Understanding Islamic Finance - Doha Academy of Tertiary Studies

468 Understanding Islamic FinanceThe stakeholders must have the knowledge that all Islamic modes have potential fordevelopment. Shirkah-based (PLS) modes that provide the much-needed risk-related fundsfor development of trade, business and industry can be used for short-, medium- and longtermproject financing, import financing, preshipment export financing, working capitalfinancing and financing of most single transactions. The institution of Mudarabah servesas a basis of business to be conducted by combining funds and the expertise of differentgroups of people. Mudarabah Sukuk can be issued to mobilize funds and strengthen tradingand industrial activities. SPVs can manage such assets and conduct business for their benefitand that of the Sukuk holders. This could generate higher rates of return for the investorsrelative to the return realizable on any interest-based investment, as discussed in Chapter 12.In the case of big projects, IFIs may form consortia to issue certificates to the publicfor subscription. Similarly, they can carry out work on infrastructure and socio-economicprojects in coordination and partnership with engineering firms.The non-PLS techniques not only complement the PLS modes but also provide flexibilityof choice to meet the needs of different sectors and economic agents in society. Murabaha,with less risk, has several advantages vis-à-vis other techniques and can be helpful inmeeting the needs of risk-averse investors, employment generation and alleviation of poverty.Leasing is very much conducive to the formation of fixed assets and medium- and long-terminvestments. Salam has a large potential in financing productive activities in crucial sectors,particularly agriculture, agro-based industries and the rural economy as a whole. To realizethis potential, IFIs could organize a forward commodity trade market on the basis of Salam.This would provide not only a nonspeculative forward market for resource mobilization andinvestment, but would also be a powerful vehicle for rural development.On the basis of the above, it can be said that supply of and demand for investment capitalwould continue in an interest-free scenario with the additional benefit of a larger supply ofrisk-related capital, more efficient allocation of resources and an active role of banks andfinancial institutions, as required in the asset-based Islamic discipline of finance. This couldbe helpful in achieving the objective of development with distributive justice by increasingthe supply of risk capital in the economy, facilitating capital formation and growth of fixedassets and real sector business activities.But a point of concern in this regard is that Islamic banks are obliged to work with anumber of limitations and constraints, most important among which is competition with themainstream banks. They have to use the same benchmarks and apply charges comparablewith the main conventional market. As such, it may take more effort and relatively a muchlonger time to achieve visible socio-economic results.As regards points 3 and 4 above, the moral dimension is the main ingredient of Islamicbanking and finance. IFIs may implement a code of conduct reflecting Islamic values andprinciples, strictly ensuring that it is demonstrated in the management procedures, operationsand overall behaviour of their incumbents (see the AAOIFI’s Code of Ethics). This isparticularly relevant in Muslim majority areas, where Islamic culture has a deep bearing onthe approaches and ideas of the masses. Islamic banking is one aspect of an Islamic way oflife and if an Islamic banker is involved in any unethical or prohibited practices, it couldundermine the integrity and credibility of the system. Therefore, ensuring good governanceby IFIs on the basis of Islamic behavioural principles and moral and business ethics is a bigchallenge for the integrity and long-term health of IFIs.The ultimate objective in this regard should be to provide the best services at competitiverates and to strike a balance between the interests of the shareholders and those of the