Dr.
Siddiqi is Playing the Role of the Guardian of the Soul of Islamic Finance
I consider this article (Future of Islamic Finance by Dr. M.
Nejatullah Siddiqi, Radiance Views weekly, 28 October-3 November 2007,
pp. 22-24) to be a continuation of Dr. Siddiqi’s continuous strive to relate
this modern Islamic experiment to the universal experience of mankind trying to
find itself in a world which gives little time and no opportunity to anyone to
check the morality of its deeds.
The Islamic experiment places an additional tier of
regulatory authority to check the correctness of our financial actions, namely
the Shari’ah Board, which is supposed to apply the true Shari’ah scale to our
financial transactions. The aim is to act with a moral aim on the one hand, and
remain efficient as well as sustainable on the other.
A direct consequence of an enlightened Islamic finance,
which is correctly practised, is to build a lighthouse that leads ships full of
tired and exhausted people who have been fighting with angry waves (perhaps of
their own making) to a safe landing.
There are several positive results from such an
experiment. Dr. Siddiqi has mentioned several of them, most important is
that Islamic finance makes the real sector the dominant power in economies and
pushes the financial sector to the background after reducing it down to size.
However, the way he expressed some of them may require fine tuning.
The idea that Islamic finance drastically curtails debt
financing echoes the pure-equity model propagated by early Islamic economists,
who have considered equity to be good and debt to be bad. I consider this to be
a passing stage of our thinking, as now the mixed model (debt plus equity)
is the more realistic.
However, Islamic finance significantly modifies the nature
of debt. First, it is not negotiable. Second, it is open to rescheduling
at times of temporary insolvency at no extra costs (whatsoever).
Third, delinquency is subject to penalty to be collected for
charity. Such modifications rid economies from the bond market, with all
its associated instability and contagion.
As to speculation, this is based on short-selling and long
purchase (presumably in the stock and not in the bond market). Short
selling violates the basic Shari’ah rule of “do not sell what you do not
own.” Lending shares or renting them to go around this is
irrelevant. Long purchase requires
finance. Interest-based finance would not be acceptable. Purchase on
the margin is also non-Shari’ah compliant, even when the credit provider
(the broker) claims to charge no interest. The reason is that interest is
obtained indirectly through higher commission.
Dr. Siddiqi’s expression of “financiers who have a better
mix of interests and values” sounds overly optimistic. The presence of the
Shari’ah supervisory Board is a design to force such a mix and not to rely on
the good nature of financiers.
I am glad he has brought up the problem of Tawarruq.
This actually exposes the weaknesses of Shari’ah Board. I have previously
mentioned that such a board is formed with little attention to the academic and
practical qualifications of Shari’ah scholars. This to me represents a
high degree of opportunism on the side of businesses that require Shari’ah
supervision. Let us agree that Shari’ah scholars (like scholars in
economics) must have a Ph.D. in Shari’ah (specifically, and not in Islamic
studies). This should be the first step to standardisation.
Rating companies must give low rating to products of
institutions whose Shari’ah Board members are (well-intentioned) impostors,
with insufficient credentials in Shari’ah. Having one economist as a member of
such boards is also a necessity as an expert, but not as a Shari’ah expert and
never to be called Sheikh!
We economists must work patiently with Shari’ah scholars in
order to explain to them how Maqasid Al-Shari’ah can be realised or
inhibited through a certain pronouncement. We can tell better the consequences
but we cannot set the rules.
Tawarruq is not the only ill. Other ills are present.
The latest are some purposed hedge products based on two parallel (claimed not
to be mutual) promises. Some, who are too enthusiastic, attempt to use the
promise as a tool, instead of the contract, as the former is more flexible than
the latter. They meanwhile forget that a contract between two parties is just
like a combination of two self binding promises.
Finally I must say that I am glad that Dr. Siddiqi is
playing the role of the guardian of the soul of Islamic finance. Such a
guardian is badly needed, considering the state in which the world finds
itself.
[Dr. Mabid Ali Al-Jarhi, born in 1938 in Egypt, is one of
the top most Islamic economists today. He did Ph.D. in Economics from
University of Southern California. He has served as Secretary-General of the
Council of Governors of Arab Central Banks at the Arab Monetary Fund, Abu
Dhabi, and as Director, Islamic Research and Training Institute (IRTI), IDB. He
is a long-time member of the American Economic Association, the Royal Economic
Society, the European Economic Association, the Econometric Society and several
other professional groups. He can be contacted at mabid.al.jarhi@gmail.com]
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