Introduction
This post explores the challenges and ethical dilemmas in modern Islamic banking, examining why criticism of practice is necessary, how scholars are placed in difficult positions, and what Muslims can do to drive reform.
Islamic banking is my passion, and I am a firm believer in the benefit this can deliver to us on a global basis. However, up to now, we have persisted in implementing a version of Islamic banking that is very far removed from the benevolent aims and principles of my faith.
I feel very strongly about this because I feel this results in a break of the trust what we, as Muslims, place in institutions that profess to act in the name of our faith and for the benefit of Muslims.
We have several different ways to react to this.
1) We can deny there is a problem
This is a possible stance to take, but, in my view, it is one that is based on ignorance. Ignorance of the aims of our faith, ignorance about the practice in financial markets, and ignorance of the impact this is having.
2) Acknowledge there may be a problem but leave it to the experts to drive any change that is necessary
This is a reasonable stance, on the face of it. However, it can be viewed as an abdication of our personal responsibility. If one is a simple Muslim, with little interest in the activities of the banking system, and is busy focussing on their personal lives to try to be a better person, and providing for their families – then I fully understand.
However, if you have any level of education, any level of concern about what is done in the name of our faith, and any level of discomfort about how that trust can be betrayed, then this stance that is difficult to justify.
Information is freely available; it is very easy to find out the basics of Islamic banking. If one fails to take these steps, then the only conclusion is that person fails to see any relevance of this information to their lives, and thus has no interest.
3) Acknowledge the problem is significant, and ask ourselves what we can do to support any change
This is the stance that I take. Not everyone is obliged to take this stance. We have to remember that you do not have to be very knowledgeable or an expert to be able to offer something, however small, in the process to drive change.
Everyone has something they can offer, and there should be no excuses such as: “I can not make a difference, so I will not do anything”.
Everyone can assist, we just have to be informed how we can, and then be offered some support in what we try to do.
One of the major challenges that we face in pushing for beneficial change is that everything about Islamic banking is approved by scholars. They are qualified experts in our religion, and are in a position to deliver fatawa, or legal opinions, about Islamic banking. They say Islamic banking is Shariah compliant.
How on earth can we argue against that?
I have a firm level of respect for scholars and the role they play for Muslims in helping us to understand our religion, and how it impacts our daily lives.
However, I also know, very well, the process that occurs when a scholar gives a fatwa, or approval, to a contract or product in Islamic banking. I know this because this has been my job for a long time. I have spoken, face to face, with scholars, presenting ideas and contracts and hoping for their approval.
And let me tell you, as an investment banker, and an Islamic banker, there is not one single thing that I have wanted approval for, that I did not (eventually) get approval for. Not one thing.
And herein lies the problem.
I must say this again – I have unfailing respect for scholars. I have been brought up to respect those with knowledge, and if a scholar provides an opinion, who am I to disagree with this?
This is the stance, I expect, of the vast majority of Muslims globally.
A few months ago, I was delivering a workshop to an investment bank in Nigeria. We spoke about a product, and the delegates (experienced bankers) asked me how on earth did scholars approve this?
On the face of it, it appeared to contradict several aspects and rules of Islamic banking and commercial law. It involved Riba, speculation, Gharar and so no – all the things we are old we must avoid.
So, I told them how this product is approved. I explained to them how I would, if I really had to, speak to a Scholar about this product. For example:
“Sheikh, we plan to do this, then this, then this, then this. The contracts we will have are this and this. This is how it will work.”
And all the delegates agreed that everything sounded fine. There was no hint that any aspect of this product would challenge any aspect of Shariah law relating to business and finance.
Yet what I had described was exactly the same product that made the same bankers wonder how it could ever be approved.
So, what did I do? I never lied, I would not do that in order to make money, ever.
I simply had knowledge. I understood the real product, I understood how everything must work in order to make the product work. From a legal perspective, from an operations perspective, from a risk perspective, from a cash perspective. From every conceivable angle.
In addition, I understood, very, very well what the limitations were in Shariah that would restrict this product.
Finally, I was able to devise and create structures, contracts and mechanisms that were completely Shariah compliant (on the face of it) and yet still delivered all the financial, economic and risk profile that these products demanded.
And this latter is what I explained.
If you have any doubt whether this is the exact same process that is used to obtain approval from scholars for all the Islamic banking products that are “questionable”, then you must work to remove those doubts, Your doubts can only arise from lack of experience of how the industry works.
Do I know more than scholars about Islam, about Fiqh and rules and law? No, never.
Do I know more than scholars about finance, money, contracts, risks, and modern financial concepts and practices – I have to say yes. After all, this has been the specialty in my career. I have been paid for no other reason that I have expertise in these areas. And if I knew less than I was expected to know, I would quickly be demoted or sacked. That is how life works in the finance and banking industry.
A scholar is an expert in many different areas of our religion, whether it be aspects of law, Fiqh, Quran, Hadeeth, and any of the vast branches of knowledge. They dedicate their lives to this, and provide huge benefit to Muslims, whether it is an Imam in a small mosque or a Grand Mufti of a country.
However, not many of them spend their lives mastering the detailed aspects of banking and finance.
The scholars I have dealt with have generally been very knowledgeable about banking. But, to be frank, I was more knowledgeable – and I say this without bragging. After all, it is only one aspect of many for them in their scholarly pursuits – for me, it is my career.
All I needed to know from them was detail of Islamic law relating to business and banking. And once I understood that (and I had to understand that very well) it is not a difficult exercise at all for bankers to create the contracts they want.
What we are doing is putting scholars in an impossible position.
We are asking them to provide approval. This approval has commercial value. They are paid for their work, and this is quite right – they are providing a professional service.
However, the banks pay them for approval, and the banks business depends on this approval.
This has several consequences.
Firstly, if a scholar is opposed to certain practices, and the bank needs to conduct these practices, then that scholar will not have a long career in Islamic banking. He will be replaced, swiftly. After all, the banks pay the salaries for these scholars.
Also, we create a real conflict of interest for the scholars. This is similar to the criticism faced by credit rating agencies during the financial crisis. They approved, or provided inflated credit ratings to, products that they (and, probably, nobody at all) really understood. And they were paid to provide these positive opinions so that money could be made by the banks paying these agencies for their services.
This conflict of interest is exactly what we are doing to our scholars.
Finally, it means that any voices of dissent or disagreement are marginalised. Simply put, if you approve certain practices, you will be employed for providing these approvals. If you refuse to provide approval, you will find yourself not employed by banks, it is as simple as that.
And if a scholar speaks out in a manner that is not beneficial to Islamic banking, he or she is criticised widely by the industry.
As an example, I recall when the Fiqh Academy of the OIC declared commodity Murabaha to be deceptive, and called for it to be made impermissible, I asked some of the expert Islamic banking scholars about their view. They all said the Fiqh Academy opinion was due to their lack of knowledge, and their opinion is incorrect.
In my view, the opinion of the Fiqh Academy was perfect. It was correct in every sense. They saw through the veil of contractual confusion that the banks attempt, and realised what the underlying intentions of the parties were. And they identified aspects of the contracts that were contrary to Islamic law. This process is exact and they did it correctly.
I have no doubt, that if scholars who are active in Islamic banking, have the reality explained to them, that they would have different opinions.
And how to explain things “properly” to them? To do this, you must be an expert in banking and finance. You must have a very good working knowledge of Islamic and commercial law.
You must know how transactions and products work in banking. And you must know the loopholes that are created, and why they are created.
Only after you have mastered this, can you begin to meet any argument that your opponents will have.
For example, some of the common excuses for modern Islamic banking practice include
- 1) The Quran says that trade is permitted, and that Riba is not, What we are doing is conducting trade, and not Riba
- 2) Even if the price appears to be related to Riba, the contracts are all Shariah compliant. The price is simply a commercial agreement and has no bearing on the transactions
- 3) If a shop sells juice for the same price as a bar sells alcohol, how can you call the juice haram? It is a coincidence the price is the same but the juice is clearly halal and the alcohol is clearly haram.
- 4) It is the contractual environment that makes this halal. For example, fornication (adultery) is a sin, but the same act within the contract of marriage is permissible. It is simply the contract that makes the same act permissible. And we are using Shariah compliant contracts, so there is no problem here.
All of these justifications are deeply flawed. They can only be used by those who lack understanding of the matters involved. They can only be accepted by those who are unable to identify these flaws that make these arguments completely invalid.
What does all this mean?
There are several points to conclude with here.
Firstly, criticism of Islamic banking must NEVER be equated to criticism of scholars. It is criticism of practice. The scholars are involved, of course, however they are placed in impossible circumstances. We must support them. Our criticism and wish for change does not mean we are criticising scholars.
Second, criticism is certainly due. For Islamic banks, up to 99% of their practices are priced at Riba. Every single contract priced at riba is one that will contain deception. It is not easy to spot this. For me, it is very easy to spot this.
Thirdly, our trust is being broken. The Islamic banking industry professes to act in the name of our religion. We are almost obliged to place our trust in them. But we must not do this blindly. This trust is being manipulated.
Fourthly, educate yourselves. Do not just say Islamic banking is good, or Islamic banking is bad. Educate yourselves, Find out why it is good, or why you think it is not good. Research. Read. Ask questions.
Finally, never think that you can not do anything to drive change. Every single person has a role to play. Whether you are a scholar, a banking expert, an Islamic banker, a regulator, a government worker, or a simple customer, and have no expert knowledge of these things – you also have a role to play.
This is the responsibility of all of us.