Islamic Finance: Is it really Shariah-compliant?

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Islamic Finance: Is it really Shariah-compliant?

Tariq H. Cheema

As he delivered his welcome address to delegates at the Global Donors Forum in Kuala Lumpur recently, Malaysian Prime Minister Datuk Seri Najib Tun Razak sought to make a few crucial points about the necessity, and viability, of Islamic finance and micro-finance in today’s world.

The occasion was the 5th annual meeting of the World Congress of Muslim Philanthropists (WCMP), the organizing force behind the forum which was held in the Malaysian capital in late April. The audience before the Malaysian premier, therefore, was a veritable who’s who of people who matter at the global level. More importantly, it consisted of philanthropists from across the Muslim world, and beyond, who understood the deeper context of his words.

“At the heart of Islamic finance is, of course, the genuine philanthropic spirit,” he said, “a spirit that pervades both philanthropy and business practices and that holds the potential to transform the lives of billions of the poorest people in the world.”

“Islamic microfinance is about financial inclusion, entrepreneurship and risk-sharing through partnership finance – an approach that conventional microfinance lacks,” the prime minister added. “And there can be no doubt that, going forward, it represents an opportunity for Islamic finance to develop ethical yet profitable products and services at the same time as supporting social entrepreneurial activities and invest long-term in social funds.”

All of these are valid points. Islamic finance is one of the fastest growing finance sectors in the world. Yet, as Shariah compliant products are being developed, wealth made and assets built across the Muslim world’s landscape, we would do well to ask ourselves if all this really does fall within the purview of the term “Islamic finance”?

The answer is simple – and negative. The reason, again, is simple: it is not enough for a financial institution to claim to be a Shariah-compliant enterprise merely because it is providing or selling Shariah compliant services or products to its clients or customers. Merely pronouncing a service or product as complying with well-defined Islamic principles might go down well with an unsuspecting target market, but it would eventually be a brazenly self-serving business ploy completely at variance with the very humane principles outlined in the purpose of Shariah.

It takes only a cursory glance at how these Islamic financial institutions function to be able to gauge that their primary purpose appears to be only to serve their own corporate objectives.

A company dealing in finance should realize that a corporate objective entails more than merely seeking to increase the value of its shares. In the case of an Islamic financial institution, this responsibility extends to ensuring that the demands of the Islamic concept of Shariah (Maqasad-e-Shariah) are met.

Unfortunately, those who associate their businesses with Islam appear to tend to forget that they and their organizations carry a far greater responsibility to society than they exhibit. Islamic finance should focus on the dual purposes of Personal Social Responsibility and Corporate Social Responsibility, because both were clearly laid out according to Islamic Shariah more than 1400 years ago (although the terminology used here is obviously another by-product of the times we live in and not from an era long since past). For example, Shariah prohibits the use of certain economic goods and forbids any indulgence in particular economic activities, even though, in practice, they might yield great dividends.

But they are banned in the Islamic context because, while they might benefit the business owner or the company, the detriment they would cause would create an ill-balanced society. Riba, or interest, has been deemed un-Islamic for that very reason.

Making a business ethical entails more than lofty pronouncements claiming to adhere to Islamic principles, which are sadly left by the wayside the moment the profitability angle makes its insidious presence felt.

A truly socially responsible enterprise would understand the importance of value creation for all stakeholders – shareholders, society, the environment – but, sadly, Islamic financial institutions lag far behind in the important field of philanthropy as compared to their worldwide counterparts. This represents a significant under-utilization of their resources.

According to Islamic Shariah, an Islamic financial institution’s focus, as part of its social responsibility, should be to bank those who have no collateral (financial inclusion) and invest in Small Enterprises in the Islamic way by sharing their risks and developing their entrepreneurial skills.

A direct consequence of this would be genuine social change: an economically empowered populace which, in turn, would lead to financial institutions being strengthened immeasurably and a society’s triple bottom-line would improve.

Finally, if funds for social investment – such as providing capital to sustainable livelihood schemes – are established by Islamic financial institutions, much needed social change can be brought about; not just in our society, but others as well.

All that would require would be a strict adherence to the rules outlined in Islamic Shariah and not a desire to exploit innocent people by merely invoking its name as a marketing ploy.

Yet all is not yet lost. I still have faith in genuine Islamic finance institutions and believe that social justice will be advanced as soon as they rise up to the challenge.

The faith of marginalized millions will be met by proactive policies that are centered around action, not baseless wordplay.

And this shall be achieved through impact philanthropy and investing because these are designed to create and achieve true empowerment of the people which is a beautiful way to follow and live Shariah.


Dr. Tariq H. Cheema is the founder and CEO of the World Congress of Muslim Philanthropists (WCMP)