Page 1 - Saiful Azhar

Islamic Finance Practices: Danger Of

Convergence

JANUARY 30, 2019|WAHED EDITORS
Prof. Saiful Azhar Rosly, INCEIF

The drive for Shariah compliance in the Islamic banking business may have brought it towards
the intended objective which is to free its operation from riba and other prohibitions. But thriving
on profits alone and lack of social touch in the business has produced criticism about the value
driving it which to some extent gave way for the concern of justice and hence, maqasid shariah
(Objectives of the Shariah). The maqasid shariah amplifies the need for moral and legal
imperatives in Islamic banking policies to strike a balance between profits and social as well as
being resilient to shocks in financial markets. By doing so, it makes a difference being an Islamic
bank to be emulated by competitors and adversaries alike.

Convergence in Practice

But reality bites as signs of converging into mainstream banking practices are painfully visible
that brought questions of substance over form. When tawaruq and Murabaha instruments began
behaving like interest-bearing loans, convergence seemed imminent. Converging means
possible exposures to the danger of fragility as well as the injustices that riba creates in a lender-
borrower relationship. One is fragile if he avoids disorder and disruption for fear of the mess they
might make of his life: he thinks he is keeping safe, but really he is making himself vulnerable to
the shock that will tear everything apart. Fragility in Islamic banking will mean failure to stay
resilient to shocks arising from its debt dependent system that it should be free from in the first
place.

According to IMF (2017), hybrid financial products emerging in Islamic banking have
replicated aspects of conventional finance, raising financial stability concerns. It supports earlier
studies indicating that both the Islamic and conventional banking systems are vulnerable to
macroeconomic and financial shocks. This is despite the popular belief that the Islamic financial
system can weather financial shocks relatively well due to its interest‐free nature. It somewhat
contradicts suggestions that the interest‐free banking system is able to insulate the monetary
system from interest rate fluctuations and therefore, minimize the possibility of financial
instability.

Fragility in banking can potentially destroy the wealth of individuals and families. The 2007 US
Subprime crises destroyed $35.3 trillion of wealth globally. The US government alone took $20
trillion of public funds over a period of two and a half years to lift the total world market
capitalization of listed companies by $16.4 trillion. While the protection of wealth (al-mal)
constitutes one element of the maqasid shariah, through the institutions of zakat and waqf,
property rights and the prohibition of riba, all these will crumble to pieces when Islamic banks
remain fragile and vulnerable to financial shocks. All of the hard-earned income from halal
investments will go down the drain swept by falling asset prices and business closures adversely
impacting society at large.