The financial over-regulation that took place in the aftermath of the 2007-2011 financial crisis is currently regarded as an economic growth barrier, where investors and borrowers are stuck in a deadlock.
However, within this over-regulated environment, during the past four years, several well-known financial institutions in the UK have been in somewhat financial mayhem, from rigging the Forex and LIBOR to helping customers avoid tax, not to mention all those failing banks that were bailed out with taxpayers’ money. This leads to the question: is regulation performing its required role and can deregulation, with more emphasis on control of practice, be the solution?
Answers to these questions can be explored in alternative financial models, such as Islamic Banking and Finance (IBF). Despite the general consensus that IBF is a form of regulation, the fact that it is a market-led phenomenon proves otherwise. Transacting parties can freely enter into Shari’a-compliant contracts. Hence, IBF can be considered a form of deregulation. Islamic financial markets have historically been subject to minimum regulation, allowing market players to enter into contracts to maximise their respective interests. In Islamic history, the only key governing body has been the institution of Hisba (the ombudsman’s office). Its role since the 7th century has been to ensure that the business was conducted by Islamic economic principles (Shari’a).
A Muhtasib (ombudsman) often relied on the Hisba (accountability manuals), a set of pragmatic regulations allowing the Muhtasib to discipline markets in line with specific instructions and guiding principles. The institution of Hisba would ensure smooth functioning of the market, without necessarily intervening to control supply or prices. Its primary function was to provide healthy competition and avoidance of unethical activities and practices. It must be clarified that the role of Muhtasib was general, covering all the trades and crafts. According to Hill (1984), artisans and builders were normally responsible to the Muhtasib for the standards of their work. The Muhtasib also inspected public eating houses. For example, the Muhtasib had the authority to do on-the-spot checks and order pots and pans to be re-tinned or replaced. This role was similar to what modern times food authorities must do to ensure hygiene. The role of the Muhtasib even extended to check on all doctors, surgeons and apothecaries (Stone, 1977). Further Zerban et al. (2012) note, in the late 10th century the responsibilities of the Muhtasib of Cairo also included the regulation of market scales (weights) and money. These roles can be regarded as similar to the functions of the modern times Office of Fair Trade (OFT) and Financial Ombudsman. The institution of Hisba and certain modern regulatory authorities (e.g., OFT and Financial Ombudsman) share features that primarily aim to uphold fairness in the marketplace rather than one size fits all regulations. Thus, Muhtasib had a supervisory role rather than that of a regulator. There was an assumed lack of connectivity of markets in ancient times; it was natural to have the Muhtasib appointed at local level (i.e., every city had an appointed Muhtasib). This helped prevent contagion impact; for example, malpractices or deviations from standard practices were rectified at local level, which prevented one market from transmitting problems to other (neighbouring or distant) markets. In ancient times,
the institution of Hisba had a broad scope, encompassing; policing, acting as a magistrate and performance of religious rituals (‘ibadat), which eliminated the need for a separate financial control authority. Given the extensive jurisprudence diversity coming from the different Shari’a boards, as well as cultural and social differences, Islamic Banking and Finance (IBF) requires an external monitoring agency to ensure the financial well-being of customers and transacting parties. In this respect, IBF industry takes a more pragmatic and a holistic approach compared to its conventional counterpart. In addition to facing regulations from national regulatory bodies, Islamic financial institutions also voluntarily attempt to consider adopting standards, guiding principles, recommendations, advice and findings of research studies conducted by a number of organisations. In this respect, the roles of the following are acknowledged and valued by the Islamic Banking and Finance industry:
- Accounting and Autiting Organisation for Islamic Financial Institutions (AAOIFI);
- Islamic Finance Services Board (IFSB);
- International Islamic Financial Market (IIFM);
- Islamic International Rating Agency (IIRA);
- General Council for Islamic Banks and Financial Institutions (CIBAFI);
- The International Islamic Liquidity Management (IILM);
- Islamic Research and Training Institute (IRTI);
- International Shariah Research Academy for Islamic Finance (ISRA); and
- Islamic Development Bank (IDB).
Out of the above, IIRA can potentially be developed into an internationally accepted supervisory and monitoring body for the institutions that offer Islamic financial products and services. To date, it has provided rating services, focusing primarily on risk identification and reporting. In the past, it attempted to rate the quality of Shari’a assurance but failed because there was no Shari’a regulatory requirement for procuring rating. Given the recent developments where AAOIFI has issued a new standard necessitating external Shari’a audit for Islamic financial institutions, it is perhaps the right time for IIRA to consider re-introduction of Shari’a rating services.
Furthermore, there is a need to introduce Shari’a assurance and control as a function in the roles and responsibilities of the financial ombudsmen, in the countries where such institutions already exist. In other countries, where a significant share of the financial market is made up of IBF, a Shari’a Ombudsman must be institutionalised. For example, a Banking Mohtasib1 has existed in Pakistan since 2005. However, there is no reference to Shari’a or Islamic banking separately in operations, processes and procedures as adopted by the Office of Banking Mohtasib. This institution, however, could assume a role of paramount importance for Shari’a assurance and authenticity of Islamic financial products. In the presence of the likes of AAOIFI, IFSB and IIFM, which serve as the standard-setting bodies, IIRA must assume the role of a Muhtasib to disseminate information on the quality of Shari’a processes and procedures and the associated risks. An Islamic banking Muhtasib on a national level should be a proactive secretariat that must ensure that Islamic banking and finance is practised in letter and spirit in a given jurisdiction. It must be emphasised that it should not be a regulator rather it should specialise in supervision and monitoring of Shari’a assurance and control functions. Such a body will certainly be better equipped than the regular Banking Supervision Departments within central banks or other banking regulators. In conclusion, the application of Muhtasib through a reputable Islamic finance body such as, Islamic International Rating Agency (IIRA) will help in managing Islamic finance, not through regulation but a monitor of practice.
IIRA’s understanding of the IBF procedures, challenges and customer needs, will provide customer service quality and assurance, outperforming conventional banks based at an institutional level. This would also help to remove the current negative views associated with Islamic jurisprudence enforcement (Hisba) that have been seen in some places in the UK (Sharia zone ghettos) that is seen as a form of antisocial behaviour within a non-Muslim jurisdiction which is not representative of the inherent inclusive nature of the religion of Islam and contributes alienation and stereotyping of anything associated with Islam and more importantly with the IBF industry. Finally, I hope this article will promote research and debate in the Islamic banking and governance domain, contributing to the importance in the development of the institution of Hisba (accountability). Effectively, this will promote trust, awareness and confidence in the Islamic banking and finance (IBF) industry, offering better opportunity cost and safeguards for the consumers as a viable alternative to the conventional banking and financial system.
