Monday, May 4, 2009

ISLAMIC FINANCE MUST BE TRUE TO ITS LABEL

ISLAMIC FINANCE MUST BE TRUE TO ITS LABEL

ISLAMIC business and finance are about ways of conducting financial transactions in accordance with the tenets of Islam. For individuals, it may relate to methods employed to manage daily financial activities at various levels that may essentially involve the sale and purchase of goods and services on a daily basis. The way we conduct ourselves determines how we treat our fellow citizens in the process of buying and selling. In Islam, the key principles are fairness and justice for all. Although Islam does not forbid us from making profits in commercial dealings, it prescribes honesty as the mainstay of conducting business.



FAIR TREATMENT OF ALL

Islam cares for the interest of both parties in a dealing. Take the case of a mortgage or charge in a loan or credit transactions. In the conventional system, upon failure of the borrower to repay the loan on time the creditor will begin foreclosure proceedings, starting with the issuance of notice to the borrower to remedy the breach within a certain period. Failing this, the creditor will ask for an order of sale at the High Court to sell off the collateral by public auction i.e. a forced sale.



In contrast, Islam tells us that if a borrower is unable to repay the money debt when it is due, then according to the Quranic injunction, he must be given time to settle it provided that he is facing a genuine case of hardship. In the case of the creditor's right to sell off the collateral or charged property, Islamic law says he cannot ask the court and the court cannot make an order for the forced sale of the property until and unless the borrower is given an opportunity to sell the property himself. Juristic opinions, however, differ as to whether a borrower's refusal to dispose off the charged asset entitles the court to make an order of sale.



Some schools of Islamic law are of the opinion that the court can proceed with the sale. Other schools maintain that contempt proceedings can be taken against the borrower for not complying with the court order and the court can imprison him until he is willing to sell the property and pay off the debt. The wisdom behind the Islamic ruling is that the charged asset is the borrower's property, so only he can sell it. He needs to be given time to find a suitable buyer who is willing to pay the market price for the property.



Islamic law is thus more considerate in its treatment of the borrower but at the same time protects the interest of the lender in allowing the court to intervene. Islam respects the right of ownership to the fullest extent when it says that the owner must be given a chance to sell the property first because only he will try to sell it at the highest possible price. Only if he failed or refused to do so is such right to be delegated to an independent party after the court grants an order of sale.

DISCLUSURE

In sales, Islam requires sellers to disclose all that they know about defects in their goods. Buyers must be told of the existence of such defects and be allowed to make up their mind whether or not to buy the goods based on informed judgment. Concealment of defects is considered unlawful. The position is different in certain other systems where buyers are expected to discover for themselves all material facts about the products they are buying. Here, the concept of caveat emptor (buyers beware) is followed.



MOTIVE AND INTENTION

Some observers have maintained that there are no differences between the Islamic and conventional ways of conducting commercial dealings given the perception on the ways Islamic finance has been pursued. For many it seems that Islamic finance products and services are more or less replicas of the conventional ones such that their distinctive Islamic features are difficult to be known. Others have argued that such perception is not necessarily true given the rationale for the introduction of the Islamic financial system in many Muslim countries? Why can't the Muslims just accept the conventional way of conducting business if there are no true differences between the two systems?

MONEY IS NOT A COMMODITY OF TRADE

The fact is that there are many major differences between the Islamic and conventional systems, the most striking of which relates to the concept of money. Islam views money as primarily a medium of exchange and unit of account, whereas in the capitalistic world money is more of a commodity of trade and as such can be bought, sold and speculated freely. Money, thus, has a time value and one who uses other peoples' money must pay for it in the form of interest. The basic position in Islam is that money lending or qard must remain a benevolent act worthy of being rewarded highly by Allah the Almighty. Money lending should never be allowed to be used for profit-making activities. In the conventional sense, lending is primarily for unjustified gain in the form of riba' (interest).



The current provision of financial services by Islamic financial institutions is said to be coloured by doubtful elements such that many parties have reservations about some of the financial instruments introduced in the market. Some institutions, they argue, have resorted to back-door money lending activities that involves interest. What they mean is that these institutions which claim to follow the Islamic way have remained essentially as financial intermediaries that use certain modes of financing which raise doubts as to their motives. By twisting words and phrases, they have coined certain concepts to make them look Islamic, while the true intention or motive of the institutions' activities is hidden behind the veil of the permissibility of sale.

In Islam, forms or words used shall never take precedence over intention and motive not only in contractual matters but in fact in all affairs. Islamic finance, if it is to be truly successful, must avoid impurities in form and essence, as it is a system based on the highest standard of morality and religious conscience. When Islam abolished interest, it naturally disallowed everything that might lead to it.



Hence, it is high time now, given the speed of the development of Islamic finance, that serious efforts be made by all parties involved to re-examine whether the process followed so far is truly in line with the teachings of Islam. It is true that innovation is badly needed, especially now. It should not however , in any way, sacrifice the true spirit and injunctions of Islam. Islam is a system that seeks to act as a benchmark for acceptable rules of conducts considered to be just for all. It is therefore very naive to think, in the context of being innovative, that everything the capitalistic system provides us with must be replicated since not all the so-called modern and sophisticated products are just and good for us.