REFLECTIONS ON ISLAMIC BANKING – PART II
MUAZZAM ALI
Islamic civilisation dominated the world scene for over one thousand years. During this long period of history, the impact of Islam was visible in every field of human endeavour: be it arts and culture, economy and finance, trade and commerce, science and technology, philosophy and metaphysics, or administration and defence.
During the ascendancy of Islam, Muslims spread over a large part of the world – from Indonesia to Morocco, and from Eastern Europe to Spain, playing a dominant role in world affairs. However, with the passage of time, their power and influence began to decline, until it came to nought. The main reason for this calamity was their deviation from the principles of Islam.
As a result, Muslims, who for centuries had been the torchbearers of learning for humanity, and had wielded great power and influence, fell into a life of disgrace, humiliation and weakness.
Taking advantage of the situation, the European powers occupied Muslim lands and ruled the Muslim people. During the two centuries of their occupation, the European colonial powers tried to steer them away from their Islamic faith. Muslims were told incessantly that their backwardness was due to their “ancient” Islamic faith. They were told that to advance and prosper they must embrace Western values. Th e ceaseless propaganda of the European powers achieved only a partial success. They could not shake the faith of the vast majority of Muslims.
The achievement of independence by the Muslim world some 50 years ago saw a strong resurgence of Islam, and Muslims all over the world began to clamour for a return to their Islamic identity.
The nascent Islamic movement received a strong impetus from the advent of the 15th Century of the Hijra in 1976. The event was celebrated extensively the world over under the auspices of the Jeddah-based Organisation of Islamic Conference. A major programme was launched in London, followed in 1977 by a major international conference on the Islamic Economic Order, which was addressed by eminent economists.
This conference strengthened the desire for the revival of the Islamic banking movement. Th e timing of the conference was most opportune as there was a growing longing among the Muslims to conduct their affairs in ways approved by Islam. There was also growing disappointment among the Muslim masses in that even decades after gaining independence, Muslim countries were continuing to use the interest-based banking system of the Western powers.
The oil boom of the seventies and accelerated economic growth in many Muslim countries in the post-independence era generated huge funds. The owners of such funds felt frustrated because there were no banks working on Islamic principles with which they could place their funds. For the same reason, many devout Muslims preferred to keep their savings in cash in their homes rather than deposit them in interest-based banks. This deprived the countries concerned of much-needed capital for accounts development projects.
The abhorrence felt by Muslims towards interest (Riba) can be judged by the fact that some two decades ago, many affluent Muslims who had deposited their funds with banks in the UK declined to collect millions of pounds that had accrued as interest on their deposits.
Concerned about the absence of Islamic values, particularly in financial matters, some thinkers, statesmen and economists took upon themselves the task of promoting Islamic financial institutions. The financial institutions that we see today are the result of their efforts. Yet in the absence of official co-operation, the banks did not make the desired headway. It is a sad reflection on Muslim governments that despite the strong demand by the Muslim masses for Islamisation of the banking industry, these banks are still struggling to fulfil their aspirations.
It is pity and much to be regretted that countries which ought to have been in the vanguard of Islamic banking proved to be either indifferent or hostile to it. Had Saudi Arabia – the birth place of Islam and home to the two holiest mosques of Islam – extended its support and co-operation to Islamic banking, the situation would not have been so disappointing, but instead of being in the forefront of the Islamic financial movement, Saudi Arabia has not even given official recognition to it.
Had Egypt, the centre of Islamic learning and scholarship for centuries, extended its support to Islamic banking, this system would be flourishing today in the land of al-Azhar – the most famous Islamic University in the world. Unfortunately, the authorities in Egypt are trying to destroy the very fabric of Islamic banking.
Had Turkey – the capital of the Caliphate for centuries – been true to the spirit of Islam and realised the truth that the fount of its immense power and glory in the past was its Islamic ideology, it would have taken steps to promote Islamic banking in the country. Had it done so, today Islamic banks in Turkey would have occupied pride of place in the Muslim world. But alas, it was not to be so.
In recent years Turkey has allowed, albeit reluctantly, some branches of Islamic banks. Even so, they are not allowed to be called banks. Instead, they are described as finance houses. Moreover, the real aim of allowing Islamic financial operations was merely to mop up the large reservoir of peoples’ savings to boost the country’s economy.
Had Pakistan, the only country created in the name of Islam, abided by the concepts which were its raison diltre. Islamic banking would have prospered in the country and would have been a model for others to follow. In 1982, Pakistan introduced an Ordinance for Islamisation of the country’s banking. But unfortunately, little attention was paid to issues that were necessary for its successful implementation. One of the crucial issues was the incorporation of the Islamic legal doctrine. The result of this neglect was that except for an Islamic veneer, interest-based banking remains more or less unchanged.
It is reassuring that the Prime Minister of Pakistan, Nawaz Sharif, on assuming power, pledged himself to promoting Islamic banking. In his first address to the nation, Sharif said, Pakistan is an Islamic state. To establish an Islamic banking system is our constitutional and Islamic duty.
Many countries, including Pakistan, have experimented with Islamic banking successfully. Replacement of the existing banking system in Pakistan by an Islamic banking system is my heartfelt desire.
“For the achievement of this desire, I am appointing a committee consisting of experienced and able constitutional, legal. Islamic and economic experts. The committee will formulate a practical framework for an Islamic banking system for Pakistan and put its recommendations to the government for implementation. This committee will also be authorised to consult international experts.
Nawaz Sharif has been a supporter of Islamic banking and it was he who, during his first regime, gave permission for the opening of two Islamic banks in Pakistan. His assumption of office for the second time augurs well for Islamic banking.
Had the Islamic Republic of Iran been true to its claim of being the harbinger of Islamic revolution, its economic and financial system would have been truly Islamic and flourishing today. But is it so?
And lastly, had Indonesia, the world’s most populous Muslim country, paid heed to the aspirations of its people – people who have remained loyal to their faith – Islamic banking would have taken strong root and prospered in the country.
It must be underlined that the Islamic banks that exist today in a number of countries were established not as a result of support from the ruling elite, but by ordinary, albeit highly committed, Muslims.
Two other factors which have been responsible for the slow progress of Islamic banking merit mention. They are:
a) a shortage of scholars well-versed in Sharia injunctions relating to economics and finance.
b) an insufficient supply of personnel who are not only educated and trained in the theory and practice of Islamic banking but also believe in it and are committed to it.
Islamic banks have to operate within the parameters defined by the Sharia. To fulfil this requirement, they have to be supervised by scholars who are well-versed in the Sharia as well as the Sharia’s approach to economic and financial issues. However, such scholars are in short supply. As a result, their services are over-stretched. Moreover, the shortage is also affecting the desired growth of Islamic banks and financial institutions.
Two factors are responsible for the prevailing shortage. First, during colonial rule, the study of the Sharia was badly neglected. Second, with the exception of a small number of scholars who have equipped themselves with knowledge in both areas, the majority of scholars who have studied the basic principles of the Shariah are not conversant with the complexities of present-day banking and financial issues.
The situation can be remedied by setting up courses tailored to produce scholars who have a thorough grounding in the Sharia and its approach to financial issues and by making existing Fatwas available to financial institutions.
With a view to giving access to the Fatwas issued by various Sharia scholars, the Institute of Islamic Banking and Insurance, London, has collected all available Fatwas relating to financial issues. These have been translated into English and classified by subject. The project has taken two years of hard work. It is hoped that this publication will prove to be a major step in clarifying the Sharia approach to financial issues.
Another factor that has retarded the growth of Islamic banking is a shortage of qualified personnel.
To organise and run Islamic banks requires personnel who are fully conversant with the concept and objectives of the Islamic economic order. Unfortunately, some Islamic banks are staffed by persons who have drifted into them not from any belief in the Islamic financial system but as a career opportunity. It is also a fact that some Islamic bankers in key positions do not have the commitment necessary to run the Islamic banks.
The setting up and running of Islamic banks requires personnel who are not only well-versed in the theory and practice of Islamic banking, but also believe in it and are committed to it. However, there is an acute shortage of such personnel and this is adversely affecting the considerable growth potential of Islamic banking.
As its contribution to overcoming this shortage, the Institute of Islamic banking and Insurance launched a distance-learning post-graduate Diploma Course in Islamic Banking and Insurance. The course has been received extremely well and so far 240 students have enrolled in it from 33 countries. Of these, 45 have already graduated. There is, however, a need for the establishment of many more training and educational institutions to meet the existing shortage fully as well as to satisfy future demand.
In spite of the aforementioned shortcomings and obstacles, Islamic banks have attracted adherents. This is particularly true in the UK. Recognising the potential niche market for Islamic banking, several prestigious British banks have organised in-house Islamic banking units. Such banks have won the confidence of Muslims, who have placed substantial funds with them. Muslim funds to the tune of billions of dollars are believed to be under their management.
Why are Muslims giving priority to such banks in handling their funds? They are doing so because:
a) They are convinced that their funds are used strictly in accordance with the Islamic Sharia, as interpreted by Sharia scholars.
b) They are impressed by the transparency of the Islamic system of banking operations.
c) Political instability in Islamic countries compels them to keep their funds in what they regard as secure banks in the West.
d) They feel that the confidentiality of their accounts through the Islamic windows of Western banks is assured.
e) The rate of profit on their funds is also attractive.
One can only surmise that Allah acts in His own mysterious ways: Islamic banking is taking root in an un-Islamic environment.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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