Diary of a Mad Philosopher - 5

Where do we go from here now that Islamic banking and finance (IBF) has become a credible proposition for sustainable business? Should we continue to emphasise on its Islamic identity and the associated nomenclature or move on to pitch it as any other form of business competing in the market? There are certain sectors where Islamic identity is required, whether in name, brand or culture. Lack of emphasis on Islamic identity may result in complete change in the nature and character of the organisation. For example, Aligarh Muslim University in India was developed as a university where Muslims (and of course non-Muslims) could be trained in different academic disciplines. Its "Islamic" character was never emphasised upon, although its “Muslim” identity was a differentiating factor. Consequently, this university is now like any other university in India, which admittedly also has academic departments for teaching and research in different aspects of Islam.

Darul Uloom Deoband, on the other hand, was set up as an Islamic seminary specialising in Islamic sciences and has remained as such after more than 150 years. 

With the giants like Al Rajhi Bank, Dubai Islamic Bank and Kuwait Finance House, with operations in multiple jurisdictions, and in most cases sovereign backings, no analyst would seriously question longevity and future survival of this phenomenon. IBF is going to stay. Calculator and Quran have proven to be compatible. Burkinis and beaches have embraced each other!

IBF is going to stay. Calculator and Quran have proven to be compatible. Burkinis and beaches have embraced each other!

Relevance of IBF to socio-economic developments is admittedly limited. Like conventional banking and finance it remains an elitist business aimed at offering services to the upper segments of the society with economic entitlements and strength in business. Islamic bankers can be seen rubbing shoulders with those wearing Hublot on their wrists, wearing Pal Zileri, Armani, Dolci & Gabbana, etc, scribbling with Mont Blanc pens, playing with expensive electronic gadgets, and hobnobbing on the highest floors of Shard in London and Burj Khalifa in Dubai.

There shouldn't be an iota of doubt that Islamic banking is banking first, and its Islamic character is secondary. Most of the customers are not exclusively motivated by their Shari'a credentials but also of other commonly influencing factors in bank choice, like service quality, ease of location, and the general reputation of a bank, etc.

Any further developments in IBF from here will strengthen its banking aspect more than its Islamicity. It will emerge as more money lending than financing of business activities. The Islamic bankers will continue to get excited on the introduction of practices like tawarruq, as has been the case even in markets like Pakistan where some of the most conservative Shari'a scholars of the world have been seen defending the introduction of tawarruq, celebrating it, and their followers dancing in ecstasy. That's where IBF is moving all over the world.

Those who have visited or lived in Cambridge must have come across Cambridge Building Society's branch in the City Centre (opposite to Emanuel College). This must remind us that financial services still have scope outside banking. Building Societies receive deposits and offer all the basic "banking" services outside the banking sector. Of course, as the name may suggest, these are mutual organisations to allow their members to buy homes through access to financing from a common pool.

If Islamic banking and finance has to move away from its current position as banking institutions and progression towards money managers, it should look for a structure outside banking. Pakistan developed the most beautiful model of mudaraba business, which was undoubtedly a "double-helix" structure for Islamic finance, but it hasn't been developed further. Nevertheless, mudaraba business in Pakistan provides an excellent starting point for Islamic finance to develop further. The banking model is bound to kill Islamicity of Islamic banks.

To conduct mudaraba business in Pakistan, it is a regulatory requirement to first set up a mudaraba management company as a limited company registered with Registrar of Mudarabas at the Securities & Exchange Commission of Pakistan (SECP). The mudaraba itself is a separate entity that must be floated on Pakistan Stock Exchange. All the investors are required to invest by way of buying shares in the listed mudaraba, which may be of two types: Specific purpose and the ones set up for any authorised business activity. Similarly, they can be set up for a given time period or may exist perpetually.

The investors receive return in the form of frequently paid dividends – profit or loss depending on the movements in market prices of shares. There are no profit equalisation or investment risk reserves, making the practice of mudaraba in this context very different from what Islamic investment accounts offered by Islamic banks.

Mudarabas are allowed to raise further capital in the form of Musharaka Investment Certificates that mudarabas/mudaraba companies issue without having to list them on the stock exchange. The Musharaka Certificate holders receive returns based on the profitability of the business.

There are scores of other examples of financial intermediaries outside banking, but Islamic bankers have decided to be in bed with conventional bankers. While this marriage has not been entirely unhappy, there is a need to improve the relationship. More importantly, a polygamous solution may serve the purpose. In addition to the current model of Islamic banking and finance, a new non-bank model needs to devised to ensure more authenticity and independence of Islamic finance.

Muslims should forget about banks and come up with something else that is more genuine and disruptive in nature. But perhaps this will never happen, as intellectual slavery is widespread in Muslim lands, where parrots are now uttering words like FinTech and Bitcoin and God knows what, because all these developments have come from the West. Where mimicry is revered and rewarded, authenticity remains rare and remote.

Although need for setting up more Islamic banks may still be argued, it will be more useful to set up murabahas (e.g., H. Karim Bakhsh Murabaha) for financing of household items, mudarabas and joint stock companies based on musharaka for business development, ijaras for property and vehicle financing, qard hasan based ROSCAs for collective savings and loan programmes. Muslims should forget about banks and come up with something else that is more genuine and disruptive in nature. But perhaps this will never happen, as intellectual slavery is widespread in Muslim lands, where parrots are now uttering words like FinTech and Bitcoin and God knows what, because all these developments have come from the West. Where mimicry is revered and rewarded, authenticity remains rare and remote. 

P.S. The article is written by someone who would like to remain anonymous. Diary of a Mad Philosopher is a regular contribution to ISFIRE (https://www.isfire.net) the December issue of which is carrying the above.