Understanding Islamic Finance - Doha Academy of Tertiary Studies

476 Understanding Islamic FinanceFor achieving the objective of Sharī´ah compliance, the active involvement of peoplehaving deep understanding of Sharī´ah matters, socio-economic issues and principles offinance is crucial. Credibility has to be established, both at national and international levels.For this purpose, the involvement of IFIs in real sector business is necessary, failing whichthey cannot escape severe criticism. Moreover, this will have no socio-economic impact,even if implemented across the whole world. Presently, the common man understands thatIslamic banks do not actually carry out businesses like trading, leasing or constructionactivities and hence they end up doing only financial operations. This impression needs tobe removed.Sharī´ah compliance requires Sharī´ah inspiration and complete observance of the principlesof Islamic finance. It also needs internal controls and Sharī´ah-related inspection forenhancing credibility and acceptability of the IFIs. It does not mean, however, that otherprofessional requirements for successful business are of less importance. Phillip Moore, inIslamic Finance: A Partnership for Growth (1997), contends that a Sharī´ah board willtypically ask four questions in relation to any given transaction. These will generally be:1. Do the terms of the transaction comply with Sharī´ah law?2. Is this the best investment for the client?3. Does the investment produce value for the client and for the community or society inwhich the client is active?4. As an asset manager, is this a transaction in which the banker as an individual would beprepared to invest his own money?If the answer to any of these four questions is no, the proposed transaction would usuallybe rejected, although the committees only have the power to reject the transaction on thegrounds that it does not comply with Sharī´ah law. This author agrees with Moore andreiterates that Sharī´ah compliance must be accompanied by the best solutions for thefinancial problems of the clients.Competitiveness and Parallel FunctioningThe most dominant and common model of Islamic banking in practice today comprises adual system, whereby interest-based and Islamic financial institutions are working side byside. While the growth of the Islamic financial system is a challenge to the conventionalinterest-based banks, the adoption of Islamic financial modes by the conventional banksis a challenge to the Islamic banks. This situation, on the one hand, points to increasingcompetition in future, and on the other hand, calls for the development of cooperationbetween the two types of institutions.In the present scenario, wherein the share of IFIs in the national as well as globalfinancial systems is low, functioning of the Islamic financial institutions in the competitiveenvironment is really a challenge. They cannot give rates to the depositors significantlydifferent from the conventional benchmark rates because of regulatory requirements andthe forces of demand and supply in the competitive markets. While conventional bankscan market their liability side products by offering fixed rates of return, Islamic bankscannot do so unless they compromise on the Sharī´ah principles. This makes it much moredifficult for them to get deposits from the corporate sector where the main concern of thefinancial managers is the highest return without any risk. The same is true on the financingside, as competing with the conventional institutions while ensuring Sharī´ah compliance is