Sheikh Muhammad Taqi Usmani, a prominent Shariah scholar, said in 2007 that the majority of so-called sukuk instruments violated Islamic principles. Over the past two to three years this has made a lot of people’s jobs much more difficult. It has compromised the growth of the market for these nominally Islamic bonds.
Bankers and lawyers have had to pay closer attention to standards of Shariah compliance in the structuring of Islamic bonds. The result has been that some add-ons that were previously common have not been applied to new structures. The less-contentious ijarah – the leaseback style of sukuk – has come to the fore.
But the debate is not going to go away, nor should it. It is about how closely Islamic finance sticks to Islamic principles. As such, it is central to the whole project of building what Muslims see as a fairer and better financial system.
Now some of the world’s most prominent companies are beginning to make use of Islamic financing, and the industry is growing around the world. The Islamic derivatives market, for example, is ballooning. In the Middle East, the first Islamic financial restructurings are being successfully completed in a relatively standard fashion, potentially erasing the doubts some investors harboured about lending via these instruments.
However, Islamic banks and investment companies have not performed much better than their conventional peers during the past two years. And this has been a time when, from one perspective, the utter wastage and instability at the heart of conventional banking has been highlighted. Why did Islamic banks not do better?
Financial products whose returns depend on the real economic performance of assets and issuers would be more in line with the Islamic principle of risk sharing in finance. A risk-sharing approach should therefore do more to direct capital towards projects that better benefit the real economy through the more sustainable business plans of entrepreneurs. Investment that is more speculative should consequently be less favoured, and when adverse circumstances do occur, companies should receive more help.
Yet it is no secret that much Islamic finance as it exists today still replicates and restructures conventional methods of fixed-income pricing in ways that only appear to be Shariah compliant.
The range of products available now is so half-heartedly Islamic partly because doing away with the current method of pricing to interest-based interbank rates would be so difficult. Marking to market and hedging genuinely risk-sharing investment would need new approaches. Financiers would find it extremely hard to adapt. For such a market to come into existence, a huge amount of effort would be needed.
But it is possible. Moreover, there is a groundswell of demand for more genuine Islamic banking, not least among consumers.
It is not all the bankers’ responsibility. The task might also involve the Islamic scholars. Could one answer be for scholars to get together and, after discussion with bankers, give an amnesty of an appropriate period – say, three years – after which much more stringent standards for their approval would be implemented? That would give the industry time to prepare, at least.
In whatever way it is done, if the demand for Islamic finance is not to fall into a pit of future apathy, the whole market must change – and change profoundly.
