Understanding Islamic Finance - Doha Academy of Tertiary Studies

466 Understanding Islamic Financethe wake of emerging issues in the fast-moving world of finance, some aspects will remainto be decided in the light of the Sharī´ah principles, and the same may be resolved as andwhen confronted, but the major Sharī´ah-related issues that the Islamic finance movementfaced in the early years of its foundation have been resolved or cleared by dint of amplework by the jurists.The Islamic Fiqh Council of the OIC, the AAOIFI and the Sharī´ah scholars in generalhave discussed at length almost all major areas and provided a number of alternatives tomost of the conventional products, except derivatives based on interest or short-sellingand speculative transactions in the Forex markets. Now the practitioners have to proceedon the basis of the achieved consensus. Product innovation from the Sharī´ah perspectivedoes not mean that alternatives must be provided for each and every instrument or productused by conventional institutions. This is not possible; a discipline based on ethics and justhypotheses cannot afford to follow any unethical system step by step. Islamic finance willhave to observe certain restraints so that it does not become exploitative and unjust, as isthe case with its counterpart, interest-based system.There are some unresolved issues as well, but these are not purely of Sharī´ah interpretation;the practical difficulties and the ground realities have given rise to these issues.Therefore, such problems and issues can be resolved once and for all by a body of Sharī´ahscholars like the OIC Islamic Fiqh Council or that of the AAOIFI. And if this is not possible,the Sharī´ah boards/Sharī´ah advisors of the respective banks may decide cases on merit byresorting to Ijtihad, subject to the widely accepted principles of the Sharī´ah.Examples of such unresolved issues are the award of liquidated damages to the banks incases of default on their receivables. In principle, the penalty paid by the defaulting clientgoes to the charity fund; if the default persists for longer periods, it will be harmful to thesystem, besides being unjust to the bank and the depositors. An accepted solution in thisregard is that banks may claim their loss through a court or any independent arbitration;but on what firm basis the courts would be deciding is another related issue. Conventionalopportunity cost per se should not be the basis for such award. Some Sharī´ah boards allowthe banks to charge defaulters a rate based on the income that they have earned from thesimilar portfolio in the related period. But the deciding factor should be the financial positionand the behaviour of the client and the expenses and time involved in litigation, on the basisof which the court may allow some or the whole of the penalty to go to the bank.Another practice-related issue could be that of the liability of the banks’ shareholderstowards investment account holders of Islamic banks. This is a complicated issue becauseit also involves conflict of interests; its solution lies in a firm regulatory framework withspecial emphasis on safeguarding the interests of the depositors. Losses to banks couldbe due to overexposure, lack of diversification, imprudent banking practices and/or actualbusiness losses. The Sharī´ah boards of the banks may decide the cases on merit, keepingin mind all such factors.As regards the big issues of Sharī´ah interpretation, it is encouraging to observe that,lately, the practitioners in the Far East have started using genuine alternatives to interest(like Ijarah) for issuance of Sukuk, and it could be anticipated that in future, they will alsochange the basis of products based on the sale of debt and buy-back. Going forward, thefocus of policymakers and product developers should be on development of the products,instruments and the Islamic finance industry by using the flexibilities already available andnot wasting time and money on such areas that could lead only to the loss of integrity ofthe emerging discipline of finance. They should stick to the standards issued by the AAOIFI