“Islamic finance is a serious alternative that academia is still ignoring,” said Dr. Muhammad Fahim Khan, a distinguished economist speaking at a seminar at IIIT on May 28. Dr. Mohammad Fahim delivered a lecture entitled “Islamic Finance: Future Directions and Agenda for Research”.
Dr. Khan is currently a visiting faculty member at the Markfield Institute of Higher Education, Leicester, United Kingdom. He has 39 years of experience in economic policy planning, teaching and training, institutional capacity building and policy oriented research. He worked for the Ministry of Planning, the Government of Pakistan, for 13 years where he played a leading role in developing and using planning and forecasting models for the country for the first time. He also played an instrumental role in establishing the School of Economics at the International Islamic University in Pakistan. Subsequent to that, he headed the Research Division of the Islamic Development Bank and built and enhanced its Islamic Research and Training Institute. He also contributed to the established of the Islamic economics program at the Islamic Foundation in the UK which has now developed into the Markfield Institute of Higher Education.
In his lecture, Dr. Khan focused on the inherent problems of Islamic Finance, its current challenges and future directions. He started off with outlining the political circumstances of the 1970s that gave rise to Islamic financial institutions such as the events in Afghanistan, the retreat of Russia, the Islamic revolution in Iran, the Islamization policy of the military government of Pakistan (under Zia Ul Haq), and Sudan’s commitment to Sharia. Islamic resurgence – he maintained – was seen at the horizon and economic institutions – and not social institutions – were to take the lead. It was not a good starting point, he concluded.
He then moved to address the issue of interest and how the Muslim states – driven by a need to borrow and constrained by the dictates of an international financial system that is interest-based, accepted the norms and practices of the interest-based international system. Consequently, Islamic financial institutions grew as private enterprises and out of the control of governments.
As an alternative orientation, Dr. Fahim said Islamic financial institutions should have focused on the elimination of starvation and the reduction of poverty in countries such as Bangladesh, Pakistan and Indonesia instead of their current focus on capital growth and financial investment. It is easier to do, he maintained, since large sectors of the population will benefit and governments will get credit for it domestically and internationally. Once we have proven that an Islamic policy can indeed eliminate starvation and reduce poverty, the people will listen and rally around an Islamic program.
Dr. Fahim then turned to the impressive growth rates of Islamic Finance globally – even at the peak of the current international financial crisis -and described it as a success story in terms of growth, management, networth and monetary profits. However, there are rational limits to these impressive growth rates beginning with the sheer size of Islamic Finance itself. In addition, he questioned the contribution of this expanding sector to the socio-economic development of Muslims. If we measure Islamic Finance against the higher objectives of Islamic law or Maqasid, it will not score high marks. If we measure it against Muslim expectations from Islamic Finance, it will not achieve high points, either. He concluded that the current growth rates of Islamic finance are not sustainable, at least not in the direction Islamic finance is moving.
Dr. Fahim focused on some of the problematic areas that complicated the practices of Islamic finance such as the diversity of Fiqh opinions on concepts such as Murabaha, Mudarabah and Musharakah. The controversies surrounding their interpretation and the resulting contradictory practices of Islamic banks led to too much confusion among lay Muslims and – consequently – eroding trust in Islamic banking practices. In addition, the lack of transparency on the part of Islamic banks , their preference of current accounts to deposits and the use of financial tricks - such as tawarruq – that apparently conforms to Sharia but in essence are devised to facilitate an otherwise unacceptable – or haram – practice. He concluded that whereas tawrruq may be acceptable in individual cases, it cannot be adopted as a system.
In conclusion, Dr. Fahim called for the development of institutions that will minimize adverse selection and moral hazards in financial transactions before the technical applications of instruments such as Murabaha and Mudarabah. The institutions themselves should adopt and promote transparency of financial transactions. Minimizing information cost through collaterals and guarantees is not good policy in Islamic finance, he maintained. What is needed is to educate both the policymakers and lay Muslims with the higher objectives of Islamic law as it relates to Islamic finance and how these objectives are delineated in polices and institutional practices as well as instruments for the conduct of financial transactions. He called for a critical evaluation of experiments such as microfinance and the development of mechanisms that distribute wealth from the rich to the poor and not from the poor to the poor ( such as the current practice of micro-finance ). Finally, he emphasized that a good starting point would be to educate the policymakers and to bring reforms at the macro level of policymaking before engaging in developing private institutions.