Euromoney, September 19 2018
Islamic finance has become too focused on getting arcane structures to be technically Shariah compliant, but a new initiative in Malaysia attempts to make Islamic finance socially positive once more – and to measure its success.
Islamic finance faces a challenge. While the industry has grown dramatically in scale and sophistication, many of its practitioners fear this has come at a cost: a drift in intention, with so much emphasis on letter of the law compliance that the spirit of the whole idea has been lost.
“When we talk about Islamic finance, one of the problems we have is that we are always talking about the three ‘S’s – sukuk, Shariah standards and scholarly debate – at conferences,” says Arsalaan ‘Oz’ Ahmed, chief executive of HSBC Amanah Malaysia in Kuala Lumpur.
“We’re not talking enough about the important S, which is social impact: the role Islamic finance has in supporting society.”
“Islamic finance-hood is defined by the size and number of issuances of sukuk, and the Islamic finance-ness is defined by how Shariah compliant you are,” he says. “While the industry focuses too much on that, we will not be focusing our attention on the right things to progress.”
Ahmed believes the way his profession measures its own success has gone adrift.
Malaysia is by some distance the world’s most sophisticated market for Islamic finance and has the institution in the strongest position to do something about the loss of focus Ahmed is describing: Bank Negara Malaysia, the country’s central bank.
Malaysia has already dealt with most of the initial challenges around Islamic finance – scale, availability of products, consistency of interpretation and the creation of leading educational institutions – and is now able to take stock and deal with some of the nuances of where the industry has got to.
Islamic finance requires that transactions must be based on real assets and not on speculation, and a network of regulations and interpretations is required to ensure that people meet these fundamental rules. The more complex structures have become – particularly in areas like derivatives necessary for hedging – the harder it has become to be certain about compliance and so an industry of financially savvy Shariah scholars has evolved, and a highly technical (and lucrative) specialism of commercial law firms alongside it.