;difficultyinselec+ngappropriatepartners;demandcomesfromlowcreditworthinesscustomers;andlackofcapitalsecurity

ExchangebasedContracts

•  Murabahah,BayalIs+sna’,BayalSalam,BayalDayn,BayalSarf,Ijarah,BayalIs+jrar,BayalInahandBayalTawarruq

•  HeavyrelianceonBayalTawarruqamermigra+ngfromBayalInah.

OtherContracts•  1.SecurityContracts:Kafalah(guarantee)andAlrahn(mortgage)

•  2.CharitableContracts:HibahandWadiah(Deposit)

•  3.Suppor+ngContracts:Muqasah,IbraandWa’d

•  Excessiveusageofwa’dintransac+on.

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Critique on Islamic Finance (1)

ObjecMvesofIslamiclaw.•  IslamicinIslamicfinanceshouldrelatetothesocialand

economicendsoffinancialtransacMonsratherthanthecontractmechanicsthroughwhichendsareachieved.

•  TheoreMcally,itisexpectedthattheIslamicbanks,relyingoninterest-freebanking,shallnotbeaffectedbytheinterestrates;however,theIslamicbanksarevisiblyinfluencedbyinterestratesandinfactaremoresensiMvewiththeinterestratesmovement.

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Critique on Islamic Finance (2)

Excessivedebt.•  ThedisproporMonatepercentageofdebt-basedinstrumentsascomparedtoequity-based.

•  AcomparaMvestudyon34IFIsand34convenMonalbanksin16countriesaffirmsthefindingthatnosignificantdifferenceintermsoftheeffectofthefinancialcrisisonthesoundnessofIslamicfinanceandConvenMonalbankingsystem.

•  IslamicbankingindustryisnotenMrelycrisis-proofandfinancialcrisisdoeshaveanimpactontheIslamicbankingperformance.

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Critique on Islamic Finance (3)

MereReplicaMonandIdenMcaltoConvenMonal•  “The‘appliedbusinessmodel’ofIBsisalmostidenMcaltothe

convenMonalinterest-bearingone.Itisneithera‘two-Mermudharabah’norawakalah(agency)butratheraspecially‘engineered’debtmodel.

•  TheframeworkadoptedandproductsarealmostequivalentineconomicandriskcharacterisMcstoconvenMonaldebtinstruments.

•  AlthoughtheIslamicbankshavesuccessfullyreplacedthepracMceofinterestwithothermodeslikeBBAandTawarruq,doubtsregardingtheirpermissibilitysMllpersist.ThisisbecauseIslamicbanksinthosecontractsarenotactuallyinterestedinrealsale,butjusttofacilitatecash;

•  IndevelopingafiqhmuamalatcauMonmustthereforebeexercisedforitisalltooeasy,whencreaMngandthenrelyingonlegalficMon,tofallintothepitofcomplacencyandinadvertentlydevelopingafiqhhiyal.

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Critiques on Islamic Finance

SocialDimension•  LackofcommitmentofIslamicfinance

industrytosupportdevelopmentalagendaandcorporatesocialresponsibility.

•  ‘Thedoctrineofshareholders’value,whichisthebedrockofcapitalisMcmarket,hasbeenshowntobethebasisofIslamicfinancepracMces’.

Critique on Islamic Finance (4)

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Critiques on Islamic Finance

LackofauthenMcity•  OperateswithinNeo-classicaleconomics.•  RatherthanbeingpartoftheIslamicpoliMcal

economy,IslamicfinancehasbeenpursuingpoliciesawayfromthetheoreMcalunderpinningsandsystemicunderstandingofIslamiceconomicsandhaslocatedasurrogatefinancialframeworkinneo-classicaleconomics”.

Critique on Islamic Finance (5)

OverlegalisMc..

•  FromthelegalisMcperspecMve,itisarguedthatinterestisharamforbeingunjustandexploitaMve.Howevertheseconcernsaremerelyrhetorical,asthenewinsMtuMonsinquesMonhavebecometoocozywiththeirownexploitaMveenvironmentaboutwhichtheyaremute.IslamicfinanceisdelinkedfromthebroadergoalsofdevelopmentandpovertyalleviaMon.

•  Islamicfinanceisexperiencinga“formalistdeadlock”wheretheindustryismoreconcernedwithformaladherencetoIslamiclawinsteadofpromoMngIslamicethicalvalues.“ThecurrenttrendreducesIslamanditsShari’ahtotheirlegaldimensionratherthanseeingthemwithinagreatercivilizaMonalframework”

Critique on Islamic Finance (6)

NegaMvepercepMonbythegeneralpublic.•  MuslimConsumerAssociaMonofMalaysia(PPIM)

reportedthattheyhavereceivedmorethan4000reportsfromconsumersbetween2003-2012oftheirdissaMsfacMonwithIFIs.ThePPIMclaimedthattheIFIshaveabusedtheword‘Islam’forthepurposeofprofitmaximizaMonwithouttakingintoconsideraMontheethicalaspectsofdoingbusiness.

•  TherearemanycaseswherethecustomersneedtopaythewholeamountofsellingpricetoIFIseventheconstrucMonprojectwasclearlyabandoned.

Critique on Islamic Finance (7)

Islamic Banks 2015

BIMB RM7,768.02

AIBB RM363,945.67

HSBC Amanah RM135,000.00

Maybank Islamic RM65,000.00

OCBC Al Amin RM2,631.00

HLIB 437,833.89

Alliance Islamic RM245,593.30

CIMB Islamic 0

AmIslamic RM113,600

Shari’ah Non-Compliance Income

ChallengesandRealiMes

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CompeMMveness Equal the conven+onal product inbenefits.

Price Islamicfundingmaycostmore.Benchmarkagainstconven+onal.

Process Processandopera+onslightlylongerandrequireaddi+onaldocument.

Flexibility Interchangeability of Shari’ah conceptsto be at par with the conven+onalproducts.

Non-Compliance To simplify opera+on, some processmaybeomided.E.gexecu+onofblankLederoffer

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Profitability Some charges may not be avail to Islamicproducts e.g commitment fees, lowercompensa+onfee.

MarketDifferences

Differences in Shari’ah concepts in variousmarkets. E.g Bai Al Dayn not acceptable bymanymarketorevenbanksinM’sia.

ProductAwareness

PublicawarenessonIslamicfinanceiss+lllacking.Indifferenceaotude

PosiMveValues

Islamic principles advocates fairness and just.Ideally, genuine defaulters to be givenconcessions,butnotbeingdoneinsomeIFIs.

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ProductRisk Riskinsomeconceptsarehigherthantheconven+onalproduct.E.gMurabahah(riskofnonacceptanceofgoods by customer) Is+sna’ (non-comple+onofprojects).All possible risk to be iden+fied andproperlymi+gated.

LegaldocumentaMon

An extended version of conven+onaldocument. Too much influence on theprevious prac+ce. Market wants simpledocumenta+on

ModifiedConcepts

Investmentproductse.gpureMusharakahcannotbedonewithoutmodifica+on.

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Shari’ahRisk Product development and opera+on requiresShari’ahCommidee’s endorsement and requires indepth study. Conven+onal banking can transact onanything.Non-Shari’ah compliant may lead to “haram”income whichrequiresthebanktoforgotheprofitearned.

BalancingofBusinessandShari’ah

Some business areas are out of bound in Islamicfinance.

People Changesinincep+onofIslamicfinanceknowledgeandvaluesamongststaff.

TechnologicalAdvancement

EfficientdigitalbankingsystemthatcomplywiththeShari’ahprinciples

DifferentRequirementofStandard-SeDngAgencies

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Areas of Standards Key Agency(s) in the International Financial Architecture

Corresponding Agency(s) in Islamic Finance

1. Accounting International Accounting Standards Board (IASB), International Federation of Accountants (IFAC), Committee on Banking Supervision (BCBS)

AAOIFI

2. Anti-Money Laundering / Combating the Financing of Terrorism

Financial Action Task Force (FATF) Common

Auditing International Federation of Accountants (IFAC)

AAOIFI 3. Banking Committee IFSB 4. Corporate Governance OECD, Basel Committee, World Bank AAOIFI and IFSB 5. Data Dissemination IMF Common 6. Fiscal Transparency IMF Common 7. Insolvency and Creditor Rights Systems

World Bank, United Nations Commission on International Trade Law (UNCITRAL), International Bar Association (IBA)

Not yet addressed but especially critical for Islamic financing as it is based on risk sharing

8. Insurance Regulation International Association of Insurance Supervisors (IAIS)

Not yet addressed but within the mandate of IFSB

9. Monetary & Financial Transparency Policies

IMF Common 10. Payments Systems Committee on Payment and Settlements

Systems (CPSS) Common

11. Securities Market Regulation International Organization of Securities Commissions (IOSCO)

Not yet addressed but within the mandate of IFSB

The Way Forward

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TowardsValue-BasedIntermedia+on

•  ParadigmShip•  FromFinancialIntermediariestowardsInvestmentIntermediaries

•  UNSustainableDevelopmentGoals

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Innova+oninIslamicFinance

•  CrowdfundingandEquityCrowdFunding’,‘EquityFinance’,‘BusinessAngelInvestment’,‘InvestorsNewParadigm’,‘RiskSharingFinanceFacility’,“RiskSharingSecuriMes’,dan‘Customer-OwnedBanking’.

•  Eg.Al-WaqfHomeFinancing-ibyBankIslamresultedintheconstruc+onof76residen+aland9commerciallotsona9-acreplotinPenang.Thisproject(RM24mil)wasinpartnershipwithJabatanAgamaIslamPulauPinangandapropertydevelopmentcompany.

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Standardisa+onandHarmonisa+on

•  Forthepurposeofharmonisa+onandconsistency,thestandardseongagenciesandregulatorshaveissuedseveralShari’ahparametersandguidelinestoIFIsasguidanceandreferencetopromoteharmoniza+onandstandardiza+onofIslamicfinanceprac+ces.

•  Thesestandardsputcertainrequirementstoensureeachfinancialtransac+onisgenuineandvalid.

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Concluding Remarks

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•  Therearesomevalidandlegi+mateconcernsonthecurrentprac+cesandtrendsofIslamicfinance.Insimplewords,‘askourheart’,whethertherecentIslamicfinanceprac+ceshavefulfilledtherealhigherobjec+vesofShari’ah.

•  Itisimportanttocri+callyevaluatetheperformanceofIFIsagainsttheirfounda+onalbaseandatthesame+metomaintainitsposi+vedevelopment.

•  Moreimportantly,withthecurrentprac+ces,Islamicfinanceissurelynotimmunefromthecrisis.Asthecrisisisnottheoutcomeofsuddenprac+ces,Islamicfinancemustlearnfromthehistoryandtakelessonfrompreviousfinancialcrisis.

•  WedonotwanttohearthattheonlylessonthatIslamicfinancehaslearnedisthatitneverlearns.

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Ask our Heart