INTEREST in Islamic banking is gaining momentum. More countries are jumping onto the bandwagon. Everywhere we look someone, somewhere, is staging another seminar or roundtable to explain the system, promote the products, or raise and address issues.
Non-initiates are beginning to ask about the differences between Syariah-complaint and Syariah-based products. Academics and professionals from various sectors and industries continue to contribute points to help provide illumination for those who need this.
One of these is Encik Mohamad Illiayas bin Seyed Ibrahim, of the law firm, Illiayas Advocates & Solicitors, a graduate of National University of Singapore and a lawyer with 21 years standing, specialising in banking, Islamic banking and finance.
Need For Expertise And Knowledge
We asked Illiayas about something he was quoted to have said about how conflicts between Syariah and civil law would be resolved. He had said earlier that, given the existing legal framework, one would still have to resort to common law at one stage or another.
“That was in the context of arbitration,” replied Illiayas. “For example if all Islamic disputes went for arbitration and the arbitrator gave an award that award, under our present system, would still have to be enforced in the civil court.” According to Illiayas, Islamic banks in Malaysia have not really gone in for arbitration. “About 99 percent of all our Islamic banking cases still go to the (civil) courts,” he says. And this could be where the trouble begins.
Illiayas notes that competency of judges is a problem, not just because of their unfamiliarity with Syariah laws but also with their inexperience in Islamic banking practices and because of the ethos of Islamic banking and finance.
Illiayas says that most of them are civil lawyers and that they have no exposure to the Shariyah. Because they come from a civil law background, their approach is probably one-dimensional.
Because this is an inherent problem Illiayas and others like him believe we should look at other modes of dispute resolution, including arbitration which allows involved parties to appoint an arbitrator qualified in both civil and Syariah law and expert determination within the context of litigation whereby Syariah law issues are referred by the court to a neutral body of Syariah experts and the court treats the opinion or holding of the expert body as final and binding.
“At the moment we have this fused system where both (civil and Syariah law) are working interdependently, in a way, and in view of the shortcomings of the courts, viable alternatives would be arbitration and expert determination,” he says.
Given this lack of familiarity and experience and the difference in ethos of Islamic and conventional banking practices we ask what kind of progress Malaysia is making as far as training and education is concerned.
“We’ve taken giant strides, actually, (over) the last five years,” says Illiayas. “Under the auspices of the Bank Negara you’ve got at least two or three training institutions dedicated towards training in Islamic banking.
One is known as IBFIM, the Islamic Banking and Finance Institution of Malaysia, they are active in providing training and organising seminars and workshops.”
Another is the International Centre for Education in Islamic Finance (INCEIF) which according to Illiayas conducts courses and gives out graduate and post-graduate degrees in Islamic banking.
The third organisation he referred to was Bank Negara’s International Shari’ah Research Academy for Islamic Finance (ISRA).
Syariah-Based Products: Islamic Banking’s Killer Application
Illiayas notes that conventional bankers overnight became Islamic bankers, bringing with them all their usual practices and policies. Because of this the majority of products offered were Syariah-compliant products which are different from Syariah-based products.
“There’s a very fine distinction,” he says, attempting to explain the difference. “At first blush it may not seem so apparent. By Syariah- compliant products I take that to mean you take an existing conventional banking product and make it comply with the Syariah. Meaning you eliminate all elements that are contrary to Islam.” He cited Islamic house financing as an example of this.
He tells us that Syariah-based products are different from those found in the conventional (banking) system and goes on to talk about Musharakah and Mudarabah which are “joint-venture” and “profit-sharing” products, encouraged in Islam where you not only share rewards, you also share risk.
“For example, you form a Joint Venture company (with the bank) and both the bank and the customer invest in that company. And they let the company grow. So that’s a classic joint-venture on a Musharakah basis.
The other one would be Mudarabah. In Mudarabah the capital provider is usually a passive investor. He provides the money and it’s left to the expert, the other contracting party to manage the business, and they share the profits. If there’s a loss, the capital provider bears the loss and the person who has invested his time and expertise and energy loses that investment.”
A further illustration of the difference between conventional and Islamic banking products can be seen in the practices and policies concerning home loans.
“In conventional banking in the event of default what the contractual documents would provide is the bank is entitled to exhaust all remedies against the borrower upon the occurence or in the event of default. And in practice banks normally follow that policy very strictly,” Illiayas tells us.
“Let’s say I took a loan to buy a house as my home. For so long as I fulfil my contractual obligations the bank doesn’t bother me at all. But the moment I default, the contract would provide that at that very instance the bank would be able to recall the loan and to give me, say, seven days notice to pay up whatever is due. That is standard conventional banking practice. And assuming I don’t comply with that demand what the bank will do is number one take a civil suit against me and also foreclose on my property notwithstanding that that’s the only home I own and it provides a roof for me, my family. So, considerations like whether that person is in need of special treatment don’t arise. Across the board, the policies are the same.”
Syariah-Based Versus Syariah-Compliant
Syariah-based products do not adopt this approach. The general principle laid out in the Quran (Chapter 2, Al-Baqara [The Cow] Verse 280) is that a debtor in difficulty should be given time to meet his commmitment.
According to Dr Muhammad Humayon Abbas Dar (Humayon Dar) an Islamic economist and Islamic banking expert, public interest, substance over form (cash advancement and irrelevance of trading) and economic criteria may help determine whether a product is Syariah-compliant or Syariah-based. Syariah-compliant, if not Syariah-tolerated products are not in the spirit of Syariah according to him.
In Humayon’s opinion, a Syariah-based product is one that best serves public interest and represents a commitment to social responsibility and to the communities it aims to serve, consistent with a social responsibility code disclosed by and adhered to by the financial institution.
Syariah-based products reflect common sense based on simple prohibitions. In the Syariah there is no scope for money (cash) lending other than in the form of an interest free loan (Qard Hasan). A product that gives a customer direct access to cash against a return (either in the form of fixed profit or rent) is not a Syariah-based product.
According to Humayon proponents of the economic criterion seem unconvinced by value proposition of an Islamic mortgage that happens to be dearer than conventional mortgages. He says that these proponents prefer home financing programmes that offer more affordable options to people than what conventional mortgages provide.
Jurisprudential Differences
Dr M. Kabir Hassan, a professor and financial economist at US-based University of New Orleans, speaking to reporters after delivering a public lecture organised by Universiti Putra Malaysia (UPM) in Seri Kembangan recently, said that our aspiration to become an Islamic financial hub could be even brighter if Malaysia can resolve differences of opinion regarding syariah compliance.
He warned that at some point there would be a tussle between the Malaysian model and those of the Middle East. Of the total world Muslim population, about 20% live in the Arab countries (where Muslims comprise majority populations, with Christian and other religious minorities of differing sizes by country), 30% in the countries of the Indian subcontinent, and 15.6% in Indonesia alone, which is the largest Muslim country in absolute numbers.
Almost all Muslims belong to one of two major denominations, the Sunni (85%) and Shi’a (15%). Muslims in Malaysia are generally of the Sunni denomination. “We, in Malaysia, belong to the Sunni mazhab (juristic school) as do the Middle Eastern and Pakistani (Muslims),” says Illiayas.
He adds that under the Sunni school there are four main jurisprudential schools of thought, Hanafi (founded by Abu Hanifa), Maliki (founded by Malik ibn Anas), Shafi’i (founded by Muhammad ibn Idris ash-Shafi`i) and Hanbali (founded by Ahmad bin Hanbal).
The followers of these four schools follow the same basic belief system but differ from one another in terms of practice and execution of rituals, and in juristic interpretation of “divine principles” (or Shariah) as envisaged in the Quran and Hadith, although Sunni Muslims consider them all equally valid. Hadith refer to oral traditions relating to the words and deeds of the prophet Muhammad.
The majority of our Muslim population here belongs to the Shafi’i school, so in Malaysia the Shafi’i school is predominant. “But if you look at the Middle Eastern countries the majority do not follow the Shafi’i school. They probably are Malikis or Hambalis, and in Pakistan they are more Hanafis,” said Illiayas. “So it is this difference of opinion that causes one to accept or reject a product. But it doesn’t go towards the core fundemental principles.”
According to Illiayas while Shafi’i scholars have accepted Bai’ Bithaman Ajil and Bai’ al-Inah, two products sold in Malaysia, other scholars have challenged their compliance with Syariah law.
Some scholars hold that the buy-back agreement in Bai’ al-Inah (Sale and Buy Back Agreement) that allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency, is not compliant with Shariah principles.
Similarly there are those who believe that the Bai’ Bithaman Ajil (Deferred Payment Sale) contract, as practiced in Malaysia, resembles the Bai’ al-Inah contract which they view as a legal device to overcome the prohibition of riba or interest.
The Future Of Malaysia’s Islamic Banking Products
“We are not only looking at ourselves as a regional hub, we are promoting ourselves as an international hub so we want to appeal to not just the Westerners but also the Middle Eastern investors.
And I think our focus now is the Middle Eastern investors. We want to attract their funds. So in that sense whatever laws that we pass or whatever policies that we formulate will have to look at the international position, and make our products and services acceptable not just to the region but also worldwide,” says Illiayas.
He notes that regionally there is a strong challenge from countries like Singapore, Indonesia and even Hong Kong who have become very serious about Islamic banking. Illiayas believes there has to be a comprehensive settlement of issues. “You can’t look at issues ad-hoc or from a national angle only. You have to look at it from a broader perspective,” he said.
Does this mean that we will have to do away with some of our products?
“Perhaps not do away with them completely,” says Illiayas. “Perhaps (we need to) have a system which is flexible so that some products are still offered to locals and not to foreigners. And we have products that will attract the foreigners. It becomes clear, though, as we study the intent and principles behind Syariah-based products, with their practice of having the bank share the risk together with the customer, why financial institutions may be reluctant and slow to promote these.
However, from the customer perspective we can also see how these can be viewed as extremely attractive when compared to conventional banking products and the practices under the conventional banking system.