Modern finance has played a key role in economic development across the globe. Its impact has varied from country to country depending upon the adopted economic systems, capital mobility, market imperfections and regulatory environment. Contemporary Islamic finance has generally operated within this broader framework of conventional finance and has conformed to globally acceptable conventional rules, prudential regulations and financial standards. Therefore, its impact on development is also expected to be consistent and similar.
Empirical evidence from Muslim majority countries, however, remains mixed. It suggests that gains from Islamic Finance have been limited to only a small segment of the general population. This has to do primarily with how the business and industry of Islamic finance evolved over last forty years and how it has been preoccupied with high net worth individuals. Retail Islamic banking and insurance products have been launched successfully to match the performance of conventional products but they have only taken some market share away from conventional products and have not made any significant impact either on the growth of financial sector or on greater monetisation of economy. In fact, Sharia compliance practices have created additional burdens, inefficiencies and operational constraints. That is unfortunate since Islam is universally acknowledged as an inclusive religion which promotes equality and justice for all. Sharia compliance protocols that industry adopted, however, have led to sub optimal solutions for the economy, thus undermining the original Sharia objectives of fairness, inclusiveness, equity and economic justice.
It is not suggested that classical Islamic jurisprudence principles or underlying traditional Islamic operational contracts such as Murabaha, Ijara, Musharaka, Mudaraba, Wakala, or Salam, have not been correctly applied in the development of either the retail consumer products or the asset/wealth management products for the high net worth individuals. Similarly, Islamic banks have satisfied their liquidity or treasury management needs by supporting the adoption of Sharia compliant equity and fixed income securities that perform exactly like their conventional counterparts. In this process of compliance, they have been aided by all the regulators, rating agencies, a vast majority of investment advisers and the industry-retained Sharia scholars. Thus there has been no additional or supplementary expansion of the financial sector, better access to finance for the masses or deepening of the financial markets simply because of gradual market introduction of Sharia compliant products over the last three decades. This has occurred even with substantial capital infusions from the development banks such as ADB, IBRD, and the Islamic Development Bank.
The conventional character and performance of Islamic finance products limits their religious or inspirational impact on a Muslim society. Central bankers, securities commissions, stock exchanges, and other government regulators have all followed conventional guidelines in approving and standardizing Sharia compliant products without developing a coherent national economic policy that distinguishes or maximises the benefits from such products. Islamic finance industry has remained satisfied in using newly Islamized nomenclature products for sheer profitability and market share gains at the expense of their conventional competitors. It has neither sought nor received any long term comprehensive or strategic plan from any Islamic nation to become an instrument of economic change, development, poverty alleviation, enhanced access to financial services or general social welfare.
The industry has relied heavily on the jurisprudence associated with trading practices of ancient Arabia for the Islamic legitimacy and for operating precedents from the Islamic past. It is a historic fact that classical financial contracts that provide the Sharia compliance rationale for contemporary Islamic banking and insurance products have been instrumental in the past centuries in fostering trade, growth and development all over Muslim lands. They were the pillars and facilitators of economic fairness, equity and justice in all business transactions in these societies and contributed greatly to the well being of common people as well as the emergence of the class of successful global traders and financiers. Unfortunately, internal strife and foreign colonialism destroyed the legal and judicial systems of the land and made these contracts obsolete or irrelevant until they were rediscovered in the post colonial period beginning the middle of the last century.
The pace of new Sukuk launches has picked up after the decline witnessed because of the global financial crisis of 2008 but the supply of new Sukuk still falls short of the demand from investors for fixed income securities. We can review the precedents from the conventional bond market to explore the creation of new classes of Sukuk for institutional investors and consumers alike that will enhance the potential for government projects financing in developing countries. It will not only ensure deepening of the Sukuk driven capital markets but will also provide a mechanism for Sharia conscious consumers to adopt Sukuk as a long term savings tool. Examples and case studies of public utilities financing and municipal bond financing can be looked at as viable basis for new Sukuk ownership certificates as the alternative to widely marketed savings bonds in these countries.
The potential of hybrid Sukuk structures emphasising Wakala principles should not be overlooked. Similarly, recommendations for effective placement of lower yield sovereign Sukuk in foreign currencies should be carefully examined. In the light of 2008 AAOIFI rulings on Sukuk, unique Sharia issues associated with commonly used contracts such as sales, lease, partnership and agency should be contrasted with Sukuk classifications based on commercial functions such as exchangeability and convertibility. The difference in asset-backed versus asset-based Sukuk should be examined with the available data for sovereign issuers who would like to expand the prospects for Sukuk holders in Muslim majority societies that are eager to use Sukuk instruments for economic growth and infrastructure development. Failure of past privatization efforts because of underlying corruption or other moral hazards should be noted along with suggestions for a new class of convertible Sukuk.
The popularity of both sovereign and private Sukuk in major markets such as Malaysia and UAE suggests that large population Muslim countries such as Indonesia, Pakistan and Bangladesh will benefit from the issuance of new fixed income securities in these markets. Development banks such as IDB and ADB should work in collaboration with the World Bank and other multilateral organizations in broadening the base of such Islamic finance instruments that are positioned to create a positive transformation of these economies.
by Malik Muhammad Mahmud Awan,Author is professor of Islamic Finance.