GROWTH CHALLENGES: Lack of a strong legal platform may hinder growth of the industry
Despite the recent global economic crisis, the Islamic finance industry has continued pushing forward strongly. Entering 2012, the industry increased its total assets by 23.8 per cent by the end of 2011— comprising a hefty 22.4 per cent of the total assets of the banking system.
Global recognition has not been in short supply either as evidenced by The Banker Magazine’s 2011 rankings of top Islamic financial institutions which saw 21 Malaysian institutions listed.
By all appearances, Malaysia’s Islamic finance industry is well on its way to fulfilling its aspirations to becoming an international Islamic financial centre.
Is it all hunky dory?
Missing element: “The government should look into establishing a special court for Islamic banking,” says Datuk Ahmad Zaini Othman, Chief Executive Officer of the Malaysian Building Society Berhad (MBSB). “This is something I think is still missing in this country.”
“If they want Islamic financing in Malaysia to be recognised internationally, they need to do this,” the CEO stresses.
Zaini points out that at present the legal aspects such as legal settlements still go through conventional courts. While the conventional judiciary may be familiar with Islamic financing law, Zaini stresses that we need judges who not only know the Islamic financing law but who also possess deep understanding of the religious aspects that go beyond laymen comprehension.
“It is all there in the Quran and Sunnah, but we need people who can correctly interpret them,” says Zaini, emphasising that “interpretation is important.”
“For example, riba is not right and forbidden; however excessive profit, such as selling a property for 150 per cent profit, is wrong too.”
Mismatched avenue: Zaini believes that continuing to rely on conventional courts for Islamic financing’s legal matters would be detrimental in the long run.
“Conventional court in itself is a mismatch,” says Zaini, clarifying that the word ‘conventional’ does not match with ‘Islamic’.
“Because it is religion-based, at the end of the day we need to return to that essence and adhere to it,” says Zaini. “That means having the necessary infrastructure to uphold it in a dedicated manner.”
What might happen if conventional courts continue to be used to deal with legal matters pertaining to Islamic financing?
“For one, you will continue looking at it through a secular way of thinking,” replies Zaini, adding that it may lead to oversight of some aspects based on Islamic principles. According to Zaini, another effect would be the stagnation of Islamic financing expertise in the country.
“One example is the musharakah mutanaqisah product — this product is not feasible for properties under construction as some aspects of the law do not recognise certain parts of the transaction,” highlights Zaini. “So if a developer goes ahead with the product, there is no protection for the developer under any law.”
The CEO further points out how the lack of protection in certain scenarios is limiting the industry. “If you want to attract foreign Islamic investment in a big way, you need to have a strong Islamic legislative framework in place.”
“Foreigners would not come here and invest hundreds of millions if they are not protected,” Zaini emphasises. “With a proper legal framework, we can do much bigger business.”
In addition, Zaini also points out that such a framework would also mean that the country would be more attractive to top talents in the industry.
“If you do not have a very strong framework, you may not have a strong image of the Islamic platform,” says Zaini, asking rhetorically, “why would an Islamic financing talent from the GCC (Gulf Co-operation Council) come to work in Malaysia if we don’t even have a court for Islamic banking?”
“He would probably much rather go to GCC countries where the legislation is more developed in this respect.”
Challenging: However, Zaini admits that putting in place a legal framework for Islamic financing would be challenging. Differing opinions and interpretations worldwide pose a daunting obstacle — Zaini cites the introduction of Profit Equalisation Reserve (PER) by Bank Negara as an example.
“The Islamic deposit programme is based on profit and loss whereby banks pay dividends based on the allocated profits,” says Zaini, explaining that this means the dividends are higher if the Islamic banks make good profit and vice versa. “In comparison, conventional banks pay based on a fixed amount of interest.”
“So when Islamic banks report good profits and subsequently pay more dividends than conventional banks, there would be a flow of customers from the conventional banking market to the Islamic financing market.”
Zaini explains further that PER was introduced to avoid the mass movement between markets by fixing the percentage of profit shared as dividends by the Islamic banks.
“Say they make profit and are able to pay 9 per cent, PER means they can only pay for example 4 per cent while 5 per cent would be kept in reserve.”
“There might come a time when the profit margin is smaller, in such an event, the reserve would be used to top up the dividends to be paid out,” says Zaini. “The GCC is against this and do not recognise the practice because it is not in line with shariah.”
However, Zaini feels the way forward would be to ignore the differences and focus on what can actually be done.
“Malaysia is heading towards a two-system financial system and for the Islamic part of it, we need a strong legal platform,” says Zaini. “I think we have a sufficient pool of shariah legal expertise, and our universities are also producing enough experts in the area of Islamic financing.”
“But I think we also need to bring in scholars from abroad with a different perspective of the international market so that when we formulate the legal framework, it will be more comprehensive,” adds Zaini, explaining that doing so would enable Islamic financing in the country to reach greater heights.
“Like the English law, this will not happen overnight but instead through years of practice and experience.”
Zaini … government should set up a special court for Islamic banking.