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Thursday, 20 February 2014

Islamic finance education: What does it entail?

When we talk about finance, we are really talking about the way the finance is managed at the individual, corporate or public levels. However, when we add the adjective Islamic to finance, it gives a completely different picture.

Islamic finance as is being used, though not so widely, perhaps connotes all aspects of finance that is Islamic, including Islamic banking, Islamic capital market, Islamic insurance or takaful and Islamic wealth management. This usage is quite unique in the sense that one would have expected that Islamic finance means all finances that are Islamic. If this is the case, then it would connote Islamic personal finance, Islamic corporate finance and Islamic public finance. This is not true in terms of usage.

For example, Islamic public finance would imply that the main revenue should be based on zakah which is a wealth tax. It is only when the total collection of zakah does not cover the government expenditure that other forms of revenue sources would be introduced such as the direct and indirect taxes; tax on agricultural land (kharaj), poll tax (jiziah) or tax on the non-Muslims living in Muslim lands, etc. Similarly, Islamic corporate finance is basically corporate finance that is being conducted in accordance with Shariah, while Islamic personal finance is also conducted in accordance with Shariah.

The most important component of Islamic finance which distinguishes itself from conventional finance is the element of Shariah.

Without Shariah, there is clearly no Islamic finance because Shariah determines how the contracts, the mechanisms, the transactions, should be developed or designed. Shariah requirements in terms of the dos and don’ts are very clear, and leads to the correct contract and its consequences.

Since Shariah itself is very wide, selectiveness is needed so the most relevant aspect of Shariah is being exposed to the students of Islamic finance. The starting point has to be “Usul Al- Fiqh” which embodies the study of the sources of Islamic law and the methodology for its development. The second most important aspect of Shariah that is relevant to Islamic finance has to be laws of contracts, and this is for two reasons. Firstly, in any Islamic transaction, it is always a form of contract between two or more parties, hence, it is imperative for students to understand the different types of contracts for ease in applying such contracts in the correct context.

Secondly, it is becoming clearer that products based on a simple contract are no longer meeting the commercial objectives of such products that combine a few contracts in a more sophisticated fashion being promoted by the scholars from time to time.

While these two aspects of Shariah form the main body of Shariah knowledge in Islamic finance, it is imperative for the students to appreciate the various Shariah issues that are begining to emerge in the market. If the list of issues discussed in class cover a wide range of topics, then it would certainly help the students to identify the real issues that seem to occur and sometimes blur the market.

Then there is the technical knowledge, the first of which is that of finance itself, which covers the basic theories of finance such as the riskreturn trade-off, annuity and arbitrage pricing theory. These theories can become very useful in the course of evaluating certain parametric changes in the commercial environment.

The second part of the technical knowledge in finance covers banking, insurance, capital market and wealth management. Specifically, we should be touching on Islamic banking, Islamic insurance, Islamic capital market and Islamic wealth management, which are interrelated and in addition, it helps to make the student knowledgeable all round.

Development of Islamic Finance Programmes

The best practice especially in the banking industry is to recruit staff from various backgrounds, including staffs whose disciplines are not related to economics and finance as they can be engineers, medical doctors, quantity surveyors and lawyers, but can easily learn the tasks in banking. I know a statistician who was given a chance to work in an Islamic bank. Eventually he became one of the most efficient senior staff of the bank. We also know of engineers and lawyers who do extremely well in the banking industry. Learning from such experience would be proper practice for students of Islamic finance to come from various academic backgrounds, enriching the discussions in class with different views from different perspectives.

I, for one, strongly believe that the students would do extremely well if the professor shows tremendous patience in nurturing them inside and outside classroom. I read of a story of a sociology professor who wanted to know whether the young children of about 10 years old, in a particular slum area in US would make it in life or not. He sent two hundred of his MBA students to the slum area and selected two hundred children to find out if they would make it in life. Based on the environment, the way they dressed, the materials they wear, etc, the two hundred MBA students had only one answer: These children will never make it in life.

Twenty-five years later, another sociology professor who happened to read the report sent two hundred of his Masters students to the same slum area to find out from the same two hundred children. They found that out of two hundred children, only one hundred eighty three were around, seventeen having either moved out of the area or have passed away. The Masters students found that the rest of the children who were about 35 years old had actually succeeded in life, becoming engineers, lawyers, doctors, teachers, corporate executives.

They then asked how come they were so successful. The answer was, “there was a teacher” who happened to be an old lady of about seventy years old. When she was asked how come those children had achieved tremendous success, she answered with a broad smile on her face, “I LOVE THEM ALL”.

I strongly believe that the approach to be adopted in nurturing students whoever they are is to show them respect and confidence we have in them, the dedication and commitment we give them to really make them successful in life. It is not just the quality of students that we have but more importantly what our real intention is when teaching them.

Some Challenges

Having a very comprehensive programme with high quality curriculum and content is very essential to produce the talents we need in any field. Of course we also need quality students with the positive attitude to learn. Above all, we need the right approach to coach, train and educate the students in the most effective way.

One of the major challenges in producing the right type of talent in Islamic finance is to provide them with the right input so that they will be able to manage and handle all situations that they face in the industry. This is a major challenge because Islamic finance as a subject or discipline of study is still very new, without standard texts for all the subjects that we teach.

Most of the time, we use texts that are not complete and hence have either to use many texts or to be added with our own materials.

This poses a problem of standardisation or harmonisation, especially with regards to Shariah, principles or concepts and products.

We know that there are conflicting views on Shariah matters between jurisdictions. Hence, we do get products that are acceptable in one market but rejected in other markets. Even these differences are not considered as major issues, which can be explained, thus, mitigating such conflicts.

There is yet a bigger challenge where some scholars simply feel that the current practice of Islamic banking and finance are not Shariahcompliant because the beneficiaries do not include the poor and the have-nots. They prefer to take the view that the benefits of Islamic banks today which directly benefit the rich and the bankable only have ignored one of the objectives of “Maqasid Shariah” that is meant to bring about benefits to all and sundry. Such a view simply denies the benefits that Islamic finance as practiced today has brought about to society. Those who adopted this view do not have the alternative system that could resolve the problem of those poor and not bankable. The challenge then is how to ensure that there is financial inclusion. One possible answer is Islamic microfinance.


Although Islamic finance is growing at a faster rate than conventional finance, which under the present circumstances is unstoppable, the biggest challenge is acute shortage of human talents who have very high technical knowledge and at the same time have excellent Shariah knowledge. We have also observed many qualifications in Islamic finance that have been introduced to the market that do not provide the right level, quality and scope of the subject. We need to find ways of attracting students to the right programmes so that the objective of bringing Islamic finance to the next level can be effectively achieved.

(The Malaysian Reserve / 17 Feb 2014)
Alfalah Consulting - Kuala Lumpur:
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