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Friday, 10 January 2014

Dubai: Islamic banks face a moment of reckoning

Dubai is preparing to become the capital of the Islamic economy. Experts estimate global Islamic capital amounts to $1 trillion (Dh3.6 trillion), according to a statement by Dr Ajeel Al Nashmi, head of the organising committee for the Islamic Jurisprudence Conference.
Dubai’s objective is in line with its historic endeavours as it set up Dubai Islamic Bank in the 1970s, making it a pioneer in the Arab world in the field of Islamic banking and the second after Malaysia, which experimented with Islamic banking in the 1940s.
Dubai’s goal tasks it with the responsibility of “re-Islamicising” banks in the region or restructuring them to become sound banks. This means Dubai has to focus on preparing a regulatory framework for these banks’ operations, and secondly touching on noticeable weaknesses or shortcomings in Islamic banking services, most notably obsolete ones, and the decline in quality of customer services.
It also has to look into bank advisory bodies, currently undergoing a state of disguised unemployment, bank regulatory bodies, strengthening governance systems, stanch decline in the usage of advanced technology, and intensifying training programmes for technical cadres.
Perhaps a little light should be shed on some aspects of Islamic banking. Often we hear people say that Islamic banks are good, meaning that they offer services that are not provided by conventional banks, despite having come into existence only 40 years ago. Islamic banks portray themselves as “non-conventional banks”.
The word “good” here also suggests that Islamic banks have created new products and non-conventional methods to serve customers, therefore “surpassing” other banks and financial institutions in the Arab world. On the other hand, Islamic banks are not very common in the global market, as most foreign banks are content with setting up Islamic banking solutions to attract Islamic capital.
There are two different services that a customer seeks in banks. The first is when a customer makes a deposit for a period of time for a set profit. The customer has the right to choose the area of investment which they feel is profitable.
The second form of service is when a person opens an account in which their monthly salary is deposited, and in return they receive other services such as a cheque book, credit card, bank statement and other services.
Some banks choose to operate in specialised fields. For example, there are banks that focus on agriculture and others on real estate and industrial projects.
There are two types of non-specialised banks.
The first has massive capital and its operations depend on financing huge projects and providing loans to countries. They have no interest in serving small customers, and they have a limited number of branches.
Banks with a small capital, on the other hand, prioritise customer services, are in regular contact with their customers and always inform them about new products.
Conventional banks operate with interest rates. They invest the money of a customer for profit over a period of time. For example, depositing Dh100,000 in a bank that operates with a 4 per cent interest rate would mean that the customer would make Dh4,000 in profit on their savings.
The perspective of Islamic banks on these is that they are Riba-based, because they set the rate of profit over a predetermined period of time. Therefore, stemming from Sharia, it is prohibited for Muslims to deal with these banks.
Then how do Islamic banks operate? Islamic banks are not any different from conventional banks. They are financial institutions that collect shareholder and customer money, invest them for a profit, which is later distributed to shareholders and customers at the end of each year. These investments are based on ‘murabaha’ against interest.
Murabaha after all is halal (permitted), while interest is riba and prohibited. It is best to quote in this case the Quran, in Surat Al Baqarah (verse 275): “Allah has permitted trade and has forbidden interest”.
Therefore, Islamic banks never set the “interest” for money saved for a certain period, instead the rate of profit is not specified. The reason behind such an approach is that the money of a customer, placed in the bank’s trust, is invested in commercial operation — if the bank makes a profit, so does the customer. If the trade results in a loss, then the customer’s capital remains unchanged.
This means that a customer would get a share of the profit, but their money remains protected against any losses. In face value, this kind of trade feels almost ideal.
This is despite the fact that a loss is liable to occur in any trade as a predetermined factor, but this trading operation is not subject to the profit and loss equation.
On close review, a predetermination might be incompatible with the philosophy behind the referenced Quran verses, as a person committing riba is gambling on the interest rate period for guaranteed profit, while Islamic banks do not specify a time period.
In Islamic banks, for example, if a customer deposits Dh100,000 for a year, they might make a profit of Dh4,000, Dh6,000, or nothing at all. In conventional banks, including non-conventional Islamic banks, the funds deposited by customers and shareholders are invested for profit for investors and customers, and some of this profit will be used by the bank to pay the salaries of its employees, bonuses for members of the board, and operational expenses.
The question is: Where do Islamic banks invest the funds of customers and shareholders? Unfortunately, some Islamic banks invest in areas that are not compliant with Islamic principles that they promote to their customers. Some, for example, invest in local and foreign riba-based banks.
And how do the advisory and regulatory bodies deal with these banks? That is a sad and funny tale best kept for another time.

(Gulfnews.Com / 09 Jan 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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