"The birth of the Islamic banking industry in the late 1960s was preceded by numerous literatures in Islamic economics that discussed an economic system complete with social justice. Islamic banking was only a minute discussion in these literatures. Regardless of the initial initiatives by the economist, the Islamic banking industry was actually instigated by the business community because they sensed that it will be too long to wait for the complete Islamic economic system to emerge. These efforts gave birth to the first Islamic commercial bank - the Dubai Islamic Bank in 1975. Since then, Islamic banking has gained acceptability and success." This comment came from Sheikh Nizam Yaquby during the 15th Islamic Banking Discussion Series at the International Islamic University of Malaysia (IIUM).
He also added that despite the acceptability and success of the industry, the economist always criticizes Islamic banks and makes them responsible for the problems of the Muslim community, including the inequality of wealth among the people. This, however, serves as an important reminder: one has to be fair to the Islamic banks in their criticism. "We have to remember that an Islamic bank was initially set up because traders wanted to conduct business without contravening the Shariah. To claim that Islamic banks have deviated from the path (i.e. Musharakah) and to make them responsible for all the economic problems of the Ummah, would be an over-reaction by the economists I say." Sheikh Nizam concluded his brief prologue with these words before providing an opportunity for the attendees to pose various questions. This article summarizes some of the questions and answers put to Sheikh Nizam at the discussion series.
Shouldn't Islamic banks play a role in the development of the Muslim society?
Yes, Islamic banks do play a role, however they are not the only institution responsible for the development of the Ummah. They play a developmental role by employing people, providing finance for trade and granting scholarships for students. However, to say that Islamic banks are responsible to eradicate the poverty of the Ummah is just too much. We need collective efforts from the state government, the banks and the Awqaf institution to effectively eradicate poverty, not the banks alone.
Which one should prevail in accounting for Islamic banking products; the substance of a transaction or the legal form of it? We cannot apply a general rule for substance over form. We have to examine each situation on a case-by-case basis. Ideally, we would like to recognize both substance and form. However, in certain situations the substance would be more important while in other situations the form would need to prevail. For example, when the prophet prohibited the companions from exchanging a portion of good quality dates with two portions of bad quality dates and suggested them to first sell the good dates and use the money from that transaction to buy the lower quality dates, it shows that form is important. However, this does not mean that substance should be ignored. What is more important, I think, is to analyze the impact of any policy that we choose.
In an Ijarah Muntahiyah Bi Tamlik transaction, for example, rather than arguing about substance over form, the final decision that is much more vital is to settle is who should carry the asset in their book - the lessor or the lessee? Focus on this and leave out the substance over form argument. Islamic funds are eventually placed with conventional banks via commodity Murabahah. What is your comment?
As long as there is no full Islamic economic market, the Islamic funds will always flee to the conventional market. The solution is therefore to find a commodity market that trades within the Muslim countries as an alternative to the London Metal Exchange (LME), for example. It is amazing to note that no single oil producing country has an oil exchange. Muslim countries are the major oil producers, however none of these countries have an oil exchange. We need to change this. We need to establish exchanges for oil, rubber and palm oil, for example. This will give the bankers alternative investment avenues. Currently, Sukuk is not providing that much of an alternative because there are not many issuances, and within this limited issuance, investors usually will hold Sukuk until maturity due to the good yield and the double collateralization it carries.
Can Islamic banks provide Hajj financing?
Capability (financial and physical) is always made a prerequisite for performing hajj. The aim of hajj financing is to provide the financial capability to individuals who may not have the financial capability immediately, however who have good salaries which provide steady cash inflow (i.e. future financial capability). During the pre-industrial era, people were farmers and entrepreneurs. They did not enjoy a fixed income every month. However, with the advancement of the industrial revolution, most people are salary-based and financing has become a modern aspect in life. It is not haram to seek debt if you are able to fulfill obligations. Therefore it is permissible to seek finance to perform hajj. Nonetheless, it should be made clear that hajj financing is meant for those who have the capability to repay the financing, not for the poor. As for the poor, it is better to go for saving schemes like the one provided by Tabung Haji here in Malaysia.
What is your opinion regarding the time value of money?
All eight schools of thought agree that the time value of money is accepted in exchange contracts. If we analyze verse 2:275 in al-Quran, it says: "They say: Trading is only like riba, but Allah has permitted trading and forbidden riba." What trade is this verse referring to? It is certainly not cash sales. It is actually referring to a credit sale where the price is higher than the cash price. Then only would it be comparable to riba.
Time value in sales is recognized, while time value in loans is haram. This is unanimously agreed by the scholars.
What are the challenges that the industry faces in the next 10 years?
There are three major challenges. First, we need a real genuine solution to solve the liquidity problem of Islamic banks today. Secondly, we need to establish a mega Islamic institution with at least US$50 billion capital. We may even establish four to five of these mega institutions for each continent - the Middle East, Asia, Europe, the US and Africa. This institution will be able to solve a lot of problems that the industry faces, including the liquidity problem. Finally, we need to seriously look into human resource development and R&D. The salaries of the CEOs of Islamic banks today are unbelievably high due to a shortage of experienced and qualified Islamic bankers. Concentrated efforts should be focused on education and training of human resources. The industry also needs to allocate funds for R&D purposes to come up with innovative and competitive products