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Monday, 25 June 2012

Islamic Finance : Eliminating the disconnects

by Rushdi Siddiqui

IF ISLAMIC finance (IF) is about business, then, logically, the product offering must primarily be about business and syariah compliance second, correct?

And, if it’s about business, then the continuous question of ‘… is Islamic finance only for Muslims…’ should not arise, but it does. Furthermore, the standardisation seems to be leading the conversation and not the power of the business.

Let’s review the lay of the land, as there seems to be a disconnect between promotion, testing and language.

Conventional Finance

In the conventional financial space, for financing, investing, or insurance, the focus is consumer credit pricing (interest rates), returns, and premiums/coverage, respectively, on the end product. There is minimal overt references to structures, screening, and compliance (with regulations), usually in small print in the addendum. 

In Islamic finance, the ‘syariah-ness or Islamicity’ of the offering seems to lead, but the (lack of) standardisation seems to stop it from moving to the merits of the offering. 

The question then becomes the re-positioning of the Islamic finance offering on the merits of the end product, and the syariah-compliance in the fine print in the addendum. 

Question: But, are we there yet? Or, are we on the path to the end product promotion and not how it’s produced?

IF for Muslims 

Let’s start by understanding the marketing and positioning of Islamic finance products. Islamic finance marketing and public relations (conduct) would appear to be inconsistent with the assertion that Islamic finance is for all human kind:

q Focus is on the names of the syariah scholars/board, especially for new entrants and for the launch of new products. However, is it the performance that attracts the customers and the syariah-compliance that convinces them of the merit of the offering or vice versa? 

q Focus , is on Islamic modalities of contract on financing, like Murabaha, or Takaful and the Arabic terms. This is also confusing for Muslims, where a glossary becomes a basic book partner. 

q Focus is on the screening and the financial ratios for compliant investing. However, the end result are typically top companies (1) from the G-20 non-Muslim countries like (2) Microsoft, Pfizer, ExxonMobil, etc, and (3) the ‘man on the street’ does not understand (and may not agree) the link of these companies to Islamic investing. 

To a segment of Islamic (equity) investors, the assumption is Islamic investing should be about Islamic financial there are more depositors than investors in the Muslim countries. 

q Focus is on advertising in niche (Islamic) market places, print, websites, tv programs, especially during Ramadan, etc, but not in the national or regional general business/finance/banking counter-parts. 

May be due to budget constraints and immediate target market are Muslims clients.

q Today, there are very few major conventional financial/banking conferences (in non-Muslim countries) that have a panel session on Islamic finance. The only major event that’s comes to mind is SWIFT’s SIBOS event, held Toronto in October, 2012, where myself and colleagues (Deloitte, Standard Chartered Saadiq, HSBC Amanah) were part of a panel.

This is an expandable list of examples on saying one thing (Islamic finance for all man-kind), but actually doing something else (preaching to the converts, the Muslims). 

Disconnected Stress Tests

What if we apply a ‘conventional’ test on an Islamic financial institution?
We are all aware of the stress tests there were conducted on the US and European banks, whether the tests were ‘robust’ enough is an article for another day. Late last year the IFSB announced an exposure draft (ED) for stress testing Islamic banks as way to actually show, without cheerleading, the resiliency of Islamic banks as the financing is linked to the real economy. 

While it’s a good first step in showcasing the operations of Islamic banks in a transparent manner to the world at large, I would take it one step further to ‘measure like to like’ as much as possible. 

Why not take the US and European stress tests and apply it to the Islamic banks as much as possible, and take the stress test ED of IFSB and apply to the western/conventional banks as much as possible. 

This would an interesting and, possibly, eye opening exercise for institutions like IIUM, INCIEF, ISRA, SESRIC, etc, to undertake.

In order to build bridges of understanding at the regulatory, policy and government levels, it would make sense to examine institutions, Islamic and conventional, under similar metrics. 
Thus, Islamic banks, as licensed institutions from the central banks, must adhere to Basel requirements, as there is no Islamic Basel, why not review banks under both sets of stress tests! 

Disconnect of Economists?

But, we all speak a common language, or do we?
Islamic economists and academics need to step up their vocabulary to connect with the common man. The below is text from an article, An Appeal for a Paradigm Shift in the Theoretical Foundations of Islamic Finance.

What is being proposed is a logical scientific process that is built on an economic-centred paradigm that can eventually be formalised by legal methods as opposed to the current cart-before-the-horse mode of operation whereby legal contracts are established and economic theory is brought in to (unsuccessfully) rationalise their existence. 
Interestingly, the realisation of this economic-centred proposition will not only mark a paradigm shift in the theoretical foundations of Islamic finance to be more in line with Maqasid Al Shari’ah (objectives of Islamic jurisprudence), but also serve as a potential instigator to a paradigm shift in neo-classical economic theories that are built on self-centred rationales as opposed to the religiously-desired human-centred ones that include fairness, productivity, wealth creation, and stability.

To that end, it should be acknowledged by all of us that the economic doctrine of the sayriah is for the benefit of all mankind not just Muslims. 

Thus, the sooner the industry moves away from ring-fencing itself with the rhetoric of Islamic versus conventional finance along formalistic lines and adopts a more inclusive, systematic approach to the evolution of economic theories, the sooner the world can benefit from the wisdom of God. That would indeed be a scientific revolution.

The author, like many others, speaks of the present (authenticity) challenges in Islamic finance and then leaps to the Maqasid of the syariah. However, there is the missed middle ground, the syariah- based blueprint strategy for the offerings and its execution. 

It is this needed blueprint, explained in everyday language, that is the need of the hour, otherwise it just become another feel-good piece by well-meaning academics. This seems to be where the disconnect is, hence, requiring continued reference to Maqasid. 

Furthermore, a common question asked by students of Islamic finance and informed non-Muslims is, ‘what Muslim country has Islamisised their economy and financial system in the last 40 years?’ The responses offered by Iran and Sudan have not been convincing.

Thus, to promote Islamic finance to western regulators and countries, the immediate question that needs to be addressed is, ‘what Muslim country has adopted the suggestions of Islamic economists?’


If Islamic finance looks in the mirror, what does it see? It needs to see how its viewed by its stakeholders and act accordingly.

by Rushdi Siddiqui, Thomson Reuters’ Global Head of Islamic Finance based in New York.

(Business Times / 25 June 2012)

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