LOOKING AT ISLAMIC BANKING IN ITS PROPER CONTEXT
This article appeared in Forum page of The Edge Malaysia, Issue 902, Mar 19-25, 2012
My Say: Looking at Islamic Banking in its Proper Context
Written by Zahid Aziz March 19 2012
The Muslims Consumers Association of Malaysia (PPIM) in a press statement dated 12 February 2012 criticized
banks “who use the name ‘Islam’ in efforts to promote and sell their respective products when in reality
they still oppress and use methods contrary to Islamic law.”
The Association of Islamic Banks in Malaysia (AIBIM) countered “All Islamic banking institutions
in Malaysia operates in accordance with Syariah values and are well regulated in compliance with high standards…”
I believe that we are today actually guilty of failing to see Islamic banking in its proper context.
To put it simply, the true environment of Islamic banking as expected by the Shariah is that it should be operating in a riba
free environment, in a riba free economy. In other words it should be a sole single system operating in an Islamic economy,
putting aside the wider environment of Islamic law for the moment.
What we find today is an Islamic banking system enveloped and impacted by the riba banking system operating
within a riba driven economy. Practitioners of Islamic banking understand these daily pressures imposed on them by riba banking,
but often, they are not able to articulate the issues to the general public. Incidentally, this is the voice I tried to give
them in a thesis entitled “The negative impact of riba banking on the performance of Islamic banking in a dual system
like Malaysia” that I recently submitted to a local university.
The following are a few examples dealt with in the thesis:
Islamic banks use the concept of Mudarabah to collect deposits whereas conventional banks use interest
rates. If one understands the concept of Mudarabah one knows that the Islamic bank cannot quote a deposit rate upfront; the
return on the deposits will only be known on maturity. In a low-liquidity situation, conventional banks merely hike interest
rates, but Islamic banks are helpless to compete.
Inability to sell ethical financing products
Ethical financing products for house financing under parallel Istisna’ (a contract of exchange
with deferred delivery), for example, requires the Islamic banks to assume higher risks than conventional housing loans. If
the developer abandons a housing project under parallel Istisna the Islamic bank assumes responsibility and will not burden
the customer to continue paying for a house they will never own. Under conventional house financing (and incidentally the
BBA house financing currently used by Islamic banks) the burden is placed squarely on the customers, who will be forced to
continue to pay for a house they will never own.
However, to offer the ethical product, the Islamic banks need to price it higher than a conventional
loan as it involves assumption of higher risk. The conventional housing loan is at discounted pricing because the burden of
abandoned housing is placed on the customers not the banks. Give the public an option - where riba is not made haram to Muslims
- society will choose the cheaper but defective conventional product because everyone believes it is always other people and
not them, who will suffer the abandoned housing problem.
They actually take a gamble, willing to sacrifice x% of society who will suffer due to abandoned housing.
Under the ethical Parallel Istisna’ financing, 0% of society will suffer because Islamic banks will assume responsibility
for abandoned housing. Thus, we see how the dual system, and not making riba haram for Muslims, impacts Islamic banking negatively.
There are many other examples but the above should be enough to illustrate the problem. However I would
like to clearly state that the current practise of Islamic banking is in no way absolved of the criticism aimed at it.
Today it is very clear Islamic banking is being practised without reference to Maqasid Shariah or Objectives
of Shariah. One wonders whether the Islamic bankers who are in a position to decide are adequately educated of Maqasid Shariah.
In an Islamic economy economic units must work towards achieving the objectives of Shariah.
Maqasid Shariah in respect of the economy requires among other things, for wealth to be widely distributed
and not confined to the wealthy few. A wide distribution of wealth cannot be achieved in an overly debt financing biased Islamic
banking system the world finds itself in today. In debt financing, preferences are always given to Islamic banking customers
who can offer collateral and who have high levels of equity to meet debt to equity ratios set by Islamic banks. These debt
financing conditions usually marginalise the poor and favour the rich. Thus, we see Islamic banks guilty of making the rich
richer and the poor poorer.
Celebration of the poor is a hallmark of the struggle of our Prophet s.a.w. We cannot ignore the poor
in economic activities. Islam does not believe in the invisible hand as believed by Western Economists to right economic wrongs.
Islam demands proactive actions to uplift the plight of the poor and in the context of Islamic banking this translates into
emphasis on Islamic microfinance.
How many Islamic banks today see Islamic microfinance as a responsibility they are willing to shoulder?
If Islamic banking management are not motivated to do microfinance we need to ask why, and enquire whether there is a bigger
systemic issue at hand.
As for the consumers, they need to understand Islamic banks are not charitable organisations but businesses.
Cheap financing may translate to poor returns on deposits; will all consumers deposit their money in Islamic banks in such
To conclude, we cannot afford to ignore the environment Islamic banks operate in. The way forward, I
believe is to understand the environment, know where we are headed and, last but not least, get the right people to lead Islamic
Muhammad Zahid Abdul Aziz has 20 years of experience in Islamic
banking and finance and is a director of Muamalah Financial Consulting, an Islamic capital market consultancy.
The Truth about Money
Written by Zahid Aziz
This article appeared in Forum page of The Edge Malaysia, Issue 889, Dec 19-25, 2011
In 1982 the average fresh graduate’s salary was RM1, 200;
the cheapest car, if bought brand new, was RM14, 000; and a house cost RM60,000. Today, a fresh graduate earns just RM1000
more at RM2200 but the cheapest car is RM40,000 and a new house is RM300,000.
This has little to do with increasing steel and building materials
prices but more to do with the way nations create money. This has not been explained to the populace.
Happy to get his job the fresh graduate is informed he will be
paid RM2200 per month. For the moment we will not even think about the fresh school leaver who earns an average wage of RM1000
per month. The graduate employee believes that one year from now he would be able to buy the same number of goods with his
salary as he can today. Nobody informs him the truth about money and he believes that money is just paper currency and coins,
and that somehow, governments will always ensure the nation’s total amount of money remains unchanged.
In the early days of banking, banks gives gold receipts to people
who deposit gold in their vaults. The gold depositors discovered they can use the gold receipts as money as they were readily
accepted for the purchase of goods. These gold receipts became money. The banks then realised they could do the same with
land and other assets pledged to them.
If they could get people to deposit cash with them by promise
of a receipt of interest, they could lend these deposits to other people at higher interest margins. To the delight of the banks, the borrowers did not want to receive the loans in cash; they were happy to be given
a chequebook with the bank with an accounting entry that said the borrower was entitled to that money.
Initially, the banks ensured the loans do not exceed the amount
of cash deposited. Then they realised through experience they needed to only hold a certain amount of cash in their vaults;
not all their depositors would come to the bank to withdraw cash at the same time. As that was the case, they had the bright
idea that they could lend many times more cash than they actually had. All borrowers wanted were cheque books not actual cash,
and if everybody used the cheque books to make payments, then there only need to be a good clearing system, not much cash
was required to be available.
This was the birth of fractional reserve banking where a RM1000
deposited in a bank and lent out to a borrower less the statutory reserve can result in a chain of depositing and lending,
which could create a figure of , say, RM25,000 out of thin air. If the initial deposit is RM1billion then the money created
is RM25billion. Hence the money stock of nations continues to increase and that is why the fresh graduates today have to pay
so much more for his car and his house.
Governments also add to a nation’s money stock without the
graduate employees realising it. When governments spend more than the revenue they earn, they have to sell government bonds
to cover the deficit. In other words they give their IOUs, take cash from bondholders and use it to pay the deficit.
When the bond matures at the end of the year and there is another
budget deficit, the governments issue new bonds to pay the existing bondholders as well as another series of bonds to cover
the new deficit. If the volume of bonds is too high, they print paper currency to settle some of it. This is called the monetisation
of budget deficit, which adds further to the nation’s money stock.
With the double increase in the nation’s money stock from
fractional reserve banking and the monetisation of budget deficits, the fresh graduate soon finds his RM2,200 per month buying
fewer and fewer things. Shouldn’t we tell him about what is happening to his purchasing power?
There is also much reduction in the quality of products as suppliers
have to lower quality standards to keep their products within the price range that wage earners can afford. For example keropok
or fish crackers no longer taste as good as more flour replaces fish in its ingredients. In rural Indian Muslim restaurants
the delicious bawal curry has been replaced by the cheaper sardine curry. Fresh graduates no longer buy new cars but second
hand ones and they no longer buy houses but small apartments. Some continue to stay with their parents after getting married
creating the new phenomenon called “sandwiched families” with three generations living under one roof.
We really ought to be thinking about a new money system where
there are no such wild increases in the nation’s money stock. A return to gold is the obvious solution. If disbelievers
say there is not enough gold to fund world trade, let’s put our thinking hats on; it’s really not beyond our intellect
to solve the issue.
What appears lacking is the initiative to overcome the inertia
to solve the problem. Maybe, when our grandchildren starts work in 2020, they
would earn ,RM5000 per month but a new car could cost around RM100,000 and a new house RM1 million. Do we apologise to them
that we were too busy to solve the problem during our time?
be thinking about indexing wages and salaries? The people followed their government’s advice not to over unionise lest
it affected the nation’s economy but shouldn’t the people be helped in return now?
Yes we are proud of national corporates recording billions of
ringgit in retained earnings every year, but we paid for it with an untold amount of sweat and tears through the erosion of
our spending power.
Muhammad Zahid has 20 years of experience in Islamic banking and finance. He is a director
of Muamalah Financial Consulting, an Islamic capital market consultancy.
The A and B of currencies ( The Edge, Malaysia July 18-23, 2011)
The A and B of currencies
Written by Zahid Aziz
This article appeared in Forum page of The Edge Malaysia, Issue 867, July 18-24, 2011
We have just completed a job and about to be paid for it. We are given an option to be paid A or B. A’s
value is stable - there seems to be a basic value which is unchanged.
B has no basic value. If you hold B its value can be taken away by various external forces. It can be
changed by the governments; it can be changed by governments creating more and more of it; it can be changed by people losing
confidence in it; it can also be changed by outsiders holding large quantities of it and cornering the market for it.
However the worse thing is the theft of its value by governments creating more and more of it. We do
not even realise the loss of value until we use B to buy things; what cost three B before now cost six B for example.
But we have no choice, we have to use and accept B otherwise we will be imprisoned. But then again we
should be grateful it is just a prison term. In the days of Kublai Khan, we could be executed for refusing to accept B!
So the people just accepted it without any protest. The governments also told the people to ‘just
do it’. In Latin this translates to ‘fiat’. Hence B is based on fiat- forced on you by the governments.
In the early days one used A to buy and sell things. However dictatorial governments force its citizens
to hand over A and use only B. This trend was started by Kublai Khan and he was not a pleasant personality.
Where A was concerned no one could steal its value but with B such opportunities thrived! Isn’t
this opportunity to defraud called gharar in Islamic terms? And we have not even address the qisas punishment for theft.
Don’t forget that in an Islamic finance system we are trying to remove riba from a system of B,
a system of deceptive IOUs to be exact, which is really what B is all about. One should remove riba when A is used for buying
and selling. But when deceptive IOUs are used instead of A and we are trying to remove riba from that system, it’s farcical
to say the least. However the persistent optimist in us hopes that this is just Phase One. Phase two will be the removal of
B to be replaced by A.
Before we address the cries of the non-believer of the deemed impossibility of removing B let us dwell
on the deceptive nature of B so that things will be clearer.
Now every month we receive a certain number of B, say 3000 of it, which we use to buy food and things
for our family. Our assumption is that the governments have put in place a system where the total number of B in the country
is unchanged. An unchanged total number of B means we can retain the value of our B, right?
We understand if there is, for example, a fixed total of one million B in the country available for buying
and selling a fixed number of products of say one million C. Then the number of C our 3000 B can buy a month is unchanged!
However if the number of B can be increased while C remains unchanged we can see the price of C going up in terms of B, right?
That means if our 3000 B used to buy 3000 C it can now only buy 2500 C. So who is stealing the value of our B?
Governments are one of the culprits; they can do that by creating more B and you cannot do anything about
it. But did you know that governments allow other groups of people to wantonly create more B? These people accept deposit
of your B and lend B to other citizens.
When these citizens deposit B again, it is lent to other people. This system allows B to be created out
of thin air. Based on the original amount of money that remains unchanged, both the depositors and the borrowers believed
they all owned the same bundle of money. And they all have cheque books to prove they can spend it! And remember more B in
the system the less C you are able to buy.
Crazy huh? But you don’t question because you were brought up not to question. Now you recall how
when you first started work in the 1980s your salary was 1,800 B. If you wanted to buy a new first car it only costs 14,000
B and if you wanted to buy an ordinary terraced house it will only cost you 60,000 B. Today the young man starts work at a
salary of 2000 B but a new car is 40,000 B and a new house is 300,000 B! But you still don’t question the system.
It is bad enough if that is all the effect of B, but an international system of B allows superpowers
to manipulate the system at the expense of little countries. And you wonder why nobody believes, that if little countries
drop B and instead use A in their international trade this ability to manipulate will end
A is gold and B is paper currency and the deposit-lending system described above is fractional reserve
banking. Gold is Sunnah money; Dinar, Dirham and Fulus. Dinar is gold, Dirham is silver and Fulus is small change. Sure, there
are technical difficulties down this road but is it really beyond our intellect to solve them? Or just like what riba has
done to us down the centuries we are hopelessly zombied to its inequities.
Zahid Aziz has 20 years of experience in Islamic banking and finance and is a director of Muamalah Financial
Consulting, an Islamic capital market consultancy.
LOOKING AT THE FINANCIAL CRISIS FROM AN ISLAMIC PERSPECTIVE
Written by Zahid Aziz Monday 14 March 2011
This article appeared in Forum page of The Edge Malaysia, Issue 849, Mar 14-20, 2011
LOOKING AT THE FINANCIAL CRISIS FROM AN ISLAMIC PERSPECTIVE
In 2008 for the first time
since 1930s the world economic system was on the brink of collapse. The international financial system was a like a train
screeching to a halt. Fortunately it did not happen this time, the train hobbled on, a wrong system saved by, in all likelihood,
an equally erroneous solution that probably sowed the seeds for an even bigger disaster to come.
Nobody knows the ultimate impact of the crisis of October ‘08 but the causes are now generally
understood, within the context of conventional understanding without the benefit of an Islamic worldview. This article will
try to provide the Islamic perspective on some of the problem.
US mortgage lenders go bankrupt between early 2007
to October 2008 BNP Paribas freezes funds; Northern Rock UK nationalised,
Bear Stearns collapsed, Fannie Mae and Freddie Mac rescued; Lehman Brothers bankrupt; AIG rescued by Federal Reserve; credit
market squeezed, Icelandic and many European banks nationalised or recapitalised.
The trigger was a decline in
US housing prices which unraveled highly leveraged and unsound lending which has been building up over time specifically in
the subprime residential mortgage market. It came in the form of securitisation of housing mortgages.
This is the scenario. Banks gives out mortgages which are then sold to a special purpose company (SPC)
which issue securities to investors. The Arrangers are investment banks who get paid a fee and their employees gets paid huge
bonuses as more structuring are generated. The housing loan banks were happy because they can continue to extend mortgages
without keeping them on their books. The Arrangers are happy for as long as mortgages continue to be generated much demanded
mortgage backed securities (MBS) can be repackaged and sold to investors. The Investors are also happy, pensioners in Sweden
or Singapore are holding clever US originated securities. The US government are also happy and assisted the saga further by
deliberately keeping interest rates low in pursuit of a home owners’ democracy.
Soon the good credits dry up. Prudence would have stopped the securitisation machine however a system
without values pays no credence to prudence if players involved find they can get way with it, and got away with it they did,
and then some.
They started to get involved in predator lending. They seeked sub prime housing loan borrowers aptly
described as NINJA borrowers, i.e. individuals with No Income No Job and Assets. Their objective is to keep the production
line churning so that the model can continue to securitise the mortgages and MBS sold to the investors.
A clever idea at the time had the poor credits bundled with the better ones to create more saleable
securities. To ensure continued sale they got another party involved to deliver credit enhancers. Thus enter AIG, US’s
major insurance corporate with the now infamous credit default swaps or CDS.
What this paper actually does is to take the credit risk away from the Credit Debt Obligations (CDO)
which is the official name of the securitised mortgages. AIG gets a fat fee for the CDS, assuming credit risks they have no
way of measuring. The investors are lulled into believing they have a truly secured paper, secured by the largest insurance
company of America.
However bubbles have to burst. By end 2006 US house prices reached unsustainable levels. As the
interest rates was raised to address inflationary concerns weaker borrowers began defaulting on housing loans. New purchasers
stopped entering the market triggering downward spiral in house prices.
This process rapidly transmitted itself through the structures of securitisation. Lost in their own
structuring in the initial stage they did not know who owned the securities that were becoming impaired; the housing loans
being packaged and repackaged into CDOs repeatedly. Since the market did not know who owned the loans they stopped dealing
in such securities. Soon their attention turn to the companies active in such instruments and are likely to hold large amounts
of such impaired securities. Interbank lending and borrowing stopped and the credit crisis internationalised. The dominoes
fell as outlined above.
Western literature does not one touch the underlying world view; it either does not know the significance
of world views or does not know what it does not know. When world views are not addressed then existing systems and values
or lack thereof are assumed correct so solutions are designed for a fundamentally defective system ; patches on balding tyres
when what’s required is a full and complete replacement.
From the Islamic perspective there is nothing wrong
in securitisation. What is wrong is in the mechanics, the subject matter, and derivative innovations on the concept of securitisation
unfettered by Shariah parameters.
Securitisation according to Shariah has certain basic rules to comply with which limits its growth
within the confines of the allowables. Such rules include rules of ownership where if sales are made then ownership must be
transferred whole; Shariah does not allow sales where it is not clear whether and to whom ownership has been transferred.
Apart from the issues of gharar or uncertainty such incomplete transfers approaches the definition of a batil transaction.
Secondly, is the asset being transferred Shariah compliant? Do the parties trading
the securities that represent ownership of the underlying assets understand the assets? If not we are clearly in the realms
of gharar. It is worse if the assets are ‘toxic’.
The subprime aspect aside, there are already issues in the securitisation structure. Mortgages are
receivables or dayn. Under all mazhabs (Islamic schools of law) other than Shafie securitisation require the purchase of the
houses with the attached mortgages.
Some structures are so complex structurers can buy pools of asset to underlie their securities, distancing
further the security holders from the house owners. The zenith of the structure are CDO’s of CDO’s. This is what
happens when structuring are limited only by the imagination of the structurer without benefit of guidance by revealed Shariah.
The asset which the securities represent ownership thereof is gharar of the highest nature. Such instruments will not see
the light of day under an Islamic system.
Under Shafie purchase of debt is only acceptable if inter alia, it is dayn mustaqir, a valid and collectible
debt, purchased by cash The sub prime MBS is certainly not dayn mustaqir and similar issuance cannot arise in jurisdictions
adopting Shafie rules.
An insurance company sells CDS for a fee. This means it will reimburse all credit defaults by individual
mortgage borrowers. Islam views whoever sells CDS for a fee as engaging in maysir or gambling. These players do not know whether
or not the mortgage borrowers will default and they hope their calculation on the fees is correct. When the property bubble
burst their calculations and gamble failed. A takaful company would have been prohibited from issuing CDS because of gharar
in the nature of asset purchased and maysir in the transaction.
In this context one cannot avoid discussing moral hazard
or the weakness of man to conduct muamalat (economic transaction) in an honest and God fearing way. In the Western problem
the only worry is getting caught. Furthermore individual interest always supersedes public interest.
So obviously, the structural problems of subprime were made worse by the dishonesty of the players
in pursuit of incentive payments and fat bonuses. Personnel of arrangers and banks were in cahoots in predator lending. Personnel
of CDS providers blind themselves to the maysir of CDS.
The personnels’ lack of world view aggravated a
defective structure that delivered a killer blow to the US economy. An Islamic system with God fearing personnel should remove
some, if not all, of the moral hazards because in an Islamic system it is not about being caught but about being watched.
My Say : When risk is a four-letter word
Written by Zahid Aziz Monday 17 January 2011
This article appeared in Forum page of The Edge Malaysia, Issue 841, Jan 17-23, 2011
The objection of Islamic Syariah to riba has never been about
the size of the interest charged. It is also not confined to consumption loans; it is prohibited also to investment loans.
Investment loans, isn’t that a misnomer in the first
place? How could an investment be a loan, and how could a loan be an investment? That is the objection of Syariah to riba,
an investment cannot be a loan, and a loan cannot be an investment. But we have accepted the fraud and spun it that a loan
is an investment without question. For how else could we have agreed to a guaranteed return to someone who has lent us capital?
How else could we have agreed to a full undiminished return
of his capital at the agreed time without consideration of the underlying success or failure of the business? Someone used
to say, tell the lie a thousand times and it will be accepted as the truth. In riba the axiom seems to be, practice it for
a hundred million times and people will no longer question its injustice.
It becomes a fact of life that we are numbed to its injustice.
We are numbed to its injustice because it is not us who bears the direct brunt of the injustice. The UN sponsored Study by
the World Institute for Development Economic Research reported that in the year 2000 there were one billion people living
on less than USD1 per day.
The per capita GDP (total national output divided by the population)-
the difference in income between the world’s richest countries and the world’s poorest countries - is now 267
times, from 22 times in 1913 1% of the world’s population now own 40% of the planet’s wealth.
study emphasised that economic growth is, by itself, no fix: How the gains are distributed is just as important. In China,
Romania, Sri Lanka and many Latin American countries, swiftly expanding economies have improved incomes for many, but the
benefits have been limited by a simultaneous increase in economic inequality, putting most of the spoils into the hands of
the rich and not enough into poor households..." This is the tragedy
of the riba driven economy, delivers economic growth but with much inhumanity.
it is not our problem because we are not amongst the one billion people mentioned above. And so we continue with our life.
We have a form of Islamic banking. Some of us are no longer practicing riba banking; really? As outlined above isn’t
the objection to riba based on the risk aspect where all manner of risks are transferred by a lopsided contract to the other
party? Isn’t the objection to riba about the owner of money disattaching himself from all manner of risks whilst expecting
a guaranteed return at the same time?
do we measure against this requirement? No measure of akad (contract or agreement) will make a transaction riba free until
we address the risk aspect. Risk is indeed a four letter word when we have not yet shed our riba drenched clothes.
the parameters of an Islamic Economic system is the prohibition by law of riba and an economy driven by qirad or mudarabah.
Banks will take deposits on Mudarabah and extend financing in the form of Mudarabah and Musyarakah. Banks will remould themselves
as true Investment Banks and bankers remould themselves into equity investment managers.
order to allow the Banks to operate freely as true equity managers of money, the nation’s payment system will in most
likelihood be decoupled from them and run by specialist Debit Banks who will honour cheques much in the way debit cards operate.
In other words cheques only for amounts in current accounts and processed by banks who are unable to extend credit. Thus the
exposure of the investment banks and any failures in their financing will not collapse the nation’s payment system.
setting is set now for the banks to extend capital on Mudarabah (trustee profit sharing) and Musyarakah (joint venture profit
and loss sharing), thus truly transforming the banks into equity investors and rewriting the risk formula into what is natural
for business. No more fixed returns on capital extended, and no more guaranteed full return of capital notwithstanding outcome
extend capital on equity basis and absorb business losses as is only equitable. Things are now back into natural equilibrium
and risk is no longer a four letter word. Risk is assumed in the correct proportion by all component parts of the economy
and serves its function as the oil that runs the economy.
only people who will object to this will be the riba financiers who have it their way all this while, and of course some of
the professionals they enslaved who can no longer see the woods from the trees.
My Say: Risk-managing in Islamic financial institutions
Written by Zahid Aziz Monday, 09 August 2010
This article appeared in Forum page of The Edge Malaysia, Issue 818, Aug 9-15, 2010
Surah Ta Ha Verses 115 to 119 of the Holy Quran basically tell us that God created us in an environment of risk. Our Father
Adam was created in heaven, given a wife and everything he needed but God also gave him risk — the risk of disobeying
His command. Man was made weak and susceptible to risk, hence Verse 115, which says: “We had already, before hand, taken
the covenant of Adam but he forgot; and We found on his part no resolve.”
This teaches us at least two things. First, an environment of risk and exposure to risk is a natural state of existence
for man, right from his beginnings in the heavens of God. On top of that, man is naturally forgetful and weak, which accentuate
his exposure to risk.
If man does not have needs, he is less susceptible to risk. If Adam had not needed Hawa, he only had himself to manage
as risk exposure. But his need for a wife extended his responsibility of risk management beyond himself. This teaches man
that living in a society of other beings is also a natural state of being for him. He has to accept that fact, recognise the
increase in risk exposure and manage it.
Similarly, an Islamic financial institution (IFI) has to accept the fact that risks exist in its business and have to be
managed. There is no business that is riskless except perhaps riba or interest-based banking. That is why riba banking is
abhorred by syariah. Author Saiful Rosly (Performance of Islamic and Mainstream Banks in Malaysia — Saiful Rosly &
Afandi Bakar  International Journal of Social Economics) notes that the riskless nature of riba banking “violates
the law of nature in Islam since everything except God must depreciate and money is no exception. When money is not subjected
to the law of depreciation, man has put money equal to God. In Islamic law, this amounts to idolatry [shirik]. For this reason,
God declared war on Muslims who consume riba”.
Once we acknowledge that there are risks in Islamic banking, we need to identify and learn how to manage them. Islamic
banking is a business, so there are risks attached to various aspects of the business. What is Islamic banking? It is a business
of collecting monies from the public and investing those funds to give returns to the people who have extended the monies.
We then need to know why people give money to Islamic banks. Is it for investment or safekeeping? Truly, there is no such
thing as depositing money in an Islamic institution and expecting a return. That presumes there is a price on money and the
act can be construed as a rental of money, which is the theme of riba banking and the antithesis of Islamic banking. Monies
placed in Islamic banks should never be described as deposits with all their conventional connotations. They should be described
as public investments or monies for public safekeeping.
So, what are the risks associated with such monies? The risk of not being able to deliver the cash when required by the
bank’s customers because the cash has been invested in profit and loss earning projects is one. The question is, why
are investors entitled to withdraw on demand when they agreed their money was an investment that surely has a period of maturity?
Allowing withdrawals on demand is then clearly seen as an act of aping conventional banking. If the bank needs to have this
feature, then the akad of safekeeping or wadiah yad dhamanah seems the most appropriate. Then there is a legitimate risk for
the Islamic bank to manage; it needs to risk-manage the liquidity risk of not having enough cash when customers demand to
take out their money. That’s the risk on the sources side.
The funding side entails credit risk when Islamic banks engage in credit finance, which has never been considered “illegal”
by Islamic jurists; it is its over-usage and abuse that has drawn much criticism. With debt or credit finance, there will
be credit risk or the risk of the counterparty not honouring its commitment. If the nature of the Islamic bank’s funding
is equity of mudharabah or musyarakah, then the Islamic banker need only address investment risks.
Of course, all risks are looked at from the point of view of the Islamic bank that is exposed to the risks. If the risks
are not managed, then the Islamic bank will suffer losses or in the worst-case scenario, it will have to be closed. All these
risks are measured in terms of monetary loss. However, Islamic banks are also exposed to a particular risk that conventional
institutions are spared from — the risk of a mukallaf, or not obeying the laws of his Maker.
In Islamic risk-management terminology, this is called syariah non-compliance risk. However, this is usually classified
as an operational risk and its loss is measured in monetary terms. The overriding risk faced by an Islamic institution is
the risk of incurring the displeasure of his Maker, but who is the mukallaf here? They need to be humans. In a combination
of responsibility, we offer that the mukallaf include the regulators, shareholders, directors, management, staff and also
customers of the bank. The nature of risk management here is to do all things to comply with the requirements of the Law Giver,
be it in action, words or heart.
This teaches IFIs another form of risk management: to be true to the teachings and requirements of syariah in all its business
and actions, and God will surely protect the institution. It needs to be said, however, that such institutions have to go
beyond adhering to the literal legal rules of syariah and achieve the higher platform of embodying masqaid al-shariah
(objectives of syariah). Again, we quote Saiful Rosly (2003): “Ethics again takes a back seat, making way for legal
rules to dominate Islamic banking juristic opinions. As ethics [akhlaq] and law [fiqh] do not seem to mix, the Quranic spirit
of justice and mutual aid is compromised to pave way for financing techniques that may look Islamic on the outside only.”
Banks are exposed to four broad categories of risks — financial, operational, business and event. These should now
be familiar to most people and are much discussed in literature. I would like to forward one aspect of risk for an Islamic
bank that has rarely been discussed or brought to the forefront of public forum, that is the risk of operating in a dual financial
environment. Islamic banking has to start in a dual banking environment; it’s not as if we have a choice. But the choice
we have is not to ignore the impact of riba banking on Islamic banking. The greatest risk of this dual system is the risk
of turning an Islamic bank into a replica of the conventional bank in order for the Islamic bank to survive.
When riba is not haram and Islamic and conventional banks have to compete for the same deposits, the rules Islamic banking
have to observe can be an unfair advantage to conventional banks. However, this does not mean that conventional banks produce
superior products in spite of not following syariah rules; what this means is that conventional banks are allowed to produce
defective products for society which should not have been allowed to leave the production line. Factory rejects which are
popular in the market would be an apt similitude for conventional products.
Islamic banks take deposits on mudarabah; they have little leeway to respond to sudden changes in market liquidity. Conventional
banks price deposits on interest; they can adapt quickly to liquidity changes. As a result, Islamic banks can be high and
dry in times of low liquidity and flooded with unwanted deposits in times of high liquidity. All this forces Islamic banks
to replicate the nature of a conventional bank so that they can get economic benefits. These actions will bring them into
disrepute, entering the dangerous zone of breaching syariah.
Second, an Islamic bank may wish to extend financing based on the equity concepts of mudharabah and musyarakah. However,
such financing needs to be funded by deposits. Because of the rental of money concept introduced by conventional banking,
people are used to depositing money for the short term so the majority of deposits are short term in nature. Islamic banks
that want to extend financing based on mudarabah and musyarakah will think twice if they are to be funded by short-term deposits.
What if the depositors wish to withdraw when the projects are always long term in nature?
So to be safe, Islamic banks will find financing that will deliver to them early returns; hence, they will focus on debt
financing — again becoming a replica of conventional banking in order to get economic benefits. It is about time people
recognised these particular risks of Islamic banking and addressed them in the manner the Law Giver expects them to.
Islamic economics have crossed the divide. Islamic accounting is on the verge of doing so. Islamic risk management must
make the jump soon. A subject is only truly relevant when it crosses the divide to take into account the mukallaf’s
fear of the consequences of the hereafter. Islamic economics have extended all time horizons to the hereafter and so their
calculation of risks and rewards. We should not confine Islamic risk management to monetary loss lest we lose our grip on
the subject. An IFI’s risk management must cater for the biggest risk of all — incurring the wrath of the Law
The risk management framework of an IFI must have achieved maqasid syariah as its ultimate
objective. Otherwise, we will achieve neither protection against monetary loss nor maqasid. Sometimes, what seems disastrous
in terms of conventional knowledge may actually be the route we need to take to achieve our true objectives.
Muhammad Zahid Abdul Aziz, who has 20 years of experience in Islamic banking and finance, is a director
of Muamalah Financial Consulting, an Islamic capital market consultancy
My Say: Commendable
Act but it’s no saviour
The Edge Malaysia.
Written by Muhammad
Zahid Abdul Aziz
Monday, 22 February
The Central Bank
Act 2009 was gazetted on Sept 3, 2009, to replace the Central Bank of Malaysia Act 1958, which was repealed. The Act created
international history as the first central banking legislation anywhere in the world to declare that a nation is operating
under a dual financial system, conventional and Islamic. Although Malaysia is acknowledged today as the country with the most
advanced and comprehensive Islamic banking and finance legislation, local players will remember how they were thrown into
the deep end with a barely adequate Islamic Banking Act in 1983.
Islamic bankers, lawyers, and other practitioners
were expected to survive on their own, fight for new rules, and generally steer Islamic finance forward, with the condition
that it complies both with syariah and every single piece of civil law. One doesn’t need a degree in comparative law
to appreciate the enormity of this task.
Islamic banking is supposed to operate as the sole and single system in a
riba-free environment, operating within an Islamic economy governed by syariah laws. The Revelations in the Quran certainly
do not coincide with an Islamic banking system enveloped and impacted by a well-entrenched riba competitor system, operating
within an interest-driven economy, within man-made laws.
Islamic banking law began to be built on case law, which could
sometimes steer it into choppy waters. But we always found ourselves back on course, with many mindful of the fact that the
boat we were in was being built on questionable specifications in the first place. Into this context was born the Central
Bank Act 2009.
Is the Central Bank Act 2009 the long-awaited saviour? Before we analyse the Act, we need to identify
the major outstanding issues of Islamic banking practices that cry out to be addressed:
in a civil law environment where syariah issues may not be appropriately and adequately addressed, should Islamic banking
be taken out of the realm of the civil courts and placed where it rightly belongs, the syariah courts?
Procedural laws, such as the Rules of the High Court, that do not accommodate Islamic banking. For example, court forms
that require Islamic banks to specify the “principal” and “interest” of their facilities. Or the automatic
8% a year default interest from the date of default to date of judgement awarded by judges to all successful litigants.
There is no legislation that makes it compulsory for the courts to refer syariah issues to syariah experts, leaving
it to the sole discretion of judges who may or may not consult syariah experts as they see fit.
conflicts of Islamic banking legislation with other legislation, which one rules?
• The National
Syariah Advisory Council at the Central Bank, being the assumed supreme authority to determine Islamic banking laws, being
then by wording of the legislation, be made subservient to the supervision and regulation of the Central Bank.
The legal treatment of Ibra’ or rebate in an Islamic debt-financing facility which iconises the incompatibility
of syariah nuances with certainty as required by civil law.
• The lack of formal Islamic finance
education among judges and litigating and drafting lawyers has been much lamented but not addressed.
Consideration for alternative dispute resolution for Islamic banking cases in view of its alien nature to civil courts.
are just some of the major issues facing Islamic banking practices presently. Let us now examine whether the new Central Bank
Act 2009 has accommodated all Islamic banking wishes.
• The Central Bank Act 2009 (CBA 09)
does not touch on the jurisdiction for Islamic banking cases, which remain firmly within the ambit of the civil courts. As
a Central Bank Act, it may not be the platform to change federal and state lists in the constitution. But the import of the
Act reaffirms that Islamic banking is going to stay firmly on the federal list. This then begs the question on when the syariah
capabilities and Islamic banking knowledge of judges and the legal fraternity are going to be addressed. If Islamic banking
cases are to be dealt with by civil courts, court officials must be adequately trained. The problem is not going to go away
by ignoring it. And when are procedural laws going to be amended to accommodate the existence of Islamic banking? A
lot of judicial time and effort are being wasted on matters that can be easily resolved with long overdue amendments to procedural
• The previous legislation did not make it compulsory for judges to refer syariah issues
to syariah experts. Section 56 of the new CBA 09 appears to have resolved this problem by requiring the Court (and arbitrator)
to “take into consideration” any published rulings of the Syariah Advisory Council of Bank Negara. However, a
Muslim bred in unspoken respect and obedience to fatwa finds this phrase quite discomforting. Section 56 is an improvement
over the previous legislation, but it does not say the rule is binding on the judge. Religious nuances aside, what if
a judge “takes into consideration” an SAC syariah ruling, decides it is not appropriate for his judicial decision,
and makes a decision which in terms of the Islamic Banking Act (IBA) is against Islam? Does not the IBA define Islamic banking
business as any banking business that does not go against Islam?
Whilst it is all very well to declare in Section 51 that
the SAC is the supreme authority over Islamic financial law, Section 55 then goes on to say that the judge is actually the
ultimate arbiter. So that fits into the context that Syariah law is not supreme in this country. But how then do you reconcile
a judicial decision which is ultra vires a democratically passed Act of Parliament, namely the Islamic Banking Act? The position
is, however, a bit clearer on new issues which have not been deliberated on by the SAC — upon making a reference to
it under Section 56, the court is then bound by the ruling under Section 57.
• Conflicts between
Islamic banking legislations and other legislations are not addressed by the CBA 2009. Only against the Companies Act does
Islamic banking legislation win by virtue of Section 55 of the IBA, which makes the Companies Act subservient to it. Against
all other legislation there remains deafening silence. We’d hope that the Islamic Banking Act, as outlined above, would
be a comfort of sorts, but a more forthright legislative defence would be the preferred choice.
The phrase in the previous legislation putting the National Syariah Advisory Council under the purview of Bank Negara
appears to have been left out. In addition to the deletion we have, for what it’s worth, Section 51 (2) which says the
SAC may determine its own procedures. Dare we draw comfort from the fact that the SAC is no longer by wording of legislation
subservient to a body which should not be, and I daresay would not want to be, its supervisor, Bank Negara?
Ibra’ or rebate of an early settled Islamic debt financing facility has always exemplified the uncomfortable juxtaposition
of syariah nuances with the certainties as required by civil law. Syariah advisers have always been loathe to approve rebate
clauses in Islamic sale and purchase agreements for fear of indicating a multiplicity of prices in an Islamic buy and sell
akad which demands the declaration of only one price. This quirk of syariah demand has led to banks demanding defaulters settle
the full selling price in mid-term defaults, when it is clearly not due. Islamic banks that know the correct procedure will
then make an undertaking in their statement of claim to rebate to the defaulter any amount not due to them. Islamic banks
who know that the date of settlement could be years after the date of judgement resort to this, rather than go to court again
to ask for an additional sum. It is clearly so much easier to ask for the full selling price, which they are entitled to,
and rebate all amounts not due to them. But some court submissions were made without the undertaking to rebate in the statement
Remember the infamous case of Affin Bank vs Zulkifli Abdullah (2005), where the plaintiff bank did
not make the undertaking to rebate, leading the judge to declare Islamic banking exorbitant, and subsequently, for the same
judge to declare that all such Islamic debt financing facilities non-syariah compliant. The decision was overturned by the
Court of Appeal, leading to a collective sigh of relief for the embattled Islamic banking industry. The SAC in 2002 approved
the inclusion of such an Ibra’ or rebate clause, in sales agreements based on the objective of maslahah and the analogy
or qiyas of dha’ wa taajjal. Perhaps via Section 56 and 57 of the CBA 2009, when syariah rulings of the SAC may no longer
be ignored by the courts, this issue will be put to rest once and for all.
• Lastly, although
arbitration is mentioned under Section 56 and 57, no declared bias is made in its favour as compared to settlements via court.
Perhaps this is not entirely unacceptable as only through court battles can case law be built and precedent Islamic banking
law be established.
The CBA 2009 is clearly not the knight in shining armour expected by some. Clearly,
the authorities have decided to postpone all major battles. However, its hand is shown in the manner of testing of waters.
We commend the law makers for the bold declaration of a dual financial system and the legislative requirement that the judiciary
may no longer ignore SAC rulings. Apart from that, the CBA 2009 can hardly be said to have resolved all outstanding issues
in Islamic banking practices. With the baton of leadership in their hands, we sincerely hope the authorities are mindful of
the landscape of the battlefield we find ourselves in, for no war can ever be won without such vision. We need generals who
see the battlefields clearly and an army that is well trained, disciplined and committed. For did not Allah say we are at
war with riba?
Muhammad Zahid Abdul Aziz has almost 20 years of experience in Islamic banking
and finance. Starting with Bank Islam Malaysia Bhd in 1990, he made his mark as a sukuk pioneer. He left Bank Islam
in 2000 to form an Islamic capital market consultancy in Kuala Lumpur called Muamalah Financial Consulting.
Korean Daily News 16th March 2010
Korea sukuk Law order to help bring funds from the Middle
Say selfless representative Abdul Aziz Islamic
Islamic finance funding and long-term investment brings much potential of rich business
opportunities in the Middle East, etc. There are many advantages says Malaysia's Islamic financial consulting firm, Muamalah
Financial Consulting’s Muhammad Abdul Aziz, He spoke with representatives of the Korean Development Bank who acted as co-host to the 17 th Islamic Finance
Seminar at which he was invited speaker.
Aziz said the "global Islamic financial markets since the crisis amounts to 50 percent annual growth rate" and
"based on assets, particularly thorough sukuk has been hailed as safe investments," he explained.
As excessive leverage and high risk credit default swaps (CDS) learnt by global
investors, they are increasing their investments will sukuk. Sukuk are beginning to be attractive to investment funds in the
U.S., the UK and global funds, he said.
sukuk investments is also expanding in the
Middle East. Oil money is a rich pool for invesments," he said. Diversify the portfolio in terms of these funds have not yet
entered fully the market looking for investment and it is very likely they will do so soon. " For AAA credit rated sukuk in Malaysia, the cost of financing
is 10 ~ 20bp (0.1 ~ 0.2%-point) lower than bonds now," he said. Yes the reality
is different in Korea, but "if South Korea enabled Islamic finance borrowing costs wil be lowered," he predicted.
Another advantage of Islamic finance long-term investment is
that you prefer.
Aziz said tenor of Sukuk depends on company size, smaller companies ususll commands 5 years, large
companies perhaps up to 20 years over the long term," he explained. State-owned petrochemical company in Saudi Arabia, SABIC
has even issued a 20-year sukuk.
take advantage of Korea sukuk issuance capabilities similar advantages can be obtained.
The Saudis are planning sukuk
for IWPP Desalination , learning from Malaysian experience in issuing Sukuk for IWPs. The Islamic investors are expected to
strongly support the sukuk
corporate taxes are still issues in Korea because the Sukuk law is not yet passed.
[Ⓒ Daily News & mk.co.kr,
My Say: Differences in sukuk jurisdiction
By Zahid Aziz
Email us your feedback
at firstname.lastname@example.org ( The Edge Daily 19 Nov 2007)
While Islam has declared
war on riba (usury), many Muslims interpret that as allowing them to practise and develop Islamic banking gradually —
letting it coexist with conventional banking so that its beauty and advantages will shine through better understanding of
the system. Hence, it will allow more people to use it and perhaps later, opt for the Islamic way of doing banking.
That's what we assumed
as acceptable under syariah. However, to equally as many Muslims, a clear interpretation of syariah does not support such
a notion; what is haram (forbidden) is haram and cannot be condoned in any manner. But many Muslims, being seasoned apologists
for their religion, condone riba banking and allow it to exist side by side with Islamic banking. As a result of setting up
a competitor with many rules, to compete with one which doesn't have to observe such rules, we see a mutated version of Islamic
banking appearing everywhere, moulded not so much by the demand of syariah but that of unfair competition.
Therefore, what we see
everywhere is Islamic banking in the sense of a wolf in sheep's clothing. No doubt, the wolf's claws are somewhat trimmed
and manicured but that aside, it's still very much a wolf. There are many who fail to see much difference between what is
called Islamic banking and its conventional alternative.
Righteously, the illiterate
ummah or Muslim community are being criticised for not seeing the difference between a transaction with a syariah akad (solemnisation/agreement)
and one without, but deep down I sympathise with their confusion because true Islamic banking is not allowed to flourish.
Many wise men tell some of us that mudharabah (profit sharing) and musyarakah (joint venture), which are considered the true
proponents of Islamic banking, are impractical and only for the dreamers.
Let's us not fail to
see the wood from the trees. The banking industry has never known any other form of banking until Islamic banking started
making its appearance. Conventional banking flourished unperturbed and has developed into a university of knowledge that holds
sway as the only practical way to do banking. Subjects, such as derivatives and risk management, derive from this body of
Against this background,
let me begin to compare the merits of Islamic banking by using the following analogy. During my university days, I remember
my English mate who told me he did not like curry very much. His version of the curry was this: you cut the apples into small
pieces, boil them with raisins, throw in some curry powder and then give it a good stir until it all seems cooked. I then
invited him for a meal at a local Indian restaurant and purposely ordered some curry and rice for my friend. He polished his
plate and told me he was so wrong about the curry and it was actually very nice.
Now, Islamic banking
in a dual banking environment is your curry with apple and raisins boiled in curry powder water. Islamic banking on its own,
without the existence of conventional banking, is your home-cooked curry your mother makes.
Decisions are coloured
by what the ummah know and don't know. Do we know that mudharabah and musharakah have macro objectives? Do we know that mudharabah
is a tool in the Islamic economic system meant to rope in idle capital into the economic machine? Do we know that musharakah
is the Islamic economics answer to a world free of economic recessions? More pertinently at the individual level, do we care?
For many within the community,
they apparently don't care. So, who should take heed if the individuals don't care? Obviously, the answer is the authorities.
The next question is:
are our policymakers aware of the philosophy and hikmah (wisdom) of Islamic banking? In my view, an honest answer is a sad
no. How many times did we not see central bankers govern Islamic banking with little understanding or sympathy of its hikmah
and objectives? Is it the vogue now for central bankers to impose strict risk-management practices on Islamic banks with exactly
the same rules for conventional banks?
Do they think that conventional
banking is a "this is my money, pay me back at all costs" system, compared with Islamic banking which tries to implement economic
justice between contracting parties and shoulders macro objectives for the bigger economy? Where do mudharabah and musyarakah
rank in the context of risk management? Are they not the conventional risk managers' nightmare? So, is it right to insist
that Islamic banks adopt the same risk management rules as conventional banks? Are the present captains of Islamic banking
appointed to run Islamic banks today fully aware and conversant with the philosophy of Islamic banking?
To extend the argument
further: do we acknowledge that an Islamic banking system is merely part of a larger Islamic economic system operating within
the confines of hudud and syariah law and meant to govern people to whom the akhirah (hereafter) — many times more important
than the world we live in today — is the key objective? Until we see Islamic banking within this perspective, we will
not do justice in any of our judgements on it.
The dilemma faced by
Islamic banking today is well illustrated in sukuk developments in three jurisdictions — Malaysia, the Gulf
countries and Saudi Arabia. Sukuk, for
the uninitiated, is your Islamic bonds, which are the flavour of the century in financing mega projects in the world today.
They are so popular now that even a state in Germany
has used them to raise funds.
Malaysia started the ball rolling with the issuance of sukuk. The Kuala Lumpur International Airport Islamic
bond issue of RM2.2 billion in 1996, of which this writer pleads guilty to be principally responsible for, is said to be the
one that kick-started the sukuk industry in Malaysia. The Guthrie sukuk, pioneered by Bank Islam (Labuan)
a little later, became the precedent used by sukuk arrangers throughout the world. The trading of debt in Malaysia is objected to by some, although supported by the
Shafie Islamic school of law (Malaysian Muslim Sunnis are from this school of thought) provided it is dayn mustaqir, that
is, valid and collectible debt.
I do not wish to enter
a debate here but what I would like to highlight is the existence of a particular group in the Malaysian Islamic finance industry
which exerts an exceptionally strong influence. When a particular Islamic finance product or syariah interpretation seems
quite unwieldy, the Islamic bankers or scholars usually get the blame. Little blame is ever put on the legal advisers.
However, in Malaysia, the legal advisers have a big say in the shaping
of the final version of Islamic finance products. Their final decision as to what is or is not acceptable has stunted many
Islamic products. When Islamic banking emerged in 1983, the government basically said: "Here is the Islamic Banking Act, but
we are not going to amend any other law. You have to work that out yourselves. Any disputes in Islamic banking go to the civil
courts, not the Syariah Courts."
That set the tone for
Islamic banking in Malaysia. The players
not only have to comply with syariah but also with every civil law. Scholars or Islamic bankers will never allow any clear
contradictions with syariah, but the legal advisers have the talent to drive things into no man's land, with the aim of complying
with civil law and syariah. What results is usually an Islamic product that is not "pristine" and one that does not blatantly
contradict syariah or offend civil law.
Now, how do they fare
in the Gulf? In sukuk, they have steered clear of the objections to Malaysian debt sukuk by some clever structuring using
the principle of musyarakah. But they make an about-turn in some features, turning the musyarakah sukuk into just another
debt sukuk. I am referring to the purchase undertaking by the clients and the profit tanazul by the sukukholders/musyarakah
Under the purchase undertaking,
the clients give the sukukholders a guarantee that the musyarakah investment is profitable. If it ever makes a loss, they
undertake to buy the sukukholders' share. Now, any beginner in Islamic banking fiqh (jurisprudence) will know that one simply
cannot guarantee profits in a musyarakah venture; it goes against the basic principles of musyarakah.
The musyarakah partners
agree on a profit-sharing ratio. Every six months, profits are shared according to this ratio. However, in return for the
purchase undertaking, the sukukholders reciprocate by a tanazul or "rebate" of profits in excess of an agreed amount, usually
Libor (London inter bank offered rate) plus an agreed percentage. Many people find it strange for one partner to give away
its share of the profits to another in a musyarakah. Why do they do these things: purchase undertaking and tanazul of profits?
Many people who invest
in sukuk are conventional bond market investors or Muslim investors who leave the decision making to conventional advisers.
These people tell the sukuk arrangers and issuers, "Call it what you like, but make sure your sukuk have these two conventional
requirements and we will invest in it." Thus, we see another example of those from conventional banking dictating the terms
of Islamic instruments.
For as long as monied
Muslim individuals or institutions leave investment decisions to conventional advisers, we will not see truly syariah-compliant
instruments coming to the market. Like most things in Islam, things do begin with the ummah. Allah says in the Quran: "We
will not change the destiny of a people until they begin to change themselves."
Let's now turn to Saudi Arabia which started later than most in Islamic banking
and sukuk. But to its credit, it had no pretensions: it was willing to learn from whomever has more experience. But it tolerated
no short-cuts in syariah interpretation. In this country, courts and judges decide based only on syariah and syariah law is
supreme. It will not compromise on syariah in implementing Islamic finance.
So, forget about the
Malaysian sukuk and the Gulf sukuk; neither is acceptable in Saudi Arabia.
It objects to the Malaysian interpretation based on the issue of "inah or reflection of riba" and the Gulf sukuk for the reasons
above. The battle lines are drawn between the Saudi scholars and the conventional bond market. The Saudi scholars will not
budge. There is a stalemate, although some breaches in the defence were seen recently over two major sukuk issues, which conservative
Saudi scholars are not happy with. Alas, in Saudi Arabia,
Islamic bankers have found a fort where conventional pressures hold no sway.
Muhammad Zahid Abdul Aziz has more than 17 years' experience in Islamic banking and capital market.
He started with Bank Islam Malaysia Bhd,
later managed ICM Consultancy and syariah advisory company, Muamalah Financial Consulting. Now based in Riyadh, he is a full-time sukuk and Islamic investment banking consultant to Saudi Arabia's