SPECIAL COMMENT: Questions For Islamic Finance

By Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries, Thomson Reuters

Questions for Islamic Finance

“We don’t see things as they are, we see them as we are” - Anais Nin

I used this quote as I wanted to share with the readers a sample of questions posed to me during the last few years of travel in Europe, GCC and ASEAN countries. These questions originate from people from all walks of life, whom in one way or another form opinions of their own and see Islamic finance from their own lenses.

It’s about a kaleidoscope of concerns in connecting to the young, understanding the spirit and perception of Islamic finance, innovation that results inclusion of the non-bankable, and a deeper dive about Malaysia and Islamic finance.

The questions give insights into the ‘mindsets of the landscape’ that Islamic finance industry needs to address and win over.

• Why aren’t more Islamic financial institutions sponsoring events that connect them to the young people, next generation of clients and employees, like sporting events in Muslim countries (badminton, football or cricket) or concerts like Sami Yusuf, whose lyrics are about Islamic values?

For example, Malaysian Islamic financial institutions like CIMB Islamic, sponsoring Maher Zain concert, or Bank Islam, sponsoring, the Imam Muda program, may well show outside-the-box thinking for connecting to the youth with certain principles and values.

• Why don’t Islamic finance conference award sponsors include categories like: (1) Most admired Islamic financial institution; (2) Most respected Islamic financial institution; (3) Most ESG, environment, social and governance, conscious Islamic financial institution? These awards attract the best young talent and build bridges to the non-Islamic community.

The bottom line for an Islamic financial or Halal Food industry institution needs to include social returns. The ‘best this or best that’ is product centric or institution centric, and Zakat contribution is obligatory, so the act of almsgiving is a bare minimum. Who will take the lead, an Islamic subsidiary/window of a conventional bank or dedicated Islamic financial institution?

• Are Islamic banks and funds focusing too much on Shariah and less on the value proposition? It seems many institutions use their Shariah Board members, be it in their marketing materials or public presentations, too prominently to pitch the product sale rather than the merits of the product? Shouldn’t the focus be the value proposition of the (retail) Islamic product, rather than the identity and sign off of the scholars? I suspect scholars do not want to be positioned or viewed as part of the marketing materials.

If a large part of the ‘pitch’ includes scholars and the marketing materials includes excerpt of fatwa, names of scholars, and so on, then Islamic finance is positioned only for Muslims, and lets dilute the rhetoric of Islamic finance is for all.

• There are many Islamic funds, about 560 plus (according to Lipper), but not one has a ‘green’ mandate, meaning companies that pass screening from Shariah and ESG, Environment, Sustainability and Governance? The color green is typically associated with Islam, yet, few, if any, ‘green’ funds.

I was fortunate enough to lead a team to launch the world’s first Islamic Sustainability index in 2006, but, to my knowledge, not one fund has been launched off the index. My question is ‘why no interest’ when there is market performance?

• Why is it when there is ‘bad’ news on Sukuk, like UK and Luxembourg delaying issuance or a Sukuk default, there immediately appears to be questions on viability and sustainability of both Sukuk and Islamic finance? One wonders if the early days of the Euro-bond market encourage the similar range of confidence volatility? Sukuk, $130-billion in size, is not Islamic finance, $1 Trillion, it’s an instrument to raise money.

There is no ‘divine put’ in Islamic finance, it is exposed to the same market forces much like conventional finance and investing. One of the sajor difference is less ‘bells and whistles’ on uncertainty, leverage and derivatives.

• Will Islamic finance have ‘proprietary trading’ in the near future as more instruments come into the market place? An ‘Islamic Goldman Sachs,’ where trading profits contribute much to its bottom-line? Today, some of the scholars have signed off on an Islamic hedge fund, where returns are typically tied to hyper trading and with Islamic ‘short’ [approved by some] combined Murabaha margin lending available, it would appear ‘prop or algo’ trading may be with us soon! Is this innovation or catering to higher fee margin producing HNW money?

Innovation may imply increasing efficiency, new products or financial inclusion of the disenfranchised. The Financial Times recently stated that only 12% of 1.6 Billion Muslims use Islamic finance, or 192 million Muslims, its a number I place with those who cheer Islamic finance. The actual number is close to 2-4% as Islamic is less than 15% of global banking assets, and actually Halal foods are ‘used’ by a larger percentage of Muslims, more than 12%, then Islamic finance!

• What are the lessons for the $640B Halal from the $1T Islamic finance industry for establishing industry bodies, like AAOIFI, IFSB and the recently launched IILM? The Halal industry is even more fragmented with territorial issues on the certification process than Islamic finance on standardization.
• A ‘Big Mac Index was published by The Economist (1986) as an informal way of measuring the purchasing power parity (PPP) between two currencies, and it gave rise to the word ‘burgernomics.’ Put differently, its the amount of time that an average worker in a given country must work to earn enough to buy a Big Mac.’ Should the halal industry look to produce a similar index, but it must be representative of the a ‘universal food’ available in the Muslim world. My suggestions were Kebab index, Rice Index, and Dates Index. The Dates index makes most sense because universally known and consumed by Muslims, especially during Ramadan.

Thus, rephrased, the Dates index implies the amount of time that an average worker in a given country must work to earn enough to buy 5 pounds (or 2.5 Kilograms) of Medina or (the expensive) Tunisian Deglet Nour dates.

-Is Takaful, Islamic ‘insurance,’ being used or positioned to mitigate risk in Islamic investing (Islamic hedge funds), transactions and structures, like Sukuk issuance, hence, lowering the Islamic cost of capital? Or, is the Takaful industry not well developed to ‘insure’ complicated structures and projects?

• Why doesn’t any Islamic financial institution in Saudi Arabia have ‘Islamic’ in its title name, which is commonly found in UAE, Qatar, Bahrain, Malaysia, and even the UK, European Islamic Investment Bank and Islamic Bank of Britain? In Turkey, because of the historical sensitivity to the word ‘Shariah,’ it may make sense not to have ‘Islamic’ in title.
• Why are the same people from the same institution in Islamic finance interviewed by western media? Its gives the impression that Islamic finance has very few qualified people to speak on topics, developments, events, etc. It’s almost like the Funds-at-Work study, linking scholars to Shariah Boards, implying, to the lay person, only 20 scholars when, in fact, there are over 400 plus and counting.
• Why are interviews with Islamic finance personalities open ended ‘soft’ questions instead of hard hitting? For example, why is the banks exposure to real estate excessive and how are you managing the risk? Why are clients of Islamic mortgages penalized for early payment?

There needs to be certification courses on Islamic finance journalism, and it needs to be taught by retired financial journalists. The journalists are the policemen of the capital markets and compliment the role of regulators, but in Islamic finance more needs to be done.

How come there are no Malaysian founding shareholders in any of the five FSA approved banks in the UK, yet there are many travelling Malaysian delegations and sponsored events taking place there, and a number of Malaysian Islamic financial institutions have won Euromoney Islamic finance Awards? To be a global Islamic financial hub, which Malaysia is, shouldn’t Malaysian Islamic banks be in G-7 jurisdiction that is welcoming to Islamic finance?

-The perception or myth of Islamic finance needs to be addressed. When will people understand that it’s not only for Muslims? Would it take a non-Muslim scholar to break this image/perception of Islamic Finance?

Today’s perception of Islamic finance is tomorrow’s reality, and reality is nothing but a collective hunch ! If the doors of perception were cleansed, everything would appear as it is – infinite!