Developing a Sustainable Islamic Finance Through … 17, 2012 · Developing a Sustainable Islamic...

Developing a Sustainable Islamic

Finance Through Genuine

Islamization

Mohamed Aslam Haneef

Department of Economics &

Islamic Economics and Policy Research Unit

IIUM

115th IRTI Distance Learning Course17/04/2012

Synopsis

• IBF has made tremendous progress over the last 4 decades but still criticised on ‘authenticity’ issues, blamed partially on ‘Islamization’ efforts that are equated with ‘patchwork’

• In actuality, Islamization of Knowledge (IOK) is an important intellectual response to modernity in the 20th century; Part of ‘islah’ and ‘tajdid’movements throughout Islamic history

• IOK calls for genuine creative synthesis of both Islamic heritage and contemporary knowledge. However, IOK has been misunderstood at the intellectual level; the term ‘Islamization’ has been abused at the practice level

• ‘Genuine Islamization’ is needed, both at the academic and practice levels, if we want to have sustainable IBF.

• Creating Qualified Human Resource/Scholars and IBF practitioners is central in the quest for a sustainable IBF


Outline of Presentation

I. IBF at 40- Positive Impact but With Tensions

II. Central Challenge- Qualified Human Resources

III. Need for Genuine Islamization

IV. Islamic Economics and Islamization

V. Operationalizing Islamization- Academia and

Practice


I. IBF over the last 40 years

• Islamic banking and finance (IBF) has become, rightly or

wrongly, the main practical manifestation of Islamic

economics and of the ‘Islamisation of economics/knowledge’

project that began in the mid 1970s.

• Track record of IBF is impressive in terms of numbers and to a

certain extent, in content.


Despite the positive strides made, there have

also been criticisms of IBF, for example

1. issues of ‘islamicity’ and ‘originality’

(of products and instruments)

2. issues of products and instruments used

(especially between academics and

practitioners)

3. issues of qualifications of those involved in

academia and IBF practice

4. issues on the role and competency of

the sharīʿah advisory process.


Tensions in Contemporary IBF

1. How Islamic is IBF?- theory of IBF vs. practice of IBF; theory of debt financing vs.

practice of debt financing

2. Are we asking the right questions?

- modifying instruments vs. going beyond; trying to fit shari’ah into current banks vs. do we need banks; other types of IFIs?

3. What is Shari’ah and its implications on IBF?

- Al-Attas (1978) and the ‘Corruption of Knowledge’ i.e. important terms narrowed in meaning; overly fiqh-legal orientation of IBF and ‘shari’ah compliance’; role and qualifications of shari’ah board


II. Central Challenge- Qualified Human Resource

• IOK requires interaction between al-turath al-

Islamiyy and modern knowledge

• Meaningful and genuine IOK (i.e genuine creative

synthesis) requires qualified scholars who are

comfortable with both Islamic heritage and modern

knowledge


Problem with Scholars

• Modern economics and finance scholars- the main developers of Islamic economics and finance

• Have they ‘mastered’ their modern disciplines, especially the history and philosophy aspects?

• Do they have sufficient knowledge of Islamic heritage? Are taking a couple fiqh courses sufficient?

• Some may have ‘mastered’ modern finance but knowledge of turath is minimal or even non-existent; some even look down on ‘Islamic’ dimension as they see it to be ‘khutbah material’.

• Some are ‘captive minds’ to modern economics/finance


Traditionally Trained Scholars

• Great expectations from them since ‘Islamicity’ of IBF depends on them

• However, many have not really ‘mastered’ turath. Usually limited to knowledge of fiqh rather that the full spectrum of the turath (in many universities in the Muslim world, Islamic economics is found in the Faculty of Shari’ah (Law), rather than in the Faculty of Economics)

• Exposure to modern disciplines of economics and finance minimal, if any. Hence, ‘subservient’ to the existing modern frameworks (and the dictates of IBF industry); wait for change to happen in modern finance first!

• Some modern scholars who are inclined to Islamic economics are accused of having shallow knowledge of modern disciplines; some are criticised if their views go against mainstream and if they do not display use of math/econometrics, even if their views may be worthy/correct


Cases

1. Role of Stock Market in EconomyTo allow for ownership and long-term participation in the economy; not short-term liquidity and hence, proliferation of speculation; Mid 1980s article in Islamic economics vs. recent article in Economist

2. Waiting for Change to be Initiated by Others – why the reluctance/inability to move?

Sale contract requires ownership of asset that is being sold. InIBF practice, this is ‘questionable’, partly due to legal framework. Why this framework not changed?

Waiting for ‘west’ to change first? Post 2008 crisis may see this. (In other types of systems, ownership is possible)


III. IBF at Cross roads-

Need for Genuine Islamization

• IOK calls for genuine creative synthesis of both Islamic heritage and contemporary knowledge

• Genuine Islamization is needed, both at the academic and practice levels, if we want to have sustainable IBF


Islamization of Knowledge

• Although one could argue that IOK began with revelations

from Allah and in particular, the revelation of al-Qur’an; was

continuously renewed over the centuries by reformers and

scholars, for purposes of our presentation we will focus on

IOK in the later part of the 20th century

• Many scholars in many parts of the world contributed to the

reform movement; to seek indigenous solutions to problems

faced by the ummah

• For the current topic- Late 1960s and 1970s saw IOK

promoted by Al-Attas and Al-Faruqi as main proponents


Why IOK?

• Ummah plagued with numerous ills

• Source of problem is in realm of knowledge and education

• Corruption of knowledge and Dual education system

• Modern disciplines taught in Muslim countries are basically

‘western’ i.e. they developed over the last 300 years in

western Europe/ America

• Based on worldview, portrays values of modern western

civilization and developed using an epistemology that

negates revelation as a source of scientific disciplines


What needs to be done?

• Rebuild knowledge frameworks according to twin

epistemological sources of naqliyyah and aqliyyah

• Integrated education system

• Develop disciplines that will solve problems of

ummah and humanity

• Convert/Transform those theoretical frameworks

into practice/policy


IV. Islamic Economics and

Islamization

• Although writings on IE can be traced to the 1940s, before 1980s, writings on Islamic economics were not specifically talking about ‘Islamization of economics’

• writings of pioneer Islamic economists like Mahmoud Abu Saud, Khurshid Ahmad, M.A. Mannan, M.N. Siddiqi, Anas Zarqa and Monzer Kahf and scholars such as M. Baqir Sadr and Mahmud Taleghani did not focus on Islamization per se but were presenting Islamic economics according to their understanding.


Cont.

• The works of subsequent 2nd and 3rd generation scholars presented Islamic economics in the form of ‘Islamized modern economics’, albeit in more sophisticated/robust works, either attempting to modify neoclassical economics or adding elements from alternative schools

• However, very few, if any, truly focused on ‘methodological and epistemological’ concerns.

• But IOK/IOE is by definition and interactive and methodological concern. Hence genuine IOE was not given proper attention.

• What we found was IBF had ‘hijacked’ the agenda (even name of International Conference on Islamic Economics had to be changed!)


IOE in Practice

• Practical dimension of Islamization in late 1970s but especially

1980s

– Pakistan

– Iran

– Sudan

– Malaysia

Besides issues on Islamic State and implementation of

shari’ah laws, IBF the main manifestation of this

dimension


Why IOE?

• Based on IOK agenda, modern economics is not value-free nor is it ideology-free.

• All modern disciplines in the social sciences taught in universities in the world were born in the last 300 years and have ‘foundations’ that represent western European history and experience (Read al-Attas, 1978, Ch. 1)

• Many aspects of this worldview (and its implications on the way we see the human being and relations to other human beings and nature) may not be in line with the Islamic worldview. Hence many policy tools may also be unacceptable.


Al-Attas (1989)

What is needed?

• Critical examination of the methods of modern science

• Of its concepts, presuppositions (assumptions) and

symbols

• Its empirical and rational aspects and those impinging

upon values and ethics

• Its theory of knowledge

These will have significant impact on the way we build

models, theories and what we teach students- and also in

the textbook contents.


Why IOE - Practice?

• Muslim society demanded indigenous solutions to

economic/development problems

• 1980s saw establishment of ‘Islamic institutions’ in Pakistan,

Iran, Sudan and Malaysia

- Islamic Banks were established to show that it was

possible to offer Islamic alternative to conventional

banks

Performance so far?

Numbers are impressive; Content also positive…… but criticisms

also on the increase.


What is IOE?

• Based on the IOK agenda, IOE by definition, implies critical interaction/dialogue with modern economics. (even critics of IOK/IOE do not disengage completely)

• Critical evaluation of not only modern economics

but its foundations too

• One major weakness in contemporary Islamic economics literature has been this oversight and neglect of the history and philosophy of modern economics


What is IOE- cont.

• IOE is (based on IOK)

– de-westernizing modern economics and then infusing it with Islamic values/principles

– Recasting modern economics by eliminating, amending, reinterpreting and adapting its components according to worldview of Islam and its values/principles

– Both the above imply that focus of IOE is primarily an epistemological and methodological concern that require ‘some sort of integration of knowledge based on Islamic sources with that generated by modernsocial science sources/methods


What is IOE- cont.

• Practical dimension- ‘Patchwork’?

– Islamic banks have been established

– Islamic banks accused of replicating practices of

conventional commercial banks, but making it ‘shari’ah

compliant’- this has been (mis)termed by some as

‘Islamization’

While fulfilling immediate needs, should we carry on this

path or have alternatives?


V. Operationalizing IOE

and the

Human Resource

Challenge


Islamic Heritage Modern Knowledge

Islamization of Knowledge (Economics)


IOE and Curriculum/Textbooks-cont.

• Can we use the modern economics textbooks?

• Should we maintain the textbook outlines of modern

economics?

• Should we attempt to infuse ‘Islamic input’ at the end of the

chapters or infuse Islamic input in every topic/section?

• Or should we separate the Islamic input from the modern

economics in different courses/ programmes?

• Requires comparative study of IE/IBF curriculum


What is IOE in Practice- cont.

• Can we Islamize conventional commercial banks?

• Can we adopt the practices of conventional banks?

• Can we use the evaluation criteria used to evaluate the performance of conventional banks?

• However, in IOK- some degree of assimilation is needed. How and What?

• Simplistic Islamization vs. Genuine Islamization


Operationalization

- The Need for Human Capital

• Before undergraduate/ graduate curriculum can be effective, we must give prior attention to the academics that are going to present this integrated curriculum and in the reference materials/textbooks that are to be produced.

• ‘Creating qualified academics’ must be addressed first or at least simultaneously.

• IOK agenda is meant for academics

• At the same time, there is also a need to create qualified practitioners in the industry- how to think outside the ‘mainstream box’


Challenges in Realizing Genuine

Islamization: The Academia

1. ‘Mastery’ of modern economics

Substantive knowledge

– Is neo-classical/keynesian economics enough?

– What level of theory sufficient to perform IOE?

– What about other schools of thought?

– What about other disciplines like history, sociology,

political science etc?


Cont.

– Cannot have IBF without IE.

– Cannot develop genuine IBF based on conventional economics base.

– Cannot have IE without its foundations (philosophy).

– Cannot have meaningful IBF without giving attention to ‘foundations’. Very few exposed to this.

– How will this affect our textbooks?

– Need to look at our present human resources, our exposure, strengths and plan for the future with our objectives in mind.

– Have neglected very important dimensions in our human resource planning- sacrificed long-term sustainability for short-term expediency?


Challenges in Academia-cont.

2. ‘Mastery of the Heritage’

Substantive knowledge

– What from our heritage is relevant to develop

contemporary Islamic economics?

– Current emphasis is on fiqh and to a lesser extent usul al-

fiqh? Is this sufficient?

– What about kalam, falsafah, history? Ulum al-Qur’an and

ulum al-hadith? Etc.


Cont.

• Methodological knowledge in Islamic heritage

– Very little, If anything is available and is being taught

(besides the usul al-fiqh courses)

– Is knowledge of Usul al-Fiqh sufficient to develop

contemporary Islamic economics?

– we need to develop a new discipline ‘Methodology of

Islamic economics/ usul al-Iqtisad al-Islami’?


Challenges in Academia-cont.

3. Creative synthesis i.e Integration between turath al-Islami and modern knowledge/economics, knowing what to eliminate, reject etc, and how to interpret and approach the problems faced in society today, cannot be considered separate from the process of thinking itself.

The lack of (1) and (2) has not enabled us to do (3),

hence efforts in trying to produce intellectually sound articles, readings materials and textbooks on Islamic economics leaves a lot to be desired.


To build Islamic economics

• We need to have a body of knowledge that we call Islamic economics (nature, scope and definition)

• We must be able to argue (rationally, coherently, logically) the reasons how and why that body is legitimate and the principles that make Islamic economics legitimate

• We must be able to develop theories based on our assumptions and to translate these into practice

• Ultimately, IE/IBF must be ethically superior to conventional economics and finance


Challenges to Genuine IOE-

IE/IBF in practice

• Need for detail knowledge of who run IBF industry

• What knowledge and skill are required? Strengths and shortcomings?

• The need for training and education- content provided must also create thinking out of the conventional box– Is it necessary to have bankers take one or two courses in fiqh or better to

provide the operational side of genuine IBF?

– Important to provide ‘foundations’ to bankers in an appropriate way

• Require to amend laws etc. to allow Islamic banks to function; even more important the political will to deliver

• Requires correct ‘social capital’


Conclusion

1. IBF has made tremendous strides.

2. For sustainable IBF, need genuine Islamization- ask right

questions and understand what we want to do

3. Genuine Islamization based on IOK agenda i.e. knowledge

and education is primary focus, ultimately focusing on

creating qualified human resource

4. To operationalize genuine Islamization, academics must

acquire pre-requisites, especially in the foundations of both

the heritage and modern economics. In substantive

knowledge, exposure to wider fields of knowledge needed

(both in heritage and modern sciences)


Conclusion-cont.

5. In-house exposure to these issues for short term solution, but proper HR planning is the way out for the long term

6. For the industry, there must be proper HR planning to send the practitioners for further training and education to expose them to both the heritage and modern finance.

7. Genuine Islamization also requires political will and legal/institutional reforms

8. Academic institutions have to find ways to cooperate and collaborate to utilize scarce human and financial resources in IE/IBF education.


Wa alLahu a’lam

Thank you

[email protected]


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