Islamic finance: from sacred intentions to secular goals

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The title is an article by Roszaini Haniffa Mohammad Hudaib published in “Journal of Islamic Accounting and Business Research”, Vol. 1, No. 2, pp. 85- 91. The following is the article.[1]

Abstract

Purpose

The paper seeks to examine the political and socio-economic circumstances in three different periods of the evolution of Islamic finance and how the fundamental aim of its existence altered over time.

Design/methodology/approach

Based on the existing literature on the evolution of Islamic finance, this paper explores the tensions and conflicts with reference to the dynamic changes in the political and socio-economic landscape to understand how "intentions" changed over time.

Findings

The sacred intentions to help Muslims fulfill their religious economic obligations especially with regards to riba (usury) have been distorted with secular goals as a result of the intervention of political-economic and social events as well as the dynamic interactions with the conventional sector. Maqasid al-shari'ah (purposes of the law) has been unduly used to justify the innovation of financial products to compete and converge with conventional banking.

Originality/value

This editorial paper enhances the understanding of the status quo of Islamic finance in general and paves the way for country-specific research on this indispensable issue. Keywords: Islam, Finance, Politics, Paper type Viewpoint


1. Introduction

Islam is not merely about religious beliefs and rituals but a complete way of life including involvement in economic activities. In fact, commercial activities are highly regarded in Islam, and Muslims, besides fulfilling their religious duties, are encouraged to work hard and participate in economic activities as stated in the Qur'an:

0 ye who believe! When the call is proclaimed to prayer on Friday (the day of assembly), hasten earnestly to the remembrance of Allah and leave off business (and traffic): That is best for you if ye but knew! And when the prayer is finished, then may ye disperse through the land, and seek of the bounty of Allah: and celebrate the praises of Allah often (and without stint): that ye may prosper (Al-Jumu'ah 62: 9-10).

Management and disposal of resources truthfully help believers to fulfill their covenant with God which is to act as His khalifah[1] (vicegerent) including as temporary trustee of all His resources on this earth[2].

In the post-independent states of the Muslim world in the 1960s, developing economic activities that conform to shari'ah was on top of the agenda. Avoiding involvement in riba (interest-based) activities was the priority as the Qur'an emphasized on the implications of engaging in such activities[3]:

0 ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are Indeed believers. If ye do it not, take notice of war from Allah and His Messenger: But if ye turn back, Ye shall have Your capital sums; Deal not unjustly, And ye shall not be dealt with unjustly (Al-Baqarah 2: 278-9).

However, the emergence and evolution of modem Islamic finance and financial institutions are to a large extent influenced by the dynamics of political and socio-economic circumstances within as well as beyond the Muslim countries. Consequently, over time, the implicit and explicit intentions and goals change and affect the nature and structure of Islamic finance and financial institutions that exist today.

Hence, in this editorial paper, we attempt to describe the evolution within the dynamics of the wider socio-political and economic context and the tension and conflicts from both within and outside the majority and minority Muslim countries in each distinctive period based on a review of the literature. We will show how "sacred intentions" become perplexed with "secular goals" in the globalization age. To discuss our analysis of the literature, the paper is organised as follows. Section 2 describes the socio-political and economic environment and the major events and their impact on the development of Islamic finance in each period. Section 3 provides the conclusions.

2. The various phases in the evolution of Islamic finance

For the purpose of analysis, we divide the evolution into three periods which we labeled as the experimental, amorphous and metamorphosis periods.

2.1 The experimental period (1940 to mid-1970s)

The idea of reviving Islamic economic system and Islamic finance came about during the time when colonization[4] of Muslim states was coming to an end and the process of Islamization[5] began. According to Warde (2010), the initial idea of modern Islamic finance may be attributed to the Indian Muslims in the 1940s especially to Abul Ala Mawdudi, the founder of]amaat-i-Islami and author of the book Al-riba, who called for behavioral norms based on the Islamic traditions. Other influential writings include those by Quraishi (Islam and the Theory ofInterest) and Sayyid Qutb (Socialjustice in Islam) (Kahf, 2004). Their discontent with western-style economic and banking system, which was largely based on interest, prompted Muslim economists and political Islamists to focus their attention on developing economic activities that are more compatible to Islamic shari'ah.

Two major experiments on interest-free institutions[6] took place in Egypt and Malaysia in 1963, i.e. the Mit Ghamr savings/investment houses and the Lembaga Tabung Haji (Pilgrims' Savings Fund Board), respectively. Although both institutions did not explicitly make reference to religion, they were in some way successful in trying out a profit-sharing model, i.e. by collecting small savings from the mass, investing them in various projects and sharing the profits earned instead of paying interest. The idea of modem commercial banking and short-term placement was never part of the aim or goal of founders of these two institutions (Kahf, 2004; Warde, 2010).

Both the Egyptian and Malaysian Governments at that time fully support the establishment of these two institutions as they help to induce savings among the poor in society as well as improve the social status of such group. Being neither connected to any Islamic movements or parties nor with any government-appointed Muslim religious scholars at that time (Warde, 2010), there was minimal intervention on the operations of both institutions in their attempt to fulfill the goals of shari'ah, which is Islamic finance to restrain from dealing with interest-based activities and to achieve socio-economic justice. In other words, the "sacred intentions"[7] and goals were on top of the agenda of the newly independent Islamic states following the struggle against western colonialism and secularism[8].

2.2 The amorphous period (Mid-1970s to 1990)

Islamic finance entered a new phase in the mid-1970s as a result of two political• economic events: changes in oil prices in the Arabian Gulf States and pan-Islamism (Warde, 2010). The newly found wealth in the Gulf states through petrol money need a more sophisticated system to channel the idle funds and satisfy the financing needs of regular businesses especially for the purpose of import, export and domestic trade and credit. In terms of politics, the newly independent Muslim countries were divided between two ideologies: Egyptian President Gamal Abdel Nasser's pan-Arabism goal of Arab and Third World solidarity against western colonialism (Mortimer, 1982), and Saudi Arabian King Faisal's pan-Islamism political movement with the goal of unifying the Muslim world under the guise of ummah (solidarity among Islamic communities)[9].

The idea of Islamic banking was appealing to all interested parties. For the developed world, it serves as a promising tool to control the political-economy of Islamic countries under the New International Economic Order (NIEO)[lO]. For the Islamists[ll], it marks the beginning of the Islamization process and the desecularisation of law. For Saudi Arabia, an ally of the West, to set its footprint as the custodian of the ummah by channeling its abundant wealth through the creation of institutions that are deemed to be consistent with shari'ah and also viable for "modern" functioning of the economy, as well as to protect the survival of the regime.

Two large-scale banking initiatives came into existence during this period: the International Islamic Developmental Bank (IDB), championed by the secular head of states of Saudi Arabia, Somalia and Algeria who deemed such institution as vital under the guise of pan-Islamism; and the Dubai Islamic Bank (DIB), initiated by a reputable entrepreneur with social-political connections with the ruling family. This was later followed through private initiatives by personalities such as Sarni Hamoud (Jordan Islamic bank), Ahmed al Yasin (Kuwait Financial House) and Abdul Halim Ismail (Islamic Bank Malaysia Bhd).

Since the driving force behind the establishment of the modern form of Islamic banks during this period were bankers with experience in conventional banking, they have limited knowledge on the modes of financing that can be used in interest-based lending and also how to conduct banking affairs in order to be compatible with Islamic shari'ah. Hence, each of these institutions separately started to establish relationships with shari'ah scholars seeking their fatawa (religious opinions) on specific issues related to certain aspects of their activities and transactions. Since new legislations are needed for establishing the banks based on shari'ah, they face complications not only due to most of the newly independent Muslim countries adopting the secularised law left by their colonizers but also deciding on which madh'hab (Islamic school of thought) to form the basis of the legislation. Nevertheless, these enthusiastic pioneers of Islamic banking strive to fulfill their sacred intentions despite the various obstacles common of any system in its infancy stage.

Besides the bankers, another figure providing the impetus for the growth of Islamic financial institutions during this period was the Saudi Prince Mohammed who seized the opportunity to exert his power and influence through ambitious expansion plans worldwide under the pretext of Islamic solidarity. To help achieve his goals, he created the International Association of Islamic Banks (IAIB) in 1971, which initiated the publication of the Handbook of Islamic Banking written by leading Islamic scholars to provide additional coordination and advice to the sector (El-Nagar, 1980). In 1981, he managed to rally leading Islamic political and religious leaders to establish Dar al-Maal al-Islami (DMI Group) to endorse the setting up of a worldwide network of Islamic financial institutions in Muslim countries (Wohlers-Scharf, 1983) as well as in non-Muslim countries.

In the mid-1980s, Islamic banking entered yet another phase. Unlike the earlier decade, the decline in oil prices and the financial crunch experienced by most governments together with the spread of neo-liberal ideology, have profound effect on Islamic banking. However, the major turning point was the fatwa in 1989 by the Grand Mufti of Al-Azhar, Sheikh Tantawi, who legitimised interest by allowing for new pragmatism in the interpretation of riba as interest (Mallat, 1996). This fatwa provided Islamic bankers more bargaining power to expand globally.

In short, this amorphous period began with genuine sacred intentions by individual Islamic bankers who visualize a banking system that comply with the goals of shari'ah. Their limited knowledge and experience offiqh left them with no option but to consult well known names in fiqh for guidance as well as commitment to abide by the rules of shari'ah not only related to the prohibition of interest but also in terms of shari'ah compatibility of financial transactions. There also exist another group of neo-liberal Muslim entrepreneurs or Muslim bourgeois who were more interested in enhancing their economic and political reputation under the guise of Islamic solidarity. Such individuals managed to charm and captivate the common minds in accepting their reasoning and practices although at times pushing the boundaries of shari'ah. Their motive in interacting with fiqh scholars was to get their endorsement in liberalising the industry. Their attempt bears fruit with the fatwa from Sheikh Tantawi. Hence, this period marks the start when sacred intentions became mixed with secular goals facilitated by the alliance with highly respected shari'ah scholars.

2.3 The metamorphosis period (1991-present)

Several events from the 1990s onwards left considerable impact on Islamic politics and finance. The "New World Order" marked the beginning of the globalisation era and the emergence of new global rules, norms and institutions (Henry and Springborg, 2001). The role of the state, especially in developing countries, were discredited under the "Washington Consensus"[12] as their policies were deemed to be backward, inefficient and a major obstacle to development. Structural reform became the sine qua non in exchange for international aid and terms of borrowing from the international markets were determined based on Moody's and Standard & Poor's ratings (Warde, 2010). The outcomes of privatization, deregulation and technological change include removal of restrictions on capital movements, more interconnected financial markets and loss of independence of financial market regulators over their regulatory territory (O'Brien, 1992). The formal scrapping of the 1933 Glass-Steagall Act [13] in 1999 allowed financial institutions to reinvent themselves and central bankers are granted more legal independence which increases their power considerably (Solomon, 1995). The outcomes of some of those policies have been detrimental as can be seen in the recent global financial crisis.

Similarly, the 1991 Gulf War and the September 11 events aroused the religious sentiments in the Muslim world for rapid Islamization of political and economic life and a rise in pietism (Warde, 2010). Consequently, Islamic finance is allowed to grow by most governments as it is a less costly and less risky option to appease the demands of their societies (Warde, 2010). The new geo-economics of the Islamic world have shifted from Saudi Arabia, Egypt and Pakistan to new territories with the Malaysian[14] and Bahraini Governments playing active roles in "modernizing" Islamic financial institutions through setting of accounting, auditing and corporate governance standards and promoting innovation of products in order to compete in the global market. The divergence in the interpretations of the shari'ah, which results in the so-called Arab and Malaysian models, is fast converging to further consolidate the power for Islamic financial institutions to compete with their conventional counterparts. Ijtihad (juridico-ethical reasoning and argumentation) for legitimating innovation of financial products was made based on the unduly application of maqasid al-shari'ah (purposes of the law) which takes into account the degree of benefits for human interests (maslahah) as opposed to harm (mafsadah). Other adaptive mechanisms in legitimising the modernization of Islamic finance and financial institutions include urflo(cal custom) and darura (necessity). Besides deregulation of the financial sector resulting from the policies of the new world-order, greater alliance between bankers, governments and shari'ah scholars facilitate the innovation of shari'ah-compliant products as opposed to shari'ah-based products (i.e. based on the sacred goal of Islamic finance). In short, over the years, the ardent sacred intentions were slowly suppressed and secular goals promoted and the process intensified in the neo-colonial global economic and debt-peonage era.

3. Conclusion and contribution of papers in this issue

The growth of Islamic finance to become part of mainstream global finance is not driven purely by sacred intentions of fulfilling religious obligations but also a powerful political-economic weapon for control. Over the years, Islamic finance had to undergo transformation in order to become acceptable as part of the global finance community and in the process, the traditional sacred intentions of fulfilling religious obligations and acting as part of the act of worship became perplexed with the secular goals of modernity. Will this trend continue in the foreseeable future or will it enter another phase bringing it back to its root? Only time will tell. But based on the conditions of the present, we can anticipate the future as mentioned in the Qur'an:

Verily never Will Allah change the condition of a people until they change it themselves (with their own souls) (Al Ra'd 13: 11).


Notes

Notes are available on the website of the journal.[2]