Despite having undergone ‘a four-stage evolution’, composed of the early years (1975-1991); the era of globalization (1991-2001); the post-9/11 period; and an era after the 2008 recession, the Islamic financial services industry is still perceived to have failed to deliver on its promises of fairness, equity, and inclusion. As such, this has been due to the industrialisation along with its inevitable commercialisation along the way.
Rightly so, the contemporary age of Islamic financial engineering, that has been characterised by a greater reliance on plugging ‘classical Islamic financial contracts’ into an Anglo-Saxon banking model and a conventional securitization technique in Sukuk issuance, has made Islamic finance appear to be no different from its conventional counterpart. Such an era, which commenced in the mid-nineties has been considerably exacerbated by the introduction of the following. First, the wa’ad technique (especially double wa’ad) applied to Islamic financial contracts. The white paper by Deutsche Bank in 2007 was perhaps the first documented articulation on the use of double wa’ad in contemporary Islamic financial engineering. Second, the deployment of a commodity Murabaha through the use of tawarruq for both liquidity management and personal financing purposes. Third, the operationalisation of the concept of beneficial ownership and the extension of the khulta (mixture) principle to the field of commercial transactions, of which Islamic capital market through sukuk issuance has undoubtedly been the great beneficiary of the implementation of such concepts. These three components have altered the profile or body of Islamic financial contracts resulting in the financialization of the entire Islamic financial services industry.
In the process, one of the unpreventable outcomes is a ‘shift’ in the natural domain of the contract; from initially being classified as a benevolent contract to now being a commercial contract. One example is the kafalah contract upon which a fee is now permissible. This is possible since, in contemporary practice, kafalah has essentially been moulded into ‘shirkatul wujuh’ using the principle of tab’iyyah or subordination.
Financialization, as Palley (2007) contends, is a process whereby financial markets and financial institutions gain greater influence over economic policy and economic outcomes leading to a supreme superiority of the financial sector over the real sector. The consequential impacts of this process would be, an elevated significance of the financial sector relative to the real sector; income transfer from the real sector to the financial sector; increase income inequality; and propagation of debt creation instead of wealth creation.
Having said the above, it has become clear that under the existing commercial institutional set-up, reducing inequalities and being more inclusive has never been the ultimate ‘natural’ objective of Islamic financial institutions; hence, it may not necessarily be attainable.
Nowadays, where the innovations are characterised by the use of Artificial Intelligence (AI), FinTech, and Internet of Things (IoT), or collectively known as the Fourth Industrial Revolution, Islamic finance being in its 5th phase of development is encountered with situations where such innovations are creating substantial displacements in industry and employment in major economies around the globe.
It is imperative; therefore, that Islamic finance has no other choice but to change. Furthermore, there is also a genuine demand and opportunity to redirect innovations towards services and products that create more economic opportunities, jobs and financial inclusion for those who have been on the sidelines of the Islamic finance revolution. Coincidentally, we are witnessing the propagation of Environmental, Social and Governance (ESG) discourse; which refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business combined with the proliferation of the immense potential of Islamic Social Finance. The terminology ‘Islamic Social Finance’ itself was only prominently introduced in 2014 by the Islamic Research and Training Institute through its Islamic Social Finance Report.
A change in the look and direction of the industry is needed. Malaysia’s recent movement of Value-Based Intermediation in Islamic finance can be considered evidence of such change. Another one is the issuance of Khazanah Sustainable and Responsible Investment (SRI) sukuk. Waqf-linked sukuk is another breakthrough championed by the Ministry of Finance Indonesia in partnership with Badan Wakaf Indonesia (BWI) and Bank Indonesia.
It is becoming apparent that the drivers of change are no longer driven by an entirely profit geared motive, rather they are emphasising upon creating social and environmental impact. In other words, it is an admission that the deviations caused by the operation of Islamic finance in relation to the expected or aspired paradigmatic knowledge, theory and institutional emergence have to be corrected. One way to do that is through the introduction of ESG, Impact Investing, and Islamic Social Finance.
More importantly, in the wake of the industrial revolution 4.0 that is somewhat synonymous with the use of technology and digitalization; we could perhaps hope it would pave the way for Islamic finance to be more appealing for not only its inclusivity but also the ubiquity of its fundamental principles as an ethical, socially responsible, and fair system of finance for not only the Muslims but other communities as well.
