Islamic finance – yes, it is for real

The 25 basis point increase in the Overnight Policy Rate (OPR) will benefit fixed deposit (FD) savers after the real rate of return on deposits will return to positive in 2018.

AS we celebrate close to four decades of Islamic Finance (IF), we ask ourselves this question – is IF for real? Is IF the real deal?

Elephant in the room

Let us very quickly jettison that huge elephant in the room – IF is not a religion. You do not risk religious conversion by practising IF. Likewise, you do not need to profess a religion in order to practise IF. You betray no principles of life by embracing Islamic Finance.

Fairness and all things equitable

What IF brings to the table is a breath of fresh air in the otherwise stale environment of modern banking and finance. A much-needed mix of a more equitable and fair method of financing, at a time when we are in dire need to correct the disequilibrium caused by the oppressive nature that modern banking is moving towards at an alarming rate.

Inherent in the conventional lending transaction is the unequal bargaining power of the parties. One party has the money and the other party needs the money. IF aims to infuse fairness and equitable principles between and amongst the parties by transforming the lending transaction into a trade transaction. Parties then engage as trading partners rather than as lenders and borrowers. The IF principle of certainty in intentions and in rights and obligations encapsulated in written contracts is one of several spokes in the IF wheel of fairness. IF frowns upon uncertainty (gharar) to the extent that it leads to a deception being practised on a party.

The typical wide and unfettered discretion being placed on lenders in a conventional financing contract would very likely run foul of the IF principles if the exercise of this discretion leads to a deception being practised on the customer.

IF demands a fair contract; a contract that is fair to both the financier and the customer.

Debtors are not all the same

Syariah requires that we accommodate the debtor in need more time.

IF principles demand that the financier discriminates in its treatment between a recalcitrant debtor and a genuine debtor in need of more time to settle his debts.

The conventional ways and means of recovery by financiers, including the restructuring and rescheduling of banking facilities will now be shaped to reflect this IF principle.

The sanctity of the debt obligation

Much misplaced apprehension has arisen from the misconception that any syariah non-compliance in IF avoids the repayment of the debt obligation of the customer. This probably explains the almost homogenous line of defence by delinquent customers screaming syariah non-compliance in cases that are brought before the courts. Whilst there may have been moments of trepidation in the course of arguments and judgments in the lower courts, justice and good sense prevailed in the judgments of the appellate and apex courts.

Strong sentiments extrapolated from the various court judgements point to one inescapable conclusion – you cannot expect to “take” or “borrow” money from a financier and make use of it and then not pay it back. This is not how IF works.

This is the sanctity of the debt obligations under syariah – you must pay what you owe. Extenuating circumstances may grant you some indulgence, both in the eventual amount of the debt that you pay and, in the time that you are given to pay. But, pay you must. Only in very rare circumstances is the entire debt waived or forgiven.

Permissibility vs practicality

One of the main challenges in the journey of IF is the constant pressure and temptation to sacrifice the pristine and sacrosanct principles of syariah at the altar of practicality.

Stretch and bend we can. But, break we must not. The tenets of the syariah are flexible enough to achieve as much practicality as is needed to ensure fairness in the deal. Fairness in the deal necessitates us to also consider the greater good of the community. This is another example of IF being intricately linked to the real economy.

The journey, the destination and green garbing

IF is about doing the right thing the right way. Syariah principles for financing are different and distinct from conventional financing. Profit is not just another name for Interest. The sale price is not just another name for the principal amount of the facility. Whilst we do not intend to reinvent the wheel, we must resist “Islamising” conventional products. We must continue to innovate and not replicate conventional products.

IF is not merely conventional financing in green garb. We must not just garb any and every conventional product that comes our way. Yes, our ultimate destination and objective is aligned to conventional financing. And that is to provide the customer with the financing that he needs. But the journey in getting there is different. Structures are different. Principles are different. Concepts are different. And we must acknowledge these differences.

Hope and request

Judge IF by the pristine principles that it exhorts. And by the many good people that make it their cause to promote these principles for the greater good of the financing community. Judge not IF by the few cynics and pessimists in the industry that have twisted these pristine principles in their attempt to pigeon hole them into the conventional finance mould.

Whilst IF is indeed different from conventional finance, all participants in the IF ecosystem must not be indifferent to conventional and other forms of financing.

As a stakeholder in the industry and a proponent of IF, one must remind oneself that the IF cause is to teach, not to preach. We educate, not complicate. We must infuse, and not confuse. We can then showcase IF for what it is – the real deal. Insya-Allah.

Jal Othman, a lawyer practising at Messrs Shook Lin & Bok, is a member of the Conveyancing Practice Committee, Bar Council, Malaysia.

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