ISFIRE June 2019 Issue by aatazazfaisal

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NOTE FROM THE

EDITOR

IN CHIEF

Nur-Sultan, previously known as Astana, is increasingly becoming an important destination for those involved in professional tourism related to Islamic banking and finance. Hardly a month passes by during which an event of international relevance doesn’t take place in the city. The Astana International Financial Centre (The AIFC) has been holding Astana Finance Week for a couple of years and this year’s Astana Finance Week is taking place in the first week of July. It is befitting the occasion that this issue of ISFIRE is being launched there, with a special focus on The AIFC and its Islamic finance offerings. An exclusive interview of Dr. Kairat Kelimbetov, the AIFC Governor, is included herein to provide updates on The AIFC and its new initiatives and plans for further development of Islamic finance in the country as well as in the wider region. This issue of ISFIRE deals with numerous themes. The Objectives of Shari’a and their relevance to Islamic banking and finance is of paramount relevance to the industry. With the growing adoption of Sustainable Development Goals (SDGs), players in the Islamic finance industry have also started taking the Objectives of Shari’a seriously. A relevant theme is the implicit traps in Shari’a structuring, a topic that has been ably covered by Dr. Ehsanullah Agha. Dr. Inamullah Khan focuses on the issue of juristic differences in Islamic banking and finance. The most important article in this issue, however, is written by Dr. Muhammad Tahir-ul-Qadri who argues that standardisation of juristic opinions is absolutely must for further development of Islamic banking and finance. This issue also focuses on leadership in Islamic banking and finance, with two articles and a survey report on women leadership in the industry. Dr. Rashidah Kamarulzaman talks about different traits the leaders must possess, with me also commenting on it in a separate short note. Professor Humayon Dar’s Pause for Thought is a regular feature, which the reader may enjoy reading. We have also brought back Standardisation of Notation in Islamic Economics, Banking & Finance, with a new Cambridge Note on Sukuk. We take pride in initiating such an immensely important project for pedagogy in Islamic economics and finance. Cambridge Institute of Islamic Finance is the new owner of this project, following an initial period of two years during which ISFIRE founded and developed it. We are also delighted to include Dr. Jamshaid Anwar Chattha, Assistant Secretary General of Islamic Financial Services Board (IFSB), as Personality of the Issue. Dr. Chattha is a dynamic young leader who is playing a pivotal role in developing a comprehensive regulatory framework for Islamic banking and finance. There is a lot more intriguing content as you read further. We have also reviewed a new book that was published just before we sent this issue of ISFIRE. We hope that our readers continue to find the contents of ISFIRE relevant, instructional and thought provoking. Happy Reading!

Dr. Sofiza Azmi Editor-in-Chief

ISSN 2049-1905

An official publication of Cambridge Institute of Islamic Finance

FOUNDER Professor Humayon Dar EDITOR-IN-CHIEF Dr. Sofiza Azmi EDITORIAL ASSOCIATE Tabinda Hussain INTERNATIONAL EDITORIAL BOARD CHAIRMAN Stella Cox DDCAP Professor Mehmet Asutay Durham University Professor Dr. Mehmet Bulut Istanbul Sabahattin Zaim University, Turkey Dato’ Dr. Asyraf Wajdi Dusuki Islamic Finance Expert Professor Joseph Falzon University of Malta Dr. Mian Farooq Haq State Bank of Pakistan Professor Kabir Hassan University of New Orleans Dr. Hylmun Izhar Islamic Development Bank Dr. Rizwan Malik Islamic Finance Expert Moinuddin Malim Alternative International Management Services Dr. Aishath Muneeza INCEIF Dr. Asmadi Mohamed Naim Universiti Utara Malaysia Professor Muhamad Rahimi Osman Universiti Teknologi MARA M. Saleem Ahmed Ranjha Wan Miana Rural Development Programme Dr. Irum Saba Institute of Business Administration, Karachi Dr. Mughees Shaukat College of Banking and Financial Studies, Muscat Dr. Usamah Ahmed Uthman King Fahd University of Petroleum & Minerals ADVERTISEMENTS, COMMERCIAL AND SUBSCRIPTION ENQUIRIES Faisal Mehmood E: fmehmood@cambridge-ifa.net T: +44 (0) 207 078 7297 PUBLISHED BY Cambridge IFA, United Kingdom

On behalf of Cambridge Institute of Islamic Finance www.cambridge-iif.com

T: +44 (0) 207 078 7297 E: info@cambridge-ifa.net W: www.cambridge-ifa.net

TABLE OF

CONTENTS TALKING POINTS 37 HIDDEN TRAPS IN SHARI’A DECISION MAKING DR. EHSANULLAH AGHA 70 CHARACTER BUILDING THROUGH ISLAMIC

BANKING & FINANCE

32 MISUNDERSTANDINGS ABOUT ISLAMIC

BANKING – HOW TO MOVE FROM DEBT-BASED TO PARTICIPATORY MODES OF FINANCE AMJAD BANGASH

ISFIRE REVIEW

26 CORPORATE GOVERNANCE, ETHICS &

COMPLIANCE

HUSSAIN KURESHI 48 LEADERSHIP IN ISLAMIC FINANCE – WHERE DO

WOMEN STAND?

TECHNICAL NOTE 90 STANDARDISATION OF NOTATION IN ISLAMIC

ECONOMICS, BANKING & FINANCE

CAMBRIDGE PROJECT

ISFIRE PERSONALITY

54 DR. JAMSHAID ANWAR CHATTHA ASSISTANT SECRETARY-GENERAL, TECHNICAL AND RESEARCH, ISLAMIC FINANCIAL SERVICES BOARD

BOOK REVIEW

96 FINANCIAL AND ACCOUNTING

PRINCIPLES IN ISLAMIC FINANCE

PAUSE FOR THOUGHT

24 SHARIâ&#x20AC;&#x2122;A GUIDELINES ON MARKETING AND

SELLING

PROF. HUMAYON DAR

PERSPECTIVES 44 MAKING WOMEN EMPOWERMENT A KEY GROWTH

DRIVER OF ISLAMIC FINANCE INDUSTRY

58 JURISTIC DIFFERENCES IN ISLAMIC BANKING AND

FINANCE

DR. INAM ULLAH KHAN

ISFIRE COVER STORY

10 AN EXCLUSIVE INTERVIEW WITH DR. KAIRAT KELIMBETOV GOVERNOR OF THE ASTANA INTERNATIONAL FINANCIAL CENTRE

ISFIRE INSIGHT

62 PERSPECTIVE ON LEADERSHIP STYLE:

TRANSFORMATIONAL, TRANSACTIONAL AND ENTREPRENEURSHIP

DR. RASHIDAH KAMARULZAMAN

74 THE ANATOMY OF LAW DR. RIZWAN RAHMAN

POINT OF VIEW

66 COMMON TRAITS SUCCESSFUL LEADERS IN

ISLAMIC FINANCE HAVE

DR. SOFIZA AZMI 80 STANDARDISATION IN THE ISLAMIC BANKING

AND FINANCIAL SYSTEM

DR. M. TAHIR UL QADRI

This publication is provided for information purposes only and should not be treated as financial, legal or policy advice in relation to Islamic banking and finance in general or to any Islamic financial institution in particular. The reader should not act on the basis of the information contained in this publication without having obtained individual, expert advice. In this respect, publishers, editors, contributors, sponsors and other supporters of the publication do not assume responsibility for any damage resulting from decisions made by the reader on the bases of the information contained herein.

ISFIRE COVER STORY

AN EXCLUSIVE INTERVIEW WITH

DR. KAIRAT KELIMBETOV GOVERNOR OF THE ASTANA INTERNATIONAL FINANCIAL CENTRE

azakhstan is a rising star in the global Islamic financial services industry. His Excellency Nursultan Nazarbayev, First President of Kazakhstan, is one of the few leaders in the OIC countries, who have shown their commitment to providing Islamic banking and finance a level playing field, along with the conventional banking and finance. His efforts have been recognised by Global Islamic Finance Awards (GIFA) in 2014 when he was chosen to be a GIFA Laureate in Dubai. The top GIFA award – the Global Leadership in Islamic Finance Award 2014 was bestowed on him in the presence of Sheikh Mohamed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and the Ruler of Dubai. Dr. Kairat Kelimbetov, the then Governor of the Central Bank of Kazakhstan, played an instrumental role in attaining the top award for the President. The incumbent President of the country, His Excellency Kassym-Jomart Tokayev, has affirmed the continuity of his government’s support for Islamic banking and finance in the country as well as in the wider region. Dr. Kairat Kelimbetov is known for his advocacy for Islamic finance not only in his own country but also globally. His efforts have been recognised by various public, private and social sector organisations, as well as by GIFA Awards. He was the first governor of the Central Bank of Kazakhstan, who in real terms owned what may be termed as “the Islamic finance project” in Kazakhstan. He ensured that Islamic banking and finance was not only well-grounded nationally but was also recognised globally. The Astana International Financial Centre (AIFC) of which he is the founding Governor is now a reality. He started it from scratch and opened its doors in 2018 for the international players to come and domicile their businesses therein. In this exclusive interview with Dr. Kelimbetov, we unfold the story of Astana International Financial Centre, and in the process attempt to know him as a leader in the global Islamic financial services industry.

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ISFIRE: Dr. Kelimbetov, you have a long list of accomplishments, which makes it difficult to start an interview with you. So, we shall pick up the most recent one. The Astana International Financial Centre is now not only open for business but has also started attracting players from around the world. How do you feel about it? Dr. Kairat Kelimbetov: Pleased... But this is only the start. I keep on reminding myself and my team that success is not just an event. It is a process. The success must continue and for this to happen we all must not stop working. There is no room for complacency.

ISFIRE: How did the idea of setting up the AIFC come about? Dr. Kairat Kelimbetov: We are a young country, albeit with a long and rich history. Our First President has been a great source of inspiration for us. All of us in Kazakhstan, including the incumbent President KassymJomart Tokayev, share his vision of making Kazakhstan an abode of excellence for financial services, including Islamic banking and finance. The idea was conceived by the First President and it came under discussion when His Excellency Nursultan Nazarbayev spoke with Sheikh Mohamed Bin Rashid Al Maktoum during the GIFA Awards Ceremony in 2014. Sheikh Mohamed Bin Rashid offered to help Kazakhstan if he wanted to build a similar financial centre. I was then serving as Governor of the Central Bank and I decided to work to convert this idea into reality. I must say that this was not possible without the help of an amazing team I enjoy the support of.

ISFIRE: What is the real value proposition of the AIFC? Dr. Kairat Kelimbetov: We take a very pragmatic approach when it comes to doing business. We have tried to collect best practices from around the world and have modified them to suit our own unique position and to serve our clients in better ways. We wanted to emulate the success of Dubai International Financial Centre and in the process have come up with something that is the best solution for our region. Kazakhstan is a huge country that offers ample opportunities to the financial firms to do business in the region. Nowadays, Kazakhstan is an inalienable part of the New Silk Road. In some sense,

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by promoting the AIFC we are bringing the financial services back to the region, where the industry was blooming centuries ago. The aim of the AIFC is to enhance growth and development of financial services in Kazakhstan and the region by providing services in accordance with the international standards and best practices of the leading financial centres of the world based on the principles of English common law. Governance and trust have become an important agenda for the emerging markets, which is why we adopt the same principles of English Common law, according to which independent regulatory authorities with flexible regulation attractive to businesses, conduct their operations. An independent regulator, Astana Financial Services Authority (AFSA) is one of the central elements in the AIFC model. AFSA’s underlying principles are based on fairness, transparency and efficiency to ensure the integrity of the whole financial industry’s ecosystem. AFSA accommodates the AIFC’s efforts to continuously adapt to the evolving global financial world by introducing innovative new regulations that cater to market trends and industry needs. The AIFC Court has exclusive jurisdiction over disputes arising out of the activities and operations of the AIFC and jurisdiction in the case of other disputes in which all parties agree in writing to give the Court jurisdiction. To earn global community’s confidence in

the AIFC, we have invited the most trusted, influential and well-recognised judges to come on board. This shows our commitment to the rule of law, transparency and accountability. International Arbitration Centre has its own panel of outstanding international arbitrators and mediators who are familiar to international businesses for being greatly experienced, impartial, and of the highest integrity. It offers parties maximum choice and flexibility in choosing the rules and procedures they wish to use for the resolution of their disputes and offers arbitration, mediation, and other types of alternative dispute resolution services at the choice of the parties. We are also proud to partner with the world’s largest stock exchanges, Nasdaq and Shanghai Stock Exchange, who have also become the shareholders of the Astana International Exchange (AIX). Last year, Goldman Sachs became a shareholder of the AIX. Prior to that the Silk Road Fund became our strategic partner as well. The role of the AIX is to enable domestic and regional development, through the mobilisation of domestic resources and foreign portfolio flows.

On the contrary, we take a cooperative approach by welcoming financial firms based in New York, London, Dubai and Kuala Lumpur to also have cost-effective presence in Nur-Sultan.

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The AIX is also missioned to host the large scaled privatisation program of the countryâ&#x20AC;&#x2122;s major national companies and the first IPOs have already taken place. We have introduced a number of incentives to businesses so that it makes sense for them to conduct their business through the AIFC. For example, all registered businesses will enjoy a tax holiday for 50 years. So, any firm registering at the AIFC will enjoy tax benefits till 2066. Besides, our Financial Centre, being a separate legal jurisdiction, enjoys a simplified labour and company registration process. Through our singlewindow system, the new businesses do not have to go through various government offices and departments, but rather, we have ensured that all the services are offered under one single roof. Establishment of the AIFC Expat Centre provides a one-stop-shop for visa issuance, registration and work permits. It also provides favourable entry and stay conditions for foreign guests. In this regard, I am truly grateful to our First President and the incumbent President of Kazakhstan who have supported us in all our endeavour to make AIFC as a business-friendly regime.

We have introduced a regulatory sandbox to ensure that technological advancements and innovations are encouraged rather than hindered at the AIFC. ISFIRE: Thank you Excellency, could you elaborate on why one would prefer the AIFC over other competing financial centres? Dr. Kairat Kelimbetov: There are numerous reasons for financial firms to choose the AIFC. Number one, Kazakhstan as a country offers huge opportunities, not only within the country itself but also in the region. We are the largest economy in the Central Asia, both in absolute terms and in per capita income. Domiciling a business here offers easy regional access. Number two, we are the only financial hub of its kind in the region, as no other country in the Central Asia have even embarked upon such an approach. So, we shall always remain ahead of the game. The AIFC will continue to benefit from the first-mover advantage. Number three, we are not here to compete with other financial centres. Rather, we take a complimentary approach. We shall never attempt to compete with, for

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example, DIFC. On the contrary, we take a cooperative approach by welcoming financial firms based in New York, London, Dubai and Kuala Lumpur to also have cost-effective presence in Nur-Sultan. It is a winwin situation when we take a complimentary view on our competitors. Our approach has already won us accolade on a global level. Global Islamic Finance Awards, for example, recognised our efforts by way of presenting us three prestigious awards at its last annual awards ceremony held in Sarajevo, BosniaHerzegovina.

ISFIRE: You have already pre-empted our next question. Please feed us with your success at Global Islamic Finance Awards (GIFA). Dr. Kairat Kelimbetov: I must emphasise that the AIFC is not just about Islamic finance but rather we are a financial centre focusing on all aspects of financial business. Islamic finance, nevertheless, attracts our special attention. Back in 2016, I received GIFA Excellence Award at Jakarta in the presence of President Joko Widodo of Indonesia. This award necessarily recognised the excellent approach we had adopted to develop a state-of-the-art financial centre in the Central Asian region. Last year, the AIFC was chosen to receive Islamic Finance Advocacy Award (Institutional). It was a proud moment for me to receive this recognition in the presence of His Excellency Bakir Izzatbegovic, President of Bosnia-Herzegovina, and His Excellency Ismail Omar Guelleh, President of Djibouti. I am also happy that our Head of Islamic Finance, Alibek Nurbekov, was honoured as the Upcoming Personality in Islamic Finance. It is so good to have some of the ablest people in the field working for you! In September 2017, we were the proud hosts of GIFA in Nur-Sultan where our First President was the Chief Guest. This was a special occasion for us as the top leaders in Islamic banking and finance from around the world visited the country. His Excellency Omer Ismail Guelleh, President of Djibouti, was bestowed upon the top award â&#x20AC;&#x201C; Global Leadership in Islamic Finance Award 2017. His Excellency Nursultan Nazarbayev presented the award. In 2018, we participated in GIFA Awards Ceremony held in Bosnia-Herzegovina and received three prestigious awards.

ISFIRE: FinTech is in vogue, with hardly any conference, seminar or any professional gathering missing out a discussion, debate or reference to it. At the AIFC, how have you managed to keep yourselves on the forefront of FinTech? Dr. Kairat Kelimbetov: We are very open to developing

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“Kazakhstan is an attractive platform for the development of Islamic finance in the region. The AIFC plans to become a regional Islamic finance hub for the countries of Central Asia and the CIS by providing special infrastructure, legal and tax regime, as well as opportunities for professional development. Working closely with the Asian Development Bank (ADB) the AIFC created a favorable legal and regulatory environment on Islamic finance and banking, takaful and Islamic capital market. For the further development of Islamic finance legislation, representatives of the AIFC joined the Technical Committee of the Islamic Financial Services Board (IFSB), as well as working groups on the development of IFSB standards. With the technical assistance of the Islamic Bank, the AIFC is working on a Master Plan (Roadmap) of the development of Islamic finance in Kazakhstan. To promote the AIFC as a regional hub of Islamic finance, the AIFC Advisory Council on Islamic Finance and the AIFC Central Shari’ah Advisory Board with the best international experts in the field of Islamic finance have been established. Currently, the AIFC is forming a full-fledged market for Islamic finance. The AIFC has created the conditions for Islamic securities to be issued on the AIX: the issuance of corporate and sovereign Islamic securities (sukuk) are planned. The AIFC registered the first companies operating in the field of Islamic finance, including Islamic bank, Waqf fund, investment fund, Islamic fintech organisations, as well as legal and consulting companies.”

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a conducive regulatory framework for technology firms in banking and finance. In this respect, we have introduced a regulatory sandbox to ensure that technological advancements and innovations are encouraged rather than hindered at the AIFC. Moreover, we have established the AIFC Fintech Hub, which supports Fintech start-ups in the areas of incubation and acceleration programmes, workshops and seminars, informal meetings for the Fintech community, training and Fintech courses on advanced techniques, consulting and mentoring, assistance in presenting the project to foreign partners, participation of Kazakhstani start-ups in international conferences and exhibitions. An important area of work will also be to attract successful foreign Fintech start-ups to the region and help in building partnerships with the local financial ecosystem.

ISFIRE: As an emerging financial centre, what kind of challenges you face internally and externally? Dr. Kairat Kelimbetov: I don’t think it is appropriate to talk about the challenges once you have successfully gone through them. We had our fair share of challenges that kept us busy in the last three years or so. More importantly, we are fortunate to have a very understanding government that has gone an extra mile to accommodate the AIFC in its existing regime in such a way that our businesses are governed in accordance with the best international practices and the English Common law. I would, however, like to mention one challenge, i.e., convincing the international financial community that not only are we here but we are here to stay. This required us engaging with the players from around the world – bringing them to Nur-Sultan and visiting them all over the world. This is something that will continue for some time in future. The good news is that now we have a large number of governments, private sector organisations, regulators and other stakeholders who have started believing in the value proposition. Today, around 200 financial and ancillary services companies have been registered with the AIFC. The presence of financial institutions plays a positive role in attracting investments to the country: Kazakhstan is ranked 5th in terms of attractiveness for Islamic investments amongst 57 OIC member countries.

ISFIRE: Attracting 200 companies in a short span of time is a huge achievement. Congratulations! For the benefit of our readers can you please elaborate

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on what have been done in terms of development of Islamic finance and what other areas of the financial market the AIFC aims to develop? Dr. Kairat Kelimbetov: The aim of the AIFC is to support sustainable economic growth and foster the development of financial services in the region. We focus on enhancing growth, carrying out main strategic pillars such as capital markets, asset management, private banking, financial technology, green finance, and we pay a great deal of attention to Islamic finance. Islamic finance has a huge potential for development in the region. Since the potential market for Shari’acompliant services in the Eurasian region is affected not only by large underserved Muslim populations (exceeding 80 million people and projected to grow up to 100 million people by 2030) but also a direct link between Islamic finance and real economy. Assetbacked financing and risk-sharing feature of Islamic finance could provide support for small and medium– sized enterprises (SME), as well as investment in public infrastructure. Given the prohibition of speculation and uncertainty, Islamic financial institutions enhance financial stability and provide sustainable economic growth. With that in mind, we have worked closely with the Asian Development Bank to create a favourable legal and regulatory environment on Islamic finance and banking, takaful and Islamic capital market. We have created conditions for Islamic securities to be issued on the AIX and the first sukuk issuances are in the pipeline. Up to date, AIFC has created a legal framework for the Islamic financial industry in accordance with the best Islamic finance practices and principles. We are further developing the Islamic finance ecosystem and currently in the framework of the IsDB Technical Assistance Grant we are developing Kazakhstan’s Islamic Finance Master Plan. Besides, our close cooperation with the IsDB Group is supported by the AIFC’s role as the IsDB Governor office for Kazakhstan, as I am the official representative of Kazakhstan in the Board of Governors of the IsDB Group, which allows us to effectively coordinate the IsDB projects in Kazakhstan. In addition, President of the IsDB Group Dr. Bandar Hajjar is the member of the AIFC Management Council. To promote the AIFC as a regional hub for Islamic finance, we have established the AIFC Advisory Council on Islamic Finance. The Council includes top-notch and highly reputable international experts with a great expertise and vast experience in the field of Islamic finance. We have also launched the AIFC Central

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Shariah Advisory Board which consists of renown Shari’a scholars and who will further enhance the credibility of the industry. For the further development of Islamic finance legislation, representatives of the AIFC joined the Technical Committee of the Islamic Financial Services Board (IFSB), as well as working groups on the development of IFSB standards. As a result, the initiatives undertaken by the AIFC in the promotion and development of Islamic finance have improved the ranking of Kazakhstan from the 31st in 2017 to the 24th in 2018 according to the Global Islamic Finance Report’s (GIFR 2018) Islamic Finance Country Index. I am proud to say that Kazakhstan holds the leading position in the Islamic Finance sector according to Thomson Reuters and Dinar Standard’s the Global Islamic Economy Indicator among the nine post-Soviet countries. We are pleased with the developments so far, and we are looking into the future with an optimism.

ISFIRE: If we may quote Forbes Magazine, it states: “[AIFC] has everything. It wants to be everything.” Don’t you think that it is a bit too ambitious? Dr. Kairat Kelimbetov: Ambition breeds progress. I don’t think we are overly ambitious though. Having said that, the statement by Forbes Magazine dramatises our situation. We have never claimed to have everything, and we don’t want to be everything. As I said earlier, we focus on six areas, i.e., Capital Markets, Asset Management, FinTech, Islamic Finance, Private Banking and Green Finance. It is also true that this is something we have never tried in Kazakhstan before. We were encouraged by the success of similar financial centres in the world, and we believe that we can do it best in our own region. As the strongest economy in the region, we are all out to build a global city in the form of Nur-Sultan. The AIFC will feature prominently in this success story.

the beginning we decided to invest in our people. The investment is paying off, as my staff is respected for their professionalism and commitment to work. This is part of our plan to develop a new breed of young and energetic professionals in banking and finance. For the purposes of developing human capital and forming pool of professionals in different aspects of financial market, we have established the Bureau for Continuing Professional Development. The Bureau has selected top programmes from international certification and education institutions and organises trainings for local community and professionals. We also collaborate with top institutions specialising in Islamic finance trainings such as Bahrain Institute of Banking and Finance (BIBF), Chartered Institute for Securities and Investments (CISI), Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), General Council for Islamic Banks and Financial Institutions (CIBAFI), Cambridge Institute of Islamic Finance (CIIF), Finance Accreditation Agency (FAA), Islamic Research and Training Institute (IRTI), and International Centre for Education in Islamic Finance (INCEIF).

ISFIRE: Any message for the professionals in Islamic banking and finance? Dr. Kairat Kelimbetov: Islamic finance provides additional sources of financing, investment portfolio diversification, enhances financial inclusion and fosters innovative and entrepreneurial spirit in financial services industry. During the recent global financial crisis, Islamic banks showed greater resilience and stability compared to conventional banks due to the nature of Shari’a principles applied by Islamic banks. In this regard, Islamic banking and finance industry is becoming one of the essential elements of the global financial architecture. I would like to advise the professionals in the field to remain committed to the cause of Islamic banking and finance. This is certainly going to pay dividends to your investment in the profession.

ISFIRE: One thing that impresses everyone is the quality of your team and their dedication to the work. How have you managed to develop such a wonderful team? Dr. Kairat Kelimbetov: Kazakhstan is blessed with high-quality human resources. There is a world-class Nazarbayev University in Nur-Sultan. Also, right from

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HUMAN CAPITAL DEVELOPMENT IN ISLAMIC FINANCE THE SUCCESS STORY OF KAZAKHSTAN

The Bureau for Continuing Professional Development has initiated development of the best certification programmes in Kazakhstan with the purpose of forming a pool of professionals in the sphere of Islamic Finance starting from 2017. The Bureau has selected top programmes from international certification and education institutions and organised trainings for local community and professionals. Currently, the Bureau has the following certification programmes in the pool:

Bahrain Institute of Banking & Finance (BIBF, Bahrain) • •

Advanced Diploma in Islamic Finance (ADIF) Islamic Banking & Finance Certification (IBFC)

Chartered Institutes for Securities & Investments (CISI, Great Britain) •

Islamic Finance Qualification (IFQ) – б азовый уровень.

Chartered Institutes for Securities & Investments (CISI, Great Britain) •

Professional Certificate in Islamic Finance (PCIF)

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI, Bahrain). •

Certified Islamic Professional Accountant (CIPA)

The Bureau had also organised Train the Trainer Programs to develop trainers in Islamic Finance Certification for further development of educational programmes in this direction. They are:

•

Train the Trainer Program Certified Training Professional by Finance Accreditation Agency (FAA, Malaysia) in June 2017, 9 trainers have been accredited

•

Train the Trainer Program INCEIF – Professional Certificate in Islamic Finance

Mr. Nurlan Kussainov, CEO of the AIFC Authority receiving the “Human Capital Development Award” at the GIFA 2018 on behalf of the AIFC Bureau for Continuing Professional Development.

BCPD is the exam centre for all above mentioned certifications There are 60 retrained people in BIBF IBFC and CISI IFQ, 5 certified in CISI IFQ to date. The total number of retrained people in BCPD Islamic Finance programmes is more than 100. Conditional grants are issued in BIBF IBFC, CISI, PCIF (INCEIF), CIPA (AAOIFI) to stimulate professional development of financial sector specialists and universities’ teaching staff. Islamic Finance Week – platform for discussions of Islamic Finance industry and education issues - is conducted annually in October. BCPD is developing its presence is academia by opening joint centres in universities and redesigning academic programmes. Thus, Islamic Finance courses within academic programme in Finance are

launched in M. Narikbayev KazGUU University with BCPD trainers, and tri-lateral MoU and joint Islamic Finance Centre is launched in Al-Farabi KazNU in cooperation with Hamad bin Khalifa University (Doha, Qatar). BCPD had conducted numerous Islamic Finance programmes info sessions in universities in Almaty and Nur-Sultan with the purpose of raising awareness in Islamic Finance education and certification issues. Society of Islamic Finance Professionals had been registered in 2018 for the development of Islamic Finance community. It is a nonprofit organisation, which is aimed to develop expertise and initiatives of local Islamic Finance professionals.

Mr. Alibek Nurbekov, Head of the AIFC Islamic Finance & Business Hub receiving the “Upcoming Personality in Islamic Finance for Policy Development Award” at the GIFA Awards 2018.

Ms. Madina Tukulova, Senior Manager of the AIFC Islamic Finance & Business Hub receiving the “Top 50 Most Influential Women in Islamic Business and Finance Award” at the WOMANi 2019.

The Astana International Financial Centre (AIFC) is the farsighted initiative of the First President of Kazakhstan H.E. Nursultan Nazarbayev. The Constitutional Law on the AIFC was signed on 7 December 2015 by the President of Kazakhstan. The aim of the AIFC is to support economic growth and foster the development of financial services in Kazakhstan and the region by enhancing human capital development, providing services in accordance with international standards and the best practices of the leading financial centres and establishing Nur-Sultan as the financial & logistics hub of the vast Eurasian region. The AIFC is a modern financial hub for the countries of Central Asia, Eurasian Economic Union, Caucasus, Western China and Mongolia. Following an ambitious goal of becoming one of the top 10 financial

centres in Asia and one of the top 30 financial centres of the world in the long-run, the AIFC focuses on development of the following core pillars: Islamic finance, capital markets, asset management, private banking, financial technology and green finance. Islamic finance is one of the core strategic pillars of the AIFC with special legal and regulatory framework based on the English Common Law and the Islamic finance principles. The AIFC aims to develop Islamic finance in Kazakhstan and CIS region to serve as the Islamic finance gateway and the Islamic finance Hub of the region. The key features of the AIFC is an attractive business environment and the presence of the Astana Financial Services Authority (regulatory body), the AIFC Court,

the International Arbitration Centre and the Astana International Exchange (AIX). The independent AIFC bodies, the AIFC legal and regulatory regime ensure fairness, justice and greatly enhance the credibility of Kazakhstan in the eyes of foreign investors community. The AIFC fulfils the development of all its pillars through the following benefits such as tax exemption for 50 years (corporate income tax, personal income tax, land tax, property tax); simplified currency, visa and labour regimes for participants and employees of the AIFC; modern offices at the premises of the international exhibition Expo 2017; as well as connectivity of Nur-Sultan with the key financial centres around the world via direct flights and open sky policy.

PAUSE FOR THOUGHT

pa se

THOUGHT PROF. HUMAYON DAR

SHARI’A GUIDELINES ON MARKETING AND SELLING

hile gharar has received a lot of attention in Islamic banking and finance, a related concept, ighra, is not so commonly known and understood in the industry. Other Shari’a rules like la tabi’a ma laisa ‘indak/ ladaik (prohibition of sale of something not owned/ possessed by the seller) are also adequately known and fairly understood. Ighra means luring, attracting or enticing usually with deception, but not necessarily always in a negative way. The word is used both in a negative and positive sense in the Arabic language, like libis mughri (enticing dress) and ratib mughri (attractive salary). In fiqhi (Islamic juristic) context, however, it is usually used in a negative context, implying enticing wrongly by attracting someone to a dangerous activity or an outcome. For example, by making a path in a jungle attractive to allure travellers to a place where they could be robbed. In this context, ighra is certainly not allowed.

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PAU S E F O R T H O U G H T

While Shari’a scrutiny takes place at each and every stage of product development, the advice offered by Shari’a scholars is taken lightly when it comes to marketing and sale of Islamic financial products. This is by no means to suggest that Shari’a guidelines on marketing and selling are relaxed or abused. In general, Islamic financial institutions are very sensitive to the cultural requirements and ensure that their advertisements or other marketing collateral do not lead to raising of eyebrows or explicit criticism.

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Most of advertisements by Islamic banks and financial institutions do not fall under the definition of ighra as they do not lead people to any negative outcome, and they are not based on any deception. Some people, however, raised the question if it is acceptable to advertise prizes attached with some of the Islamic financial products, e.g., investment accounts and other products like National Bonds in the UAE.

in the form of cash back or loyalty points is acceptable in case of Islamic investment accounts and most of the assets-side products, it is strictly prohibited to offer such incentives in case of current accounts.

The promise of prizes leads the promisor to give certain prizes to those who qualify to receive it. As such it is not based on any false presumption as the prizes are given in all circumstances to those who win it. This is a view taken by the contemporary Shari’a scholars who have allowed promising and giving prizes by way of draws (e.g., National Bonds in Dubai, and numerous Islamic saving products with prizes attached).

• • •

Each and every Islamic financial/business contract has its own idiosyncratic requirements, and it is important for the sale and other staff to be aware of these so that they do not inadvertently breach them and expose their institution to what is known as Shari’a risk. For example, while attracting new customers by way of offering them some incentives

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There are three aspects about which no meddling is acceptable when marketing, trying to sell, or advertising Islamic financial products: Price Object of sale Delivery

Fortunately, these are regulatory requirements as well in almost all the jurisdictions in which Islamic banks and financial institutions operate. Hence, any miscommunication will be deemed mis-selling and hence subject to apprehension and reprimand by the regulators and other authorities. This has been the primary reason for lack of explicit Shari’a guidelines on marketing and selling. However, it is important for Islamic financial services industry to start developing such guidelines for the sake of completeness of the regulatory framework for Islamic banking and finance.

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CORPORATE

GOVERNANCE ETHICS & COMPLIANCE HUSSAIN KURESHI

orporate governance, ethics and compliance are three topics of huge importance on their own. This short article treats these topics separately first to discuss how they are interrelated. References are also made to Islamic banking. Modern corporations, typically listed companies brought to the world a phenomenon of a â&#x20AC;&#x153;divorceâ&#x20AC;? between ownership and control. Although a divorce sounds rather unpleasant, in this context this separation is in fact a requirement for the smooth functioning of a complex organisation. Companies go public in two ways, either government owned entities are privatised, and investors with surplus capital invest in the entity to become owners. Or, an entrepreneur may take a company through various layers of investments, own sources, angel investors, venture capitalists, and private investments from other large companies, to an IPO. In either case one or more entities may end up holding a large percentage of the shareholding. In the latter case, often the founding owner of the company may retain a dominant shareholding.

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Shareholders enjoy the right to cast a vote, one share and one vote, in nominating directors who subsequently hire a chief executive officer (CEO) to run the company. Companies, or individuals, that own a large share of the rights issue, can nominate a director on the board of directors (BOD), whose role is to protect the investments of the shareholders. In various jurisdictions a shareholding of 5% may allow the right to nominate a director, in others the percentage may be higher or lower. Thus, in this manner, shareholders, that are owners of a company, nominate members to a BOD. The BOD provides direction to a company, and hires a CEO that acts upon the direction provided by the BOD. A conflict of interest may arise, where a director may make recommendations that are in the interest of those shareholders that nominated the particular director. However, a director has a fiduciary duty to act in the interests of the company at large and not the shareholders that nominated him. Companies have executive directors (EDs) that

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play an active role in the functioning of a company, non-executive directors (NEDs) that make up part of BOD but do not have any ancillary role in the functioning of the company, and independent directors. Of late, independent directors have been gaining importance, as they function more as the “moral voice” of a company. Independent directors are nominated by the BOD (which is a bit of a contradiction), and they may be involved in the audit committee, the remuneration committee, and their job is to ensure that the company is following the rules of industry and the government – basically to ensure that the company is playing by the rules. They report to the chairman of the BOD, who along with directors is answerable to shareholders. In the case of financial intermediation, and especially banking, many critics have commented that depositors, being the major capital providers should also enjoy representation on the BOD. This means that customers, especially those that place a considerable amount of funds with a bank should

environments, it may well be difficult to place the blame on any individual in the case of wrongdoing. Various scandals have hit the banking industry over the past few years since the sub prime mortgage crises. The LIBOR rigging scandal haunted the career aspirations of Bob Diamond, the American CEO of Barclays. With all the court hearings, and legal investigations involved, one of the major problems was finding someone to pin the blame on. According to Bob Diamond, the blame could have been shared even with the Bank of England right down to those individuals that misreported the rates at which they were borrowing money from the interbank market. Silos are another management structure introduced to the banking industry, which divides up roles in such a manner that no one individual may have the complete visibility over a product, from how the product behaves on the balance sheet to how it is sold to customers. This structure is another mechanism that shields the bank from taking responsibility for any wrongdoing and

Different countries adopt various corporate governance structures, certain companies, have two boards, others rely on just one, but the main purpose of the board is to protect the interests of the company and its shareholders. have the right to nominate someone on the BOD who can protect their interests and keep them informed of the bank’s operations and internal functioning. In the context of Islamic banking and finance, the Islamic Financial Services Act 2014 in Malaysia recommends appointment and nomination of an independent director to ensure segregation of mudaraba funds placed in an Islamic bank. Another issue for Islamic banks is the role of Shari’a committee. Certain commentators feel that an Islamic bank’s Shari’a advisor should have the status of an independent director, thus allowing oversight of all functions of a bank beyond just product development.

allowing accountability to dilute within different departments of banks. However, ultimately, the BOD is the thinking mind of the legal entity known as a company and bears the responsibility for the actions of the management. This accountability is not limited to shareholders but regulators as well as customers and other stakeholders. We conclude this discussion by adding one final

Modern corporate governance structures however have revealed a fundamental fault related with responsibility and accountability. Under pressure from shareholders to generate profits, directors may pass the pressure on to management to missell products, not fully disclose losses, or engage in activities, which would not be in line with the culture of the company or even the law. In such

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point: companies enjoy legal and economic existence. Companies too become shareholders in other companies and nominate a director on the BOD of another entity. In fact this allows shareholders to leverage their influence over other companies. For instance, XYZ family has 51% shareholding in Company A and nominates 50% of the directors and thus have control over the management of the company. Company A, buys 5% shareholding in Company B. This allows, Company A to place a director in Company B. XYZ family with 51% shareholding in Company A, now also enjoys some control over Company B. Different countries adopt various corporate governance structures, certain companies, have two boards, others rely on just one, but the main purpose of the board is to protect the interests of the company and its shareholders. Ethics is a subject that is as distant from the world of financial services as the sun from the earth. The Global Financial Crises (GFC) – which is now

agencies to financial products backed by these mortgages, the deliberate oversight by regulators, the LIBOR rigging scandal which involved Barclays, or the many other scandals involving compliance fraud, and opening accounts of sanctioned individuals, financial institutions have revealed over the past 10 years a complete lack of integrity and credibility. Banks, at one time, enjoyed the credibility of churches in the developed world; bankers were trusted. Ratings agencies enjoyed the credibility of priests and investors trusted the products rolled out by financial institutions in the manner that crowds trusted a sermon. What is amazing is that in the post-GFC world, the financial universe is still dominated by the same institutions that were part and parcel of the crises. Banks like Citibank, Goldman Sachs, HSBC, Barclays, UBS, Merrill Lynch, and others that defrauded the public, still enjoy the credibility of the public. Citizen’s money that is channelled through forced savings plans, pension funds, is still being invested in the very same mortgage backed securities, which now have a new name, “bespoke tranche opportunity”.

Banks, at one time, enjoyed the credibility of churches in the developed world; bankers were trusted. Ratings agencies enjoyed the credibility of priests and investors trusted the products rolled out by financial institutions in the manner that crowds trusted a sermon. being called the Great American Recession – revealed the lack of ethics in the financial services industry in the world’s largest markets. Whether it was the fraudulent mortgage activities of real estate brokers, casual ratings offered by the ratings

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The financial system of the developed countries is so heavily leveraged that the key players know the markets cannot be called. For instance, gold futures contracts are being traded on the London Metal Exchange, in notional values, which far

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exceed the actual values of gold available for investment or other uses. In this universe of paper assets, intelligent people realise that this allows them room to sell financial products that have opaque pay-outs, vague regulatory environments, and a chance to speculate in such a manner that the upside is rewarded with bonuses and the downside is rewarded by a bailout. In 2004 the financial markets were primed for ethics breaches. Ethics violations occur in environments of severe information asymmetry. Products like MBS, CDOs, CDO^2 and ABS etc. created this information asymmetry not only because no one knew what quality of mortgages backed the bonds issued against them. No one even bothered to check. If the ratings agencies said they were AAA grade, then they must be AAA. Any one with an ounce of common sense would wonder again and again, how $11 trillion of mortgages could all have ratings between A and C. It is as if everyone in the US was a doctor or a nurse with secure lifetime earnings. However, what the financial crises exposed in the global financial system was a complete lack of ethics and a sense of responsibility not only exhibited by those who sold such products, those who rated them, regulated them and those who callously bought these products with their customers’ money. The saddest thing however is that while key players in the Islamic finance space claimed to offer an alternative to the leveraged, debt based model offered by conventional finance, issuers of sukuk went running to the same investment banks involved in the scandals for running their books, finding investors for their somewhat opaque instruments, and to the very same companies to rate these issues. Asset backed sukuk and asset based sukuk create an environment of uncertainty that definitely speaks loudly of information asymmetry, and lack of certainty when it comes to rights of investors in the event of default. Nevertheless, a system of credit, which is what the modern financial system is based upon, demands and requires, above all, credibility. It seems that financial institutions that built up customer confidence over the years, took advantage of this trust to sell the same clients junk, in no polite terms. Ethical finance seems like an oxymoron in todays day and age, and it seems that the emergence of FinTech companies may be the signs of people looking for alternatives to keeping money in the banks. Many industry observers have started proposing an ethics filter in the process of Shari’a screening, which is also lacking in sufficient moral fibre. A company is like a citizen, and like a citizen can act ethically or unethically. Companies may violate labour laws, hire underage labourers, violate rules of safety and security (especially mining companies), expose workers to unsafe working environments

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(Samsung asbestos scandal), and so on. Although much of the internal information of the working of a company is unknown to investors, ethical investors should make extra efforts to know more about the companies they invest in. Nevertheless, an ethical fabric is required to keep any complex society to function. A lack of ethics in transactions enhances counter-party risk and performance risk, which cannot always be priced into a product. Credit risk is based upon the willingness and ability of a counter party to pay. Although the ability to pay back can be calibrated and the risks associated can be priced, but willingness to repay or perform cannot be priced accurately. Financial institutions play an integral role in modern society, they can help organisations and individuals raise money and to hide it. Money earned through illegitimate means needs legitimate channels to hide its trace. As bankers often attend trainings in anti-money laundering, anti-terrorism financing, due diligence workshops, rating of clients and the like. This subject may here be discussed from the perspective of industry practice and concerns. In an ethical world, most citizens would earn their wealth through legitimate means, pay the required taxes on earnings and so on. In the real world this is not entirely the case. Individuals and corporations attempt to conceal legitimate earnings from regulators to save on taxes, or earn money through illegitimate means, which needs to be “laundered” into the fabric of the financial system. For instance, a drug peddler amasses a great fortune from illegal activity – cash that cannot be kept at home. Often a drug dealer would have earnings incommensurate with the earnings linked to his or her levels of skill or existing legitimate commercial activity. Were such an individual wish to open a bank account, a good officer while conducting due diligence would identify the gaps in the drug dealer’s expected balances and reported earnings. The drug dealer would conceal his or her source of funds but would want to possibly utilise these funds through legitimate channels. Layering is a technique adopted by such individuals where illegitimate earnings are shown instead as legitimate earnings of a cash intensive business such as a restaurant or retail outlet. In this manner illegal funds find their way into the legal world. It is a bank’s role to curb such behaviour and act as a deterrent to corrupt practices. Sadly, banks have not played such a role and as recent scandals have shown have facilitated the process of helping high net worth individuals conceal their wealth from the government and thus caused severe social cost to societies. In other instances, individuals with limited earnings, but in roles of immense influence in governments have also used banks to place moneys earned from kick backs, bribes, and so on. Often politicians are

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classified as politically exposed persons and thus rated high risk when establishing bank accounts for instance. Bank due diligence forms require clients to reveal not just their wealth but their source of wealth and their specific financial behaviour as well. Thus, if a high school teacher with no other documented source of wealth opens a bank account with say a $1,000,000, red flags should pop up. Or, if a restaurant with monthly deposits of just $20,000 begins to deposit $45,000 in cash and alters their financial behaviour, a relationship manager would and should be concerned. In most cases, clients fill out diligence forms that actually enter how many deposits and withdrawals they intend to make in their accounts every month. The source of funds for these accounts had to be disclosed as the purpose of utilising those funds along with (at times) a description of whom the funds are received from and whom they are paid to. A conscientious bank would monitor the flow of funds from its branches for instance. Once a customer’s financial profile is fed into a banks software, any deviation from expected financial behaviour is picked up by the system and

transactions that break from the norm pop up on the screens of the bank’s compliance officers. Compliance officers then in turn seek documented explanations from the relationship managers for the behaviour. Often an account relationship manager would have to then speak to a client to seek justification and at times documentary evidence to support any suspicious transaction. Compliance from this perspective thus helps curb channelling ill-gotten money into the banking system. Know your customer (KYC) and due diligence are important components of compliance roles. Shari’a compliance is another issue altogether. Critics of Shari’a compliant financial products feel that these products are Shari’a compliant in form only and not in substance. This criticism is valid but needs to be taken with a pinch of salt. Islamic banking was engineered with the purpose of replicating conventional financial products albeit without the element of interest based lending. Liability products based upon wadi’a (safekeeping) and wakala (agency), certainly fulfil the criteria of Shari’a compliant products. The concept of mudaraba has not been fully embraced by customers as a pass through liability product. Products based upon commodity murabaha certainly do not reflect any consistency in substance or form but are accepted in certain jurisdictions. Asset based products based on ujr, ijara, murabaha and diminishing musharaka incorporate within them the same debt based approach found in conventional banks but do not breach any Islamic principles. Products based upon wakala, such as letters of credit, and kafala and letters of guarantee, whereas export financing which are based upon bai’ al-dayn are still controversial. Shari’a audit teams are busy ensuring that financial products are designed, sold and processed in a manner that adheres to the law. However, they are more focused upon form rather than substance.

CONCLUSION:

Corporate governance, ethics and compliance are interrelated concepts. For a company to exist as a moral and conscientious corporate it is essential that they be managed with responsibility, with ethical business practices and in compliance with the rules and regulations of the industry. However, business managers with a short-term approach feel that these very same principles are deterrents to short term profits. Certainly the behaviour of certain financial institutions over the past 10 years reveals a lack of regard for guidelines laid out by rules of corporate governance, ethics and compliance. It is also evident that a breach of

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these guidelines creates private benefit at social cost and thus breaches need to be adequately addressed. Corporate profits cannot come at the expense of mis-selling products, violating industry rules, exploitation of natural resources, lack of concern for the environment, lack of concern for labour laws and so on. Thus, a moral sense, developed by a core body of ethics is necessary to keep companies in line. These ethics may well be developed by a worldview offered by a religion, be it Islam, Christianity or any other faith, or by a secular set of laws defined to create social systems that benefit humankind as a whole. Modern corporations enjoy financial power, political influence, influence over natural resources of nations in a manner unprecedented in human history. Many have balance sheets larger than the GDP of countries they do business in, employ workers in, and buy resources from. This creates ample opportunities for moral hazard. A coal company buying coal from a small nation like Mongolia for instance can exert considerable influence over the state in defining the terms and conditions at which the resources can be extracted

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for instance. Large corporations are able to fund lobbies to sway legislation in their favour in their home countries and the countries they operate in and a kind of a supra regulatory body is required to monitor and regulate the behaviour of these large corporations. Islamic banks are being criticised for not offering a distinctly different economic value than their conventional counterparts. Apart from differences in terms of Shariâ&#x20AC;&#x2122;a compliance, Islamic banks continue to follow market practices and regulatory restrictions with respect to corporate governance, ethics and compliance. The fast emerging landscape of financial services offers an opportunity to Islamic banks and financial institutions to develop a more comprehensive corporate governance regime, set of ethical values and compliance standards. The multi-million question â&#x20AC;&#x201C; Is the industry ready to embark upon it? â&#x20AC;&#x201C; remains unanswered, at least to date.

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TALKING POINTS

MISUNDERSTANDINGS ABOUT ISLAMIC BANKING How to move from debt-based to participatory modes of finance AMJAD BANGASH

ne of the most important characteristics of Islamic finance is that it is based on the principles of profit and loss sharing (PLS). However, presently, we see over 90% of financing by Islamic banks is structured around debt-based modes like murabaha (deferred sale), ijara (leasing) and tawarruq etc. Due to this phenomenon, most of the people see no difference between both systems due to similar end results. Many Shari’a scholars initially allowed use of debt-based modes in dire need and for some transitory period. However, at present, practically this is not the case. Most

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TA L K I N G P O I N T S

Islamic economists view participatory modes of financing like musharaka, mudaraba, and muzara’a etc. as authentically Islamic. Having said that, both Islamic banks and other such financial institutions and their customers prefer to use debt-based modes. This begs questions: •

Are the participatory modes or PLS really Islamic? • If yes, why are even Muslims reluctant to use them? Murabaha and ijara have in the Islamic history

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never been used as modes of financing. In the contemporary practice of Islamic banking and finance (IBF), they have been reshaped so that they could be used as modes of financing, subject to certain conditions. This article explains that even though the current practice of Islamic banks of using debt-based instruments has resemblance with conventional banking instruments, yet it is different in many respects. Nevertheless, the article asserts that there is a need to shift from such modes to the genuinely authentic participatory modes. The challenge is how to structure them to make it feasible for Islamic banks and customers to use them.

INTRODUCTION

Contemporary paper money has no intrinsic utility. It is only a medium of exchange. Each unit of money is 100% equal to another unit of the same denomination. Therefore, there is no room for making profit through exchange of these units, inter se, as is the case with interest-based lending. Profit should be generated when something having intrinsic utility is sold for money. When a financier contributes money on the basis of Islamic instruments it is bound to be converted into the assets having intrinsic utility. Profits are generated through the sale of these real assets. This is a very basic difference between the two systems even if it provides the same end results as conventional interest-based lending. Let us take an example to further explain the concept at a very basic level. All human beings are created with in-built desires like they feel hungry and thirsty, and that they want to look beautiful, need to earn money to buy goods, etc. However, there are divine guidelines on how to satisfy these desires. Islam, and for that matter other religions,

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have prescribed certain principles how to satisfy our desires. There are two ways to satisfy desires, i.e., as per the law or illegally. For example, if a person is feeling hungry, he may steal a piece of bread and eat it to satisfy his desire (hunger) or alternatively use money to buy a piece of bread to eat. The apparent end result would be the same, i.e., to satisfy hunger, but one is acceptable and the other is not. Similar is the case with interest and trade. In both the cases, there is an excess but trade is allowed and interest is not allowed since trade results in overall economic improvement while interest becomes part of an artificial economy. It means that it is the underlying transaction that makes something permissible and not the apparent end result itself, therefore, we can say it is not just change of name, as many understand it as such, rather it has well defined principles which helps to avoid involvement in interest-bearing transactions â&#x20AC;&#x201C; unethical & immoral practices. Few of the widely used Islamic modes of financing, which are the backbone of IBF industry are explained below.

MURABAHA

Murabaha refers to a contract in which an Islamic bank purchases goods upon the request of a client. Bank adds defined percentage of profit on the cost price of the goods, which results into sale price. Customer pays the sale price either in lump sum or in installments in future. It looks similar to an interest-bearing loan where interest is added to the principal amount and payment is deferred. However, in reality, it is not the case, since in murabaha, money is used to buy goods, and the goods come into the possession and ownership of bank, which means bank bears the risk before selling it on to the customer. Since bank becomes

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TALKING POINTS

an owner and owner has the right to sell its owned goods at any market price, this is a Shari’a compliant mode. In murabaha, once price is fixed, it cannot be changed, which is not the case with interest-based lending where the rate may change.

IJARA

It is an alternative to leasing. An Islamic bank upon the request of customer purchases a leasable asset and leases it to customer against a defined agreed rent (installment) for a defined time period. The bank remains the owner of the asset throughout the term of lease and bears the risks and expenses pertaining to ownership of the asset. Now again

it has resemblance to conventional leasing where bank arranges asset to customer who pays installments. The amount and payment structure of installment is usually similar to that of a conventional lease. Moreover, the Islamic bank may also create mortgage, if legally the asset has to be in the name of the customer (due to lack of legal framework and to avoid double taxation). In such an instance, the bank executes sale agreement with owner of an asset to attain ownership rights, while keeping the legal title in the name of customer. Many observers question the permissibility of such an arrangement. However, in better structured ijaras, there is a huge difference between the Islamic and conventional leases, as in such ijaras Islamic bank is responsible for the loss of the leased asset (being its owner), which is not the case with conventional leasing.

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TA L K I N G P O I N T S

TAWARRUQ OR COMMODITY MURABAHA

It is a kind of mechanism where a customer who is in need of cash, requests an Islamic bank to arrange cash for him. Conversely, when an Islamic bank feels that normal Islamic modes of financing will not work to get liquidity, the option of tawarruq or commodity murabaha is used. Under this mechanism, the customer (i.e., the buyer) signs an order to purchase, indicating the intent to purchase the commodities through London Metal Exchange (or any other commodity exchange) from a bank (i.e., the seller). The bank then buys a commodity usually metals. Once, the bank has completed the purchase from the commodity

supplier, it offers to sell the purchased commodity to the client on murabaha with deferred payment basis. Post-acceptance, the bank simultaneously sells these metals on behalf of the client on spot basis and crediting the proceeds of the sale in the client’s account. In essence this transaction generates liquidity for the client. Shari’a allows it since it is based on the concept of sale, which is valid if it meets all the elements required for sale. It is criticised since actual purpose is not the sale rather a mechanism is developed to get cash.

PARTICIPATORY MODES

This paper discusses muzara’a (sharecropping) and musharaka as examples of participatory modes.

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The participatory modes have features of investment and risk diversification for both the banks and the customers, which, if implemented properly, may lead to huge economic growth and employment generation in the economy. This will enhance commitment by and cooperation between both parties to ensure the success of the business.

THE RUNNING MUSHARAKA MODE

Under this model, a customer and a bank enter into a partnership based on musharaka whereby the bank acts as a sleeping partner while customer acts as an active partner on the bank’s behalf. The funds are used in the customer’s operating business, up to an agreed limit, during a given period (say for one year) as per agreed sharing ratio while loss is shared as per investment ratio. For calculation of profit, a weightage system is defined and agreed between the parties while reserves from the profits may be created to avoid losses. The customer is allowed to invest the funds of other investors (including its equity holders) in the musharaka pool (which is the business of the customer). Customer account may be opened in the bank where a limit is sanctioned to withdraw and return funds as per the business cycle. At the end of the tenure, the bank calculates its investment in the musharaka pool (i.e. the customer’s business) based on daily balance basis, i.e., the end of the day outstanding balances (the balance of funds utilised by the customer at the end of each day). The formula for this is as follows: Bank’s Musharaka Investment for the Period (BMIP) = End of Day Outstanding Balances in Running Musharaka Account divided by No of Days in the Musharaka period As per the rules of musharaka, the equity capital of the customer in its business is taken as customer’s investment in the pool (i.e., the customer’s business. The business is thus considered as a running business based on running musharaka. At the end of financial period the customer analyses the actual earning from the business in a year. If there is a positive earning in the pool, it is shared as per agreed ratio and if there is a loss it is also shared as per the investment ratio.

Muzara’a is defined as a participatory form of financing between the farmer and financier with the agreement to share the output in accordance with a pre-determined ratio. Due to the participatory nature of muzara’a, the provider of capital acts as a partner and possesses every right to closely supervise the activities of the entity being financed, a practice that is different from the conventional loan. This mode of financing will assist the producer to minimise the cost of capital by not being burdened with a risk that is beyond his ability. This signifies that whatever losses incurred during the cultivation period as a result of natural hazard and the effect of weather will be shared between both parties. The most important parties and their roles under muzara’a can be described as under. The Islamic bank acting as a partner enters into a muzara’a contract with a farmer by providing funds meant for farming activities and share the crop outcomes based on an agreed proportion. In addition to the provision of funds for procurement of seeds and chemicals, it also ensures that other support services such as efficient transportation and storage equipment are in place to maximise profit by reducing wastage. In addition to this, bank will also regularly monitor the activities of the farmer and may provide agricultural expertise and support through its agriculture division. It will also provide macro and micro economic data related to the sector and predictions about prices, demand (marketing expertise) and market dynamics. The Islamic bank has to do this because the farmer is its partner; its contract with the farmers is based on PLS. It has to do all these in order to avoid losing Amjad Bangash is the Chairman of Shari’a Advisory Board of Dar ul Ilm Ltd Trinidad. He is also serving as Head of Shari’a Department of an Islamic banking entity in Oman. He holds a Master’s degree in Islamic Finance, IFQ from CISI UK and is currently pursuing a PhD in Shari’a. He is an expert in Islamic commercial jurisprudence.

This model is based on the concept of PLS and both the bank and customer are actually involved in real business, which is indeed the best characteristic of Islamic banking. This mode requires more research and further scrutiny.

RUNNING MUZARA’A MODE

The word muzara’a is derived from the root word “zara’a” which signifies crop. It has been defined as a form of partnership between the landlord and agricultural labour whereby the production outcomes are shared according to agreed terms.

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their investment. In such a model the relation between the financial institution and the farmer is no more debtor-creditor; it is a partnership. Partnership requires coordination and cooperation. The farmer also agrees to enter into muzara’a contract with the bank by contributing in the form of labour and/or land and sharing the crop output based on an agreed proportion. The farmer is responsible for growing, maintaining the crops and selling them to customers or industries that use them as their inputs. The farmer is also required to provide actual qualitative and quantitative data on their activities and production, and reports any problem on time. They have to do this in their own interest and because the financial institution is their partner not their creditor. Based on the above, below is draft structure for execution of muzara’a transactions. The Islamic bank enters into muzara’a contract with the farmer(s) to provide financing for procuring the necessary inputs and logistics related to agriculture while the farmers contribute in the form of labour (and or land). The bank may facilitate the farmers in providing logistic support to deliver their produce to the market as and when the produce is ready. The profit/loss from the sales will then be distributed between the parties based on an agreed profit and loss sharing ratio.

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PRACTICAL ISSUES IN PARTICIPATORY MODES There are two common issues:

Islamic banks do not have an expertise to actually or practically participate in business and or farming activities of the customer. However, the Islamic bank can either make the customer or third party as an agent or can train some of their staff to have the knowledge, since it is necessary to achieve maximum profit that is not fixed. There is a risk factor, however, which many banks don’t want to assume. The nature of risk in the PLS modes is different from the plain vanilla credit risk in the loan contracts. The recent global financial crisis is a lesson for the banks to be more involved in PLS investments rather than financing based interest. Participatory modes of financing are a viable investment means for the Islamic banks to get acceptance from different stakeholders. The customers should also like it, as their income will rise. Furthermore, it is beneficial for the economy as participatory arrangements may reduce inflation, since less money will be created in the economy. On the other hand, inflation is inevitable in a financial system that is based on interest.

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HIDDEN TRAPS IN SHARI’A DECISION MAKING

DR. EHSANULLAH AGHA

he emergence of Islamic finance has introduced a new discipline known as “Shari’a advisory services” (SAC). SAC adds a unique value proposition of religious law in the area of commercial life, where secularism rules almost unquestioned throughout the rest of the world. This phenomenon has emerged as a regulatory requirement to ensure Islamicity of Islamic financial institutions (IFIs) by

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establishing an independent Shari’a Board (SB). According to AAOIFI, “Shari’a board is entrusted with the duty of directing, reviewing and supervising the activities of the IFIs to ensure that they comply with Shari’a principles”.1 The following diagram depicts the cycle of SB involvement in the business of an IFI.

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The exercise of tanqihul manat is in fact an important component of Shari’a advisory services provided to IFIs by Shari’a scholars, which simply can be termed as “Shari’a decision making”. Scientific research proved that there are various psychological traps, which significantly influence decision making.3 This article highlights only those traps that potentially lead to debacles in Shari’a decision making, namely (1) the framing trap, (2) the status-quo trap, (3) the anchoring trap and (4) the confirming-evidence trap, along with antidotes tips.

THE FRAMING TRAP

One of the major responsibilities of SB is to issue a Shari’a certification (fatwa) endorsing Shari’a compliance of the products offered by the institution. Shari’a scholars (SB members) pronounce the resolution through a collective ijtihad — a systematic logical approach adopted to apply legal ruling to a financial matter based on their interpretation of Shari’a sources. From a juristical perspective, this is called “tanqihul manat”. According to Sheikh Taqi Usmani, a leading Islamic finance scholar, the process of tanqihul manat requires a Shari’a scholar to get the “right description” (tassawur al-mas’alah) by understanding financial nature and business model of the product and, then to apply the relevant Shari’a ruling (al-ttakyif al-shari).2

1. As the sellers struggle to accept the reality of declining prices on time, they had to offer more discounts to sell the property.

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The first logical move in tanqihul manat is known in business management science as “framing the problem”. It is like a frame around a picture that separates it from the other objects in the room. In Shari’a decision making, framing creates a mental border that encloses a particular aspect of a situation to outline the key elements of it for in depth understanding. A mental frame enables the Shari’a scholars to navigate the complex nature of a financial product, so they can avoid solving the wrong problem or solving the right problem in the wrong way. Since majority of SB members (Shari’a advisors) come from Shari’a background, they typically rely on the information presented to them by the management of an IFI (i.e. business and product development unit) as they normally do not possess practical exposure to analyse directly a complicated product. Therefore, the way a product is defined to them by the management actually shapes the potential Shari’a solution that SB members select (of course with some exceptional Shari’a minds who have developed throughout the years a phenomenal comprehension of financial markets).

2. Usmani M. T. (2011). Usul Ifta wa Adabuhu. Karachi: Maktabah Mariful Quran.

3. Hammond, J. S., Keeney, R. L., & Raiffa, H. (1998). The hidden traps in decision making. Harvard Business Review, 76(5), 47–58.

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A substantial amount of studies found that “framing” significantly impacts outcome of a decision. The framing effect is an example of cognitive bias, in which people react to a particular choice in different ways depending on how it is presented e.g. as a loss or a gain, positive or negative.4 Similarly, there are evidences suggesting that framing influences Shari’a decision in Islamic finance industry depending on the manner in which a financial matter is presented before the SB. A famous example of the framing trap could be a fatwa endorsing conventional insurance as attributed to a famous Egyptian Scholar Muhamad Abduh. A French man explained to him that insurance is like a mudarabah contract where one party provides capital and the other manages the fund. Later, he asked Muhamad Abduh about its Shari’a status. Muhammad Abduh considered it a Shari’a-compliant product based on the information presented to him. This was in reality “mis-framing” of the product.5 Another latest example in Islamic finance would be the case of Islamic total return swap proposed by a multinational bank in 2007 and was approved by

4. Paese, P. W., Bieser, M., & Tubbs, M. E. (1993). Framing effects and choice shifts in group decision making. Organisational Behavior and Human Decision Processes, 56(1), 149–165.

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some Shari’a scholars. The proposed product was claimed to be a Shari’a-compliant version of the conventional total return swap (TRS), which had been christened as the “wa’d” (unilateral promise) based total return swap. The objective was to use non-compliant assets and their performance to swap its returns into a so-called Shari’a-compliant investment portfolio.6 The product was presented to Shari’a scholars in a way reflecting that the performance of non-halal fund is just used as a benchmark index for the Islamic investment fund, resembling the interestbased pricing mechanism (LIBOR) in Islamic banking products. However, its legality was heavily criticised by other scholars on the ground that wa’d is used as a mere stratagem to halalize a prohibited income. The analogy (qiyas) between the use of LIBOR for pricing and the use of the performance of non Shari’a-compliant assets for pricing is both inaccurate and misleading. The only similarity is that both are used for pricing. LIBOR is used to indicate the return, while the other is used to deliver the return.

5. Usmani M. T. (2011). Usul Ifta wa Adabuhu. Karachi: Maktabah Mariful Quran.

6. Atallah, & Ghoul. (2011). The Wa`d based total return swap: Shariah compliant or not. The Journal of Derivatives, 4(5).

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Sheikh Yusuf DeLorenzo categorically considered this Shari’a decision as an unfortunate one (due to mis-framing):7 “It is an unfortunate shortcoming on the part of the Shariah Board in this transaction that it has failed to consider the context of the offering. It is an even greater shortcoming when it fails to consider the consequences the product will have for the entire industry. When it is clear that a product cannot be offered in its own form or, in other words, when it cannot be offered directly, but must be offered by means of a stratagem that is basically a derivative like a swap, red warning flags should go up. In such situations, the Shariah Board must pay careful attention to the circumstances of the offering. If the circumstances can be found to justify such a product, then it may be possible to grant approval. If not, however, approval must be withheld. In the case of promised returns from a referenced basket of assets, the assets must be Shari’a compliant in order for the returns to be Shari’a compliant. It really cannot be otherwise.” To avoid such incidences, Shari’a scholar shouldn’t automatically accept the initial frame formulated by one of SB members or the management. Rather he should always try to reframe the problem in various natural ways. Sheikh Taqi Usmani accentuated that a Shari’a scholar shall get a deep understanding of the concerned case before issuing a fatwa: Sometimes the fatwa seeker–due to his limited knowledge (of Shari’a)– cannot explain features that determine Shari’a ruling (of the case enquired). In such scenarios, the scholar (mufti) shall try to obtain the relevant information by other means. This happens –mostly– in commercial affairs related questions in which the fatwa seeker presents a case according to his understanding and ignores the important aspects (that impacts Shari’a ruling). While in some instances, the fatwa seeker deliberately misrepresents (mis-frames) the matter (to manipulate its Shari’a ruling). Therefore, Imam Muhammad– a famous Muslim jurist– used to visit markets to understand the business nature and the prevailing commercial trends.

7. DeLorenzo, Y. T. (2007). The total returns swap and the “Shariah Conversion Technology”Stratagem. Retrieved from http://www.failaka. com/downloads/DeLorenzo_ TotalReturnsSwap.pdf

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8. Samuelson, W., & Zeckhauser, R. (1988). Status quo bias in decision making. Journal of Risk and Uncertainty, 1(1), 7–59.

THE STATUS-QUO TRAP

Status quo trap is an emotional bias and a preference for the current state of affairs. Psychologically, human brain considers a prevailing practice as a reference point and perceives other alternatives that vary from that baseline as inferior, hence undesirable.8 This trap affects decision making eloquently as it underpins that the current practice is based objectively on a rationale. Therefore, whenever a new product is introduced there is a great tendency of rejection in the market.9 In the case of Islamic finance, the status-quo influences Shari’a decision making from two aspects: management and scholarly reputation. It has been argued that the sin of innovation (thinking out of the box) tends to be punished much more severely than sins of replicating conventional products. The management often displays a strong bias toward a “novel” proposal since it perpetuates the ‘statusquo’ of existing conventional financial system that still—unfortunately—serves as a baseline for Islamic banking industry. For example, in 2014, Bank Negara Malaysia introduced mudarabah, musharakah and wakalah based investment account policy to portray the true spirit of Islamic investment. Nevertheless, instead of adopting this new model, IFIs resorted back to tawarruq based products.10 On the other hand, it is also observed that if a product is approved by famous Shari’a scholars, it becomes often a challenge for junior Shari’a scholars to question it or even to suggest another alternative due to the well-endowed reputation of those who endorsed it. To some extent, the status quo may be considered—depending on the case— a viable option. However, adhering to it out of fear will limit Shari’a advisory options, and ultimately will compromise effective decision making. To overcome this challenge, all other options should be carefully analysed. Exaggerating the effort or cost involved in switching from the status quo should be avoided. As far as questioning the opinion of senior Shari’a scholars is concerned, the rule of thumb in Islamic discourse is to examine validity, authenticity and suitability of the underlying Shari’a justification in the light of Islamic jurisprudence. This

9. Burmeister, K., & Schade, C. (2007). Are entrepreneurs’ decisions more biased? An experimental investigation of the susceptibility to status quo bias. Journal of Business Venturing, 22(3), 340–362.

10. Zulkifli. (2016). From legalism to value-oriented Islamic finance practices. Humanomics, 32(4), 437–458.

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principle is exemplified by the evolution of Islamic jurisprudence into different school of thoughts, proving how constructive criticism has been playing a productive role throughout Islamic civilisation. An academic criticism shall not constitute by any means a discredit.

THE ANCHORING TRAP

Anchoring in psychology refers to the common human tendency of giving disproportionate weight to the first information he or she receives.11 During decision making, an initial impression, estimate or idea thwarts subsequent thoughts and judgments, like an anchor that prevents the boats from moving away. For example, the initial price offered for a used car, sets an arbitrary focal point (anchor) for all following discussions. Prices discussed in negotiations that are lower than the anchor may seem reasonable, perhaps even cheap to the buyer, even if said prices are still relatively higher than the actual market value of the car.12 In Shari’a decision making, a common anchor could be the first proposal presented either by the management or a member of the SB. For instance, when an IFI intends to replicate a conventional product, its first Shari’a-compliant structure (alttakyif al-fiqhi) proposed during brain storming session may serve as an axis around which the subsequent discussion will revolve. One good example is the excessive use of tawarruq,13 which was initially suggested for personal financing in dire need cases. Nonetheless, since last two decades tawarruq has become the ideal baseline for both assets and liabilities sides products offered by IFIs. Due to its anchoring effect, it paved the way for reverse financial engineering that led to stagnancy and lack of innovation in Islamic finance. A prominent Islamic economist Najatullah Siddiqi demonstrated through macroeconomic analysis that the harmful consequences of tawarruq are much greater than the benefits generally cited by its advocates.14 He further articulates: The market has enthusiastically welcomed this development (tawarruq) mainly because it takes us back to familiar grounds long trodden under

11. Chapman, G. B., & Johnson, E. J. (1994). The limits of anchoring. Journal of Behavioral Decision Making, 7(4), 223–242.

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12. Campbell, S. D., & Sharpe, S. A. (2009). Anchoring bias in consensus forecasts and its effect on market prices. Journal of Financial and Quantitative Analysis, 44(2), 369–390.

conventional finance. As a result, several scholars who approved tawarruq in the first instance are raising their voices against its indiscriminate widespread use. But profit-maximisers have rarely been amenable to moral exhortations. It is recommended to try using alternative starting points and approaches rather than sticking with the first line of thought that occurs. A scholar should be open minded with the capability to think about the problem independently before consulting others in order to avoid becoming anchored by their ideas. He should be vigilant to avoid anchoring by advisers, consultants and others from whom he solicits information and counsel. He should share with them as little as possible about his own ideas, estimates, and tentative decisions as revealing too much may result in his preconceptions simply coming back to him.

THE CONFIRMING-EVIDENCE TRAP

Confirmation bias is the tendency to “search for or favour evidence and information that confirms one’s preexisting beliefs or hypotheses”.15 Research

14. Siddiqi, M. N. (2007). Economics of Tawarruq: How its Mafasid overwhelm the Masalih. In Tawarruq Seminar organised by the Harvard Islamic Finance Programme, at London School of Economics, London, UK on (Vol. 1).

13. Tawarruq is a financial instrument involving a series of sale contracts conducted in succession — a person purchases a commodity from a seller on deferred basis and subsequently sells it to a party other than the original seller on a cash basis for the purpose of obtaining liquidity.

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shows that decision makers sometimes seek out information that supports their prevailing instinct or point of view, while avoiding information that contradicts it. This trap affects the individual to halt gathering information when the evidence gathered confirms the views (prejudices) one would like to be true. The source of confirmation bias lies deep within human psyches that disconfirmation is unquestionably superior to confirmatory reasoning.16 In Shari’a decision making, a common confirming bias occurs when a scholar seeks juristical evidences in classical literature (al-juzyat al-fiqhiyyah) to validate his position regarding a contemporary case. Bai’ al-inah (sale of an asset with its subsequent repurchase on a deferred payment basis) – a common Islamic financing product in South Asia but divisive in other jurisdictions – would be a good example to illustrate confirming-evidence trap. Although its permissibility is narrated from Imam Al-Shafi’i (founder of Shafi’i school of thought), but he referred to it as an unorganised sale that takes place occasionally without prior arrangement. Yet, this reference was taken by some IFIs to legalise a buy-back sale in an organised manner to offer

15. Plous, S. (1993). The psychology of judgment and decision making. Mcgraw-Hill Book Company.

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16. Mahoney, M. J., & DeMonbreun, B. G. (1977). Psychology of the scientist: An analysis of problemsolving bias. Cognitive Therapy and Research, 1(3), 229–238.

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a commercial financial product. This practice has created a growing frustration among scholars and proponents of Islamic economics due to the failure of Islamic finance in addressing the real economic and ethical issues beyond the legal realm of Shari’a compliance. 17 Such a cheery-picking legalism not only undermines the true spirit of Islamic law (maqasid al-Shari’a), but also deviates from the multi-dimensional aspects of Islamic finance at both macro and micro level. A famous Hanafi jurist Ibn Abidin rightly pointed out that a Shari’a ruling in classical fiqhi texts is usually based on the cultural norms of that particular period, which no longer can be prevalent. Consequently, some opinions of past jurists cannot be applicable to contemporary cases. After mentioning various examples of cultural trends that have changed with the passage of time, he concluded: “these are clear evidences affirming that a mufti (scholar) shall not confine himself (in making a Shari’a decision) to what is written in classical books without taking into consideration the contemporary practices. Otherwise, the harm of such a Shari’a decision will be more than its benefits.18

17. Syed, E. A., & Omar, M. (2017). Hiyal in Islamic finance: a recognition of genuine economic need or circumvention of Riba? Qualitative Research in Financial Markets, 9(4), 382–390.

18. Abeddin, I. (1990). Rasaael Ibn Abedin. Cairo: Maktabat al-Qahirah.

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To circumvent confirming bias, a scholar should examine evidences with equal rigour avoiding the tendency to accept confirming evidence without question. One of SB members may play devil’s advocate to argue against the contemplating decision. All possible juristic solutions should be explored before drawing at a Shari’a resolution. In seeking the advice of other experts, leading questions that invite confirming evidence should not be asked. It is advisable for SB member to not surround himself with a yes-man who always seems to support his point of view.

CONCLUSION

Psychologists have identified a series of manipulative flaws hardwired into human thinking process, which we often fail to recognise during decision making. Shari’a decision is apparently not an exception. By analysing the above facts, it can be concluded that these traps together point towards two key findings. First, an unfortunate Shari’a decision might be the result of the partial information received by SB members and their subsequent limited perspectives. Such a decision will not only undermine legality of the

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product enquired but might also trigger reputational risk for the industry. To provide profound Shari’a advisory services that reflect the multi-dimensional aspects of Islamic finance, the SB should deal with accurate information exploring issues from multiple perspectives. Second, most of these decision-making traps are correlated. Falling into one trap often leads to become prey of other traps as well. Avoiding these traps largely depends on how the SB members interact with each other during a decision-making process. Furthermore, we are always susceptible to these traps in the future despite having a successful track record in the past due to the different nature of decisions and circumstances. Therefore, Shari’a scholars who are the source of confidence in Islamic financial industry should critically evaluate the situations confronting them to bypass the traps. Dr. Ehsanullah Agha has received his PhD in Islamic Finance from the International Islamic University, Malaysia and he is currently associated with Habib Metro Bank Sirat Pakistan.

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PERSPECTIVES

MAKING WOMEN EMPOWERMENT A KEY GROWTH DRIVER OF ISLAMIC FINANCE INDUSTRY

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PERSPECTIVES

Historically, the finance industry has always been male-dominated and Islamic finance was no exception where women faced various obstacles including religious conservatism, restrictions on mixed-gender working environments and stereotypes about women in Islamic finance. However, the past decade has seen a growing band of women professionals breaking down barriers and performing increasingly important roles in the Islamic finance industry. These exceptionally talented and inspiring female leaders have not only set the pace to occupy leadership positions in Islamic banking and finance, but have been playing a prominent role in the overall development of the industry as well. As inspirational role models, they have become drivers of change that have inspired a whole new generation of female talent. Women involvement in the Islamic financial services industry has come a long way, with Malaysia undeniably setting the tone. Five out of the Top 10 Most Influential Women in Islamic Finance 2019 as listed on Womani 2019 (a list compiled by Cambridge IFA, a UK-based think tank), are leading Malaysian women in their respective areas. Malaysian women have not only set the pace to occupy high positions in the Islamic finance industry, but have played and continue to play prominent roles in the overall development of the industry at both local and global level.

EMPOWERING WOMEN

The topic of women empowerment has become a significant topic of discussion in development economics and is widely recognised as a key to economic growth, political stability, and social transformation. Many agencies of the United Nations in their reports have emphasised that the gender issue must be given utmost priority. World leaders, experts and scholars alike are giving their voice to this critical endeavor. • Barack Obama, 44th US President: When women succeed, nations are more safe, secure and prosperous. •

Kofi Annan, 7th UN Secretary General: There is no tool for development more effective than the empowerment of women.

When we use the term women empowerment its meaning extends beyond this to include self actualising inner power, awareness of one’s rights and privileges and the ability to control one’s life in a more meaningful and fulfilling way. However, women experience multiple and intersecting inequalities. Structural barriers in the economic, social, political and environmental spheres

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produce and reinforce these inequalities. Obstacles to women’s economic and political empowerment are barriers to sustainable development and the achievement of gender equality. While the government, corporates, and the society at large are looking at various initiatives and means to empower women in the workplace, marketplace and community; the real game changers are the women themselves. In this context, I would like to offer the “3Es” of Women Empowerment. The first “E” is Encourage Empowerment. Even though women are making progress towards gender parity in many governments and corporates around the world, the numbers are still sobering. While more women have entered political positions in recent years, including through the use of special quotas, they still hold a mere 23.7% of parliamentary seats. The situation is not much better in the private sector, where women globally occupy less than a third of senior and middle management positions.

ACCORDING TO THE WORLD BANK,

EMPOWERMENT IS THE PROCESS OF INCREASING THE CAPACITY OF INDIVIDUALS OR GROUPS TO MAKE CHOICES AND TO TRANSFORM THOSE CHOICES INTO DESIRED ACTIONS AND OUTCOMES. |

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Deloitte’s 2017 edition of “Women in the Boardroom: A Global Perspective” underlines that women’s placement at all board seats globally is only at 15%, up by a mere 3% from 2015. Given that empowerment processes are dynamic, positive change in one aspect reinforces other aspects of empowerment. Mentoring, in fact, has proven to be one of the most effective tools for advancing women in the workplace and encouraging empowerment amongst women. Companies with mentoring programmes are often viewed as more attractive places to work and retain female employees at a higher rate. Creating more women role models in the corporate world is not just good for women, it’s good for business. Companies need women and people with diverse backgrounds at the table so that they can make better and smarter decisions that respond to the diverse needs of their customers. Hence, programmes like WOMANi, which is pioneered by Cambridge IFA, serves a good platform for both men and women to support other women professionals as they seek to advance in their careers within challenging contexts, ensuring that they have knowledge and problem-solving skills to negotiate paths to success. In addition to supporting women as individuals, mentoring programmes may contribute to change in organisational cultures by preparing women to enter leadership roles with the tools to tackle the impact of implicit bias and to promote policies and processes that nurture inclusive, supportive environments.

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The second “E” is Education for Empowerment. Education is an essential means of empowering women with the knowledge, skills and self-confidence necessary to fully participate in the development process. In education, we have seen steady and impressive decline in gender gaps around the world. Businesses are realising that a more diverse workforce adds a lot of shareholder value. However, experience has shown that the relationship between education and empowerment is not as simple as it may first appear. While education is undoubtedly a key element contributing to empowerment, the two do not necessarily go hand in hand. Many educational programmes will focus on acquisition of formal knowledge and training, and will often equip women with the technical skills necessary to take up paid employment in a specific sector. While it is important for women to receive formal training as part of their education, a more holistic approach that places a strong emphasis on enabling them to develop a wider awareness of themselves, ability to reflect on their own reality, to develop self-awareness and to build self-esteem is also vital. In my view, education must be reinforced by the development of self-esteem to lift women from the status of inferiority in which society confines them. Similarly, without education and without self-esteem there cannot be empowerment. All of these elements W W W. I S F I R E . N E T

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EXPERIENCE HAS SHOWN THAT THE RELATIONSHIP BETWEEN EDUCATION AND EMPOWERMENT IS NOT AS SIMPLE AS IT MAY FIRST APPEAR. WHILE EDUCATION IS UNDOUBTEDLY A KEY ELEMENT CONTRIBUTING TO EMPOWERMENT, THE TWO DO NOT NECESSARILY GO HAND IN HAND. go together hand in hand. The third “E” is Economic Empowerment. Women’s economic empowerment is at the heart of the 2030 Agenda for Sustainable Development, which recognises that women’s full and equal participation in the economy as a vital step toward achieving sustainable development. This is embodied with the inclusion of a Sustainable Development Goal 5 (SDG5) on Gender Equality. In the past, gender equality sometimes was regarded as a strictly social matter that exclusively benefits women and girls. Yet we know that nothing could be further from the truth! We know if women participated in t he economy equally, the world economy would expand by 25% over the next decade. This is one of the reasons why countries like Malaysia has placed economic empowerment and increasing economic independence of women high on the agenda. To increase women’s economic independence the Malaysian government seeks to create more opportunities for women to enter the labour market. A sum of RM20 million has been allocated under Budget 2018 for training and entrepreneurship programmes, including PEAK Entrepreneur Programme under MyWin Academy.

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EMPOWER WOMEN, EMPOWER ISLAMIC FINANCE

There is no denying that the Islamic banking and finance industry has provided ample opportunities for women to excel in their professional life and achieve their full potential. This is evident by the increased participation of professional women in the development of Islamic finance shattering the industry’s glass ceiling. Undoubtedly, these inspirational female leaders and industry pioneers have inspired and motivated a new generation of female talent. However, a more comprehensive view should be taken when one looks at women’s participation in Islamic banking and finance. A holistic strategy should be devised beyond merely attracting women to this industry. Issues for example barriers to re-entry such as career obsolescence and employer bias must be a given a heightened importance at the policy level. The recently concluded 2nd WOMANi Awards (held in Dubai) organised by Cambridge IFA has become an annual gathering of influential women that sparks conversations about issues and opportunities that impact women inside and outside of work, challenge the status quo, and ultimately, shapes the leadership culture.

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Since 2016, we have been investigating women participation in the workforce in Islamic banking and finance (IBF). The previous studies have been based on two global surveys we conducted in 2016 and 2017 . Cambridge IFA has repeated the exercise this year again to see if there have been any movements in the state of affairs of women participation in the economic activity related with IBF. Although the results are not significantly different from the previous two surveys, it is still instructive to report a summary of results in this inaugural WOMANi Report 2019. A loud and clear message that comes out of the 2019 survey is that there is some kind of systematic evidence of discrimination against women when it comes to employment opportunities in IBF. There are some cultural and social issues that may hinder entry of women into IBF. However, it is encouraging to note that the industry offers ample opportunities to smart and intelligent women. In fact, it may be easier for women to excel in IBF, as compared to conventional banking and finance, which is a lot more competitive (and where there is some evidence of discrimination against women). It is due to this friendly approach of IBF towards women in general and Muslim women in particular that the employment of women (both Muslims and non-Muslims) is on a rise in the industry. The industry has in many cases endogenized cultural sensitivities of non-Muslim female personnel to ensure that they are provided with a level-playing field. The readers are encouraged to refer to an interview of Angelia Chin-Sharpe included in this report. She shares her own experience of working in IBF in this respect.

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THE 2019 SURVEY ON FEMALE EMPLOYMENT IN IBF

This yearâ&#x20AC;&#x2122;s survey was conducted by Cambridge IFA, and the results will be combined with the previous two surveys undertaken by Edbiz Consulting and Cambridge IF Analytica in 2016 and 2017, respectively. A primary objective of these exercises have been to explore and analyse female employment and gender inequality in IBF. We asked just one question through an online survey on social media. There were 10,471 responses in total, from 33 countries of the world. The question was: Why has there been observed low female employment in IBF?

WHY HAS THERE BEEN OBSERVED LOW FEMALE EMPLOYMENT IN IBF? 1 2 3 4 5 6

Female participation in labour force is low Banking and finance is not a popular profession among women Banking and finance is male dominated (and hence intimidatory for women) In Islamic banks, dress code and other social requirements are more stringent for women Islamic qualifications are not readily available Any other (please specify)

The above close-ended question was designed in light of an open-ended question Edbiz Consulting asked in the 2016 survey in which 500 respondents took part. Based on their responses, five most cited responses were selected, for low participation of women in an IBF-related profession. In the next step, the above close-ended question was asked. This was repeated in the 2017 and 2019 surveys. Out of 10,471 respondents, 3,221 were in some kind of employment in financial sector. The remaining (7,250) were not working in financial sector or were not working at the time they participated in the survey. Thus, the survey is heavily based in favour of those not working in the financial sector or those who are not working for any other reasons. Total number of female participating in the survey was 3,011 (see Figure 1).

Figure 1 Global Sample 10,471

Working in Financial Sector 3,221 (30.8%)

Non-Financial or Not Working 7,250 (69.2%)

1,533

1,478

Working in Financial Sector 3,221 (30.8%)

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Malaysian sub-samples have in all of our three samples had unique properties. This year, 53% of the respondents in the Malaysian sub-sample were female. Most of them were in some kind of employment (914 out of 1,109 or 82.4% of the sub-sample). Figure 2 presents the Malaysian sub-sample.

Figure 2 Malaysia Sample 2,091

Working in Financial Sector 1,829 (87.2%)

Non-Financial or Not Working 268 (12.8%)

9,141

Women 1,109 (53.0%)

This yearâ&#x20AC;&#x2122;s survey is interesting, as for the first time we have some indication of discrimination against women in banking and finance, in general, and possibly also in IBF. Contrary to the previous two surveys, nearly one-quarter of the respondents gave male dominance in banking and finance as one of the two main reasons for the observed low female participation in IBF. In the 2016 and 2017 surveys, the main reason for this observation was low female participation in the labour force in general (see Figure 3)

Figure 3 Why has there been low female participants IBF: Full Survey [% Response] 6 33

7 10

11 15

19 27

2016

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2017

2019

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Female participant in labour force is low

In Islamic banks, dress code and other social requirements are more stringent for women

Banking and finance is not a popular profession among women

Islamic banking qualification are not readily available

Banking and finance is male dominant and hence intimidatory for women

Others

To further investigate, we looked into the responses of those who were working for financial institutions. Surprisingly, this year’s sub-sample of the financial sector workers exhibits that the main reason for women not working in Islamic financial institutions is the male dominance in the financial sector of which Islamic financial sector is no exception. Consistent with the previous two surveys, the respondents also attribute the low female participation in Islamic banking and finance to the low female participation in labour force. This year’s survey attributes three, as opposed to two as exhibited by the previous two surveys in 2016 and 2017, major reasons for the lack of or low female employment in IBF, namely: • • •

Male dominance in the industry (35%); Female participation in labour force (31%); and Lack of popularity of a banking and finance related profession among women (18%).

It appears as if banking and finance is becoming a preferred choice among women as for as a profession is concerned. However, the new aspirants to enter the industry somehow find the culture of male dominance intimidating. This point must be further explored in future surveys.

Figure 4 Why has there been low female participants IBF: The Sample of Respondents of Employees in Financial Sector [% Response] 7

3 6 3

3 6

2016

2017

Female participant in labour force is low Banking and finance is not a popular profession among women Banking and finance is male dominant and hence intimidatory for women

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2019 In Islamic banks, dress code and other social requirements are more stringent for women Islamic banking qualification are not readily available Others

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When the above results are compared with the sub-samples comprising only those who work for nonfinancial institutions or are not working at all, there are some variations. Also, variation in response in case of the female only sub-sample are given in Figure 5. Apparently, there is huge variation in response in the three sub-samples, suggesting that all the three sets of respondents perceive the problem at hand differently.

Figure 5 Why has there been low female participants IBF: Three Sub-Samples Compared [% Response]

3 6

7 25 25

1 14

18 24

Financial

Non-Financial

Female participant in labour force is low Banking and finance is not a popular profession among women Banking and finance is male dominant and hence intimidatory for women

Female

In Islamic banks, dress code and other social requirements are more stringent for women Islamic banking qualification are not readily available Others

From the above results, one may conclude that there are barriers to entry into IBF, although different groups of respondents attribute different causes to these.

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â&#x20AC;&#x153;57% women strongly believe that they face real barriers to enter the Islamic finance market because of male intimidation and the stringent dress code requirements.â&#x20AC;? Out of the five responses, only 3 and 4 imply real barriers to entry into IBF for women. Only 39% respondents globally accept the hypothesis that there are real and credible barriers to entry into IBF for women; 61% either do not recognise such barriers or attribute the low female participation in employment in IBF to the factors other than discrimination. Slightly more (41%) of those who are employed in financial sector believe that women are restricted to enter IBF-related professions; and even a smaller number of respondents from outside the financial sector believe in the existence of barriers. However, women themselves strongly believe that they face real barriers to enter the Islamic finance market because of male intimidation and the stringent dress code requirements (57%). Given the above variations in response, there seems to be two biases evident from the responses: [1] Arrogance Effect; and [2] Grudge Effect. Those who are already in employment with a financial institution tend to attribute the outsidersâ&#x20AC;&#x2122; own circumstances (i.e., inadequate qualifications, personal attributes, and not fit-for-the job kind of factors) for not being able to get a job with a bank or financial institution. They tend to ignore some factors (other than qualifications and ability) that may adversely affect prospects of employment for those who are seeking jobs in financial institutions, including Islamic banks. We call it Arrogance Effect. The Grudge Effect, on the other hand, is exhibited by the responses of those who considered themselves to be in an unprivileged or disadvantaged situation, i.e., those not working for Islamic financial institutions, the unemployed and the female in our sample. There are a number of other issues that must be looked into before one may conclusively infer that there is any systematic evidence of discrimination against women in IBF. Whatever be the results of a future research in this area, a clear message that one gets from reading the responses to the simple question posed to the respondents is that women clearly tend to believe that their entry into in IBF is restricted. If true, there is a definite need to encourage more representation of women in IBF.

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ISFIRE REVIEW

ISFIRE PERSONALITY

DR. JAMSHAID ANWAR CHATTHA

ASSISTANT SECRETARY-GENERAL, TECHNICAL AND RESEARCH, ISLAMIC FINANCIAL SERVICES BOARD (IFSB)

WHAT WAS YOUR EARLIEST AMBITION? From my early childhood I was good at maths and finance, but like others in that young age did not have a clear ambition. I wanted to work for an intelligence agency, and maybe a chef. My uncle wanted me to be a scientist as he was working for one of the largest science and technology institutions in the country. However, when at college, I decided to be a banker and a regulator of banking and financial services.

WHY ARE YOU INTO ISLAMIC BANKING AND FINANCE? I chose Islamic finance for life. Out of my 12+ years of career, I have only worked six months for a conventional bank. All my career and post-graduate education has been in the field of Islamic banking and finance. I believe, being a strong advocate of Islamic finance regulatory framework, I have a role to play in the development and promotion of a robust Islamic financial ecosystem globally.

WHAT DO YOU ENJOY THE MOST?

WHAT DO YOU DO IN YOUR SPARE TIME?

Amidst my extreme business I try not to forget to have fun and relax. Lazy Sunday with no emails to read, while watching a live cricket match, is a real treat. Next to this is having a sound sleep. Passion and commitment are important pillars of my enjoyment in office life, and I enjoy helping people even if that may involve burdening myself with extra work.

To be successful in the professional world, you need some free time. I spend my spare time with my kids and take charge of the kitchen to cook my favourite Chicken Biryani. And being a millennial, I do spend time on social media to stay connected with friends and family.

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I S F I R E P E R S O NA L I T Y

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WHICH MOVIE IS YOUR ALL-TIME FAVOURITE? [IF YOU WATCH MOVIES] Sirf Tum (lit. Only You) is romantic Bollywood love story between an ordinary young man with a big heart, and an attractive, middle class girl, who didnâ&#x20AC;&#x2122;t even meet before falling in love. I loved the unimaginable and unconditional mutual affection with quality of songs.

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WHO HAS BEEN YOUR GREATEST MENTOR? The first Secretary-General of the IFSB, and my boss, Prof. Dato’ Riffat Ahmed Abdul Karim. He is not only who provided me technical mentoring on Islamic finance but also he showed a great amount of kind-heartedness and fatherly touch in terms of intellectual growth and leadership. To be honest, I won’t be where I am today, or where I inspire to be, had he not believed in me by providing opportunity to serve the Islamic finance services industry.

I chose Islamic finance for life. Out of my 12+ years of career, I have only worked six months for a conventional bank. All my career and post-graduate education has been in the field of Islamic banking and finance.

WHERE ARE YOU THE HAPPIEST?

IN A FEW SENTENCES DESCRIBE YOUR 65 YEARS OLD.

When I am around the people who love and care about me, and give me honest feedback (positive and negative), and probably with some great and inspiring like-minded people such as Nizamuddin Arshad from whom I learned a lot. IF YOUR 15 YEARS OLD SEES YOU TODAY WHAT WOULD HE SAY? I think he would say and appreciate that I made the right decision not to pursue studying chemistry and biology on the recommendation of my uncle, which I did not like at all, and instead focused on mathematics and finance.

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Big “if”. If I am alive by that time, I will prefer playing golf and watching non-stop cricket matches in that age but I will also be actively contributing to the academia by sharing the knowledge and industry experience with the next generation. ANY DISAPPOINTMENT IN LIFE? Blessed with everything so far but life without disappointment would be boring, and we have to deal with it.

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MBRID

IFLP

July 07 - July 12, 2019

WHY CAMBRIDGE ISLAMIC FINANCE LEADERSHIP PROGRAMME? The leadership programme prepares the next generation of leaders by providing them with a unique mentoring opportunities, rigorous leadership training from renowned leaders as well as industry-specific case studies in Islamic finance.

WHO SHOULD ATTEND?

The Cambridge-IFLP aims at bringing Islamic banking and finance professionals in the middle and upper middle management positions, to the prestigious University of Cambridge for a period of 5 days, with a view to offer them an opportunity to become members of the most prestigious mentoring programme in Islamic banking & finance.

SALIENT FEATURES LEADERSHIP TALK: Covers a wide range of topics including structuring and product development, human resource development and leadership. LEADERSHIP INTERVIEW: Leading personalities share their personal perspectives on leadership in this unique one-on-one interview. LEADERSHIP ACTIVITIES: Identify leadership skills and traits in a fun way. CAMBRIDGE CASES: Delegates apply their theoretical knowledge, develop team skills, and develop solution-oriented decision making SOCIAL ACTIVITIES: There will be numerous social activities, allowing the delegates to interact with each other and with mentors. These include a Garden Party, Punting, and a Leadership Walk, among many others.

http://cambridge-ifa.net/ W W W. I S F I R E . N E T

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PERSPECTIVES

JURISTIC DIFFERENCES IN ISLAMIC BANKING AND FINANCE

DR. INAM ULLAH KHAN

n this article, Dr. Inam Ullah Khan discusses the juristic differences in Islamic banking and finance. He highlights several products on which there has been much discussion regarding Shari’a compliancy and emphasises the need for the industry to adopt a maqasid orientated approach in creating products. Islamic banking is slowly emerging as an important area of applied Islamic law and jurisprudence. The relationship between classical Islamic law and Islamic finance has created a new system of law-making under the Shari’a, one that has evolved remarkably over the last 40 years. The syncretic process of mining the classical texts, considering modern sensibilities and accommodating state-law prescriptions has undoubtedly made Islamic finance a thoroughfare of progression in the Islamic legal derivation process. Original interpretation and ijtihad are most essential today for the development of Islamic law generally and of Islamic commercial law in particular. Despite the existing weakness concerning ijtihad, if there is a success story to be associated with the revival of Islamic jurisprudence in modern times, that story will certainly include Islamic finance. From little more than a concept and an ideal, modern Islamic finance grew rapidly, with the last two decades seeing the establishment of a variety of financial institutions and the creation of a legal and governance framework.

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However, a constant concern for Islamic finance is the differences of opinion on product structures. There is a pressing need for harmonisation in the long run especially in today’s interlinked global market. If one country prohibits one product, while another permits, then this could have an effect on cross-border transactions, and on the efficiency and efficacy of the industry.

MAQASID AL-SHARI’A

Zaki Badawi, former principal of the Muslim College in London, emphasised the importance of the use of maqasid oriented ijtihad for the development of an Islamic financial system. He stated that little attention was paid by most fuqaha to the basic objectives of the Shari’a. He pointed out that Al-Shatibi as well as Al-Ghazali, Ibn Taymiyyah, and Ibn Qayyim advised the fuqaha to take into consideration the purposes of the Shari’a to address the individual and society’s needs when issuing a fatwa. Badawi added that the task of identifying the real need of society, along with their relevance to the purpose of the Shari’a is not easy. It pushes the scholar to consider the literal text on one hand and the abstract purposes of the Shari’a on the other. He concluded that a new ijtihad must begin by adopting the post Al-Shatibi approach to usul al-fiqh.

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Hashim Kamali argues that usul al-fiqh has become a theoretical discipline studied as a part of the legal heritage rather than a tool to regulate and encourage ijtihad. He added that usul al-fiqh is not without weaknesses and some of the weaknesses are not new, but existed for almost as long as the usul al-fiqh itself. A legitimate use of human intellect in dealing with emerging circumstances is guided only by the general principles of Shari’a based on justice and benevolence (al-adl wa ihsan). Al-Shatibi has emphasised the importance of maqasid for ijtihad. He advocated a sound knowledge of the goals and the objectives of the Shari’a as a pre-requisite to reach the rank of a mujtahid. Sano Koutoub argued that the protection and preservation of wealth is one of the essential elements of maqasid al-Shari’a. Therefore, the continuity and growth of wealth in society should be encouraged and maintained. The continuous distribution of wealth in the society should also be enhanced to bring happiness and financial stability. To achieve these objectives, a supportive Islamic jurisprudential framework is required based on the concept of maslaha and the boarder objectives of the Shari’a. There is no doubt Islamic banking and finance has gained greater importance over the last two decades but the soundness and stability of its infrastructure can be scored through the robustness of its regulatory framework supported by the sophistication of its products and services. While it was initially developed to fulfil the needs of the Muslims, Islamic banking and finance has gained universal acceptance as there has always been a demand amongst Muslims for financial products and services that conform to the Shari’a. With the development of workable Islamic alternatives to conventional finance, Muslims are beginning to find Shari’a complaint solutions for their financial needs.

DIFFERENCES OF OPINION

Although Islamic banking has made significant headway in a short period of time, juristic disagreements still exist. Debt financing is one of the core areas of concern, where disagreements exist over products such as murabaha, bay bithaman ajil, bay al-dayn and bay al-ina. Generally speaking, the Middle Eastern scholars prohibit debt trading while the Malaysian scholars in official rulings permit it. Apart from this, there are many issues that have to be addressed by Islamic banks both in terms of documentation and transactional structure. The general legal framework in many countries will need to be modified to promote Islamic banking. The former governor of Bank Negara, Zeti Akhtar Aziz argued that at present Islamic banking and financial institutions have, to a large extend, have been governed by the conventional regulatory framework, supplemented and reinforced by the Shari’a framework and Islamic accounting standards. However, Islamic banking is distinct from conventional finance in terms of its philosophy of

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prohibiting interest, which in turn shapes the nature of its financial transactions and its risk attributes. Therefore, she suggested the development of a separate regulatory framework in view of the unique risks associated with Islamic financial transactions to provide for their effective assessment and management. The focal point that needs to be analysed is the presiding regulatory framework: does it affect the process of fatwa and ijtihad or not? Sudin Haron stated that there is no uniformity of laws and procedures in the practice of Islamic banks around the world. Islamic banks have to conform basically to two types of laws: the Shari’a and positive laws. While Shari’a law is based on religious foundations, positive laws are promulgated by sovereign bodies to safeguard public interest. The positive laws, in most cases, are under the supervision of the Central Banks. In Malaysia, for example, the establishment of an Islamic bank is governed by the Companies Act 1965, and its operations are subjected to the Islamic Banking Act 1983 and, to some extent, the Banking and Financial Institutions Act 1989. Islamic banks must conform to all requirements as stipulated in the above stated Acts. Similarly, other governments have passed special laws that govern the operations of Islamic banks in their countries. Islamic banks in Malaysia are subject to the Malaysian’s Companies Act 1965; the Islamic banks of Bahrain are subject to the Bahrain Commercial Companies Law 1975 and the Kuwait Finance House (KFH) is subject to Kuwait Commercial Companies Law 1960. Whilst Malaysia and Kuwait have recently legislated on Islamic Banks, Bahrain has no special laws on the subject.

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DIVERSITY IN FIQH

The social changes in modern times have introduced complexities in the application of Islamic law. The prevailing diversity in the contemporary application of Islamic law as response to social change on one hand is perhaps a welcome development; but on the other hand, it creates new challenges too. The Islamic banking industry is the most prominent example, where the emerging challenges are significant and need to be addressed urgently. While the diversity in fiqh opinion is presently contributed in global growth, it may soon become a constraining factor if the challenges arising out of it are not properly addressed. The two distinct mechanisms that operate side by side to carry out business according to the divine revelation are equity financing and debt financing. Equity financing is affected through profit sharing contracts, while debt financing is affected through deferred contracts of exchange. The Quran further elaborates debt financing with the contracts of deferred exchange allowed and interestbased lending forbidden. The main disagreement which prevails between the two regions under review, Malaysia and the Gulf, is over debt based financial products such as murabaha, bay bithaman ajil, bay al-dayn and bay al-ina.

MURABAHA

Murabaha in fiqh literature is considered as a type of sale. The only feature in murabaha distinguishing it from other kinds of sale is that the seller expressly informs the purchaser of his cost and the profit he intends to make. The main objectives to murabaha are that there is a chance for partaking in bay al-ina as practiced by some Islamic financial institutions and that it combines two sales in one. There are also differences of views amongst the scholars regarding the binding nature of a promise to purchase.

TA’WIDH

The imposition of a compensation rate (ta’widh) is contentious. A consensus has been reached in this regard as contemporary jurists have allowed banks to stipulate late fees on those clients who were able to pay but were nonetheless delinquent. However, this amount shall not become a part of the income of the bank. This opinion is being followed in the Gulf. On the other hand, the Shar’a Advisory Council of Bank Negara Malaysia has permitted the imposition of one percent compensation rate on late payment and unlike the opinion from the Gulf, this money can form part of the income of the bank. This is regarded as ta’widh (compensation) for the bank and cannot be compounded.

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REBATE

Another important area is the rebate. The majority of the jurists agree that rebate can neither be stipulated in a murabaha transaction affected by an Islamic bank nor can the client claim it as a right. However, the bank can give the customer a rebate on its own as gratuity. Nonetheless, the Shari’a Advisory Council (SAC) of the Securities Commission in Malaysia has issued a fatwa declaring that a rebate clause and formula to calculate the amount for an early settlement can be stipulated in the primary legal document of Islamic bonds based on the contract of exchange.

BAY BITHAMAN AJIL

There are controversies amongst Muslim scholars as to whether the price charged by the seller under bay bithaman ajil can be higher than the spot price. Even the scholars, who are of the view that charging a higher price than the spot price is permissible under Shari’a, do not recommend a heavy reliance on it. Although, the validity of bay bithaman ajil proven from the Quran and Sunna, certain practices are not accepted internationally, specifically in the Middle East, Pakistan and Europe because of the danger attached to it of opening a back door to riba. The act of deferring the payment of price in a sale is also accepted in the rest of the world and the contract of murabaha is being used predominantly. The main issue in certain types of bay bithama ajil as practiced in Malaysia by some Islamic financial institutions is that they use bay al-ina under the guise of bay bithaman ajil. In this case, the contract of bay bithaman ajil is preceded by a purchase of asset by the bank from the same customer.

BAY AL-DAYN

Bay al-dayn has always been an issue amongst the past and present Muslim jurists. The jurists who do not allow bay al-dayn have premised their objections mainly on the prohibition of riba, and the increased risk to the buyer in the event of a default. There were differences amongst the classical Muslim jurists regarding the sale of debt from the creditor to the debtor and the sale of debt from the creditor to the third party.

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BAY AL-INA

The majority of the classical Muslim jurists were of the opinion that it was not permissible because it was legal excuse to legitimise riba. The opinion is being followed by the jurists of Islamic finance of the Middle East. The Shari’a advisors from the Middle East and Gulf region consider it as a ‘back door’ to riba. However, bay al-ina is being practiced by Islamic financial institution in Malaysia. It is considered valid by the Shari’a Advisory Council of Bank Negara Malaysia and the Shari’a Advisory Council of the Securities Commission of Malaysia.

CONCLUSION

To sum up, the central issue pertaining to existing disagreements between the scholars of Malaysia and those of the Middle East is the interpretations of Shari’a injunctions. Disagreements exist in juristic views and rulings particularly between Malaysia and the Middle East. The issue of disagreement is very important and has a farreaching impact on the Islamic banking and financial industry worldwide. It can be said that disagreement is inevitable, but at the same time, there subsists a reconciliatory mechanism in Islamic law to harmonise different interpretations from either jurisprudential or administrative perspective or both. Nevertheless, harmonisation of the different views amongst the scholars from the different schools of thought is necessary to enhance the global development of Islamic banking and finance. It is recommended that any further move in this direction be made under the purview of siyasah Shari’a. This will create a much more robust system.

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ISFIRE INSIGHT

PERSPECTIVES ON LEADERSHIP STYLE

TRANSFORMATIONAL, TRANSACTIONAL AND ENTREPRENEURSHIP DR. RASHIDAH KAMARULZAMAN

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ISFIRE INSIGHT

What may work well in developing countries not necessarily work in other parts of the world, i.e., the Western world and the emerging markets. It is also true conversely. This means that successful adoption of a style in one context may lead to failure if emulated elsewhere. This article focuses on different leadership styles being practiced in banking and finance in emerging markets, with a special reference to Malaysia. From a wide spectrum of leadership styles, three types can be identified, namely, transformational, transactional and entrepreneurial. It is hard to pick the best out of the three, as one may work better than the other in a given context. It is equally possible that no one individual leadership style may suit in an environment but a combination of two or even three may be the best choice. Although various leadership styles share general aspects of leadership and management, some vital factors differentiate them from each other. As national cultures are influenced by geographical boundaries of the countries, leadership styles vary from country to country. Hence, location of an Organisation may lead to a leadership style generally acceptable in a national context. Within a country, different industries may have slight, and in some cases, significant differences. Next, we briefly discuss the three above-mentioned leadership styles.

TRANSFORMATIONAL LEADERSHIP

Transformational leadership as a concept was introduced by James McGregor Burns in his seminal work, Leadership, first published in 1978. According to him, leaders and their followers raise one another to a higher level of morality and motivation. The leaders are expected to set higher expectations as well as clear goals and at the same time lead with example. They support their followers and recognise their work and contributions. In this paradigm, the leaders must inspire their followers. Hence, a leader is not only someone who talks the talk but someone who also walks the walk. A transformational leader not only leads their followers but also encourage them to share their ideas to evaluate and give their feedback on them. In an old-style leadership, leaders would give instructions and monitor their followers. Transformational leadership, however, emphasises upon coaching and mentoring instead. The underlying view is that coaching and mentoring breeds creativity and innovation, unlike the old school that personal interest and initiative hampers learning to progress

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within the Organisation. There are four factors associated with transformational leadership, which are discussed next.

Intellectual Stimulation

Intellectual simulation encourages creativity and innovation. The leaders encourage their followers to develop new ideas and avoid criticizing them publically for their mistakes. People make mistakes but leaders try to correct them rather than blaming the wrongdoers. At least, this should be the first course of action following a mistake. There must be solutions and mechanisms to ensure that the mistakes are not repeated.

Individualised Consideration

Individualised consideration means that the leaders treat the followers individually, based on their talent and knowledge. Each of the followers is treated differently and a transformational leader acts as a mentor and coach rather than a manager. Leaders with this trait empower the employees to make their own decisions that the leaders support.

Idealised Influence

The idealised influence implies the leaders acting as role models to the followers. In this respect, the leaders influence their followers to get a job done by demonstrating their own high standards. Ethics is important here, as the leaders influence their followers with ethical conduct and moral behaviour. By doing so, the leaders gain more respect and trust from their followers. In other words, the leaders with idealised influence reduce the risk of corruptions and scandals in their Organisations. Furthermore, the leaders at times sacrifice their own personal gains, in consideration of their followersâ&#x20AC;&#x2122; needs.

Inspirational Motivation

The transformational leaders inspire their followers by providing clear mission, vision and goals to solicit their full commitment to work. The leaders also promote teamwork among the followers to achieve the set goals collectively instead of working towards achieving individual goals.

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ISFIRE INSIGHT

ISFIRE INSIGHT TRANSACTIONAL LEADERSHIP

Max Weber is attributed to have first highlighted in 1947 what is now known as transactional leadership style. In this style of leadership, the role of the leader is to manage, monitor and supervise the followers. Followers must obey the instruction of the leaders. In exchange of the work done by the followers, the leaders promise them a good reward. On the other hand, if the followers disobey the leaders’ instructions and perform poorly in their works, the leaders have the right to penalize them. This type of leadership does not welcome new ideas, innovations or creativity from the followers. Leaders set rules and regulations that must be followed by the followers. Unlike the transformational leaders that are concerned with the mission, vision and long-term goals, the transactional leaders are concerned with the shortterm performance goals of the Organisations. The transactional leaders must ensure that the followers achieve their targets to ensure the Organisation achieve its overall performance target. Each follower is to ensure that they achieve their own KPIs on which a reward system is based. The transactional leaders also are not emotionally bonded with the followers. As the leaders believe that any directions or orders should come directly from them, employees’ engagement and their empowerment do not feature significantly in this style of leadership.

ENTREPRENEURSHIP LEADERSHIP

Entrepreneurial leadership involves forming a group of people to achieve a common goal through entrepreneurial behaviour by optimizing risks , exploiting opportunities, taking personal responsibility and managing change within a dynamic environment. The end result of this is for the benefit of the Organisation. To strive for excellence in performance, leaders should equip themselves with the entrepreneurial skills. Leaders must think as an entrepreneur, know when to grab opportunity, and treat the Organisation as their own business. As an entrepreneur, a leader must know when to drop a non-working strategy. If the routine SOPs and procedures fail to give desired result, the entrepreneur ought to be brave enough to change to a new plan that may give better results. An entrepreneurship leader knows better when to grab the opportunity that can impact their Organisation favourably. Similar to the transformational leaders, entrepreneurship leaders also listen to the ideas of their followers. These leaders welcome feedback and act upon it after adequate assessment.

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ISFIRE INSIGHT

Finally, entrepreneurship leadership is based on perseverance, determination and the ability to make changes constantly. Leaders with entrepreneurship traits are not afraid to make mistakes. Through mistakes, these leaders will have the ability to learn new things and discoveries. Entrepreneurship leaders are able to sell and promote their Organisations. Hence, they add value to the Organisation due to their boldness and braveness.

ANALYSIS

Among the famous transformational leaders is Warren Buffet who transformed a clothing manufacturer into a giant holding company. Another transformational leader is Jack Welch who transformed General Electric into a lean and agile powerhouse. John D. Rockefeller, who was the founder of Standard Oil, transformed it into a huge company from a single refinery, through acquisitions. From the contemporary Islamic banking and finance (IBF) industry, Dr Adnan Chilwan (Group CEO of Dubai Islamic Bank), Dato Sri Zukri Samat (CEO of Bank Islam Malaysia), and Dato’ Wan Fadzmi Wan Othman (former CEO of Agrobank Malaysia) provide examples of transformation leadership. By way of example, we present the case of Dato Sri Zukri Samat who was appointed as Managing Director of Bank Islam Malaysia Berhad in 2006, with one immediate mission. The mission was to resuscitate the bank after the huge losses it incurred prior to appointment of Dato Sri Zukri. He managed to transform the bank and returned it to black in just six months after implementing his strategy. The first challenge facing him was to change the culture of the bank. He instilled his vision for the bank amongst all the employees – from low management positions right to the top – and motivated them to accept changes willingly. He welcomed new ideas and encouraged feedbacks from his employees. Leading by examples, Dato Sri Zukri inspired the employees and gained their trust and respect. He also took concrete measures to empower his employees and engaged them in the decision-making process. Obviously, all these measures are popular amongst transformational leaders. An example from outside the IBF industry is provided by Kamardy Arief who was appointed as the President Director of Bank Rakyat Indonesia (BRI) in 1983 – a time when the bank was suffering huge losses. As a first step towards transformation, he attempted to change the culture of the bank. His leadership style

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ISFIRE INSIGHT transformed the bank from being a subsidized bank into a profitable business. Like Dato Zukri, Kamardy Arief also implemented the change of attitudes among his employees. He brought changes in the Organisational and institutional structures, salaries and rewards, and in product offerings and credit policies. Consequently, Kamardy Arief was able to transform BRI from a government-owned bank into a viable and self-sufficient business. As a leader he is motivated, inspired, sought commitment from his employees, and recognised their contributions and achievements. These are certainly among the good qualities of a transformational leader. One may argue that in any profit-oriented business, the transformational leadership style of nurturing, coaching and mentoring may not be the best model. Hence, the transformational leadership style may be fused with the transactional leadership style to achieve desired optimality of profits. This suggestion assumes that the transformational leaders alone may not sufficiently succeed in contributing to the bottom line. Thus, the transactional leaders remain important in such environments. Having said that, most people tend to believe that the transformational leaders are important in creating conducive environments within Organisations. However, it is also true that the reward systems drive the Organisations towards performance. Most Malaysian Organisations are still not open to the transformational leadership style. This can partly be explained by the national culture that still respects authority and a top-down approach. This suits transactional leaders. For the followers, their own personal gains are important. They look forward to be awarded with the rewards as promised by the leaders. Moreover, it remains a cultural taboo for the followers to share their own views and ideas to the leader. This in many ways is not unique to Malaysia, as other neighbouring countries, particularly Indonesia, also share similar culture. Perhaps this is why Kamardy Arief tried to fuse his transformational leadership style with an explicit performance reward system. One famous example of transactional leaders was Steve Jobs of Apple Computers. He was known as a down to earth leader but was not hesitant to give his employees a dressing down if they failed to meet his expectations. Going forward into the new economy with fierce competition in the financial sector, the key players must adopt both the transformational and transactional leadership styles. It is fair to assume that the lower management staff require a transactional leader to

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monitor, supervise and control them in achieving the performance of the Organisations. They can best be led by transformational leaders. This certainly helps in stimulating creativity, innovative ideas and feedbacks from the employees. The middle level of employees should be allowed room for improvement through employee empowerment and continuous engagement. Finally, the top level employees should adopt the transformational leadership style in ensuring that the Organisation achieves its long-term goals.

IBF AND THE LEADERSHIP STYLES

Transformational leadership may best suit Islamic financial institutions. The reality is actually different, as Islamic financial institutions tend to follow national cultures many of which are not entirely in its favour. Having said so, many conventional financial institutions in the Muslim world have successfully adopted the transformational leadership style. However, given the heavy emphasis on the bottom line, Islamic financial institutions tend to favour the transactional style. There are a few reasons for the adoption of transactional leadership in Islamic financial institutions, including: 1. Lack of sophistication of management practices; 2. Lack of depth from historical legacy for the top management; and 3. Shariâ&#x20AC;&#x2122;a restrictions in some limited cases..

CONCLUSION

In concluding the article, one must emphasise that all the three leadership styles have their own strengths. As the competition in the industry has become fiercer, leaders should equip themselves with the correct style that can enhance the sustainability and ensure growth of the Organisation. All the three styles should be adopted interchangeably. None of the leadership style is superior to the other. In Islamic financial institutions, the transactional leadership style is more prevalent for the reasons given above. IBF is still new compared to its conventional counterpart. Understandably, conventional financial institutions are more innovative and creative due to their longevity. There are now some scattered examples of transformational leadership emerging in IBF. One may hope that this will take IBF away from a heavy emphasis on the bottom line to more passion, compassion, inspiration and pursuit of ideals.

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POINT OF VIEW

COMMON TRAITS SUCCESSFUL LEADERS IN ISLAMIC FINANCE HAVE DR SOFIZA AZMI

have had the privilege of working and meeting so many leaders in Islamic finance over the course of my work, who are all inspiring and motivating. In my capacity as the editor of ISFIRE magazine, I have interviewed more than 20 leaders who are movers and shakers in the global Islamic finance industry. My interactions with other leaders in Islamic finance around the world through my various capacities as the CEO of Cambridge IFA and Programme Director of Cambridge Islamic Finance Leadership Programme (Cambridge-IFLP) have exposed me to various leadership traits and how each of them

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contributes to the success of an organisation. Here I shall be sharing some of the leadership traits that successful Islamic finance leaders have in common. I have observed that the very best leaders marry the “head” and the “heart.” What does this mean? Simply being tough-minded on standards but at the same time tender-hearted with people. Creating such a balance is no easy task but one worthy of your best efforts! As Nelson Mandela once said, “A good head and a good heart are always a formidable combination.” In this ever changing

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economic landscape, leading with the head and heart is critical to leaders as they need to motivate people to respond to changing circumstances and goals. When it comes to making changes, often people don’t resist change itself but the fear of the unknown that comes with these changes. Hence, they become defensive! Leaders who have successfully transformed their organisations understand these too well. They know that for change to happen, they must not only lead it but also willing to take action to cause action. An example of a leader who have efficaciously transformed his organisation, both on operational indicators as well as culture and overall performance is the former President and CEO of Agrobank, Dato’ Wan Mohd Fadzmi Wan Othman. He had successfully led the transformation of Agrobank into a full-fledged Islamic bank within a short span of time. In his own words Dato’ Wan Mohd Fadzmi acknowledged that “the journey for the transformation was gruelling, involving major and significant change in mind set, processes and redoing all documentations.” With any transformation exercise; changing the status quo of long ingrained cultures of inefficiency, bureaucracy and complacency is inherently a challenge. This requires leaders to be steadfast and willing to make difficult and unpopular decisions to create deep and lasting changes for the long-term benefit of the organisation. And Dato’ Wan Mohd Fadzmi stepped up to the challenge with boldness and humility. Even after leaving the bank, he is still well respected and spoken-of highly by his former colleagues and employees. When speaking at a panel discussion on building talent for the Islamic financial services industry in Kazakhstan, I was asked by a non-Muslim if it was possible for him to build a successful career in the Islamic finance industry. My answer was simple and direct. Yes! But only if you are authentic to Islamic finance, i.e., genuine and true to developing Islamic finance. This also holds true to Muslims. Being authentic here means being passionate and committed to developing Islamic finance with an unswerving belief and conviction that the Islamic system is a strong and viable financial alternative. This pure and steep belief rings true for all leaders I have encountered and is reflected in their dedication to the development of Islamic finance. They not only talk about it but they are able to translate this belief into actions and behaviours. Their commitment is unwavering! Because of their authenticity towards Islamic finance, they inspire others with their energy and vision. Iqbal Khan, the

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CEO of Fajr Capital, is one such person. As our most prominent speaker at Cambridge-IFLP, he never fails to inspire the delegates (and myself) with his own story and the steps taken to achieve success, and being resilient in pursuing his dream. You can hear his passion for Islamic finance in his voice and what he says. Being a long-time advocate of Islamic finance, Iqbal Khan continues to play a prominent role in developing and promoting Islamic finance on a global scale. Another authentic trait that successful leaders have is being their true self – being genuine and real. They are authentic to who they are and how they behave. They don’t try to be one thing in the office and another thing elsewhere. In other words, what you see is what you get! Authentic leaders are also self-aware and self-actualised individuals who are aware of their strengths, limitations and emotions. The concept of authentic leadership was first introduced by Bill George, a professor of management practice at Harvard Business School, in his 2003 book “Authentic Leadership” and was developed further in his later book “True North”. Since then authentic leadership has become the gold standard of leadership. Why is being an authentic leader an important leadership trait? According to Bill George, when leaders are dedicated stewards and lead in an authentic manner, they build longlasting organisations that do great good for people and make a giant difference in the world. What differentiates authentic leaders from inauthentic ones is that the former has full understanding of the purpose of leadership, they lead with very consistent values, build long-term connected relationships and have the personal self-discipline to deliver extraordinary results from their teams. At this point you may be asking, “What if the real me isn’t the most effective way of leading? If I act the way an effective leader should act and produce great results, I don’t see anything wrong with this.” There are at least two things that are wrong with this statement. Firstly, even if your leadership produces great results, people working for you or with you will eventually feel uncomfortable working with someone who they know is mere acting and not genuine in their actions and behaviour. This eventually leads to mistrust! Secondly, in trying to be someone you are not, you will end up failing miserably and will consistently feel stressed. Over time, your words and body language will reveal your true self and people will become more and more reluctant to trust you as a leader. In a nutshell, you won’t be able to lead effectively if people perceive you as disingenuous.

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IN MY OPINION, MANAGEMENT IS A SCIENCE BUT LEADERSHIP IS AN ART. Many leaders I have met and interacted with believe leadership is more of an art than a science. Dr Adnan Chilwan, Group CEO of Dubai Islamic Bank, puts it eloquently when asked whether leadership to him is an art or science during the leadership interview conducted at the 2nd Cambridge-IFLP. According to him, “Leadership is a cultivated art that requires complexes experiences to groom.” He argued that since there are a lot of human elements in leading people, more relevance should be given to EQ rather than IQ. In my opinion, management is a science but leadership is an art. This distinction was first made by Field Marshal Willian Slim, one of Britain’s great military leaders of the last century, who wrote, “Leadership is of the spirit compounded of personality and vision; its practice is an art. Management is of the mind, more a matter of accurate calculation, of statistics, of methods, time tables, and routine; its practice is a science. Managers are necessary; leaders are essential.” Indeed he was well ahead of his time as this passage was written in 1957. Studies have provided empirical evidence that although it’s important to become an expert in the mechanics of the business (hard skills), this is simply not enough. Those managers who can add soft skills to these hard skills are more likely to have engaged employees who would go the extra mile. Dr Adnan Chilwan hit the nail on the head when he said, “You are not successful as a leader if you are not able to ignite the passion amongst your team.” Being selected for a leadership position doesn’t automatically make you a great leader. Leadership programmes can inject fresh energy into your career and get you ready for the next level of leadership. But what makes Cambridge-FLP unique is its approach to leadership. Aimed at preparing the next generation of leaders, the programme provides delegates with excellent mentoring opportunities, rigorous leadership training from renowned leaders as well as industry-specific case studies in Islamic finance. Designed and structured by Cambridge IFA, the programme is delivered

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by some of the most influential leaders in Islamic banking and finance. Amongst them include Iqbal Khan (CEO of Fajr Capital), Dr Adnan Chilwan (Group CEO of Dubai Islamic Bank), Rafe Haneef (CEO of CIMB Islamic Bank), Stella Cox (Managing Director of DDCAP), Dato’ Izani Ghani (Executive Director of Khazanah Nasional Berhad) and Dr. Hamed Merah (former Secretary General of AAOIFI). We believe that leadership can best be understood by studying and closely observing the leaders themselves. Hence, the programme has been designed to allow delegates to benefit from the presence of a number of mentors who are leading personalities in the global Islamic financial services industry. Thus, the pedagogical methodology applied to the programme gives priority to real-time leadership perspectives, implicitly assuming that leadership is more like an art rather than a science. Leadership workshops, along with interactive social activities and leadership activities,allow the delegates to seek mentorships and develop relationships with these leaders as delegates will be able to interact with them formally and informally. There is something about being at the University of Cambridge that make one feels intelligent and very philosophical. Besides its many historical buildings, the university is also known for a number of social activities that are a must on the “to do” list when one is visiting the University of Cambridge. This includes punting on the River Cam and enjoying one of Shakespeare’s famous plays during the Cambridge Shakespeare Festival held annually every summer. Delegates of the programme are able to enjoy these activities as part of the programme agenda lined up during the programme course. It doesn’t end there. Delegates also have the opportunity to enjoy the British summer weather while at the same time hone their leadership skills during the Cambridge-IFLP Treasure Hunt activity organised on the college grounds.

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Forthcoming Book HOW TO SUCCEED IN ISLAMIC BANKING & FINANCE

Humayon Dar

Phd (CANTAB) W W W. I S F I R E . N E T

PRE-BOOK YOUR COPY NOW! |

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TALKING POINTS

CHARACTER BUILDING THROUGH ISLAMIC BANKING & FINANCE

slamic banking and finance (IBF) is legalistic in its very nature. Those who are involved in product development in Islamic financial institutions are very well aware that the Islamic jurisprudence of financial transactions is deeply rooted in ethics. There is an explicit emphasis on understanding of contractual arrangements and honouring the terms and conditions therein. Morality in Islam is governed by implicit and explicit contracts that people enter into for different economic activities. There is no conflict between the Islamic law and morality; the former merely formalises the latter. Working for an Islamic business (i.e., an Islamic bank) in itself should induce good behaviour on part of its employees. In addition, it is the responsibility of Islamic banks and financial institutions to provide character-building training to its employees so that the business does not face undue reputational risks. It may not be too demanding to ask Islamic banks to start spending on character-building of their customers and clients. There are well-established credit score cards that banks (including Islamic banks) use to assess credit worthiness of their customers. Similarly, character score cards can easily be developed to assess morality of their customers. In the beginning, the proposed character score cards may be based on the voluntarily provided information by their employees and customers, which can be further developed and refined with the availability of more detailed data.

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This is not a far-fetched idea, as the government of China has already embarked upon a project to develop a social credit score, which will be based on all the actions and activities of the companies and individuals, stored in a central place. Although this project has temporarily been halted for a number of socio-political concerns, the project will resume after these concerns have been addressed. Based on the social credit scores, the individuals and businesses will be given certain concessions or will face restrictions if their score falls short of a threshold. Credit scoring companies like Experian have credit files off all the individuals (who are listed on the national voters list) in the UK. The proposal here can be seen as an extension of the practice to include social behaviour.

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As such social credit scores are not available at present, CSR-related activities of corporate clients of Islamic banks should be taken as preliminary indicators of good behaviour, and hence they should be positively discriminated. Inclusion of positive screens in addition to negative screens in Islamic asset management is a relevant trend in this respect. Islamic banks should also start investing in a character score card similar to the proposed Chinese social credit card, which could be based on certain social, moral, and economic factors. For example, if someone is found to be involved in domestic violence, that person could be denied access to financial services offered by Islamic banks. In the beginning, it will be difficult to collect

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and collate data on customers, but it should be relatively easier to have such information on the employees of Islamic banks. Hence, a good start will be to develop the system for employees of Islamic banks, later to extend it to customers. Some people may opine that this will amount to a Big Brother watching you all the time, which goes against civil liberties and individual freedom. This is certainly a valid argument. However, in this world of big data analytics, we are all being watched all the time in one way or the other. Smart phones and social media platform continuously collect and store data on their users and customers. Credit card companies have detailed information on their cardholders and can very easily analyse their spending behaviour.

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â&#x20AC;&#x153;Social behaviour should refer to contribution to charitable and good causes, involvement in promotion of civic services, and voluntary services like lollypop man services (or what is otherwise known as crossing guide services), etc.â&#x20AC;?

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Obviously, a comprehensive character score card can only be developed with the help of government bodies and other big market players. The national citizenship registration authorities have data on all the individuals living in a country and through IT systems each and every individual is assigned a unique registration number. More data can be stitched around these unique registration numbers to develop a character score card. Without suggesting to have an open-ended all-encompassing character score system, we suggest that it should initially be based on five pillars:

FINANCIAL INTEGRITY

Financial integrity can easily be quantified by looking into the factors like involvement in fraud, tax evasion, and wilful default etc.

PERSONAL MORALITY

Personal morality should be based on whether the person has lied in the past, is involved in child labour (e.g., whether the person employs a child as a domestic worker), has been proven to be involved in domestic violence, and the related factors.

SOCIAL BEHAVIOUR

Social behaviour should refer to contribution to charitable and good causes, involvement in promotion of civic services, and voluntary services like lollypop man services (or what is otherwise known as crossing guide services), etc.

COMMITMENT TO ISLAMIC BANKING & FINANCE

Commitment to Islamic banking and finance may be gauged by looking into multiple accounts (with Islamic and conventional banks), attitude towards the prohibition of interest, and the general perception of Islamic banking and finance the person may have, etc.

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ADHERENCE TO SHARIâ&#x20AC;&#x2122;A

Adherence to Shariâ&#x20AC;&#x2122;a is perhaps the most controversial from a secular viewpoint, and Islamic banks must take extra care to incorporate it in the proposed character scoring. It is recommended that the non-Muslims should not be discriminated against on the basis of Shariâ&#x20AC;&#x2122;a adherence. In the beginning, the proposed character scoring system may not be perfect but it will evolve into something meaningful. Like Human Development Index (HDI), as developed by United Nations Development Programme (UNDP), was not all encompassing in the beginning but over the years it has given birth to a number of other sub-indices that have incorporated human development more comprehensively. Similarly, the proposed character character scoring will also improve with the passage of the time. Why is the proposed character scoring system important and why Islamic banks should spearhead this initiative? The proposed character scoring system is important because it will be a marketled process to reform Islamic societies. All other efforts (political, religious and purely reform-based) have failed to bring social reforms in the Muslim world. With the IT revolution it has for the first time become possible for the private sector to collect and collate information on individuals and corporates on various aspects of their lives and businesses. Hence, it is important for Islamic banks to come forward and play an important role in this respect. Access to finance is a basic need and there is huge emphasis being placed on financial inclusion all over the world. Islamic banks, emerging as important players in the financial systems of the countries where they operate, are in the best position to induce the required changes in individual behaviour and through an aggregation process in the social thinking and practices.

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ISFIRE INSIGHT

THE ANATOMY OF THE LAW

DR. RIZWAN REHMAN

Shariâ&#x20AC;&#x2122;a is the foundation of the Islamic finance industry. It differentiates the industry with conventional finance. But the replication of products creates substantive issues for the industry. The industry fails to recognise that law has the power to influence behaviour. In this article, we explore the concept of law and how it is pivotal in creating a defined culture.

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That the Islamic financial industry is growing is seen by exponents to be a reflection of the support for the principles and products of the industry. It highlights both increased religious sensitivities of the people along with an acknowledgement that the industry has the products to meet the needs of a discerning clientele.

This is hardly an easy feat; there is bound to be disagreement on the legislative intent of the Prophet. Thus Islamic finance, like Islamic law as a whole, has been confronted with differences of opinions. Nevertheless, there is much the industry does agree upon allowing there to be a unifying bond between most Islamic financial scholars.

That the Islamic finance industry is growing is not providing detractors any comfort. The industry is as capitalist as the interest based financial system, its substantive values are the same, the difference is only terminology (and even then some would argue we should change product names to their English counterparts). The never-ending form vs. substance debate plagues the industry but it is not destroying the industry. It is just benign tumor: frustrating, not debilitating.

Even so, transposing the opinions of a 7th century legislator to the 21th century is wrought full of uncertainty. Contextual (and temporal) differences make it difficult for the Islamic scholar living many miles and years from desert Medina to empathise completely. What is harder is providing a Shari’a opinion for new phenomena. A mistake is to assume that an opinion on new phenomena that has no precedent during the time of the Prophet is part of the Shari’a. Today’s banking and finance sector is completely novel and unique. Contract practiced at the time of the Prophet, such as mudaraba, are different to that is practiced today. For one thing, the former was used for single projects, whereas today’s mudaraba can be used to fund multiple projects. The best scholars can do is to relate principles.

That the Islamic finance industry is growing is good, or is it? The industry is only 40 years old; it could have furnished any model it wanted, but it chose this model, and it is this model that is flourishing. It is a model where clients, bankers, lawyers, marketing managers and Islamic scholars butt heads and form a unified opinion which meets the objective of each. For the banker and client, it is profit; for the market manager it is revenue; for the Islamic scholar it is Shari’a complicity, and for the lawyer, it is simply the harmony of client needs with regulatory requirements. So what is the contemporary Islamic finance model? For all the many laws and products, fatwas and industry standards, the fundamental premise is simple: if the Prophet Muhammad was present today, these are the rulings he would have passed.

Indeed, following his demise all juristic activity in Islamic law is about empathising with the Prophet, attempting to think what his opinion would have been for any given situation.

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In addition to this Shari’a engineering, we hear of the industry being ethical and an alternative to the conventional financial industry. Emphasising the ethical element presupposes the capitalist system is unethical, a quite damning statement for a sector that is operational in every country in the world and remains in demand despite concerns. There are undoubtedly unethical elements in banking and finance, but its universality shows its strength. People willingly go to banks for their financial requirements and are generally satisfied. To boast of being an alternative, the industry proclaims that its offerings are substantively different. This does not appear to be the case. For example, businesses wishing to build capital can access bank loans or sukuk. Both instruments ultimately place the business in a position of debt. Even though the industry is currently not substantively different, it is attractive because scholars deem that products and services are Shari’a complaint. In other words, products and services are those that the Prophet, as legislator, would have accepted if he had been present today. As it is, the derivation of the law is assumed to be an objective task, without being mired by the subjectivities of the scholar and fully connected to the canonical sources of Islamic law: the Quran and the Sunnah. In consequence, the law, by having this connection has more immediate power than the effect of the law. Hence, strange decisions have been proffered

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in which validation for the legal opinion comes from tenuous links to the source. As one example, the 33% threshold for debt to equity ration in stock screening methodologies derives from a hadith on inheritance and perhaps one on culinary habits. The link is fallacious. The formalist approach – relying exclusively on the Quran and Sunnah – towards law originates from the thought of Imam Shafi, who was committed to ensuring that the subjective opinions of the scholars were minimised. But this could not always be maintained, and thus scholars relied on concepts of maslaha (public benefits) or darura (necessity) to show that the Shari’a had the power to adapt to changing exigencies. This is the instrumental approach. In Islamic finance both approaches are used and through their utilisation substantive values of the law are conveyed. Any form of law carries and confers a set of values which imbues itself in the law and spreads in the action that is commanded, or in the absence of an action that is prohibited. Islamic finance is no different, but the substantive values of the law appear to be very similar to that of the conventional financial service sector. This is forgotten and could be detrimental for the industry in the long run.

LAW AS A POWER TO SHAPE BEHAVIOUR

Returning to the original question, what is the contemporary Islamic financial model, the answer is that today’s model of Islamic finance is one rooted in the Islamic sources but shaped to meet the needs of a capitalist mentality. The term, capitalism, is casually used in the Islamic finance industry and is considered as a negative. Generally, detractors of capitalism are quick to deplore it, slow to offer any alternative. They shout inequality, while probably working in a capitalist organisation. Capitalism is to do with the private ownership of land, labour or capital. Its opposite would be state ownership. By owning the factors of production, a private organisation profits off what it owns. Thus, the capitalist mentality of a person is to profit off that which they own. The financial sector exists to allocate money. They help an individual or business to gather money in order to 1) transact for day to day needs; 2) be secure in emergencies; 3) speculate for profit; 4) spend charitably. The Islamic finance industry attempts to encourage the fourth, but this is more of an afterthought especially as very few, if any, commercial enterprise is preoccupied with profiting in order to disburse charitably. Islamic finance uses a combination of the formalist

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So, if the Islamic finance industry upholds a capitalist mentality, then the Shari’a is its instrument to achieve this. and instrumental approach to the Shari’a, but as few if any 7th century law offers appropriate analogies in the 21st century, most of the laws in Islamic finance are in fact instrumental. This means the subjectivities of the Islamic finance scholars will affect the law passed. At this juncture, we turn to look to the concept of law in order to explain the impact of subjectivities on law. All laws exist to guide behaviour by rules. It is typically issued by a higher authority, which is usually the state. For religious laws, the authority would be God and His messenger. The state uses the law as a means to ensure order in society. Any descent into anarchy would weaken the state and create disunity. Creating order does not simple mean limiting violence; it also means justice and fairness prevails between citizens. For political philosophers, the state is the natural evolution of men’s communal needs. Aristotle argues that the state commenced with individuals. Individuals create families. Numerous families create communities and numerous communities create the state. The objective of each group is to secure happiness, and the state’s objective is to ensure that each grouping under its authority achieves happiness. To achieve this happiness, each member of society should be virtuous, and the state, through the issuance of law, encourages the inculcation of virtue. Part of virtue is being just, and justice between members of society should be equal or it should be the consequence after one party has lost something in a transaction with another party. However, the consent of virtue is going to reflect the substantive values of the ruling regime. Aristotle believed the regime could either function as an authority looking out for the best interests of the citizens, or it could look out for itself. Each regime has their own unique set of values, which would be

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reflected in the laws that were passed. Hence, there is an axiological unity between the regime, the laws passed and the overall morality of society.

and what could be captures under it. In this case, rings were unlikely to have been captured by the legislator.

In relation to making laws, these could be created by customary practice of different communities or enacted by the state. Aristotle opined that the best system is the former, where precedents are formed and these are utilised to determine similar cases. Here he is preempting the common law system used in the UK and former British colonies. In terms of the latter, this alludes to the passing of statutes. Statutes are passed either as a codification of customary law or to account for a new development. In light of the notion of separation of powers – the idea that a state should rule by dividing their authoritative powers into three independent organs: Executive (the power to administer a state); Legislature (the power to issue laws); and Judiciary (the power to adjudicate whether citizen has followed the law) – only the Legislature can pass laws. So, for any new phenomena a judge cannot promulgate law and must wait till new statute is ordained.

To summarise, law according to Aristotle: 1. Passed to encourage virtue amongst citizens 2. Reflects the substantive values of the regime 3. Can be based on customary practices or enacted by the regime 4. Interpreted by the judiciary who attempt to empathise with legislator when passing the law.

ISLAMIC FINANCE AND LAW

The judiciary, then, only has recourse to the customary and enacted law, and occasionally the facts may not fit the law. It is up to the judiciary to pull the law to the case. Aristotle gives the example of a law that makes it illegal to injure a person with an iron instrument. In a case, a man hits another, and on his hand is a ring made of iron. Should the man be prosecuted under this law? The literal meaning of the law would suggest yes, but intuition would suggest otherwise. In situations where the law is not exact – and these situations are many – then the judiciary has to place themselves in the shoes of the legislator, to think of the purpose of the law

That is theory. In practice, legislative power shifts in each and every generation. To deal with new phenomena requires new thinking. It means that Islamic finance scholars in fact create law. To create the law, they should be influenced by the “regime”, which would be the Prophet. But once again this is not the reality given that there are many different parties in the product structuring process. One could argue that there is a constructed regime in Islamic finance. The bank, the client, the lawyer, the standard setting bodies are all part of the regime that administers, passes laws and adjudicates. The

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Returning back to our discussion on Islamic finance, there is no sovereign authority present. Law is traditionally assumed to emanate from the regime. Previous regimes can pass laws which still perdure long after the individuals within have expired. The same is true with Islamic finance. The Prophet passed a set of laws, many of which are still relevant today. However, regimes change and are considered to be the new legislative power. In theory legislative power always resides with the Prophet.

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values of all parties of the regime will be imbued in the products created. Yet any law passed has to be anchored to Islamic law, and this leads to frequent conflicts due to the tenuous connection between pre-modern Islamic law to modern exigencies. The Islamic finance scholars will then have to empathise with the legislator, and the best way is to rely on the maqasid (the higher objectives of Islamic law). This has become a buzzword for Islamic law as a whole as it is seen as an interpretative method that divests from a slavish following of rules passed in a context different to the modern day. The maqasid endevour originate with scholars searching by induction for purpose of laws. They aggregated the laws to find that Islamic law is to protect five things: Life, Religion, Lineage, Wealth and Intellect. In situations where a direct law is not present or cannot be analogised from an existing text, considering the maqasid helps the Islamic jurists to pass law. So, with a lot of Islamic financial laws, they are to protect wealth. But, as mentioned above, the laws are there to also encourage a capitalist mentality – that is to make profits. There is thus a dual aim to the construction of Islamic financial laws.

practiced today would not have existed. But it does exist, and indicates the values of the Islamic finance regime.

HEED THE WARNING

That the Islamic finance industry has grown is definitely good and impressive. But it has to be self-aware. The power of law to motivate behaviour is rarely considered, and it has to be conscious that if the products are imbued with values of capitalism, then the overall industry will reflect that. The consequence of this is the development of a culture which may regard as not being “Islamic”. At the very least, and at the very worst, the industry will continue to be accused of being similar to the conventional finance sector if it remains on its present trajectory. Thus, to argue that it is an alternative, without providing an alternative way of practicing with substantial differences in value, will become more difficult as Muslims become more affluent. The industry itself may grow impressively with the growing demand. However, if it does not reconsider the content of the laws, there is a real possibility that the problems that afflict the conventional financial services sector will damage Islamic finance.

A case in point is the perspective on interest and its dissimilarity from the profit rate on a murabaha. Exponents argue that interest- based products are like pork – haram is haram. But let us look at it in another way. Khamr or grape wine is prohibited; there is no mention of beer or marijuana. Yet scholars find the reason of the prohibition is due to the intoxication resulting from consuming these products. They use analogy to connect the prohibition to all intoxicants. With interest-based products, the notion is that paying extra on loan is not allowed. The difference with murabaha is that it is a trade base product, but parties appear to be in the same position as of parties in a loan transaction. There is debt, and the repayment looks awfully like interest. Scholars did not analogise the effects of interest-based products with other products, yet they did so with Khamr. Now it is not the purpose of this article to criticise the judgements of scholars. It is to show that a certain thinking prevailed to distinguish between interest-based products and murabaha. Another mode of thinking could have focused on the effects, which would have meant that murabaha as it is

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2019 THE LEADING ISLAMIC FINANCE PUBLICATION SINCE 2010

THE MOST AUTHENTIC SOURCE OF INTELLIGENCE IN ISLAMIC BANKING AND FINANCE WITH NINE MOST AUTHENTIC AND WIDELY RESPECTED ANNUAL REPORTS, THE GIFR HAS GAINED RECOGNITION AND ACCOLADE FROM THE ISLAMIC FINANCIAL SERVICES INDUSTRY, INCLUDING LEADING ISLAMIC FINANCIAL INSTITUTIONS AND POLICYMAKING BODIES. THE 10TH EDITION OF GIFR CARRIES THE THEME “ARTIFICIAL INTELLIGENCE AND INNOVATION IN ISLAMIC FINANCE”. THIS THEME WAS CHOSEN TO HIGHLIGHT THE TRANSFORMATIVE POTENTIAL OF ARTIFICIAL INTELLIGENCE IN ISLAMIC FINANCE AND HOW THE INDUSTRY CAN HARNESS INNOVATION TO DRIVE SUSTAINABLE DEVELOPMENT.

CONTENTS Digital Transformation of Islamic Financial Institution: A Global Survey on the State of Readiness and Influencing Factors

Artificial Intelligence Applications in Islamic Finance Industry

Enhancing Legal & Regulatory Framework for Islamic FinTech Development

The Impact of Technology, Innovation and Artificial Intelligence on the Current State of the Global Islamic Economy

Harnessing Fintech Innovation for Sustainable Growth in Islamic Finance

Shari’a Analysis of Cryptocurrencies and Bitcoins The Race to Be the Global Islamic Fintech Hub

http://gifr.net/ W W W. I S F I R E . N E T

To get a copy of GIFR 2019 please contact: fmehmood@edbizconsulting.com | I S F I R E , J U N E 2 0 1 9 | I S F I R E I N S I G H T | 79

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STANDARDISATION in the

ISLAMIC BANKING and

FINANCIAL SYSTEM Through a Methodology of Inclusion and

EXPANSION

Rationale and Historical Intellectual Evidence Shaykh-ul-Islam Dr. Muhammad Tahir-ul-Qadri

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INTRODUCTION Islamic banking and finance (IBF) today is making giant strides in terms of development and delivery of products and services. As reported by Global Islamic Finance Report 2019, the global size of IBF is estimated at US$ 2.6 trillion at the end of 2018. This success has not emerged without challenges that are diverse and multidimensional. One of the major challenges the Islamic banking and financial industry is facing today is lack of harmonised Shariâ&#x20AC;&#x2122;a rules and regulations, and the consequent nonuniformity in Islamic banking products and services being offered in various regions of the world. This has been a major point of discussion in the global Islamic financial services industry, with a widely held view that the validity or invalidity of certain products offered by Islamic financial institutions (IFIs) across the world is due to divergence of opinions among Muslim jurists belonging to different schools of fiqh (e.g., hanafi, maliki, shafiâ&#x20AC;&#x2122;i and hanbali). Regional differences in interpretation and derivation of rulings in accordance with the popular school of law of that region stand as the main reason for not having a standardised,

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harmonised, uniform and universal Islamic banking system across the world. The resultant multiple interpretations by jurists belonging to different schools of fiqh regarding Islamic financial products result in minor and major disparities. In view of this fact, it is logical that without a universally unified and uniform Shariâ&#x20AC;&#x2122;a code, the acceptability of products introduced in Islamic financial industry will remain fragmented.1 It is, therefore, suggested that a prompt attention and action by Muslim scholars and Islamic finance experts is essential, as the continuation of the current state of affairs in this domain would damage the growth of the IBF industry in the years ahead. This is becoming a growing concern, given that the industry has already started slowing down. Furthermore, the critics question viability of Islamic economic and banking system as an alternative to the conventional system, if global harmony and universal standardisation of Islamic banking products and services cannot be achieved even within the Muslim world.

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Considering the necessity and importance of the issue of standardisation of products, this article focuses on this issue of immense importance to IBF. HISTORICAL CONTEXT OF THE PROBLEM There are different national approaches to Shari’a governance around the world. For instance, Central Bank of Bahrain (CBB) requires IFIs operating in its jurisdiction to set up a Shariah Advisory Committee at the institutional level, while it has only recently set up a National Shariah Advisory Board, with a limited role to advise the central bank on Shari’a matters. In Malaysia and Indonesia, on the other hand, National Shariah Advisory Councils attempt to standardise Shari’a opinions (fatawa) and the resultant Shari’a practices in IFIs. In the case of some other GCC countries, such as Kuwait and Qatar, the Shari’a committees at the institutional level and another independent body, i.e., the Ministry of Awqaf and Religious Affairs or the Ministry of Justice and Islamic Affairs, are given the authority to oversee Shari’a governance practices. The UAE has also recently set up a centralised Shari’a Advisory Council. The higher Shari’a authorities in the UAE, Qatar, and Kuwait only act when there are conflicts of opinion among Shari’a scholars. In Saudi Arabia, Shari’a advisory is a purely market phenomenon. It is also considered therein that the higher Shari’a authority cannot effectively supervise Shari’a-compliance for IFIs, and may in fact negatively impact stability of the Islamic finance industry. 2 In the absence of a central Shari’a authority and abidingness of its rulings and fatawa on IFIs, Different interpretations of Shari’a rules amongst Shari’a scholars may create confusion in the general public as well as in banking communities. This difference of opinion applies not only to some of the products, but also to some of the operations of the Islamic banks. For example, there is no uniformity in opinions pertaining to the principle of the trust financing

1. Rafay, Abdul, Ramla Sadiq and Mobeen Ajmal. “Fragmentation of Islamic Financial Products—An Exploratory Study of Islamic Schools of Thought.” Abasyn Journal of Social Sciences— Special Issue: Towards Financial Inclusion: 48.

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2. Kasim, Nawal, Sheila Nu Nu Htay and Syed Ahmed Salman. “Empowering the Shari‘ah Committee towards Strengthening Shari‘ah Governance Practices in Islamic Financial Institutions.” Review of European Studies 8 (March 2016): 144.

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contract (mudaraba) in business transactions. The maliki and shafi’i schools of jurisprudence are of the view that mudaraba should be confined to trade and trade-related activities alone, and should not include the activities of manufacturing. According to them, the contract for manufacturing should be excluded from mudaraba, which is a profitloss sharing contract, but formed under a specific long-term contract whereby a party undertakes to manufacture, i.e., istisna’. However, the hanafi school of law does not object to the application of mudaraba for manufacturing activities, while the hanbali school of law allows two separate agreements using mudaraba and istisna’ principles as long as the two agreements do not impose conditions upon each other. 3 Such non-uniformity of opinions amongst Islamic scholars from different schools of law generates confusion amongst bankers, customers and the general public. Customers will not really understand what are the ‘dos and don’ts’ of the Islamic banking industry, and will make their own personal interpretations. This situation is unhealthy for banker-customer relations, as both parties may have different interpretations. 4 SUGGESTED SOLUTION The real reason behind the lack of harmonisation of practices and uniformity of opinions is the strict conformity with one school of law (taqlid al-madh’hab) in a particular region, and with some other school of law in another region. The solution to this problem lies in adopting a neojuristic approach of inclusive accommodation and flexibility. This alternative approach is based on the Quranic principle of facilitation and the juristic principle of expansion. It may be named as taqlid al-madhahib or conformity with all schools of law. THE QURANIC INJUNCTIONS ON THE PRINCIPLE OF FACILITATION (TAS’HIL) AND FLEXIBILITY (TAWASSU’) One of the primary objectives of Shari’a is to facilitate human kind and remove burdens, difficulties and hardships from their lives. The Quran states, “Allah desires ease for you and does

3. Ahmad Shaharudin Bin Abdul Latiff. 2013. “The Need for an Information System for the Dissemination of Knowledge on Islamic Banking.”

4. Ibid. 7. Ibid., 5:6.

5. Quran 2:185. 8. Ibid., 4:28.

6. Ibid., 22:78. 9. Ibid., 8:66.

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not desire hardship for you.” 5 The entire religion of Islam is structured upon the provision of ease and the removal of difficulty. The Quran explicates this by saying, “He has chosen you, and has not laid upon you any hardship or constriction in the matter of religion.”6 Furthermore, it is also stated, “Allah does not want to make things hard for you.” 7 Since Allah knows the weakness of human beings, He has lightened for them the legal responsibilities and lessened from them the obligations that they would not be able to fulfil. He said, “Allah intends to lighten your burden. And man has been created weak (and infirm).” 8 He further explained, “Allah has, at present, lightened the burden (of His commandment) on you. He knows that there is (some degree of) weakness in you.” 9 EVIDENCE FROM THE HADITH Jabir (may Allah be pleased with him) reported that Holy Prophet (peace be upon him) said, “Indeed, Allah did not send me to be harsh or cause harm; He sent me to teach and make things easy.”10 Aisha bint Abu Bakr (peace be upon her) said, “Never was Allah’s Messenger presented with two options except that he would choose the easier of the two, so long as it was not a sin.”11 According to Anas bin Malik (may Allah be pleased with him), the Prophet (peace by upon him) said, “Make things easy and do not make things difficult. Give glad tidings and do not make people feel averse.”12 Abu Hurayra (may Allah be pleased with him) reports that Allah’s Messenger (peace by upon him) said, “You were sent to make things easy and not to make things difficult.”13 Imam Ahmad bin Hanbal narrated in Musnad that the Holy Prophet said, “Verily, the best of your religion is the easier part. Verily, the best of your religion is the easier part. Verily, the best of your religion is the easier part.” 14 That is why Allama Ibn Qudama, a great jurist of hanbali school of thought, writes in his book Rawda al-Nazir fi Usul al-Fiqh, “If a jurist is approached for an edict and his edict remains devoid of openness and flexibility because of his rigidity the edictseeker should be guided towards some other jurist

10. Sahih Muslim: Book: Talaq [The Divorce], Chapter: “Merely giving a woman the option of divorce does not make the divorce effective, but only when it is actually intended,” 2:1104 §1478.

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11. Sahih Bukhari: Book: Manaqib [The Exemplary Virtues], Chapter: “The qualities of the Prophet,” 3:1306 §3367; Sahih Muslim : Book: Fadha’il [Virtues], Chapter: “The Prophet’s distance away from sins,” 4:1813 §2327.

who is open-minded and flexible”.15 Furthermore, Allama Ibn Qudama reports that Hussain bin Bashaar inquired from Imam Ahmad bin Hanbal about an issue. He said, “If he does it, he will become a perjurer.” Hussain bin Bashaar said, “If someone issues me the edict that he will not be a perjurer then (what will be the case)?” Imam Ahmad replied, “Do you know of the Medinans’ session (at Rasaafa)?” He asked, “If they issue the edict, would that be permissible?” Imam Ahmad replied in affirmative16 . Here, Imam Ahmad himself is guiding the inquirer to go to Rasaafa and get the answer from the Medinan scholars because their opinion was based on openness, inclusion, flexibility and facilitation. These juristic principles are always closer to the basic spirit of Islamic teachings. THE PRINCIPLE OF DISTINCTION AND OPTION OF CHOICE BETWEEN DIFFERENT JURISTIC VERDICTS The intent of the wholesome of Shari’a is to create ease and facilitation for humankind. Keeping in view this principle, the jurists have promoted ease, expansion and facilitation for humans in making inferences from the sources. While describing various disputations, they have reported different verdicts and opinions that contain greater flexibility and facilitation. Mentioning these verdicts, the imams have frequently referred to statements, using descriptions like: •

This is the most correct

•

This is the vastest

•

This is the safest

•

This is the best analogy

•

That is better

•

This is more evident

•

This is more compatible to analogy

•

This is more lenient and easier for the people

The jurists who have used such epithets do not represent any specific period, nor do they belong to any single school of law; rather they belong to

12. Sahih Bukhari: Book: Ilm [Knowledge], Chapter: “On the Prophet being careful about giving people admonition and knowledge lest they feel aversion to it,” 1:38 §69; Sahih Muslim : Book: Jihad wa Siyar [The Striving and Military Expeditions], Chapter: “The command to make things easy and not making others feel aversion,” 3:1359 §1734.

13. Sahih Bukhari: Book: Wudu [The Ablution], Chapter: “Pouring water over urine in the mosque,” 1:89 §217; Sahih Muslim: Book: Tahara [The Purification], Chapter: “The obligation to wash away urine and other impurities,” 1:236 §284–285.

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all the eras and all the schools of law. They include Imam Abu Hanifa, Imam Malik, Imam Shafi’i, Imam Ahmad bin Hanbal, Imam Muhammad, Imam Abu Yusuf, Samarqandi, Sarakhsi, Kasani, Zayla’i, Subki, Nawawi, Shurbini, Ramli, Ibn Hazm, Ibn Muflih, Ibn Qudama, Ibn Taymiyya, Ibn Nujaym, Haakafi and Ibn Abidin, etc. JURISTIC STRATEGY FOR RESOLVING CONTEMPORARY ISSUES THROUGH THE PRINCIPLE OF INCLUSION AND EXPANSION In this regard, a reasoned strategy needs to be developed, which will enable us to benefit from the juristic reservoir of all the four schools in order to sort out the complexities of life without any deferment and hindrance. 1. Pursuing this principle, Muhaddith Dihlawi states:

Imam

Wali

Allah

•

In most of the juristic reasoning characterised by difference of opinions, the truth spreads through all of these opinions.

•

There is no narrowness in Deen; rather it offers ease, expansion and accommodation.

•

Sticking only to one way and believing firmly that the opponent’s viewpoint is definitely wrong, is baseless.17

2. Imam Izz-ud-Din bin Abd-us-Salam, expressing the same strategy, states: “Successful is the person who acted upon things the scholars agreed upon and refrained from things that the scholars declared unlawful without any disagreement, and believed in the permissibility of matters, which the scholars and jurists decreed unanimously, also performed the acts, which the scholars unanimously regarded commendable; and abstained from the acts that the scholars unanimously agreed to disapprove. However, the things where the scholars disagreed and could not concur on one opinion can be divided into two forms: •

The matter wherein they have had difference of opinion on the disputations about which the command of the Lawgiver can be repealed. In this case, no chance of following that opinion remains permissible, because such a ruling will be considered a mistake in totality. It will be rejected because the mistake lies in its original

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legality, and this mistake has detached the ruling from the basic will of the Lawgiver and spirit of the textual law. •

The second form is related to the matter where difference of opinion does not pertain to the issues about which the command of the Lawgiver can be repealed. There is no harm in obeying or disobeying such a ruling, with the condition that one should follow some authentic juristic opinion and not an unauthentic one. The practice in the early centuries of Muslim Umma, when the traditional schools of law were not formulated and enforced, was not to follow any specific jurisprudence; but people used to follow any legal opinion of a competent scholar, which at least enjoyed the consensus of some jurists.”18

3. Imam Izz-ud-Din bin Abd-us-Salam further asserted on a question: “If the school that he is abandoning and the one that he is adopting are without much distance closer to one another in their sources and origins, then it is permissible to leave one and join the other. It is because from the period of the Companions until the formation of four juristic schools, the Muslims have been following all the schools of jurisprudence instead of one of them. Whoever, one would consider a better scholar, superior in God-consciousness, he would approach him for an edict and follow him. Nobody used to dislike this way, nor was considered disliking by anyone worth any notice. Had it been the wrong way, the scholars would have rejected it and stopped others to follow it.”19 CATEGORIES OF JURISTIC OPINIONS Imam Wali Allah Dihlawi further writes that the difference of opinion is of four kinds: 1. Determined Opinion: The difference of opinion is not justified in matters wherein the truth is absolutely and certainly determined. Its compliance is mandatory and differing from this position is definitely void. 2. Preferred Opinion: The problem where the truth is determined by majority vote of the schools and the jurists and it weighs in predominant scale. Differing from this position is probably voidable.

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3. Unpreferred Opinion: This is a problem where both aspects are under equal authority and none of the aspects is preferred to the other. In this matter, an open choice between the two opinions is granted definitely. 4. Compatible Opinion: This is an issue where similar choice is given on both sides with a dominant opinion. Therefore, in this case also, a jurist is free to adopt either of the two authorities or opinions, based on the compatibility of the evidence and the given circumstances. 20 Therefore, the scholars and jurists, leaving the first kind aside, can use their juristic discretion in adopting any viewpoint in the last three situations, following the above-mentioned principles of jurisprudence. THE OCCASIONS TO DIFFER Imam Wali Allah Dihlawi describes the occasions to differ at another place in his book Iqd al-Jeed: “It is an established fact that the difference amongst the jurists or mujtahidun arose due to following reasons: 1. A mujtahid found a hadith about an incident, while the other missed it. In this case, the one who found the truth is called mujtahid mu’ayyan. 2. Every mujtahid has hadiths of the Prophet and the reports of the companions. Every one of them exercised ijtihad (deductive reasoning) in preferring or finding compatibility among hadiths and companions’ reports regarding any given legal situation. Their ijtihad took it to the status of a determined command, due to which the difference of opinion transpired to the scope of adopting any of the opinions. 3. The mujtahids differed in the following matters: • The connotations and interpretation of words and idioms in use and determining their

14. Imam Ahmad b. Hanbal, Musnad, 3:479; 4:338; 5:32.

15. Ibn Qudama, Rawda alNazir, 1:386.

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meanings and implications. • Pinpointing and determining the confines of usages. • The true recognition of conditions and constituent elements of a legal act or its effects. Thus ijtihad of every mujtahid took him to a separate and permanent opinion in framing the legal position of that act. • A different approach in formulating the juristic principles. Since the framed juristic principles or conditions were different from one another, resultantly, difference of legal opinion occurred also in peripheral issues. That is why the Prophet said: “Difference of opinion amongst my Umma is a blessing.” 21 This difference of opinion has been declared to be a blessing of Almighty Allah, because none of them is negating the command of God. All of them are trying to determine the meanings and specify the implications of a particular verse, hadith or word in question in different ways. Therefore, these juristic differences have expanded the scope of legal options for the Umma. “Therefore, all of the mujtahids are on straight path in all the above-mentioned forms when their sources are akin to and compatible with the indicated methodology. That is why, one can easily accept anyone of them without any confusion.” 22 QURANIC VERDICT ON SHIFTING FROM ONE SCHOOL TO ANOTHER It can be asserted in the light of legal arguments that, apart from the Prophets, it is not legally prohibited to differ with any person of any exalted position in any issue under any circumstances. This station is only exclusive for Allah and His exalted Messenger. The four Imams too have expanded upon this matter. The Quran states: “O believers! Obey Allah and obey the Messenger and those who hold the authority amongst you.” 23

16. Ibid.

18. Ibid., pp. 178–179.

17. Imam Wali Allah Muhaddith Dihlawi, Iqd al-Jeed fi Ahkam al-Ijtihad wa al-Taqlid, p. 178.

19. Izz-ud-Din Abd-ul-Aziz bin Abd-us-Salam, Qawaid al-Ahkam fi Masalih al-Anaam, 2:158.

20. Imam Wali Allah Muhaddith Dihlawi, Iqd al-Jeed fi Ahkam al-Ijtihad wa alTaqlid, p. 172.

21. Set forth by Jassas in Ahkam al-Quran, 2:314; Ghazali in Ihya’ al-Uloom al-Din, 1:27; Nawawi in Sharh Sahih Muslim, 11:91–92; Mulla Ali Qari in Mirqat al-Mafatih, 1:59; Hindi in Kanz alUmmal, 10:59.

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The Quran and Sunna come under the article of: “Obey Allah and obey the Messenger.”

The schools of law and their Imams fall under the article of: “Those who hold the authority amongst you.”

As mentioned in this verse, the commandment of “obey’ has been repeated for the Prophet in the same way as for Allah, to declare the absolute and unconditional authority vested with the commandment of the Holy Prophet. However, in the case of the ruler, the command of obeying has not been verbally repeated. This style of linguistic composition signifies that the obedience rendered to the ruler is qualified, conditional and challengeable. That is why, Almighty Allah has further commanded: “Then if you disagree amongst yourselves over any issue, refer it to Allah and the Messenger (for final judgment), if you believe in Allah and the Last Day.” 26

This Quranic article promulgates three basic principles: i. The principle of the supreme and absolute juristic authority of the Quran and Sunna; ii. The principle of subordinate and conditional authority of the juristic opinions; and iii. The principle of permissibility of differing from one opinion and adopting the other, due to the reason of stronger supporting evidence of the Quran and Sunna. 1. Imam Wali Allah al-Dihlawi states: “The overwhelming majority of scholars belonging to the four schools have followed the middle course between two extremes of excess and paucity we have mentioned. All the four Imams instructed their followers of the same path of moderation. Shaykh Abd al-Wahhab al-Sharani has reported from Imam

22. Wali Allah Dihlawi, Iqd al-Jeed fi Ahkam al-Ijtihad wa al-Taqlid, pp. 173–174.

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23. Quran 4:59.

25. Ibid.

24. Ibid.

26. Ibid.

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Abu Hanifa in al-Yawaqit wa al-Jawahir, saying, ‘It is unjust for a person who is not acquainted with the proof contained in my words to issue an edict just on the basis of my words.’ When he decreed his edict he would point towards himself and say, ‘As far as I know, this is the opinion of Numan Bin Thabit [Abu Hanifa], and, this is more acceptable to me. If there is a better opinion, that is more authentic and would be closer to the truth.’ Similarly, Imam Malik used to say, ‘Except for the Messenger of Allah, everyone can be seized for his words and his words can be rejected.’ Hakim and Bayhaqi have reported from Imam Shafi’i, saying, ‘When the authenticity of hadith is proved, that is my school.’” 27 2. Zarkashi states: “The Companions had a common agreement on this point that there was a difference in their level of knowledge and understanding but, despite that, there was consensus among them on the permissibility of following a path of a person of lower rank in the presence of a person enjoying a higher rank in knowledge and wisdom.” 28 This principle reveals that, under peculiar circumstances, it is permissible to prefer another Imam’s verdict due to legal expediency, evidential strength or circumstantial necessity. The majority of jurists maintain the same standpoint. However, the juristic conditions and limits have to be observed compulsorily. 3. Ibn Taymiyya states: “Sometimes, Allah Most High bestows upon a scholar the wisdom and insight which the other lacks.” 29 4. Ibn Abidin has stated with reference to al-Iqd alFarid authored by Allama Shurunbulali: “It is not imperative for a person to follow a particular school of law in all cases, without any exception.”

27. al-Sharani, al-Yawaqit wa al-Jawahir, 2:478. Shah Wali Allah al-Dihlawi, Iqd al-Jeed fi Ahkam al-Ijtihad wa al-Taqlid, p. 216.

28. al-Zarkashi, al-Bahr al-Muhit fi Usul al-Fiqh, 4:577.

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He further states: “In certain issues, it is permissible for a person to follow another Imam’s school against the school of his own Imam, provided he cares for all the terms and conditions fixed by the other Imam.” 30 We learn from these proofs and statements that, about a given disputation, shifting from one juristic school to the other is permissible. However, this permissibility is dependent upon the fulfilment of certain conditions described by the jurists. GUIDING PRINCIPLES FOR THE METHODOLOGY OF INCLUSION AND FLEXIBILITY The following are the guiding principles for finding juristic solutions for modern issues, through the methodology of inclusive accommodation and flexibility (al-tawassu’). 1. As far as possible and whatever way it works, we should normally try to draw inferences from the rulings of the great Imams and must not exit from all of the four schools of jurisprudence. There is no harm in deserting one school of law and taking up the other in solving a specific complicated issue. 2. Of the followed schools, whichever offers any key or solution to any modern-day complication or complex development, should be adopted to solve the problem. Therefore, conducting a modern ijtihad does not become the only solution, nor do we open the door of ijtihad to every Tom, Dick and Harry. 3. This is so because the demand of necessity or compulsive intervention of time neither does open the door of ijtihad wide apart, nor shuts it absolutely. The right and moderate path lies between these two extremes, so that juristic reasoning is practiced under real necessity. And this juristic reasoning does not transgress or go independent of the principles and juristic procedures laid down by the schools

29. Ibn Taymiyya, Majmu’ al-Fatawa, 20:19.

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30. Ibn Abidin al-Shami, Radd al-Mukhtar ala al-Durr al-Mukhtar, 1:87.

of law. In brief, if the desired solution is found in the master books of any of the four schools, the edict can be issued from there, and so new juristic reasoning remains beyond any need. 4. The change of school of law should not be due to personal desire; it should rather be owing to religious necessity or general expediency as stated by Allama Ibn Abidin al-Shami:

“A person’s change from one juristic school to the other due to worldly desires and pursuits without a solid reason will be an extremely condemnable act, because he has followed the prohibitions of deen and degraded his School of law.” 31 5. Leaving one’s own Imam’s verdict and following the other’s should be based on the strength of proof, legal expediency or circumstantial necessity. It should not be for the sake of avoiding the Divine Commandments. 6. Only such a person is allowed to shift from one school to another who is sufficiently competent to distinguish between weak and strong reasons and equipped with knowledge of legal expediencies. 7. If a solution is not explicitly found, even in any of these sources, there is no harm in exercising analogical deduction for unsolved matters provided the analogy is not absolutely differential.

31. Ibid., Radd al-Mukhtar ala al-Durr al-Mukhtar, 4:80.

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POINT OF VIEW

8. However, if all the four schools do not offer any analogical solution to a modern-day problem, then we should go for exegetical deduction. This is reinterpretation of the text, following the exegetical and juristic principles and general legal provisions of the Quran and Sunna. 9. If we do not find any clear text of the divine command that can be used as juristic basis for the above-mentioned deductions, then we should go for deductive reasoning based on public interest. This can be conducted in the forms of: juristic preference (al-istihsan), presumption of continuity (al-istishab), public good (al-istislah), common benefit (al-masalih al-mursala), ‘usage (al-urf) and convention (al-ada)’, ‘legal necessity (al-darura)’, ‘change of law by change of time (taghayyur alahkam bi taghayyur al-zaman)’, etc. 10. There are some juristic principles, agreed upon and practiced by all great scholars of the early Islamic generations, before the schools of law were formulated. One of these principles relates to interactions. According to this principle, wherever flexibility and facilitation is necessarily required, anyone of the four schools or anyone of the Shari’a evidences will be adopted on the basis of compatibility between the spirit of Islamic teachings and the demands of the time. FINALE In view of the current national and international complexities and changing ground realities, the jurists have followed the path of openness, flexibility and liberality (al-tawassu’) instead of tenacious adherence to a single school of law or the path of narrowness and rigidity. As the basis of the problems grows wider and expands in span and novelty, the rules to resolve the problems also demand adoption of an open-minded and a holistic approach. If the issue is related to personal matters, adherence to a particular school of law will be preferred. However, if the problem happens to be wide-spectrum and involves a broader span of activity and extensive international repercussions, the methodology to deal with it would also be allinclusive, liberal and wide-ranging. For a comprehensive and complete analysis, please consult Global Islamic Finance Report 2018 to which Dr. Muhammad Tahir-ul-Qadri contributed a chapter on the same issue.

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APPLICATION OF INTRA-SCHOOL POSITION TO INTER-SCHOOL POSITION In like manner, the above-mentioned intra-school principles should be applied to inter-school matters, in order to infer, extend, prefer or adopt a verdict of any of the schools of law as per requirements. This is how the truthfulness and veracity of all the four schools of law would be practically applied and enforced. Otherwise, it will negate Islam’s global immensity and vastness. One of the main Divine objectives, and why various schools of law earned acceptance and popularity amongst the Umma, was that all the commands and teachings of the Prophet Muhammad (peace be upon him) should be protected, practiced and transmitted in their real manifestation. In this way, every single Sunna of the Holy Prophet would always remain alive. None of the Prophets’ practices, teachings and commands may be abandoned at any given time. Almighty Allah has practically protected all aspects of the holy life of the Prophet in the form of different schools of law. Nevertheless, the protection of the whole of the Sunna of Holy Prophet would not have been possible through one school of law only, because some variations and alterations gradually took place in the Sunna from time to time, in accordance with occasional needs and circumstantial requirements. Therefore, the real purpose of the existence of different madhahib is to create a total comprehension of the Prophetic practices, and not to create a narrow and rigid vision of Islamic commands.

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TECHNICAL NOTE

CAMBRIDGE PROJECT STANDARDISATION OF NOTATION IN ISLAMIC ECONOMICS, BANKING & FINANCE

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TECHNICAL NOTE In the August 2016 issue of ISFIRE, we started with a one-pager to introduce standardisation of notation in Islamic economics, banking and finance (IEBF). This has emerged as a major project since then, as a number of universities engaged in the instruction of IEBF have started to adopt what were initially named as ISFIRE Notes. So far, we have issued 8 ISFIRE Notes: • • • • • • • •

ISFIRE Note 1 on Bai’ (issued in February 2018) ISFIRE Note 2 on Riba (issued in June 2018) ISFIRE Note 3 on Murabaha (issued in August 2016) ISFIRE Note 4 on Salam (issued in October 2016) ISFIRE Note 5 on Mudaraba (issued in December 2016) ISFIRE Note 6 on Ijara (issued in February 2017) ISFIRE Note 7 on Musharaka (issued in February 2018) ISFIRE Note 8 on Istisna’ (issued in April 2018)

Frome January 2019, the project was transferred to the newly set up Cambridge Institute of Islamic Finance (Cambridge IIF) and the ISFIRE Notes were renamed to Cambridge Notes. Hence, the new note issued through this edition of ISFIRE will be called Cambridge Note 9 on Sukuk.

WHY IS THERE A NEED FOR STANDARDISATION OF NOTATION IN ISLAMIC FINANCIAL EDUCATION? There is no standard notation in the books written on Islamic economics and finance. In the absence of a standard, authors use their discretion to notate different Islamic financial contracts. This has not only created pedagogical confusion but has also hampered true understanding of Islamic financial contracts.

We believe that standardisation of notation will help develop consistent pedagogical tools to be used for education and training in IEBF. Once Cambridge IIF has issued a sufficient number of notes, we aim to hold a special workshop on Standardisation of Notation in IEBF to finalise all these notes into standards. In this respect a Board on Standardisation of Notation in Islamic Economics, Banking and Finance is under formation. The interested individuals are invited to submit their expressions of interests to Professor Humayon Dar by emailing on hdar@cambridge-iif. com.

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Cambridge Note 1 on Bai’ 1. (A.X.B; P) represents a spot sale contract between A (seller) and B (buyer) to buy/sell a commodity X for the price P. Both the object of sale, X, and price, P, must be exchanged on spot. A variant of this contract may be notated as (A.X.B; P|T0), explicitly mentioning the time, T0, when the exchange of object of sale and its price be affected. 2. (A.X.B; P|T1, T0) represents a sale contract between A (seller) and B (buyer) to buy/sell a commodity X for the deferred price P|T1 to be paid by B at a later time T1, allowing the buyer to receive the commodity upfront at time T0. 2a. (A.X.B; P|T1, T0) is essentially bai’ mu’ajjal or what is also known as bai’ bithaman ‘aajil, or a deferred payment sale contact. 3. (A.X.B; P|T0, T1) represents a sale contract between A (seller) and B (buyer) to buy/sell a commodity X for the a price P|T0 to be paid upfront by B at time T0, allowing the seller to deliver the commodity during time period T or on a specific date at the end of T1. 3a. (A.X.B; P|T0, T1) is essentially a salam contract as per Cambridge Note 3 on Salam.

Cambridge Note 2 on Riba 1. (A.X.B) represents an (unconsidered) exchange of an asset X between two parties, A and B, whereby A transfers ownership of X to B, without any reference to a consideration or price. This may also be known as an exchange of gift. 2. (A.X.B; B.X.A) represents exchange of an asset X between A and B, whereby A transfers ownership of (an amount of) X to B, while B also simultaneously transfers ownership of (an amount of) X to A. 3. (A.X.B; B.X.A |T0, T1) represents exchange of an asset X between A and B, whereby A transfers ownership of (an amount of) X to B at time T0, and B transfers ownership of (an amount of) X to A at time T1.

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4. (A.X1,B; B.X2.A) represents exchange of an asset X between A and B, whereby A transfers ownership of an amount X1 of X to B, while B also simultaneously transfers and amount X2 of X to A; such that X1 = X2 or X1 ≠ X2. 5. (A.X1,B; B.X2.A) is an agreement between two independent parties, A and B, which may lead to riba if A transfers ownership of an amount X1 of X to B who also transfers and amount X2 of X to A; such that X1 ≠ X2. 6. (A.X1,B; B.X2.A |T0) is an agreement between two independent parties, A and B, which may lead to riba if A transfers ownership of an amount X1 of X to B who also simultaneously (at time T0) transfers and amount X2 of X to A; such that X1 ≠ X2. 7. (A.X1,B; B.X2.A |T0, T1) is an agreement between two independent parties, A and B, which may lead to riba if A transfers ownership of an amount X1 of X to B at time T0, and B transfers and amount X2 of X to A at another time T1; such that X1 ≠ X2. 8. (A.X1,B |B.X2.A |T0, T1) is definitely and unambiguously a riba agreement between two independent parties, A and B, if A transfers ownership of an amount X1 of X to B in exchange for B transferring and amount X2 of X to A, such that X1 ≠ X2, irrespective of whether T0 = T1 or T0 ≠ T1

Cambridge Note 3 on Murabaha 1. (A.X.B; PMUR ,∏MUR , T) represents a classical murabaha arrangement between A (seller) and B (buyer) to buy/sell a commodity X for the murabaha price PMUR and murabaha profit of ∏MUR for T as the date of payment of price. 2. (A.X[1].B; PMUR, ∏MUR, T) represents a commodity murabaha arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ∏MUR is the murabaha profit, and T is the duration of the financing period (in years, months, or days, etc.). 3. (A.X[1.2]X.B; PMUR, ∏MUR, T) represents a commodity murabaha with two commodity brokers, 1 and 2. 4. (A.X[1].B; PMUR, ∏MUR, T, D(.), R(.)) represents a commodity murabaha arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ∏MUR is the murabaha profit, and T is the duration of the financing

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period (in years, months, or days, etc.); D(.) and R(.) represent default and rebate clauses, respectively, such that:

Default Penalty = a Xi; and Rebate amount = b Xj whereby Xi = amount outstanding at the time of default; Xj = amount outstanding at the time of early settlement date; and 0 ≤ a ≤ 1 and 0 ≤ b ≤ 1.

5. (A.X[1].B; PMUR, ∏MUR, PMURIK, T / N, PEX) represents a commodity murabaha based Islamic mezzanine financing arrangement between A (financier) and B (financee) arranged by a single commodity broker 1; whereby PMUR is the murabaha price, ∏MUR is the murabaha profit, PMURIK is the payment in kind (one-off balloon payment at the end of the financing period) and T is the duration of the financing period (in years, months, or days, etc.); N is the number of shares that B promises to sell to A in the event of default for an agreed price PEX.

Cambridge Note 4 on Salam 1. (A.X.B; PSAL|T0, T1) represents a classical salam contract between A (seller) and B (buyer) to buy/sell a commodity X for the salam price PSAL|T0 to be paid upfront by B at time T0, allowing the seller to deliver the commodity during time period T1 or on a specific date at the end of T. 2. ([A.X.B; PSAL1|T0], [B.X.C; PSAL2|T1], T2) represents a salam-parallel-salam arrangement, involving three independent parties, A, B and C, whereby A sells a commodity X to B for a salam price, PSAL1|To, paid by B upfront at T0, to receive the delivery during time period T2 or on a specific date at the end of T2. The salam-parallel-salam arrangement also involves B selling the commodity X to another independent party C that pays salam price, PSAL2|T1, to B at the time of entering into the salam contract, i.e., at T1 ∀ T0 ≠ T1, to deliver the commodity X during time period T2 or on a specific date at the end of T2. 3. (A.X.B.X.C; PSAL1|Ti, PSAL2|Tj, T) represents a three-partite salam-parallel-salam contract, whereby A sells a commodity X to B for a salam price, PSAL1|Ti, paid by B upfront at Ti, and B sells on the commodity X to C for a salam price, PSAL2|Tj, whether Ti = Tj or Ti ≠ Tj;

TECHNICAL NOTE

the deliveries take place during time period T or on a specific date at the end of T. This is a null and void contract that does not fulfil the requirement of independence of the two salam transactions.

Cambridge Note 5 on Mudaraba 1. (A.K.B; ∏, α; -∏, 1; T) is a simple mudaraba contract between a Party A (capital provider) and a Party B (the managing party) in such a way that A receives α percentage of the profit, ∏, if any. K is the capital contribution (money) by A; while T is the mudaraba time period. In case of loss, i.e., -∏, A shall have to bear it with α = 1. 2. A.K.B; ∏0, α; ∏1, 0; -∏, 1; T) is a mudaraba contract that stipulates that the capital providing party (Party A) will receive α percentage of the profit if the realised profit is up to a threshold level of profit, ∏0; any profit over and above this threshold, i.e., ∏1, will be retained by the managing party, i.e., the share of A will be zero (0). However, in case of the loss, -∏, A shall have to bear it with α = 1. 3. If a mudaraba contract is notated with (A.K.B; α, T), it shall always be deemed as a short version of (A.K.B; ∏, α; -∏, 1; T).

Cambridge Note 6 on Ijara 1. (A, X, B; R = r1+ r2 + ... + rt, T) represents a simple ijara contract between A (lessor) who leases an asset X to another person B (lessee) for a total rental value of R to be paid in instalments of r1, r2, ..., rt, for a period of T. 2. (A, X, B; R = r1 + r2 + ... + rt, T; P1, P2) represents an ijara wa iqtina’ contract between A (lessor) who leases an asset X to B (lessee) for a total rental value of R to be paid in installments of r1, r2, ..., rt, for a period of T; with an understanding that B will have to buy the asset for a price, P1, should it happens to default on rental payment during the term of the lease, and if that (event of default) does not occur B will buy the asset X at the end of the lease period for a price, P2. 3. (A, Y, B; R = r1 + r2 +...+ r3 , T) represents an ijara mausufa dzimma contract between A (lessor) who leases an asset Y (which has yet to come into existence) for a total rental value of R to be paid in instalments of r1, r2, ..., rt, for a

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period of T (which may coincide with the time that Y must take to come into existence). 4. If an ijara contracts is notated with (A, X, B; R, T), it shall be deemed as an ijara that requires a lump-sum amount of rental either at the start of the lease period or at the end of it. 5. An ijara contract notated with (A, X, B; R0, T) shall imply that the rental amount is required to be paid in lump- sum at the start of the lease period; and an ijara contract notated with (A, X, B; Rt, T) shall imply that the rental amount is required to be paid in lump-sum at a specific time in future, which may include the end of the lease period.

Cambridge Note 7 on Musharaka 1. (A.KA.KB.B, Π, α; -Π, βi; T) is a musharaka contract between a Party A and a Party B whereby both parties contribute capital, KA and KB, respectively, to a venture, in such a way that A receives α percentage of the profit, Π, if any, and B therefore receives (1-α) percentage of the profit, Π. In case of loss, i.e., -Π, both parties shall bear loss in accordance withβi, whereby i = A or B; βA = KA/K and βB = KB/K, and K = KA + KB. T is the time period for musharaka; and α and β may differ. 2. (A.KA.KB.B, Π, βi; T) is a simple musharaka contract between a Party A and a Party B whereby both parties contribute capital, KA and KB, respectively, to a venture, in such a way that A receives βA percentage of the profit, Π, whether positive or negative, and B receives βB percentage of the profit. In other words, β = α. 3. If a musharaka contract is notated with (A.KA. KB.B; α, β; T), it shall always be deemed as a short version of (A.KA.KB.B, Π, α; -Π, βi; T).

TECHNICAL NOTE

Cambridge Note 8 on Istisna’ 1. (A.X.B; P1|T1, P2|T2, … Pn|Tn; ΡIST=∑ i=1 Ρi,Tn) represents an istisna’ contract between A (seller) and B (buyer) to buy/sell a commodity X (which may be manufactured by A during the contract period) for total price of PIST, payable in instalments P1, P2, … Pn, until the time of the delivery Tn, by when the whole price must have been paid. n

2. ([A.X.B; P1|T1, P2|T2, … Pn|Tn; ΡST1=∑ni=1 Ρi,Tn], [B.X.C; P1|T1, P2|T2, … Pn|Tm; ΡIST2=∑mj=1 Ρi,Tm) represents an istisna’-parallel-istisna’ arrangement, involving three independent parties, A, B and C, whereby A sells a commodity X to B for price, PIST1, paid by B in instalments, to receive the delivery on a specific date at the end of T. The istisna’parallel-istisna’ arrangement also involves B selling the commodity X to another independent party C that pays price PIST2, to B in instalments ∀ i ≠ j and/or PIST2≥PIST1, to receive the commodity X on a specific date at the end of T ∀ Tm≥Tn. 3. A short version of the istisna’ contract stated in (1) can be written as IST(A.X.B; ΡIST=∑ni=1 Ρi,Tn). 4. A short version of the istisna’-parallel-istisna’ arrangement stated in (2) can be written as (IST1(A.X.B; ΡIST1=∑ni=1 Ρi,Tn ), IST2(A.X.B; ΡIST2=∑mj=1 Ρi,Tm).

Cambridge Note 9 on Sukuk 1. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n) is a sakk issued by an issuer A on asset to be bought by investors B, with a notional price of N. The return on the sakk will be determined by the net revenue Ρ, generated by the asset X by way of dealing with a party C. The issuer will ensure that Ρ is equivalent to an amount added to notional N in such a way that Ρ = αN ∀ 0>α>0. The sakk is issued for a time period T and the return may be distributed in instalments on dates ti. The notional N must be returned at the end of the sukuk period T. 2. (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n) is a general notation for sukuk and may be specified for different types of sukuk. 3. For example, for sukuk al-ijara, (A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n) will represent a sakk issued by an issuer A on an asset X to be

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bought by investors B, with a notional price of N. The return on the sakk will be determined by the rental Ρ, which will be generated by leasing the asset to the party C involved in the structure (normally an obligor). 4. The relationships between A, B and C will be determined by sale contracts (C.X.A; P|T0) and (A.X.C; P|Tn) as per Cambridge Note 1 on Bai’, and lease contract (A, X, B; R = r1 + r2 + rn, T) as per Cambridge Note 5 on Ijara. 5. Thus, a sukuk al-ijara may be notated like ((A.X.B, C; N, α, Ρ|Ρ = αN; T, ti|i = 1,2,3,…n)| (C.X.A; P|T0), (A, X, B; R = r1 + r2 + rn, T), (A.X.C; P|Tn); Ρ = R)).

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BOOK REVIEW

Financial and Accounting Principles in Islamic Finance AUTHOR: DR. SAMIR ALAMAD PUBLISHER: SPRINGER ISBN: 978-3-030-16299-3

ardly a month passes without a new book on an aspect of Islamic economics, banking and finance coming into the market. The quality and academic rigour of these books vary significantly. ISFIRE editorial team chooses only those books that go through a screening process for us to make a meaningful comment.

Islamic financial products, in addition to focusing on the solid theoretical foundations both from a conventional viewpoint and in light of the standards issued by Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Springer has recently published a book entitled, Financial and Accounting Principles of Islamic Finance, written by Dr. Samir Alamad. This is a good contribution to the already existing stock of literature on accounting and financial reporting for Islamic banks and financial institutions. The book is comprehensive in coverage, as it starts with some fundamental concepts in Islamic finance (e.g., the treatment of time value of money in Islam) and provides a detour of historical evolution of money and finance before focusing on the contemporary accounting treatments of Islamic financial contracts. The author is a well-known practitioner of Islamic banking and finance, with his current role as Head of Shariâ&#x20AC;&#x2122;a Compliance & Product Development at Al Rayan Bank PLC in the United Kingdom. Therefore, the book provides practical examples of accounting treatment of

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BOOK REVIEW

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BOOK REVIEW

There is a good case developed for “faith-based” accounting, which should help not only Islamic financial institutions but also conventional faith-based organisations. It argues that a faithbased accounting system should help in presenting Islamic banking and finance as a value-based financial system. Starting with the time value of money in Islam and the traditional paper-based money, the book continues to cover modern digital currencies and cryptocurrencies. All of these are discussed in the context of modern accounting treatments and the Islamic perspective. There are 14 chapters in total arranged in an order that is reader friendly and should allow this to be used as a textbook or a reference book in academic circles. It must be cautioned that the book is not written in textbook format and that the instructors will have to blend the material contained therein with other resources. Other important books in the same genre are: • Principles of Islamic Accounting by Nabil Baydoun, Maliah Sulaiman, Roger Willett and Shahul Hamid Ibrahim, published by Wiley (2018) • Islamic Finance: The New Regulatory Challenge by Simon Archer and Rifaat Ahmed Abdel Karim, published by Wiley (2013) • Islamic Accounting by Christopher Napier and oszaini Haniffa, published by Edward Elgar (2011) • Islamic Banking: Financial Reporting Perspective by Muhammad Hanif, published by CreateSpace Independent Publishing Platform (2011) The book under review benefits from someone who has not only deep understanding of accounting and financial reporting standards but is also a renowned Shari’a expert. For keen readers, it is recommended to also read the author’s other book, Financial Innovation and Engineering in Islamic Finance, also published by Springer (2017). The book is available in both the print form and in a digital format. Editorial Note: This is a preliminary book review and we intend to publish a detailed book review in a subsequent edition of ISFIRE. The scholars who wish to provide us their feedback on the book may wish to get in touch with one of the members of the editorial team, preferably Tabinda Hussain on thussain@edbizconsulting.com.

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