Professor Humayon Dar
Many Islamic bankers tend to believe that Muslims are using Islamic financial services because such services are offered to them; otherwise (according to them) customers are indifferent between Islamic and conventional products. This thinking may be partially true. It is certainly the case where Islamic banking is either non-existent or insignificant in magnitude and proportion. Once, Islamic banking grows to a meaningful size (about 10% of the overall banking sector), Muslims choose Islamic banking, even if it happens to be slightly more expensive. Malaysia has by far come out of the nascent phase of Islamic banking, with Islamic banking representing over 20% of the banking industry. Hence, Muslims in the country demand Islamic banking because it is Islamic first and not just because it is banking that happens to be Shari’a compliant.
Shari’a authenticity is central to Islamic banking. If the customers are convinced of the Shari’a authenticity of the products offered by Islamic banks, they are not much bothered about what rate of return they get on their investment accounts. The notion of commercial displacement risk (the risk that Muslim depositors will withdraw their funds if Islamic investment accounts offer a return lower than the market rate of return) is a fiction created by conventional bankers managing Islamic banks. This thinking is popularised by conventionally trained, and inclined, Islamic bankers (and their bosses sitting on the conventional side of the fence if the Islamic bank happens to be part of a conventional banking group) to ensure that they do not share profit with the holders of Islamic investment accounts. They are interested in cheaper funds of Islamic customers and do not like sharing profits with them because of the so-called “cost of capital” considerations. When a regulator (like Bank Negara Malaysia) starts emphasising offering restricted investment accounts, the conventional mindset comes into action and the managers of Islamic banks start offering fixed-return accounts based on commodity murabaha or wakala. There is a need to read the unfolding story in most of the Islamic banks in the country, which are gradually replacing their unrestricted Islamic investment accounts with accounts based on commodity murabaha or wakala.
While there is no denial of the fact that Bank Negara Malaysia is trying its best to improve Shari’a authenticity in the country, it does not need a foreigner like me to tell the regulator that many Islamic bankers are adamant that the upholding status quo is the best way to move forward.
There is a need to improve perceptions of Shari’a authenticity of Malaysian Islamic banking and finance in the international markets. The new guidelines on the use of bai’ ‘ina are an excellent step in the right direction. In my opinion, no one in the entire world will have problems with bai’ ‘ina if it is practised the way it has been prescribed in the new guidelines. With malpractices in bai’ ‘ina being rooted out of Islamic banking and finance and reconsideration of the issue of bai’ dayn, the Malaysian model of Islamic banking and finance will serve as an ideal blueprint for many other countries that are embarking upon the task of developing Islamic banking and finance. The new markets in Africa, Turkey and Central Asia are all looking for a cost-effective way of developing Islamic banking and finance in their respective countries. Malaysia must grab this opportunity by presenting to the whole world a model of Islamic banking and finance they have developed over a period of three decades. Malaysian investment into Islamic banking and finance (with the establishment of INCEIF, ISRA, IFSB and IILMC) must start bringing financial benefits now. The government should devise a policy framework for exporting Islamic financial advisory and capacity-building services to countries in the Organisation of Islamic Conference (OIC). It may not be a bad idea at all if Malaysia takes a lead role in setting up and hosting what may be called International Islamic Development Bank (IIDB). The Jeddah-based Islamic Development Bank (IsDB) has been playing a lead role in the OIC bloc, and now it is time for Kuala Lumpur to play the role of a global leader in Islamic banking and finance. As Malaysia has done it domestically, it can certainly do it globally.
