Bismillahi Rahmani Rahim.
Assalamualaikum warahmatullahi wabarakatuh.
Good morning, ladies and gentlemen.
I am pleased to be here at the launch of the book, Shariah Minds in Islamic Finance, and its Malay translation, Minda Shariah Kewangan Islam, written by Datuk Dr Mohd Daud Bakar. A product of deep industry insight, analysis as well as critical contemplation, this book is a welcome addition to the existing body of knowledge on Islamic Finance. It reveals the intricacies and issues surrounding Shariah compliance in the products and practices of Islamic Finance, from the perspective of a leading Shariah scholar who is also an insider in the development of the industry.
- Dr Mohd Daud is an insider on two fronts. First, as a former academic, he embarked on pioneering research on Islamic banking, takaful and Islamic capital markets. At the International Islamic University of Malaysia, he developed courses that were among the first few in the world aimed at preparing the requisite human capital for a rapidly growing industry.
- Secondly, as a Shariah advisor, such as chairing the Shariah Advisory Councils of Bank Negara Malaysia and the Securities Commission Malaysia, including a decade-long stint at the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain; Dr Mohd Daud has long been part of the development, scrutiny and endorsement of Islamic financial products, practices and offerings that today form the very nucleus of the industry.
- He brings to this book a combination of Shariah legal theory, practical industry application and his experience of engaging with industry stakeholders. This is no mean feat, but Dr Mohd Daud has weaved together a personal account—part narrative, part critique, part recommendation—that offers the reader a glimpse into what would otherwise be an opaque world.
- The added value of the book is that it addresses not only Shariah scholars, but also equally importantly, other stakeholders in the global Islamic finance industry. These include policy makers, legislators, regulatory authorities, shareholders, management, customers and the general public.
Confidence in the Industry
Ladies and Gentlemen:
- Islamic finance has emerged as a viable alternative financial brand that is based on a set of principles that are in accordance with the objectives of Islamic law, the Maqasid al-Shariah. Being a faith-based system of financial intermediation, the role of the Shariah advisor cannot be overstated. When the industry emerged in the 1970s, the involvement of the Ulama and Shariah scholars was crucial in giving legitimacy to newly established Islamic financial institutions. These Shariah experts, respected as the authority on what is and what is not permissible in Islamic finance, now makes up a vital component of its governance and regulatory architecture.
- Yet, the Shariah advisory function has long been perceived as inaccessible, shrouded in a lack of transparency and engagement with other stakeholders in the industry, ranging from economists to consumers. I believe that removing the veil over the work of Shariah advisors, as this book does, is extremely important in increasing the confidence of the public and the media in our Islamic financial institutions, especially in jurisdictions less familiar with this industry.
- Many may not fully appreciate the enormous responsibility of Shariah advisors in giving their endorsements. The unique feature of Islamic finance is the sacred trust placed on institutions to comply with the principles of Islam. Therefore, every endorsement by Shariah advisors is an assurance to the public that the institution in question is acting in accordance with religious tenets. These pronouncements are based on the advisors’ deep knowledge and expertise in the Islamic legal tradition, thus enabling them to assign the appropriate Shariah response to any given situation.
- In the book, readers are rightfully reminded that adhering to the principles of Islam is not limited to products and services alone, but includes instilling a culture of internal Shariah compliance in the day-to-day operations of Islamic financial institutions. Here, Shariah advisors have a responsibility to engage with the senior management of a bank, for example, to influence the creation of a built-in organisational Shariah compliance regime—a code of ethics if you will—as well as to provide effective and independent oversight on compliance.
- Any deviation from Islamic principles by any one institution, even if evident in its organisational culture or business processes, has the potential to taint the image of the entire industry. Hence the immense responsibility placed upon Shariah advisors. Apart from providing security and confidence to consumers, Shariah advisors also provide a kind of a reputational risk management mechanism for the industry as a whole.
- It is no surprise, therefore, that the Shariah governance function has been elevated to a very high standard under the provisions of the Islamic Financial Services Act (IFSA), which was enacted in June 2013 by the Malaysian Government.
- The Act provides for an end-to-end Shariah compliant regulatory framework for the practice of Islamic finance in Malaysia. It also outlines the operational requirements for the effective application of ethical principles in the conduct of Islamic financial institutions, whereby it is the duty of such institutions to ensure that their objectives, operations and processes all comply with the Islamic tradition.
Shariah-based vs. Shariah-compliant products
Ladies and Gentlemen:
- This brings me to the topic of Shariah-based products versus Shariah-compliant products. When Islamic finance was at its infancy in the 1970s, contracts based on mudarabah, musharakah and ijarah were introduced mainly to facilitate trade. As the Islamic financial market evolved, it needed more sophisticated financial products to handle the increasing value of funds under management.
- The impulse to duplicate conventional financial products seemed natural, therefore. The trend of structuring transactions in a manner that closely mimics conventional finance through a kind of Islamic financial engineering, or in other words, by being Shariah-compliant, came to dominate the industry.
- In the last decade or so, there has been a lot of discussion among scholars and practitioners on the need to reorient Islamic finance, from one of mimicking or duplicating, to a model of emphasizing instead the original principles of Shariah. Some scholars have even proposed completely abandoning the paradigm of ‘Islamization’ of conventional financial practices, and to focus instead on attaining the social and economic ends of financial transactions—rather than focusing merely on the contract mechanics through which financial ends are achieved.
- This new line of thinking places emphasis on Shariah-based structures, such as those that can promote social inclusion and social welfare; reduce the gap between the rich and the poor; and channel investments to socially- and environmentally-responsible causes.
- As such, there has been greater engagement with the rich heritage of the Islamic tradition itself, learning from the historical precedents that can be found in Islamic theology and adapting them to contemporary cases. And as Dr Mohd Daud points out, when Shariah scholars are engaged on this issue, they ‘would welcome and praise the move towards developing totally new structures of Islamic financial products and services.’
- I find this spirit of openness evident in the increasing number of Shariah advisories that are now talking about taking responsibility and ownership of their role beyond merely approving products. It is also evident in the growing prominence of Islamic Social Finance, including such structures and activities as community banking, microfinance, socially responsible investment, humanitarian financing and the like.
- Having said that, Dr Mohd Daud also maintains that efforts to convert conventional products into Shariah-compliant forms must still go on. The provision of Islamic finance, he warns, cannot depart too much from the financial needs of consumers. He reminds us that even the Prophet Muhammad (sallallahu ‘alayhi was-salam) himself endorsed some of the prevailing customs of the Jahiliyyah or pre-Islamic society—so long as they were compatible, or were adjusted to be compatible, with the teachings of Islam.
- It is in this context that scholars must be assertive and take a bold approach to make Islamic financial products relevant, sophisticated, as well as encapsulated by what Dr Mohd Daud calls a ‘white ocean strategy’. ‘A white ocean strategy’, he says, ‘is about offering something which has not yet been attempted but could contribute a more impactful value for the whole society’.
- Whether this results in Shariah-based or Shariah-compliant products, engagement with and among scholars is imperative to see further progress, innovation and development in Islamic finance. Engagement will open up possibilities for better and more wide-ranging offerings to enable the emergence of new solutions in the industry to cater to our various financial needs in this evolving world.
The role of Shariah scholars moving forward
Ladies and Gentlemen:
- Islamic finance currently represents less than 1% of global financial assets and is still very much concentrated in a limited number of markets. However, its growth trajectory has been remarkable and, indeed, continues to outpace that of its conventional counterpart. Islamic finance is now estimated to have 2.5 trillion US dollars of assets under management with the potential to rise to 5 trillion US dollars by the end of the decade, according to Standard & Poor’s.
- In addition, according to the IMF and the Islamic Financial Services Industry Stability Report of 2015, Islamic finance has reached the category of ‘systemic importance’ in twelve jurisdictions of the world, where the industry commands more than 15% share of the total banking market. The number of such jurisdictions is set to double over the next few years.
- In this regard, Christine Lagarde, Managing Director of the International Monetary Fund, in a recent speech in Kuwait aptly reminded, that ‘as the industry expands and becomes systemically important in more countries, it is vital to nurture this development in a safe and sound manner in terms of enabling legislation, regulatory framework and the global financial reform agenda.’
- Unfortunately, this vision for Islamic finance for the next ten to twenty years and beyond is something that is probably missing at the moment. This, says Dr Mohd Daud, is about the sociology of change and transformation.
- In the 14th century, Ibn Khaldun (d. 1406), the celebrated Muslim scholar, argued that societies were like living organisms. They have cycles of birth, growth, maturity and decline, and even eventually, death. His observation was probably the first noteworthy social science conclusion that has led to dozens of theories surrounding the science of cultural and social evolution. Indeed, social evolution can be observed everywhere, and no industry or sector is immune, including Islamic finance.
- I am certain that as the industry evolves in the years to come, the role of Shariah scholars can become ever more significant. Scholars are bastions for the proliferation of knowledge. They are in the words of our beloved Prophet (sallallahu ‘alayhi was-salam):
عُلَمَاءُ وَرَثَةُ الأَنْبِيَاء
[Scholars are the inheritors of the Prophets].
They, the ulama and the scholars, are in the best position to act as institutional game-changers through their research and inquiry into new conceptual models of the present state of affairs and the proposed set of responses or reforms that are necessary for our society.
- For this to happen, however, their work must be accessible, understandable and actively disseminated to industry practitioners, students of Shariah, regulatory authorities, policy-makers and the public at large. Certainly, this calls for a certain level of audacity on the part of Shariah scholars to abandon their ivory towers and pursue a more direct involvement in the development of the industry.
- I have to agree with the appeal in this book to increase the pool of Shariah advisors who are able to think as futurists, strategists and good innovators of bid’ah hasanah in Islamic finance—apart from having solid knowledge on every aspect of the Islamic tradition. Thinking strategically and futuristically is, after all, expected in other disciplines, from information technology to business to public policy to science and engineering. And so it should be no different in Shariah scholarship as well, if we are serious about transforming the Islamic finance landscape to become better and more impactful for the whole of society.
Ladies and Gentlemen:
- In his book Shariah Minds in Islamic Finance, Dr Mohd Daud sees scholars as instrumental in advancing the Islamic finance industry from its current state, which he calls Version 1.0, to the next level, Version 2.0. He believes, ‘things could be done differently … to effectively integrate the Shariah minds in all the policies and product offerings. We need an exponential change in all respects and I hope this book will inspire young scholars and senior scholars alike to think differently and to position themselves differently to lead the industry moving forward. The scholars cannot continue to be passengers all the way. They need to take a leadership role from now on.’
- In many respects, this book is a 21st century manifestation of the well trodden path of ijtihad. It will answer many existing questions, and no doubt raise new ones. It is my hope that it will spur a whole new genre of scholarship in Islamic finance especially on Shariah governance.
- It is also my hope that this will be the first of many books by this author who I am certain will continue to have a successful career in Shariah advisory for many more years to come. Insha Allah.
- It is now my great pleasure to launch Shariah Minds in Islamic Finance and Minda Shariah Kewangan Islam by Datuk Dr Mohd Daud Bakar.
Bismillahi Allahu Akbar!