The suggestion of using Islamic banking and finance as a tool for social reform has added relevance to the countries in the Middle East, which are facing political turmoil and the collapse of many well-established regimes. In countries such as Pakistan, which faces the humongous task of a war on terror and a potential revolution in making, Islamic banking and finance can be used to promote moderation in social behaviour and the modernisation of financial relations.
Islamic financial products: In the last three decades, a number of new Islamic financial products have been developed primarily by applying Islamic nominate contracts in new ways to achieve the economic profiles of conventional products, so as to allow Muslims to have access to financial services in ways that are not contradictory with their belief. This was indeed a mammoth effort in which different stakeholders, including governments, international regulatory bodies, law firms, Shari’a scholars, accountants and many more played instrumental roles. Consequently, there is now a wide range of Islamic financial products available, which offer the economic benefits of conventional products in a Shari’a compliant way. This process may be termed as conversion of conventional products into Islamic. Some industry experts such as Professor Volker Neinhaus of Germany, however, argue that this is at the same time conventionalisation of Islamic banking and finance as well, because this process of conversion of conventional products brings the economic profiles of conventional products into Islamic banking. This is perhaps a valid argument.
Product development: The question that arises is whether Islamic banking and finance should continue with this kind of product development or attempt to develop a new system comprising institutions and products, which are distinctly different from conventional financial institutions and the products they offer. In other words: what kind of innovation is required to develop a financial model for Muslims (and possibly for others who may share the underpinning values of that model/system), which offers real benefits to the communities and not mere financial sophistication.
Many industry observers and proponents of Islamic banking and finance argue that it must have distinct social objectives for it to survive and sustain in otherwise fiercely competitive financial markets. So far the real value proposition of Islamic banking and finance is in terms of Shari’a compliancy. It is now time to start thinking about topping up its value proposition in terms of its contribution to social responsibility and commitment to the communities it attempts to serve.
Social objectives: Islamic banking and finance must have social objectives, which must attempt to bring social reforms by way of promoting good economic agents. It should come up with a notion of a good economic agent and allow only such agents (individuals and institutions) to be part of the Islamic banking and finance practice and movement. One way of defining good economic agents is in terms of efficiency, ethics, responsibility, and charity. Thus, an economic agent is good if it is efficient (e.g., does things well and quickly), ethical (e.g., honest, transparent and just), socially responsible, and charitable. A certain threshold level of efficiency, ethics, social responsibility and charitable giving must be set for accepting an economic agent in the Islamic financial services industry, as a user or as a provider of such services, including the service providers to the suppliers. This is something very different from the current practice of Islamic banking and finance.
Rhetoric rather than reality: Islamic finance at present emphasises upon rhetoric more than its current reality. The current reality is that Islamic banking and finance is competing with its conventional counterpart and has yet to develop its own niche. This is reflected by a huge emphasis in Islamic banking and finance on the maintenance of profit equalisation reserves and investment risk reserves, and the relevance of what is known as a commercial displacement risk. All of these concepts and practices are used to ensure that Islamic banking and finance remains as close to conventional banking as possible. In fact, in the countries where Islamic banking and finance is being provided a level-playing field, treatment of Islamic banking products is exactly the same as their conventional counterparts for the purpose of tax neutrality. While measures such as tax neutrality are helpful for the practice of Islamic banking and finance, these are documented proofs that Islamic financial products are indeed no different from their conventional counterparts in terms of their economic effects. It must be emphasised here that the author is not arguing that the current Islamic financial products are not Shari’a compliant; he is just referring to the fact that they offer similar economic benefits to conventional products. This is indeed the time for Islamic banking and finance to pause and think for a while what future path it would like to take. Many industry observers believe that Islamic banking and finance must find its niche, which according to them is not in the mainstream. Once it has identified its niche, it must also identify what type of Islamic banking and finance its potential users would like to see developing.
Market for Islamic finance: Admittedly, the market for Islamic banking & finance is limited. Only about 1/4 of Muslims are interested in Islamic banking & finance. This means that out of an estimated global population of 1.6 billion Muslims, 400 million are interested in Islamic banking and finance. Although per capita income ranges from less than $500 per annum to over $50,000 per annum in the countries where Islamic banking and finance exists, the incidence of Islamic banking is biased in favour of higher per capita environments. If we choose $1,000 per capita as a conservative estimate of the annual income of those who are interested in Islamic banking and finance, then an additional annual $400 billion is available for Islamic banks and financial institutions to draw their business from.
Expanding horizons: However to go from the present size of $1.14 trillion (as reported in the Global Islamic Finance Report 2011) to the forecasted $1.6 trillion (as projected by the Islamic Financial Services Board for 2012), will be difficult if Western and local conventional financial institutions do not inject their money into Islamic banking & finance. One way of doing so is for Muslim governments and political parties (e.g., Pakistan Tehrik-e-Insaf and Pakistan Muslim League (N)) to adopt Islamic banking as a tool for social reform, which could serve as an important part of the revolution brewing in the Muslim world in general and Pakistan in particular.
The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at