LONDON, 22 August 2005 — Saudi investors and bank customers are rightly incensed at the apparent anarchy surrounding the issuing of fatwas relating to investment and banking. But they should direct their anger not at the self-styled experts issuing the fatwas, but at those offices and authorities of state responsible for the regulation and supervision of the banking and financial sector — namely the Ministry of Finance and the Saudi Arabian Monetary Agency (SAMA).
Banking, whether the Shariah-compliant or conventional systems, are financial activities which have serious implications for both the national economy and the individual customer. There is a certain naivety in the Islamic banking market, especially in countries such as the GCC states and Pakistan, that anything to do with the Shariah should be the exclusive domain of the ulema or religious scholars.
In the matters of banking and finance, this cannot be further from the truth and has served to help regulatory authorities to abdicate their responsibilities of supervising the sector. In Pakistan, for instance, it was the Shariah Court that pushed for and presided over the arbitrary and unilateral ‘Islamization’ of the banking system.
This turned out to be a debacle for various reasons, and last year Pakistan, according to Dr. Ishrat Hussain, governor of the State Bank of Pakistan, finally confirmed that Pakistan had instead adopted the dual banking model of Malaysia where an Islamic banking system is operating side-by-side with a conventional system, cooperating but not interacting. In this way, Muslims and others have a choice to opt for a system of financial management based on their faith and or investment principles.
In Egypt in the 1990s, ordinary Muslims lost billions of dollars in so-called Islamic investment companies, of which Al-Rayan was the largest and most notorious. While Al-Rayan was to blame for the fraud, the bigger responsibility lay with the Egyptian authorities for failing to regulate such companies and having the necessary regulatory infrastructure in place to pre-empt such practices.
Even in the Kingdom last year, it was the Ministry of Interior which stepped in to close many companies, mainly in the Eastern Province, which had amassed over SR5 billion in deposits and which had invested them in real estate investments, which were not yielding returns fast enough to service returns to the depositors. The real issue, however, was that these companies were neither registered nor regulated and therefore were not authorized to take deposits from the public. And yet SAMA initially hardly batted an eyelid. Malaysia and Bank Negara, the central bank, have adopted and successfully implemented a Shariah governance concept for the Islamic banking sector which is now becoming the model for the global sector.
In Malaysia, there is a National Shariah Council, comprised of the top ulema in the country and two foreign Islamic scholars for the sake of diversity, which sets the Shariah “rules of the game” for Islamic banking, both in terms of products and services, compliance etc. Individual banks can still have their own Shariah advisories, but their rulings must be consistent with those of the National Shariah Council. This at a stroke removes confusion in the market over whether a Murabaha is halal because one ulema says it is and the other says it is not.
Bank Negara has also ruled that all Islamic financial products in the market must be suffixed with the letter “I” so that customers could easily identify these as Shariah-compliant.
So what can Saudi Arabia and SAMA do to improve Shariah governance relating to Islamic investments and banking in the Kingdom?
The government should start at first principles by introducing the stand-alone legal framework for Islamic banking. Al-Rajhi Banking and Investment Corporation (ARABIC) and Bank Albilad, though operating as Islamic banks, fall under the general banking law. This is the legal source of confusion. It would illegal for any entity or individual to collect money or deposits on a Shariah banking basis without being incorporated under such a law.
SAMA should set up a National Shariah Council which would then set the rules for the Islamic banking sector nationally. Shariah advisories should be registered with the appropriate entry qualifications and skills sets. IF necessary SAMA should help train Shariah scholars to improve their education and skills.
And to help Saudi customers, SAMA should introduce the same product identification marker idea by asking Saudi banks and finance companies to clearly distinguish Shariah-compliant products and services from others. Whether this is done through the suffix “I” or any other marker, would depend on SAMA and its consultation with the sector and consumers.
Consumer education and protection is an essential component of any mature financial sector. Failure to do so on the part of regulators and the banking sector would inevitably lead to serious disruptions in the market which would have dire consequences for ordinary consumers.
Unfortunately, consumer education, protection and product marketing are still nascent concepts in Islamic banking and finance.
