Islamic Banking And Finance in South-east Asia: Its Development And Future
ISLAMIC BANKING AND FINANCE IN SOUTH-EAST ASIA – Book Sample
Introduction – ISLAMIC BANKING AND FINANCE IN SOUTH-EAST ASIA
The key feature, or principle, that distinguishes Islamic banks from any other kind of bank is the rejection of interest-based financial transactions. The Quran’ s ban on giving or receiving interest is known to all devout Muslims. The words from Chapter 2, Verse 278 of the Quran are, in fact, quite specific: “O you who believe! Have fear of Allah and give up what remains of what is due to you of usury …. If you do not, then take notice of war from Allah and His Messenger.”
Just how serious a sin is paying or receiving interest? Shaykh Nizam Yaquby, an Islamic scholar who is trained in both economics (at McGill University in Canada) and in Islamic Shari’ ah law (in Saudi Arabia, India and Morocco), noted that Christianity and Judaism got over their hangups about it sometime during the Middle Ages – the Old Testament also includes several stern warnings about interest – but Islam never really budged. Back in the days of Muhammad, the reasons for deploring interest were self-evident. Loan-sharking was rampant, and failure to repay a loan could mean slavery. By outlawing interest, Islam advocated an economy based on risk-sharing, fair dealing and equity – in both the financial and social-justice senses of the word.
Islamic scholars believe this system is superior on several counts. It leads to more prudent lending, they say, by encouraging financiers to invest directly in an entrepreneur’ s ventures. “A financial system without interest is more interested,” says Shaykh Yusuf DeLorenzo (a Virginia-based Islamic scholar).
lslamic Banking and Finance in South-east Asia
Accordingly the scholars believe that interest-free finance would alsa prevent future Enrons and Argentinas. “üne reason for prohibiting interest is to keep everybody spending according to his limit,” says Yaquby. “This consumerism society was only created because of the banking system, because it encourages ‘buy today, pay tomorrow’. You alsa have poor economies in debt to rich ones. This is because of borrowing and lending with interest. So this is creating big economic chaos in the world.”
Against such a background, there are many who see Islamic finance as a possible way forward to a brighter and more socially responsible future. Today, there are more than 200 Islamic financial institutions spread across the Middle East and beyond.
They include banks, mutual funds, mortgage companies, insurance companies – in short, an entire parallel economy in which Allah, not Alan Greenspan, has the final say. Industry growth has averaged 10 to 15 per cent a year and sniffing opportunity, conventional banks like Citibank and Hongkong & Shanghai Banking Corporation (HSBC) have opened Islamic “windows” in the Gulf.
And whilst the industry’ s market share is still modest – about 10 per cent in Bahrain – its very existence challenges the modern assumption that global capitalism flattens all before it. According to Fouad Shaker, secretary general of the Union of Arab Banks, there are over 265 Islamic financial institutions in the world with capitalisation in excess of US$13 billion and assets of over US$262 billion.1
At the beginning of the twenty-first century, many Western, Middle Eastern and Asian financial institutions recognise Islamic banking as an important new opportunity for growth and have adopted Islamic practices to serve this expanding market. Islamic mutual funds have alsa sprung up which invest client monies in ways that do not conflict with the conscience or practical interests
of Muslims. In this respect they are rather like socially responsible funds in the West.
The prohibition of interest – the ethical core of Islamic banking – derives from Islamic law, which is enshrined in the Shari’ ah. The word shari’ ah literally means a waterway that leads to a main stream, a drinking place, and a road or the right path. It is a term that encapsulates a way of life prescribed by Allah for his servants and it extends to every department of daily life, including commerce and financial activities of every kind. Since the advent of Islam dates back to the seventh century, the application of ethical principles that were first established fourteen centuries ago to modern situations and circumstances can be a complex matter. Naturally, ancient texts are mute on such matters as derivatives and stock options, which means that modern-day Islamic scholars must extrapolate. Currency hedging, for instance, is prohibited on the hasis of gharar, a principle that says that one should not profit from another’ s uncertainty. Futures contracts are not allowed, since Muhammad said we should not buy “fish in the sea” or “dates that are still on the tree”. As for day trading, it is too much like gambling.
Bonds are an area of divergent thinking. Malaysian scholars have approved the issuance of specially designed “Islamic bonds”. But Middle Eastern scholars, who take a harder line than their Far Eastern counterparts, have roundly criticised them. “Playing semantics with God is very dangerous,” warns Yaquby. “Calling fornication ‘making love’ doesn’t make it any different.”
Everybody can agree on one matter, though: It is okay to buy and sell stocks, since stocks represent real assets. And now they can be traded safely, using the Dow Jones Islamic Index. Launched in 1999 with the help of Yaquby, the index offers a pre-screened universe of stocks for the devout stock picker. üne screen removes companies that make more than 5 per cent of their revenues from sinful businesses. That expels such notables as Vivendi (alcohol), Citigroup (interest), Marriott (pork served in hotel restaurants), and FORTUNE’s parent company, AOL Time Warner (unwholesome music and entertainment). A second screen eliminates companies with too much debt, the cut-off being a debt-to-market-capitalisation ratio of 33 per cent. A third screen applies the same standard to a company’ s cash and interest-bearing securities, whilst a fourth makes sure that accounts receivable do not exceed 45 per cent of assets. “Islamic investing is low-debt, non-financial, socialethical investing,” explains Rushdi Siddiqui, who manages the index at Dow Jones.2
Of the 5200 stocks in the Dow J ones global index, 1400 make the cut – yet even those may not be entirely pure. If a company makes, say, 2 per cent of its money from selling pork rinds, an investor must give away 2 per cent of his dividends to charity, a process known as “portfolio purification”. At the same time, he should urge management to exit the pork-rind business.
But demand for Islamic mutual funds is booming. There are now more than 100 funds worldwide, including three based in the United States, while a clutch of Internet companies position themselves as the Muslim E*Trade (iHilal.com), the Muslim Morningstar (Failaka.com), and the Muslim Yahoo Finance (IslamiQ). The latter offers members a feature called “Ask the Scholars”.
The first Muslim-owned banks were established in the 1920s and 1930s, but they adopted similar practices to conventional banks. Then in the 1940s and the 1950s, several experiments with small Islamic banks were undertaken in Malaysia and Pakistan. The first significant success was in the Egyptian village of Mit Ghamr, which set up a bank that conducted business according to Islamic principles in 1963. Other successes include the establishment of the InterGovernment Islamic Development Bank in Jeddah in 1975, and a number of commercial Islamic banks such as the Dubai Islamic
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