Understanding Islamic Finance - Doha Academy of Tertiary Studies

460 Understanding Islamic Financehaving a rational and sound theoretical basis and increasingly wider acceptance at a globallevel. The measures required for building an all-pervasive structure of finance and making itfree from injustice and anomalies include the creation of asset-based money and promotingretail and corporate financial services on the basis of fair play and risk-sharing.Almost all Islamic countries are still borrowing through the conventional interest-basedsystem and only a negligible part of their needs has been financed through Sharī´ah-compliantinstruments. The firm edict of the Sharī´ah people against fixed-income securities, however,does not allow the use of conventional investment instruments. In realizing the real potentialof Islamic finance, experimented and proved in recent years, these countries have to set aprecedent for other countries of the world. The OIC or IDB may formulate financial packagesfor member countries, obliging them to resort to asset-based financing on the basis of Ijarah,Istisna‘a and Shirkah. If applied wholeheartedly on a larger scale, these modes of businessand investment have the possibility of being used as an efficient alternative to interest-baseddeficit financing, along with the added benefit of disciplining fiscal behaviour. In such acase, each economy would be able to get real benchmarks for the pricing of goods, theirusufruct and services, both in cash and credit markets, representing the real demand/supplyscenario and the strength of the economy. Obtaining a benchmark for Sharī´ah-compliantsecurities in the present situation is almost impossible. This is why, IFIs are currently obligedto adopt the interest-based benchmarks in almost all parts of the world, making the integrityof their operations vulnerable.If Islamic finance theory is adopted for retail and/or corporate banking on a smaller orlarger scale, and not for the financial system as a whole, i.e. the governments continueto generate funds primarily from the conventional markets, it is not likely to have anyvisible impact on any economies of the world or their general populations. Accordingly, theeconomists and the policymakers are required to come out with confidence and dynamismagainst the syndrome of allowing the creation of monetary assets without any meaningfullimit on the one hand and allowing a fixed rent on such assets on the other; and be encouragedto adopt the real economic activity-based regimes that allow ex post profit- or loss-sharingand fixed or quasi-fixed returns through pricing of real goods, assets or their usufruct. Thiswould require some bold measures that, of course, are not novel, as these are being taken inmany economies in various parts of the world.The conventional financial system has developed through a prolonged and continuousprocess, moving away from gold to the electronic medium of exchange. Correcting it tomake it really helpful for human beings, just and conflict-free would also take a long time.However, the process of change has to be started with sincerity. Putting it on the right trackwould require a lot of work and sacrifice by present generations for the bright and safefuture of mankind.To transform whole economies and make them Sharī´ah-compliant, sooner or later thepolicymakers and planners will need well-defined phases and well-thought-out plans withcommitted and sustained efforts. This will require (i) identification of transformation requirementsin terms of laws, rules, regulations and institutional structures in different jurisdictions,and components of policies fitting into the overall implementation timetable; (ii)laying down a phased plan and the implementation mechanism; and (iii) feedback or continuousreview and evaluation in order to ensure proper application and to remove anyobstacles.Application of a real-asset-based financial system by only a few countries could cause acritical problem for them, due to exogenous factors responsible for an increase in money