Islamic Finance and Mobile Banking: Could, Would, Should

Islamic Finance and Mobile Banking: Could, Would, Should

Islamic Banking has developed rapidly over the last 30 years. Islamic Banks have proliferated in number and in geographic reach, with services now offered regularly on four continents. A number of innovative, successful financial products have also been developed, enabling Shariah compliant bonds, mortgages and savings accounts. The values of assets held by Islamic Banks are expected to top one trillion by 2010. Perhaps most important, millions of clients now have access to services which serve their financial needs without placing them in a religious dilemma.

While this success should be lauded, it should not lull Islamic Banks into complacency. Rather, the banks should remain vigilant for new opportunities that enable equally vigorous growth over the next 30 years. One key opportunity for Islamic Banks has emerged in the dynamic growth of mobile financial services. Over the last decade mobile financial services have been transformed in offerings and scope, from niche products providing account information to a plethora of applications which enable access to bank accounts, move funds, and allow for the transfer of remittances; all from the security and convenience of mobile phone. The increasing ubiquity of mobile phones, especially in developing nations, has allowed consumers to benefit from the accessibility of the system, enabling some to open and regularly access bank accounts for the first time in their lives. Banks have benefited from the low costs of running the systems and the massive increase in their potential client/depositor pool.

While mobile financial services have been adopted widely, they have yet to be utilized heavily in many traditionally Islamic nations. This lack of use is all the more curious, given that in many of those nations high rates of mobile phone ownership exist side by side with generally minimal access to formal banking. This presents an opportunity for Islamic banks, potentially allowing them to both expand their consumer base and assist the needy in their communities. Three questions should dictate whether Islamic banks adopt mobile financial services: could Islamic Banks utilize mobile financial services, would they benefit those companies, and should, in light of their underlying philosophy, Islamic Banks adopt such services?

Could Islamic banks adopt mobile financial services? Both Islamic banking and mobile financial services share complementary, fee based business models. At an operations level, Islamic banks would have to partner with mobile network operators to provide the service, though this would not be a serious hindrance. Most, if not all, mobile phones sold today are capable of handling the technology for mobile financial services. To avoid engagement in situations involving riba, Islamic banks should investigate the finances and operations of the partnered telecom with care. However, especially when mobile network operators and Islamic banks have had longstanding relationships, this should not be a problem.

The question then is would the adoption of mobile financial service technology benefit Islamic Banks? The cost of providing mobile financial services is radically lower than that of operating traditional ‘brick and mortar’ branch sites. In Karachi, it is estimated a traditional ‘brick and mortar’ branch office costs around $28,000 to run per year. In contrast, the provision of mobile financial services in the same city costs the operator a mere $300 per year. While the adoption of mobile financial services may be a large investment initially, the sharp difference in operating costs enables a banks to quickly recoup their initial investment and soon generate significant, Shariah complaint, profit.

The adoption of mobile financial services will also enable Islamic banks to radically expand their depositor pool. The percentage of banked individuals in major Islamic nations, such as Egypt and Pakistan, is estimated to stand at 10-15%. In contrast, mobile phone ownership is many Islamic nations is extremely high; above 50% in Pakistan, and a staggering 120% in the UAE. The adoption of the full spectrum of mobile financial services by Islamic Banks will enable many of the currently unbaked to enjoy accessible, safe, and Shariah-compliant financial services for the first time. Increased deposits, a good in their own right, will also increase the pool of funds with which the banks can provide Shariah compliant finance to businesses, individuals, and even governments.

Finally, at a philosophic level, should Islamic Banks provide mobile financial services? One of the original focuses of the Islamic banking movement was the promotion of development throughout the Islamic world. While Islamic Banking has succeeded in enabling large project finance, it has had less success in promoting small scale, pro-poor growth. The general lack of access to basic financial services in Islamic majority nations has inhibited economic growth, especially amongst the poorest and most needy members of society. Mobile financial services will allow for Islamic banks to reach and assist those in need in their nations. Those same banks could consider the provision of mobile services to the poor at reduced, or no cost, in order to better help the population.

As Islamic banks adopt and innovate within the mobile financial services model, it is likely Islam specific applications will be developed. Future zakat may be provided to the needy electronically, via mobile technology, enabling continuous, secure provision of assistance to the needy of society. Future calls for assistance on specific projects, or for disaster or war stricken areas could go out electronically; giving would flow back across the same channels.

To their benefit, some Islamic Banks have begun to provide mobile financial services, primarily for those who already hold accounts. However, the banks should expand such services, tailoring the products offered to benefit both banked and previously unbanked members of society. Mobile financial service technology offers Islamic banks an unprecedented option to grow as business and to fulfill their social mandate. It is time they embraced the technology, and brought Islamic banking to a new level.

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Islamic finance needs to diversify

Islamic finance needs to diversify

Estimates of the size of the industry seem to peak around $1,000bn although more conservative estimates indicate that the overall size of the industry is nearer $750bn.

Equally, the rate of growth of the industry is put at somewhere between 10% and 20% each year thereby making it one of the fastest growing areas of finance.

Even in mid-2009 industry experts are still bandying these same figures around when it is clear that the industry as a whole suffered the same kind of shrinkage as the rest of the financial world.

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Doctors of law needed to take Islamic finance forward

Doctors of law needed to take Islamic finance forward

With the global financial crisis exposing the limitations of traditional banking systems, there is now a big push in the banking sector worldwide to incorporate Islamic banking, the total assets of which are expected to reach $2 trillion (Dh7.34trn) in 2015, according to experts.

However, Islamic banking is not without its challenges, the most prominent of which is to find adequately qualified Islamic scholars for the Shariah governance boards of Islamic banks and financial institutions.

Two experts that Emirates Business spoke to said a PhD in Shariah law should be a mandatory requirement for any member of a governing board of an Islamic bank. They also proposed a system of issuing operating licences for the scholars after testing them to ensure they met all the required criteria.

Dr Mabid Al Jarhi, President of the International Association for Islamic Economics, Financial Expert and Head of Training at Emirates Islamic Bank, said Islamic banking faces a number of challenges that need to be closely considered to help increase reliability and authenticity. One of the most serious challenges is represented in the need for set standards and criteria for the governance of Shariah boards at Islamic banks, said Dr Al Jarhi.

The market demands the development of new innovative Shariah-compliant financial products. However, currently there seems to be a lack of adequate qualified practitioners to do so. "The market requires professionals who not only have excellent financial knowledge, but also a good understanding of Islamic law," Dr Al Jarhi said.

"Many members of governing Shariah boards are not qualified enough to study and generate Shariah-compliant products and this reduces the reliability of Islamic banking and finance," he said.

Central banks should intervene to issue a set of eligibility criteria for joining governance boards to help produce genuine Shariah-compliant products that have positive impacts, Dr Al Jarhi said. At the same time, there should be control over products that are listed as Shariah compliant but are not – such as "Tawarroq" – and products based on debt and risk trading. There is an urgent need for the members of Shariah governing boards to be holders of PhDs from recognised universities, such as Al Azhar of Egypt, University of Islamic Shariah in Syria and Umm Al Qura University in Saudi Arabia.

"Unfortunately, some Islamic banks appoint Muslim scholars who are not even holders of high degrees in Islamic Shariah," Dr Al Jarhi said. "The market is unable at this point to meet the demand for innovative financial products to meet all types of investment requirements." Economic advisors of these boards, too, should be holders of PhDs from recognised universities and the Shariah board should comprise an odd number to ensure a majority in voting.

Licencing Shariah personnel
Dr Abozaid also called for issuing licences to Shariah scholars engaged in Islamic banking, similar to the ones given to engineers or doctors before they are allowed to start their practice. An independent body should be set up to licence scholars for the membership of Shariah boards, he said. It should be made mandatory for scholars to clear a test in the Islamic law of transactions and the basics of Islamic finance in order to obtain the licence. A possible licencing body could the Bahrain-based General Council for Islamic Banks & Financial Institutions, he suggested.

"This is the core necessity for correcting the current anomalies in the Islamic banking and finance sphere," said Dr Abozaid.

In addition, scholars would also be required to have sufficient knowledge of the English language, as all contracts were in English, he said, and added that a non-profitable institution for training scholars should be set up to help increase their expertise.

It is also unprecedented in Islam that a scholar is paid by the party that seeks his opinion on Shariah laws, Dr Abozaid said.

"Currently, the scholar who is assigned to give an Islamic Shariah opinion, or ‘fatwa’, is paid by the bank – the party that seeks this legal opinion. This opens the door for violating and manipulating Islamic principles to favour the bank," he said.

In addition, it falls under the duties and responsibilities of the Shariah boards to arbitrate any dispute between the Islamic bank and its clients. It is unprecedented in the Shariah that an arbitrator or a judge takes his fees from one of the parties involved in a dispute. Such a practice is prohibited under Shariah, as it may open the door to malpractices that favour the party paying the fees.

To ensure that Islamic principles and teachings are implemented in banking transactions with honesty and integrity, scholars should not be paid by a party that needs a "fatwa" but rather by a third party, which could be the central banks, Dr Abozaid said. Central banks, in turn, may collect an amount from the allowances payable by Islamic banks to the Shariah boards members.

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OIC Fiqh Academy Ruled Organised Tawarruq Impermissible

OIC Fiqh Academy Ruled Organised Tawarruq Impermissible

Text of resolution:

Resolution 179 (19/5)

in relation to

Tawarruq: its meaning and types (classical applications and organized tawarruq)

The International Council of Fiqh Academy, which is an initiative of the Organization of Islamic Conferences (OIC), in its 19^th session which was held in Sharjah, United Arab Emirates, from 1 – 5 of Jamadil Ula 1430 AH, corresponding to 26 – 30 April 2009, decided on the following:

Having reviewed the research papers that were presented to the Council regarding the topic of tawarruq, its meaning and its type (classical applications and organized tawarruq), a resolution were passed. Furthermore, after listening to the discussions that revolved about the applications of tawarruq, the resolutions were presented at the International Council of Fiqh Academy, under auspices of the Muslim World League in Makkah.

The following were the resolutions:

First:  Types of tawarruq and its juristic rulings:

• Technically, according to the Fiqh jurists, tawarruq can be defined as: a person (mustawriq) who buys a merchandise at a deferred price, in order to sell it in cash at a lower price. Usually, he sells the merchandise to a third party, with the aim to obtain cash. This is the classical tawarruq, which is permissible, provided that it complies with the Shari’ah requirements on sale (bay’).
• The contemporary definition on organized tawarruq is:  when a person (mustawriq) buys a merchandise from a local or international market on deferred price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the  mustawriq and the financier executes the transactions, usually at a lower spot price.
• Reverse tawarruq: it is similar to organized tawarruq, but in this case, the (mustawriq) is the financial institution, and it acts as a client.

Second: It is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occurs between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This  is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered as containing the element of riba.

The recommendation is as follows:

To ensure that islamic banking and financial institutions adopt investment and financing techniques that are Shari’ah-compliant in all its activities, they should avoid all dubious and prohibited financial techniques, in order to conform to Shari’ah rules and so that the techniques will ensure the actualization of the Shari’ah objectives (maqasid Shari’ah). Furthermore, it will also ensure that the progress and actualization of the socioeconomic objectives of the Muslim world. If the current situation is not rectified, the Muslim world would continue to face serious challenges and economic imbalances that will never end.

To encourage the financial institutions to provide Qard Hasan (benevolent loans) to needy customers in order to discourage them from relying on Tawarruq instead of Qard Hasan. Again these institutions are encouraged to set up special Qard Hasan Fund.

Sukuk market in the Gulf needs to be regulated

Sukuk market in the Gulf needs to be regulated

The Gulf can foster growth in Islamic bonds (sukuk) market by adopting regulations and going in for measures such as credit rating, say analysts.

Even as the GCC holds a lion’s share in the global sukuk market, estimated at $130 billion (Dh477bn), it lags behind when it comes to regulations. And a model like the one followed by Malaysia can help it tap the massive potential that the segment holds, they said.

"The GCC market holds a significant share of global market when it comes to volume. But if we talk of a regulated market, the comfort levels of having prudent policy guidelines from regulators are still not there, whether it is related to type of issuances or ratings," said Moinuddin Malim, Head of Corporate and Investment Banking, Badr-Al-Islami. Mashreq.

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