Wednesday, July 08, 2009

Problems of IBF

My comments here are based on the following article, taken from The Malaysian Insider on July 9, 2009.

1. From the comment given by Daud Bakar, greed does drive the growth of IBF.
2. I feel that after decades of existance, IBF fails to segregate itself from the conventional banking. People would still ask a question on what the difference between IBF and the conventional banking. If IBF is unique, this question should long been understood by the masses. Interestingly, scholars also sometimes face trouble giving a comfortable answer to the question.
3. IBF lacks the true Islamic spirit of conducting economic activities. It is driven by promoting debts, which the teaching of Islam warns of the consequences of it mismanagement. Remember that the longest verse in al-Qur'an is about debt.
4. IBF is trapped in the systemic problem of the existing modern financial system.

Scholars juggle faith and commerce as Islamic banking grows

KUALA LUMPUR, July 8 — Religion may be the bedrock of Islamic finance but influential syariah adviser Mohd Daud Bakar says the bottom line drives the industry.

“Commercial gains are very important,” said Daud, who is listed by consultants Funds@Work as among the world’s most active scholars, sitting on 22 syariah boards.

“We are not a charitable organisation. Shareholders are looking for ROE (return on equity) at the end of the day.”

As Islamic banking tries to reach wider markets, syariah scholars such as Daud are weighing more than just Islamic tenets when they rule on the validity of financial instruments, reflecting commerce’s growing role in the RM3.5 trillion industry.

The desire to win market share, the level of expertise of individual scholars and the scarcity of scholars may all shape Islamic financial rulings and the future of the sector.

Some syariah advisers say it is not always easy to balance religion and business as they grapple with modern funding techniques that sometimes challenge Islam’s basic beliefs.

Once at odds with the syariah’s ban on gambling and excessive speculation, contentious conventional practices such as hedge funds, short-selling and derivatives are slowly finding a place in Islamic finance.

Tasked with applying Islamic law and global financial practices, syariah scholars are powerful gatekeepers, whose approvals are necessary before a product can be marketed as an Islamic instrument.

There are no official figures but some practitioners say there are around 200 syariah scholars worldwide.

Some syariah advisers say the drive to grow the industry influences their decisions on whether certain products meet the syariah’s standards.

Ahmad Hidayat Buang, who advises Islamic insurer Takaful Ikhlas, says Malaysian scholars try to meet companies’ business needs, reflecting a popular view that the country is more liberal in its syariah interpretation than the Gulf.

“We see what happens, then we try to adopt the more flexible view of syariah in order that our product could be introduced,” said Hidayat.

“It’s not necessarily a question of syariah. When you decide on the matter many aspects have to be taken into consideration.”


STAR ENDORSEMENTS?

Syariah scholars are not formally accredited by a single authority so their qualifications can vary vastly, raising questions about the ability of some to understand complex financial structures, especially if they are pressed for time.

With newer financial firms, “they know that the syariah board can be very powerful so they bring in very junior scholars and give them very little information or not enough information within a very limited period of time,” said Megat Hizaini Hassan, a Kuala Lumpur-based Islamic banking lawyer.

“So these scholars may be under pressure to give approvals or certifications.”

A select group of syariah scholars are highly sought after as the bigger a scholar’s name, the greater the drawing power of the product he approves. The industry’s most influential figures can make or break markets with their decrees.

Bankers say Islamic bond issuance fell sharply last year after Sheikh Muhammad Taqi Usmani, chairman of the board of scholars at influential industry body AAOIFI, declared about 85 per cent of sukuk were un-Islamic.

Among the most active scholars are Bahrain’s Sheikh Nizam Mohammad Saleh Yacouby, who sits on 46 advisory boards, and Syria’s Abdul Sattar Kareem Abu Ghuddah, who is on 45 boards, according to Funds@Work.

This has raised concerns about whether some scholars have enough time to thoroughly vet contracts, some of which consist of reams of documents detailing complex financial instruments.

There are also concerns about the possibility of Islamic financial rulings being affected by conflicts of interest where a scholar sits on various boards.

“Syariah board conflicts of interest are part of the practice of modern economic institutions,” said Mousa Isa, a syariah adviser in Saudi Arabia. “There should be transparency.”

Other contentious issues include giving scholars incentive-based payments linked to the success of products they approve. This echoes complaints about the hefty bonuses of some Wall Street bankers which analysts say fuelled excessive speculation and helped trigger the recent credit crisis.

Ayashi Faddad, syariah adviser at Islamic Development Bank, said scholars’ fees should be approved directly by shareholders, not management, to reduce potential for conflicts of interest.

But scholars say some lines cannot be crossed. In cases where there is no room for Islam to accommodate a structure or product, Daud said “the commercial must adjust to the syariah”. — Reuters

Wednesday, July 01, 2009

Islamic finance profit margin too high – Hadi

KUALA LUMPUR, July 1 —Datuk Seri Abdul Hadi Awang (PAS-Marang) today called for a review on the implementation of the Islamic financial system in the country, saying the profit margin from loans provided under the system was too high.

He said the margin did not differ much with the conventional financial system, thus defeating the purpose of having a separate system.

Although the system was free of “riba” or interest, it was too profit-oriented, he added.

“This is not how the Islamic financial system should be operated because the basis for its implementation is to help those in need.

“In this context, the borrowers are the ones in need of help as they had to resort to borrowing. They should be assisted and not be taken advantage of,” he said when debating the Bank Negara Malaysia Bill 2009 in the Dewan Rakyat.

Abdul Hadi said the government should do something to make the country’s Islamic financial system a truly people-oriented arrangement and to counter the negative perception that it was similar to the conventional system.

Super efficiency

An-namal
[قَالَ يأَيُّهَا الْمَلأ أَيُّكُمْ يَأْتِينِى بِعَرْشِهَا قَبْلَ أَن يَأْتُونِى مُسْلِمِينَ - قَالَ عِفْرِيتٌ مِّن الْجِنِّ أَنَاْ ءَاتِيكَ بِهِ قَبْلَ أَن تَقُومَ مِن مَّقَامِكَ وَإِنِّى عَلَيْهِ لَقَوِىٌّ أَمِينٌ - قَالَ الَّذِى عِندَهُ عِلْمٌ مِّنَ الْكِتَـبِ أَنَاْ ءَاتِيكَ بِهِ قَبْلَ أَن يَرْتَدَّ إِلَيْكَ طَرْفُكَ فَلَمَّا رَءَاهُ مُسْتَقِرّاً عِندَهُ قَالَ هَـذَا مِن فَضْلِ رَبِّى لِيَبْلُوَنِى أَءَشْكُرُ أَمْ أَكْفُرُ وَمَن شَكَرَ فَإِنَّمَا يَشْكُرُ لِنَفْسِهِ وَمَن كَفَرَ فَإِنَّ رَبِّى غَنِىٌّ كَرِيمٌ ]
38. He said: "O chiefs! Which of you can bring me her throne before they come to me surrendering themselves in obedience (as Muslims)'') (39. An `Ifrit from the Jinn said: "I will bring it to you before you rise from your place. And verily, I am indeed strong and trustworthy for such work.'') (40. One with whom was knowledge of the Scripture, said: "I will bring it to you within the twinkling of an eye!'' Then when he saw it placed before him, he said: "This is by the grace of my Lord -- to test me whether I am grateful or ungrateful! And whoever is grateful, truly, his gratitude is for himself; and whoever is ungrateful, certainly my Lord is Rich, Bountiful.''

My note:
1. One way to look at these verses was from an efficiency analysis. Sulayman had great resources.
2. And see how he chose the most efficient way to accomplish the task.

Obligation of an Islamic state

Read the tafsir of the verse below (an-naml:36 & 37) and my comment after that.

The Gift and the Response of Sulayman

More than one of the scholars of Tafsir among the Salaf and others stated that she sent him a huge gift of gold, jewels, pearls and other things. It is apparent that Sulayman, peace be upon him, did not even look at what they brought at all and did not pay any attention to it, but he turned away and said, rebuking them:

[أَتُمِدُّونَنِ بِمَالٍ]

("Will you help me in wealth'') meaning, `are you trying to flatter me with wealth so that I will leave you alone with your Shirk and your kingdom'

[فَمَآ ءَاتَـنِى اللَّهُ خَيْرٌ مِّمَّآ ءَاتَـكُمْ]

(What Allah has given me is better than that which He has given you!) means, `what Allah has given to me of power, wealth and troops, is better than that which you have.'

[بَلْ أَنتُمْ بِهَدِيَّتِكُمْ تَفْرَحُونَ]

(Nay, you rejoice in your gift!) means, `you are the ones who are influenced by gifts and presents; we will accept nothing from you except Islam or the sword.' - Tafsir Ibn Kathir.

My note:
1. The requirement of jihad isclear especially when an Islamic state is established.
2. The response of Sulayman and what Prophet SAW did after he had established Madinah were two points that support the point above.
3. In fact, US did the same - accept democracy or else war.