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ISLAMIC FINANCE & CAPITAL MARKETS

Maqasid: Invigorating Islamic Banking and Finance

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The Shariah theory of Maqasid (objectives) is a great determinant of the hierarchy of needs. In this hierarchy, we have the Daruriyyat (essential), Hajiyyat (intermediate) and Tahsiniyyat (luxurious) levels of needs. Most humans can sustain themselves with the first two while they aspire for the last category

By Jasmin Omercic

Foundational problems, practical challenges and consequences of mainstream economics, banking and finance are more apparent in contemporary times. The centuries long pursuit for profit and utility maximization, marginal cost and benefit analysis, Pareto efficiency and steady path convergence measurements among macro-economists, micro-economists, wealth and asset managers and the corporate world have generally pushed humankind to the edges of existence. There is hardly a day without a natural disaster whether it be a wildfire, land erosions, earthquakes, floods, typhoons and so on.

Life on Earth is unbalanced, yet the banking and finance world, in addition to other corporate players, perpetuate practices that caused it all. Efforts to curb them are evident in the trendy discourse on sustainable development goals (SDGs), or environmental, social and governance (ESG), and Shariah-compliant screenings. Apparently, there are alternative initiatives to mitigate disruptive globalization and climate shifts in the Earth’s ecosystem.

Islamic Economics (IE) is an alternative too, and perhaps the only one offering solutions rooted in sound and comprehensive foundations derived from sound Islamic sources. The essential methodology to pragmatize this alternative in real time is that of epistemological integration. The epistemological integration methodologies foster fused learning and practice derived from textual and real-time sources. These approaches have the potential to shape global perceptions and transform our thoughts.

Changing perceptions changes the world. Hence, the solution to many problems we currently face in the world lies in the way we perceive things. This perception is reflected in the way we consume and produce resources. We know that consumption is a central tenet of an economic system. It represents demand levels and impacts degrees of supply or production.

Management of consumption and production becomes possible if we change the way we approach the consumption of goods we really need, need less, or don’t actually need at all. The Shariah theory of Maqasid (objectives) is a great determinant of the hierarchy of needs. In this hierarchy, we have the Daruriyyat (essential), Hajiyyat (intermediate) and Tahsiniyyat (luxurious) levels of needs. Most humans can sustain themselves with the first two while they aspire for the last category. The economic world shaped us in such a way that we pursue needs that we don’t need while neglecting needs that are essential. Spending one’s wealth on any need is a legal right, but the long-term outcome of such reasoning has brought humanity to the edge of collapse. Supply for such consumer demand is no longer sustainable.

On the other hand, SDGs and ESGs are sustainably attainable through a greater epistemological understanding of economic activity, and referencing the Maqasid helps us manage our needs and wants more effectively. As much as it will manage our consumption, even supply levels will align. Questions that we may ask ourselves to delve deeper into epistemological economic thinking and the Maqasid methodological realm may range from “Do I really need this item? If so, what for?” to “Will I really use it or dispose of it shortly after purchasing it?” and “Do I affect anyone’s life by disposing of items so quickly and recklessly?” among others.

These are basic questions that each consumer can ask themselves to review whether their consumption habits are rational and sound. This will also rectify the rational or sound level of supply. Hence, the consumer will raise their awareness about their actions, i.e. disposal of plastics, electronics and clothes, which affect the degree of meeting certain SDGs or ESGs. The supply side or the producers follow course, meet consumer demand and envisage ways to enhance their experience. This approach to economic reasoning is epistemological in the sense that it takes into account how things were supplied to the consumer and how the consumer utilizes and disposes of them.

The awareness about the source of a product and its use shapes the perception of consumers more comprehensively and roots their actions on sound foundations. All their actions are executed more responsibly. Thus, Maqasid can be viewed as highly normative and rooted in sources of knowledge, i.e. contributing to environmental protection, the use of resources, sharing of products/things via responsible disposal, and living within one’s means and actual needs without a reduction of one’s quality of life. The consumer becomes an active participant in an economy by questioning their purpose and objective when consuming or supplying a product. Linkage with the reality (Haqiqah) of our world becomes evident when we have a proper purpose or objective, which defines truly living. Life becomes more truthful.

Apparently, the Maqasid-based epistemological approach in an economy not only has the potential to shape individuals but also industries or finance and banking services in such a systematic and genuine way to reveal the true teachings, vision and mission of what the industry of Islamic banking and finance (IBF) aspire to attain. Hence, it is time that stakeholders and shareholders, all of whom are consumers, begin to question their consumption habits, to use and dispose of things owned in a responsible manner to contribute to the global aims of SDGs and ESGs. This makes the Maqasid practical as well. Moreover, IBF institutions have the chance to universalize their way of economic activity by appealing to consumers around the world who are still not aware that IBF is not solely for Muslims.

The world has the chance to understand IBF from its epistemological basis and comprehensive Maqasid gateway where innovation and creativity drive change. Contemplation along these lines enables the IBF to reclaim its fame as the engine of an Islamic economy or an alternative economic system where contemporary drives for greater data analytics and artificial intelligence are integral, and the fuel for greater empirical testing and refinement vis-a-vis sound philosophical foundations derived from the sources of knowledge in Islam. Multidisciplinarity is evident from the appraised approach to economic understanding and the reshaping of the IBF industry based on real-time data.

Humanity generates the data that reveals their consumption and production habits while Maqasid identifies and defines the higher purpose of consumption and production with an epistemological integration base. The interplay between the two enables convergence along a steady path of growth toward greater levels of Shariah compliance. Greater levels of Shariah compliance mean greater levels of ESGs and SDGs that is commensurate to a pragmatic solution to save our planet.

Reversing human activity on the planet on a sound epistemological basis guided by Maqasid enables the improvement of lifestyles for all, and the prevention of further disasters, which actually maintains the welfare of many people under such threat in contemporary times. Resources, meant to relieve many that would suffer from preventable disasters, could be used to improve their living conditions. These represent new services of the industry and new revenues. Hence, it is crucial for stakeholders and shareholders to adopt the demonstrated economic reasoning in practice or reckon with the consequences of failing to do so.

Practitioners, inclusive of academics and industry players, should adopt a comprehensive analytical framework where philosophical foundations play a crucial role in defining the purpose or objectives (Maqasid) of actions. Training, seminar and workshops in the industry and academia about such foundations are crucial too and could be the means through which experts of texts and contexts exchange their views. This would lead practitioners to revise current modalities of action and systematically refurbish limited, imitated, narrow and contradictory plans. Social needs should be the core of practitioners’ orientation, and social service provision is the consumer base for each and all of us.

Worsening circumstances in society will lead to the perpetuation of contemporary experiences about which we hear daily. Regulators could oversee the plethora of activities that such economic reasoning stimulates and ensure that a data-driven economy aligns with higher purposes and objectives (Maqasid) rooted on sound philosophical foundations. The impact of such economic activity would surely be evident and appreciated globally. While this remains the inception of a new economic era, new insights are truly essential to ensure the re-envisioned approach towards economic development, and the shaping of banking and finance along with other corporate world actors remains genuine.

Jasmin Omercic is Senior research fellow at U.S.-based Maqasid Institute, research affiliate of International Institute of Islamic Thought, International Islamic University Malaysia

 


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ISLAMIC FINANCE & CAPITAL MARKETS

How Shariah-Compliant is Islamic Banking?

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Islamic banking has garnered significant attention globally, especially among Muslim communities seeking financial solutions that align with their faith. Rooted in Shariah law, Islamic banking aims to offer an alternative to conventional banking by adhering to principles derived from the Quran and Hadith. But how Shariah-compliant is Islamic banking in practice? This comprehensive blog post explores the core principles of Islamic banking, the mechanisms ensuring Shariah compliance, and the challenges and criticisms faced by the industry.

How Shariah-Compliant is Islamic Banking?

Core Principles of Islamic Banking

Islamic banking operates on several fundamental principles that distinguish it from conventional banking:

  1. Prohibition of Interest (Riba): The most well-known principle is the prohibition of Riba or interest. Instead of earning interest on loans, Islamic banks earn profit through equity participation, trade, leasing, or investment in Shariah-compliant projects.
  2. Risk Sharing: Islamic banking promotes risk-sharing between the bank and its clients. This is achieved through profit and loss sharing (PLS) contracts, such as Mudarabah (profit-sharing) and Musharakah (joint venture).
  3. Ethical Investments: Investments must adhere to ethical and socially responsible principles. Islamic banks cannot invest in businesses involved in activities considered haram (forbidden) such as alcohol, gambling, and pork.
  4. Asset-Backed Financing: All financial transactions must be backed by tangible assets or services, ensuring that speculative practices (Gharar) are minimized.
  5. Transparency and Fairness: Contracts and financial transactions must be transparent, fair, and agreed upon by all parties involved.

Mechanisms Ensuring Shariah Compliance

To ensure adherence to these principles, Islamic banks implement several mechanisms:

  1. Shariah Boards: Each Islamic bank typically has a Shariah board consisting of Islamic scholars and experts in Islamic finance. This board reviews and approves all financial products and services to ensure they comply with Shariah principles.
  2. Shariah Audits: Regular Shariah audits are conducted to assess and verify that the bank’s operations and transactions comply with Shariah guidelines. These audits ensure that any deviations are promptly addressed.
  3. Product Structuring: Financial products are carefully structured to align with Shariah principles. Common products include:
    • Murabaha: A cost-plus-profit financing structure used for purchasing goods.
    • Ijara: Leasing agreements where the bank buys and leases out assets to clients.
    • Sukuk: Islamic bonds representing ownership in a tangible asset or a pool of assets.
    • Takaful: Islamic insurance based on mutual assistance and shared responsibility.
  4. Continuous Education and Training: Islamic banks invest in educating their staff and clients about Shariah principles and the importance of compliance. This helps maintain a high standard of Shariah adherence across all operations.

Challenges and Criticisms

Despite these mechanisms, Islamic banking faces several challenges and criticisms regarding its Shariah compliance:

  1. Standardization: There is no universal standard for Shariah compliance, leading to variations in interpretations and practices across different regions and institutions. This lack of standardization can create confusion and inconsistencies.
  2. Replicating Conventional Products: Some critics argue that certain Islamic banking products are merely replications of conventional banking products with minor modifications to appear Shariah-compliant. This raises questions about the authenticity of these products.
  3. Limited Shariah Expertise: There is a shortage of qualified Shariah scholars with expertise in both Islamic jurisprudence and modern finance. This scarcity can hinder the development and approval of innovative Sharia-compliant products.
  4. Operational Costs: Ensuring Shariah compliance can be costly due to the need for Shariah boards, audits, and continuous education. These costs can make Islamic banking products more expensive than their conventional counterparts.
  5. Market Perception: Some potential customers remain skeptical about the genuineness of Islamic banking, questioning whether it truly adheres to Shariah principles or if it’s merely a marketing strategy.

To address these challenges and enhance Shariah compliance, several measures can be taken:

  1. Developing Universal Standards: Efforts should be made to develop and adopt universal standards for Shariah compliance. Organizations like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) are working towards this goal.
  2. Enhancing Shariah Governance: Strengthening Shariah governance frameworks and increasing the number of qualified Shariah scholars can improve compliance and innovation in Islamic banking.
  3. Transparency and Education: Increasing transparency in product structuring and operations, along with educating the public about the principles and benefits of Islamic banking, can build trust and acceptance.
  4. Innovation and Differentiation: Developing truly innovative and differentiated Islamic banking products that go beyond merely replicating conventional products can enhance authenticity and attractiveness.

Islamic banking, with its foundation in Shariah principles, offers a viable alternative to conventional banking for Muslims and ethically-minded individuals worldwide. While it faces challenges and criticisms regarding its Shariah compliance, ongoing efforts to standardize practices, enhance governance, and promote innovation are crucial for its growth and success. By addressing these issues, Islamic banking can better fulfill its promise of providing ethical, equitable, and Shariah-compliant financial solutions.


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Afghanistan Central Bank Joins Global Islamic Economics Forum in Malaysia

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The Afghanistan Central Bank, also known as Da Afghanistan Bank, has recently sent a delegation to Malaysia to participate in the Global Forum of Islamic Economics and Finance. This forum aims to foster discussions on the development of Islamic banking, support for small and medium-sized enterprises (SMEs), and the expansion of financial markets. Haseebullah Noori, the spokesperson for the Central Bank, emphasized the significance of this event, highlighting that representatives from central banks and financial institutions from various countries are expected to attend.

Noori stated, “A delegation from the Afghanistan Central Bank traveled to Malaysia to attend the Global Forum of Islamic Economics and Finance. Representatives from central banks, Islamic banks, and financial institutions worldwide will also participate in this forum.” This gathering presents an excellent opportunity for Afghanistan to strengthen its financial sector and align with global banking standards.

In addition to attending the forum, the Afghan delegation is scheduled to meet with several Malaysian officials to discuss establishing and enhancing bilateral relations. These meetings aim to address various economic challenges and explore potential collaborations that could benefit both countries.

Economic experts in Afghanistan believe that standardizing the banking system and developing Islamic banking are crucial for the country’s economic growth. Shaker Yaqoubi, an economist, remarked, “The more our banking system in Afghanistan meets global standards, the better we can align with the global economy. Regulated trade and investment will take shape, and given that Afghanistan is an Islamic country, Islamic banking is a crucial need.”

The Chamber of Commerce and Investment in Afghanistan also stressed the importance of addressing the challenges related to money transfers through banks during these meetings. Mohammad Younis Momand, First Deputy of the Chamber of Commerce and Investment, expressed his hopes, stating, “We hope the global community and the Central Bank’s proposals will address Afghanistan’s banking issues so that the problems we face with money transfers can be resolved.”

Abdul Nasir Rashtia, another economist, added, “The more we normalize our relations with the world and lift sanctions and restrictions, the better we can expand our international trade and provide more facilities for traders.” The lifting of sanctions and restrictions is seen as a critical step towards enhancing Afghanistan’s economic stability and growth.

Previously, the acting governor of the Afghanistan Central Bank met with the Deputy Secretary-General of the United Nations to discuss the negative impact of international sanctions on Afghanistan’s banking sector. The acting governor emphasized that these sanctions have hindered the country’s financial stability and urged for their removal to foster economic growth.

The participation of the Afghanistan Central Bank delegation in the Global Forum of Islamic Economics and Finance is a strategic move towards integrating Afghanistan’s banking system with international standards and promoting the growth of Islamic banking. This initiative aligns with the broader goal of stabilizing Afghanistan’s economy and fostering sustainable development through enhanced financial cooperation and economic integration.

By addressing key issues such as money transfer challenges and advocating for the lifting of sanctions, Afghanistan aims to create a more conducive environment for trade and investment. The focus on Islamic banking, given Afghanistan’s cultural and religious context, further underscores the importance of this financial model in the country’s economic landscape.

As Afghanistan continues to navigate its economic challenges, the efforts of the Central Bank to engage with international counterparts and seek collaborative solutions are vital. The outcomes of the forum and subsequent meetings with Malaysian officials are anticipated to pave the way for significant advancements in Afghanistan’s financial sector, contributing to the overall economic resilience and prosperity of the country.


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ICB Islamic Bank Faces Challenges in Repaying Depositors

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By Ameer Yaqub

The ICB Islamic Bank, which emerged from the collapse of Oriental Bank in 2008, is currently grappling with a severe liquidity crisis that has left it unable to repay depositors. This situation underscores the vulnerabilities within the bank and the broader challenges facing the Islamic banking sector in Bangladesh.

The crisis has had a direct impact on depositors. Abdul Hamid Mahbub, with a deposit of Tk 1,00,000 at the bank’s Moulvibazar branch, recently faced the stark reality of the bank’s financial troubles. “On Tuesday, I went to the bank with a cheque for Tk 55,000, but the branch manager said they had no money at the time,” Mahbub told The Daily Star. Similar stories are being reported across other branches, including in Dhaka’s Paltan and Karwan Bazar areas.

In a bid to mitigate the crisis, ICB Islamic Bank sought Tk 50 crore in collateral-free liquidity support from Bangladesh Bank (BB) on January 31. However, this plea was denied two weeks later due to the bank’s existing liabilities, which total Tk 425 crore. BB’s Off-site Supervision Department has since requested the Banking Regulation and Policy Department to take corrective measures, as the bank’s operations are severely hampered by the liquidity crunch.

The liquidity crisis is compounded by a range of systemic issues. ICB Islamic Bank is dealing with frozen deposits, a significant capital shortfall, and high levels of defaulted loans. As of the end of 2023, the bank faced a capital shortfall of Tk 1,823 crore, with 87% of its total loans amounting to Tk 790.4 crore classified as bad.

The crisis has also affected the bank’s ability to pay its employees. Currently, ICB Islamic Bank employs 350 people across 33 branches, and delays in salary payments have become routine. According to Muhammad Shafiq Bin Abdullah, the bank’s managing director, the influx of depositors seeking withdrawals has exacerbated the situation. “This year, we repaid our depositors Tk 50 crore,” Shafiq noted, emphasizing the unprecedented nature of the current crisis.

Legal complexities surrounding the bank’s ownership have further muddied the waters. Issues stemming from its previous owner, Orion Group, have left ambiguities regarding current ownership, and a related case is still pending in court. This uncertainty has hindered efforts to stabilize the bank and secure necessary funds.

ICB Islamic Bank’s roots trace back to 1987 when it operated as Al-Baraka Bank. It was rebranded as Oriental Bank in 2004 and later dissolved by the central bank in 2006 due to significant irregularities. The restructured bank renamed ICB Islamic Bank in 2008, saw Swiss ICB Group and Malaysian investors take majority ownership. Despite these changes, the bank has struggled to achieve financial stability.

Efforts are ongoing to address the liquidity crisis. Md Mezbaul Haque, executive director and spokesperson of Bangladesh Bank, highlighted that a large portion of ICB Islamic Bank’s funds are tied up with leasing companies, contributing to the liquidity shortfall. “We asked the Malaysian shareholder of the bank to inject fresh funds,” he stated, expressing hope that the crisis could be resolved soon.

ICB Islamic Bank’s struggle to navigate this crisis is a crucial test for the resilience of the Islamic banking sector in Bangladesh. While the bank’s management remains hopeful, the path to recovery will require strategic interventions, regulatory support, and renewed confidence from depositors and stakeholders.


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