Biggest Challenge of the Islamic Finance Industry?
Zaharuddin Abd Rahman
What is the biggest challenge facing the Islamic Finance industry at the moment?
My opinion, apart from being under the umbrella of the conventional system, law and its framework, one of the biggest challenges for Islamic Finance Institution (IFI) and Industry today is the passion of investors and customers themselves. These peoples consist of those outside the Islamic financial institutions such as corporate companies, high net worth individuals and suburban customers whom are the predominant subscribers to the Islamic Financial Institution's products. The other part of the investors is the Islamic bank and the insiders of the Islamic financial institutions such as their shareholders and the management team.
Why am i saying that?
For the first group: Islamic Finance industry has indirectly been forced to come out with the products identical to their conventional counterpart's product features such as a fixed return investment. These investors typically wanted the return and their capital to be guaranteed, but they just wanted it to be Islamic or halal. Such inclination creates real challenges to the management of the Islamic banks as there is no guaranteed capital and return under the classical Islamic investment contract such as Mudarabah and Mushakarah (except if it is coming from the independent third party).
As a result, Islamic financial institutions seem to be under pressure to introduce a number of contentious products in order to meet these inventors' requirements. Product such as Tawarruq Munazzam (Organised Tawarruq), Bai Al-Inah, Bay Al-Dayn (Discounted Debt Trading), Financial Lease, Bai Bithaman Ajil (BBA) etc, have been offered in order to meet such delicate market appetites. To date, we can easily find an Islamic investment bond with indirect fixed return structures. Also, there is already in place a certified ‘fixed return Islamic investment account' ; it is typically being structured under the Commodity Murabahah contracts and not using the standard mudarabah and mushakarah investment contract, that's why they have been able to guaranteed profit even if it is an Islamic investment.
Undoubtedly, these investors endless appetites and the Islamic Financial Institutions responses will persistently causing them to be criticized from various angles especially from academicians and Muslim economist as they perceived the products but no other than a makeup form with no real Islamic substances. In some ways, their concerned is quite true.
Yes, we can argue these products validity from Fiqh point of view, but as i said, such unhealthy appetite is one of the biggest challenges for the Islamic Financial industry. Leave aside other challenges such as state law, taxation and etc.
There are also appetites which demand IFI to create products which can bring similar outcomes as conventional financial derivatives, factoring, trade finance, debt trading, short selling, structured products etc. As a result, IFIs management will again have to crack their head in finding hilah (legal tricks) in order meet such demand, or else their product is deemed undoable, not feasible, unmarketable and eventually will bring the IFI down to earth.
As for the second group which is the eagerness of the IFIs' shareholder themselves, yes we know that most of these IFIs are targeting profit. Thus, this profit-hunting determination would originate lot of difficulties to the Shariah advisors of the IFIS and the industry, as well. As a result, IFIs will always entrenching ways to adhere to the unhealthy market desires. Whenever the market needs, IFIs will have to follow, because that is their primary purpose and objective. Any product which is truly, Islamic but non-saleable, will not be introduced at all, even though it might be saleable if there is someone to begin the spark. Yes we understand the difficulties, but such appetite if followed constantly, it could potentially threaten to weaken Islamic brand names and shrink their margins of respect. We do not want IFIs to blindly imitating conventional products because such a strategy would deprive them of their special status as Islamic banks which exclusively operate in non-riba based transactions and could be the main attraction to a large population of Muslim.
In summary that is one of the biggest challenges for IFIs and industry, to be highly competitive, capable to meet the investors' appetite, with the ability to maintain their products to be fully complied with the Shariah ruling at the same time.
Zaharuddin Abd Rahman
22nd September 2010
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