Better Knowledge of Islamic Finance Needed

The Star, Thursday January 8, 2009

Don: Better knowledge of Islamic financing needed

KUALA LUMPUR: The lack of understanding of Islamic financing needs to be addressed so that people are not confused and misguided, says International Centre for Education in Islamic Finance (Inceif) chief academic officer/dean Prof Datuk Dr Syed Othman Alhabshi.He said even some employees who worked at Islamic banks couldn’t fully understand the concept of syariah-compliance.“We need to address this matter so that everyone will fully understand and have a clear picture of Islamic finance,” he told a press conference yesterday.

I couldn't agree more. The thing about Islamic banking is that since it started to make big waves in the last ten years or so, everyone thinks they can become an Islamic banker without formal and proper education in the field. Anyone with a certain number of years in a conventional bank, or insurance company or rating agency or research house or a business publication suddenly assume they are fit to structure and develop Islamic banking products and this is despite not being able to pronounce Mudharabah properly! This is why many of the Islamic financial products in the market today are only differentiated from their conventional counterpart by their Arabic sounding names. The mechanics and modus operandi of the product is almost identical.

Islamic banking and finance is totally different in all respects from the conventional finance and banking the world has seen and grown to love for the past 300 years. It would be disastrous and detrimental to the development and growth of Islamic finance if practitioners continue to develop so-called Islamic products based on the conventional platforms and norms.

What is needed is a paradigm shift in the way we approach and view Islamic finance. We need to accept that although the objectives of Islamic financing are similar to that of conventional finance, the means of achieving it is drastically different. Different here does not mean changing the product name or adding a few clauses in the transaction documents. The difference is in the mechanics, determination of profits (pricing), contractual obligations and relationship of all parties, the risk analysis and management, recovery methods, source of funds, utilisation of proceeds and remedies in the event of default.

In order for Islamic finance to prosper, practitioners must not only be well versed in the laws of Shariah but more importantly understand the objectives of Shariah. The market also needs to be made aware of the uniqueness of Islamic finance. Only then can we see the emergence of the true form of Islamic financing.

Note: Anomaly? According to the laws of Shariah, money is not a commodity and hence not tradable. What is traded at the Islamic Money Market (http://iimm.bnm.gov.my/) then?