LONDON: At a time when the world is looking for viable alternatives to the devastating shortcomings of the neo-liberal market system of capitalism, Islamic finance is often suggested as one of those alternatives.
The faith-based Islamic system of financial management is seen as steeped in ethics that proscribe speculation in derivatives and in interest-bearing instruments and which promote financing of the real economy.
However, it would be foolhardy to suggest Islamic finance as the panacea to solve the ills of the global financial crisis, at least, at its present stage of development, which is a mere three decades compared to the two or three centuries of capitalism.
Two current legal cases in the Islamic finance industry — one in Dubai and the other in Malaysia — point to the under-developed state of corporate governance in the sector and a clear mismatch between the ethos of Islamic finance principles and its practice in some instances and jurisdictions. In both cases Islamic finance has shot itself in the foot at a time when the world is seeking leadership from the sector.
In Dubai, a former minister together with several others, have been charged with allegedly embezzling public funds to the tune of $501 million from Dubai Islamic Bank (DIB), in which the Dubai government has a large stake. In fact, DIB is involved in three separate court cases involving fraud. Only a few years ago the very same bank suffered a huge fraud totaling over $200 million following which the Dubai government bailed out the bank through a debt for equity swap and instituted a complete management overhaul.
The minister and the other accused parties are of course innocent until proven guilty. But, there is a much more fundamental principle that is at the core of such situations, a lack of corporate governance and conflict of interest, including in the Islamic finance sector.
Irrespective of the above case, the minister was also the chairman of DIB from 2004 to 2008. And his portfolio of finance and economy was directly linked to the financial sector
GCC jurisdictions seem incapable of appreciating the fact that there is a clear conflict of interest when a serving minister is also the chairman of a bank or corporate. A senior GCC regulator once explained that this is common in the Middle East. He entirely missed the point of conflict of interest.
In the case of DIB, for instance, many of the other Islamic banks in the UAE, including Dubai, were complaining that DIB was getting a disproportionate share of the mandates for Sukuk issuances in the country. The suggestion was that this was the case of favoritism because the chairman of DIB was also a minister at that time.
Diehard proponents of Islamic finance stress that people should not unnecessarily deride the sector because it is a relatively new phenomenon. As such it is bound to suffer teething problems. They also point out the spate of conflict of interest cases in the US, UK, EU and elsewhere that has bedeviled the conventional sector and in many cases led to the oversight that in turn precipitated the current global financial crisis.
This misses the point entirely especially of an ethical system of financial management. Governments and regulators are supposed to be the gatekeepers of the financial services sector and the economy.
The Shariah, says Sheikh Esam Ishaq, is very specific and strict on corporate governance; management code of ethics; and on the question of conflict of interest. “The Shariah requires that regulators have to be a disinterested party. The objectivity and impartiality of the regulator must not only be there but must also be perceived to be there. While I cannot comment on specific cases, but in general where sitting ministers and regulators also hold chairmanship of banks and companies, from a Shariah point of view, this would be a clear conflict of interest,” he explains.
The case in Malaysia is of a completely different sort, where a Shariah judge in a lower court deemed the Bai Bithaman Ajil (BBA) contract as practiced by Malaysian Islamic banks as non-Shariah compliant, only to be overruled by another Shariah judge in the Appeal Court. This to some critics raises questions of the quality of corporate governance in the Malaysian legal system relating to Fiqh Al-Muamalat and to the effectiveness of the National Shariah Council at Bank Negara Malaysia, the Islamic law body of last resort relating to Islamic finance.
On the other hand, the outcome of the case in the Appeal Court is a vindication of the Malaysian legal process as far as recourse in Islamic finance cases is concerned and a slap in the face for those who may be deliberately trying to undermine this process.
