Islamic Finance is a universally accepted mode of financing today. Irrespective of the faith convictions, Islamic finance has been adopted in the world today. However, whenever the prospects and challenges of Islamic finance is spoken, often a common challenge that has been highlighted in various literatures by various experts are the lack of will and support of the policymakers and the lack of enthusiasm on the part of the policymakers to promote it. This is an areas which is often not discussed with related to Islamic banking and Islamic finance and the objective of this research is to highlight the importance of this neglected area.
Islamic leadership is not only about having a ruler or a head of state who is a Muslim with good character. In today’s world Islamic leadership should include introducing, implementing and sustaining Islamic economic system and eliminating riba by all means as riba or usury is a concept which is forbidden in direct text of the Quran which no one could make it lawful. However, in the modern day, this important aspect of Islamic leadership is often forgotten and as a result implementing Islamic economic system has become a theory.
In countries having Islamic leadership, often the whole population or large part of the population are Muslims and Islamic law is applied to Muslims. However, the application of Islamic law are in some of the jurisdictions only limited to personal matters and commercial dealings are often forgotten. The misconception that cross-border transactions cannot be made if dealt with Islamic finance mechanisms make it the majority of the people to think that Islamic finance or economic system is a merely a theoretical concept that cannot be or impossible to be implemented practically and that interest charge on lending of money is not riba. The legislature when making law have this misconception in mind; the executive has this in mind while implementing law, and the judiciary upholds the written agreement to charge simple and compound interest in lending while having this misconception in mind.
When Islamic leadership or implementing shariah to countries is discussed often the only concerns made by the policymakers are about implementation of hudud law. The discussions on ways in which Islamic economic system could be implements is not discussed to the level it should be discussed and no pact or treaties are signed between the Islamic countries to facilitate the adoption of it. The reason for this maybe because it is a accepted belief among the policymakers of the countries that Islamic economic system is too theoretical and too remote to even discuss about it and it is something that cannot be achieved.
The probing question is in an Islamic leadership should not the paramount consideration be given to eradicate riba? How can in an Islamic leadership, riba can be allowed to operate in economic system? How cannot be standards to determine halal and haram in economic dealings where riba is not even criminalize as an offence? Why is riba not criminalize as an offence? Why opportunity to over exploit the society is given by legalizing what Allah SW has prohibited in Quran?
This article will explore the role of policymakers in introducing, implementing and sustaining Islamic banking and finance and the areas that should be focused in doing so. It is anticipated that this paper will lay down the role of policymakers in implementation f Islamic economic system via Islamic banking and finance means.
THE ROLE OF POLICYMAKERS IN INTRODUCING ISLAMIC BANKING & FINANCE
According to Oxford Dictionary, policymaker is “a person responsible for or involved in formulating policies, especially in politics”. As such, in this paper, policymakers have been referred to as all those undertaking the responsibilities in legislature, executive and judiciary.
Policy makers can play a vital role in not only introducing Islamic banking and finance, but the can play a vital role in developing it in a sustainable manner. Following discussed are the areas in which the policy makers can assist to introduce Islamic banking and finance:
- Legal Framework
Adopting a legal framework for the introduction of Islamic banking and finance is important. Without proper legislations in place to adopt it, the implementation of the mechanisms will become difficult and in some jurisdictions impossible as the only mode of financing allowed by banking and financial institutions are based on conventional modes. Creating a new legislation or amending the existing legislation applicable to commercial transaction is a decision that should be taken at the policy level. However, the important aspect of this is that definitely, the stronger and transparent the legal framework is, the confidence of citizens about the system will boost. Parallel to this decision, there will be need to harmonize substantive laws and adjective laws applicable to the main legislation as Islamic banking and finance transactions are asset backed/based transactions where commodities such as land will involve. The tax framework ensuring the double taxation in Islamic banking and finance transaction is avoided must be made certain. If not, the products of Islamic banking and finance may become expensive.
- Regulation & Supervision Framework for Islamic Financial Institutions
A sophisticated framework for the regulation and supervision of Islamic financial institutions will also be required. One strong reason for this is to protect the customers and to ensure that international best practices in relation to banking and finance is followed. Also this will ensure that no activities of money laundering or terrorism financing happens within the financial institutions.
- Shariah Governance Framework
A centralized shariah governance framework adoption will be required to implement Islamic banking and finance in any jurisdiction as this will ensure that the apex law applied to Islamic financial institutions are Islamic law. The highest level of shariah governance shall be followed and policy makers should ensure appointment of shariah committees, shariah officers to ensure shariah compliance is made within the financial institution and mechanisms like shariah audit and shariah review is established within the jurisdiction.
- Building of Supporting Infrastructure not limited to Human Capital only
Often this important aspect is forgotten. For any industry to flourish a proper succession plan with a strategic plan is required to be made where the focus is to develop not only the main industry in an isolated manner; but the supporting infrastructure required will be also be developed parallel to it. Developing the human capital required and proper infrastructures to ensure smooth running of Islamic finance like licensing Shariah Advisers, shariah review and audit firms, Islamic credit rating agencies should be made. Without proper will and support from the policymakers, this will be a challenge.
- Dispute Resolution Mechanism
Litigation is not only the form of dispute resolution mechanism that should be allowed. Alternative dispute resolution mechanisms such as mediation and arbitration shall also be allowed to resolve Islamic banking and finance disputes.
SHOULD THE LEGAL & REGULATORY FRAMEWORK BE MADE FIRST?
The question whether the legal and regulatory framework for Islamic banking and finance shall be made first or whether the institutions or products offering Islamic financial services be established/offered before or parallel to the enactment of the required legal and regulatory infrastructure is a probing question that is often asked by the policy makers to initiate Islamic banking and finance. There is no readymade answer for this as in different jurisdictions, different approaches are taken in terms of pioneering and establishment of Islamic banking and finance and the success of it is evident from jurisdiction who have taken these two approaches.
For instance, Malaysia is the cranium of Islamic banking and finance today. They have developed the most sophisticated legal and regulatory infrastructure for Islamic banking and finance and almost all the jurisdictions aspiring to develop Islamic banking and finance look Malaysia as their role model. In Malaysia, the legal and regulatory infrastructure was established first before the institutions were established and products were offered. Gradually with the developments the infrastructure was upgraded and as such the legal and regulatory framework of the country never became obsolete. It was always at par with the industry developments. The latest law on Islamic finance, Islamic Financial Services Act 2013 is the most comprehensive legislation on Islamic banking and takaful at this moment in the world.
However, if you look at a jurisdiction like Maldives, a hundred percent Muslim country situated in Indian ocean with a population of less than four hundred thousand, there is no proper or comprehensive framework for Islamic banking and finance before the starting or setting up of the institutions or offering of product. For example, when the Maldives Islamic Bank, the first full-fledged Islamic Bank wanted to operate, the law to facilitate the establishment and operation of it was a regulation. However, takaful is unregulated and there is no legal or regulatory framework for takaful and as a result until now, the first takaful company started operating in the country still have a conventional insurance license. Likewise, sukuk framework was developed by the regulator of capital markets, when the first sukuk proposal or prospectus draft was received. Today there are twelve institutions offering Islamic financial services and the industry is growing to the extent that the government has now decided and announced to strategize Maldives as the hub for Islamic finance in South Asia and has incorporated Maldives Centre for Islamic Finance which is a hundred percent government owned entity that will promote Islamic finance.
Definitely, it is important to have a legal and regulatory framework for Islamic banking and finance to be regulated, but it is not required to first make the infrastructure and then open for institutions to operate or offer products as flexibility in this sense will give room to have more innovative instruments and based on the market needs and requirements, the law and regulatory framework can be tailor made to the respective jurisdictions. In the author’s view this can be a much better approach as this approach will enable stakeholders to give their view and a bombastic law or regulatory framework will not dictate the terms that might even inhibit the institutions to operate and offer shariah compliant products. The policy makers of the respective jurisdiction will know which approach will be best for them based on the local context. Both approaches are equally beneficial provided that the approach taken is suitable to the respective jurisdiction.
Islamic banking and finance is a mechanism that can be developed in the whole world with the support from the policymakers. Policymakers are the driving force behind this and if the policy makers in all jurisdictions are made aware about how they could assist in introducing Islamic banking and finance and if they play their role well, definitely Islamic banking and finance could be introduced to the jurisdictions and it can be sustained. The cranium of implementing Islamic banking and finance in practice are the policymakers.
The author is Associate Professor at International Centre for Education in Islamic Finance (INCEIF), Global University of Islamic Finance in Kuala Lumpur, Malaysia.