Many Islamic banking practitioners and experts have recently highlighted the resilience of Islamic banking in the face of the current global financial crisis. There have also been calls to make Islamic banking products and services more mainstream by developing uniformity and standards, and to develop more products and services to suit the variety of needs in the banking and financial markets. While there are these calls for the development of Shariah-compliant products, there are also arguments for differentiating between Shariah-compliant and Sharia-based products.
Most analysts agree the industry is growing with some estimates of total Shariah-compliant investment holdings exceeding $1.5 trillion. This growth is in tandem with the industry moving toward standardization and global recognition, with the Islamic Financial Services Board and Accounting and Auditing Organization of Islamic Financial Institutions playing an important role. Notwithstanding the growth and the industry’s improving regulatory regime, it is important to maintain the correct perspective of the development of Islamic banking and finance products.
This perspective does imply differentiation between Shariah-compliant and Shariah-based products to an extent. While it cannot be claimed that Shariah-compliant products and services are in contravention of the Shariah or more susceptible to negative market dynamics for lack of empirical evidence, the recent calls for developing Islamic banking and finance products does need to take into account such differentiation. There are arguments that the resilience, or rather stability, of the industry stems from the nature of the Islamic economic system, which is generally market oriented within the precepts and constraints of the Shariah (or “maqasid” in a wider sense), hence implying that it is imperative that the development of products and services follows the dictates and constraints of the Shariah. These arguments state that amending the structures of conventional products to comply with Shariah precepts may not be the best alternative in developing Islamic financial products and do not serve the maqasid. Such products may also not be fully foolproof to financial or industry crises.
The recent resolution that the International Council of Fiqh Academy (which is an initiative of the Organization of the Islamic Conference (OIC)) passed in its April meeting held in Sharjah said that Tawarruq, as practiced by many commercial, Islamic and non-Islamic, banks was not permissible. This has been argued for many years by certain Islamic bankers and jurists for reasons of ethics and also other reasons not altogether different from the arguments of Fiqh Academy scholars and Islamic bankers who are in favor of developing Shariah-based products. Although tawarruq has its basis in the Shariah, it was — as practiced for the most part until recently — refined by conventional bankers to fit in with profitability and the transaction control objectives of conventional banks, i.e. to fit in as closely as possible to products offered by conventional banks and conventional bank objectives related to guaranteeing profits. The Shariah scholars termed it “organized Tawarruq.” The non-permissibility of such organized tawarruq has had some Islamic bankers claiming that this proves Shariah-compliant products do not fit with the objectives of the Shariah or maqasid. This does have an element of truth with specific regard to tawarruq or organized Tawarruq as mentioned by the Fiqh Academy scholars.
Long before these arguments regarding Tawarruq were being discussed by Islamic banking practitioners, the basic form of tawarruq was practiced by many individuals without the involvement of banks. Individuals used to, and still do, buy vehicles on installments and then sell them onward for an attractive cash price (below that of the vehicle dealers or if lucky higher) thereby obtaining cash for other purposes, while continuing to pay installments to the dealers or financiers. As long as the purpose of obtaining cash is permissible or halal, this has been allowed by the Shariah scholars. What banks had started to do was basically ensure that the commodity in a Tawarruq contract (vehicles in the above example) sells for a price that is less than its cash price, ensuring that banks were the clients’ agents in not only buying the commodity but also selling it, and organizing the whole transaction sometimes as a “Murabaha” contract and other times as a “Tawarruq almubarak” contract encouraging borrowing by clients and developing the debt culture which is not part of the maqasid of Shariah!
(Saeed Jawed Ahmad is an Islamic banker and investment analyst based in Jeddah. The views or opinions expressed in the article are solely his own and do not necessarily reflect the views of any institution.)
