COOPERATION and trust-building are the core of socio-economic progress in any society, and sharing-based financial contracts contribute to promote these features.
Whether the gamut of new alternatives in the sharing economy, including fintech, crowdfunding and P2P (peer-to-peer) lending pan out to be systemically successful in the medium term, and how they maintain effectively their sustainability and relevance by creating shared values through risk-sharing, only time will tell.
In fact, “Creating Shared Values Through Risk Sharing” was the theme of the 8th Securities Commission Malaysia (SC)/Oxford Centre for Islamic Studies (OCIS) Roundtable, which was held last weekend at Ditchley Park, Oxford.
Sultan of Perak Sultan Nazrin Muizzuddin Shah, who is also the royal patron for Malaysia’s Islamic Finance Initiative, delivered the keynote address in the presence of SC chairman Tan Sri Ranjit Ajit Singh and delegates from across the world.
In the Islamic finance space, by its very nature, ethical values and their propagation through example, and the relevant products and risk-sharing are intrinsic.
After all, one of the common sobriquets of Islamic finance is profit-and-loss-sharing (PLS) banking. Islamic financial institutions, however, stand accused of “deliberately and systematically avoiding PLS modes of financing”.
Underpinning this is the age old debate of whether Islamic finance is more to do with equity finance, which is considered to be more equitable in wealth distribution through both risk and profit sharing, or debt finance.
The roundtable organisers emphasised that “this trend towards greater use of debt-creating finance is not necessarily creating the level of cooperation, trust-building and socially beneficial risk-taking that are required for inclusive and sustainable economic growth”.
Is there a natural link between the creation of shared values and risk sharing?
Not necessarily so, says prominent syariah adviser and entrepreneur, Datuk Dr Daud Bakar, who is the chairman of Amanie Advisors and the Syariah Advisory Councils (SAC) of the SC and Bank Negara.
For argument’s sake, he asks, how will we treat this theme if risk-sharing is found to be detrimental in some Islamic finance practices?
To him, any discourse must be steeped in the appropriate legal basis and sources of knowledge, which must be backed by divine revelation (wahyu), essentially to protect the purity of the message and its ethos.
It is also the democratisation of access and participation in banking, insurance and capital markets by ordinary people. In this case, finance not only serves to be the great equaliser, but also the much-needed facilitator. Doing it through shared values and risk-sharing would be the icing on the cake. How does one define shared values?
Daud defines values as representing a set of beliefs, ideals or benefits, which are desirable by a group of people, which have a major influence on their behaviour and attitude.
To a large extent, both risk and values are human in nature. It’s up to humans to assess and bear the risk accordingly, either fully or partially, or even to decline from taking the risk.
There are several options and flexibility in risk mitigation — transfer from one to the other; sharing of risk; or a combination of debt and equity (Daman).
But, are shared values confined to the provisions of maqasid alsyariah (objectives of the syariah as in Islamic finance), or do they include the wider ethical finance, environmental, social and governance (ESG) and responsible finance movements, or the stakeholder universe of regulatory, legal, operational, management, shareholders, customers and other such aspects, or even the newer developments in fintech, block-chain ledger management and cybersecurity?
For instance, the Islamic finance industry is currently romancing the wider ESG/SRI/Ethical finance movements.
There is a lot of talk about synergies.
I am all for cooperation and discourse to advance the agenda of ethical Islamic finance.
But where do shared values start and end?
It would be disingenuous to the future generation of Islamic bankers and their customers/stakeholders to highlight only the commonalities between Islamic finance and the ethical finance movements — issues relating to environmental impact, labour policies, especially child labour and slave labour practices, transfer pricing, anti-trust and speculative activities, fair wage structures, transparency including non-recourse whistleblowing provisions to report wrongdoing such as mis-selling of products, and to play down the differences which in many respects go to the core of the discourse—that is the proscription of riba, gharar (non-disclosure), maisir (gambling).
Are there indeed, from a maqasid point of view, shared values in a Green Sukuk and a riba-based conventional Green Bond?
Is it a case of choosing either form or substance, instead of both which are implicit in the maqasid al-syariah?
There is also the unfortunate tendency these days by some of demonising debt-based products when these have been sanctioned by the syariah and fiqh literature over the centuries.
In today’s complex economy and society, most households are beholden to at least one type of what I would call essential debt, such as mortgages and car hire-purchases.
Not all debt is bad and regressive.
However, when some Muslim thinkers and economists elevate equity-based financing to the higher status of maqasid al-syariah, and when some have gone to the extent to even declare that equity-based financing is the only scheme that can fulfil this aspect of wealth distribution, Daud is not so sure. I tend to agree with him.
Maqasid al-syariah can’t be established in a vacuum or be based on mere emotions and preferences, and must be backed by empirical data, which he stressed is “cumulative and compounding”.
In other words, there must be a number of divine texts that carry the same message to reinforce the superiority of equity-based financing.
Both equity and debt financing have positive and negative aspects.
The Islamic finance industry needs a better and balanced narrative based on pragmatism that can leverage the benefits of both, and advance the impressive growth of the industry to the next level.
Mushtak Parker is an independent London-based economist and writer