God willing, sharia banking will earn merit

PUBLISHED : Monday, 21 November, 2011, 12:00am
UPDATED : Monday, 21 November, 2011, 12:00am


Awareness of Islamic banking and philanthropy has been rising in recent years.

There has been a corresponding interest in Hong Kong due to the city's proximity to Muslim regional giants Malaysia and Indonesia, as well as the city's historical and commercial ties to Pakistan and Bangladesh. Islamic banking refers to activities that are consistent with the principles of sharia - Islamic law.

The principles emphasise moral and ethical values and are enjoying increasing global appeal, especially in an age in which conventional Western banking models are under fire because of the global financial crisis.

The sharia approach prohibits the payment or acceptance of interest for lending, as well as trade and other activities that provide goods or services that are considered contrary to its principles.

That means Islamic law prohibits investing in businesses that are considered unlawful under sharia. This includes businesses which produce and/or sell alcohol, pork or pornography. These products are contrary to Islamic values or strictures.

Islamic banking also prohibits 'maysir' and 'gharar'. Maysir is involved in contracts where the ownership of a piece of goods depends on a predetermined, uncertain event that's predicted to happen in the future.

Gharar describes speculative transactions. Both concepts involve excessive risk and are considered to foster uncertainty and fraud. So the use of all conventional derivate instruments is prohibited by Islamic banking.

While these principles were used as the basis for a number of flourishing Islamic economies in earlier times from Morocco to Java, it was only in the late 20th century that Islamic banking formally established itself.

Islamic banks mushroomed to meet the demand for Islamic banking, which is not restricted to Muslims.

Islamic finance was practised predominantly in the Muslim world throughout the Middle Ages, fostering trade and commerce from the Atlantic to the South China Sea. Its revitalisation appears to have coincided with the worldwide celebration of the history of the Islamic calendar (Hijra) in 1976. At the same time, the financial and political clout of the Muslim world received a boost due to rationalisation of oil prices, which had been under the control of the West.

This led to a collective drive to model Islamic economic development on the ethics and principles espoused by the Prophet Mohammed in the Koran.

Just how Islamic banks make money is a complicated matter, but basically they levy a wide variety of banking and transaction charges to make up for not charging interest.

Despite forbidding profiteering from the imposition of interest, sharia banking does allow for a number of financial mechanisms that enable Islamic banks to make money.

Some of the most commonplace - and the most palatable, from a sharia point of view - are Musharakah, Ijaarah, and Ijaarah Muntahiya Bittamleek.

Musharakah (profit and loss sharing) is an arrangement where the customer 'gives' the bank his or her capital, which the bank then uses to seek out projects for growth, and - if the conditions are sufficiently promising - invests in them. The profits, or loss, is shared between the customer and the bank.

Ijaarah (rental) refers to when the bank purchases an asset and then rents it to the client. It could possibly end in purchase. This is similar to a lease agreement.

Ijaarah Muntahiya Bittamleek (rental with eventual ownership) is an arrangement where the bank rents an asset, such as a house, to a client. Over time, the client pays the bank more than the pure rent price for the asset.

This excess is used to increase the share of ownership of the asset, in such a way that, by the end of the term, the client owns 100 per cent of the asset.

Islamic banks also levy an array of banking charges for all kinds of transactions and services - and these too make money for the bank.

The concept of Islamic banking is gradually gaining traction in Hong Kong. Chief Executive Donald Tsang Yam-kuen announced in his 2007 policy address that developing Islamic banking would be a priority for the territory.

Tsang subsequently made trips to Dubai and other Islamic banking centres to drum up some business.

In that annual policy address, Tsang said that providing financial products that comply with Islamic law offered considerable potential for development.

'To further consolidate Hong Kong's position as a global financial centre, we should actively leverage on this new trend by developing an Islamic financial platform in Hong Kong,' Tsang told legislators at the time. Thanks to the global financial crisis, which unfolded only months after this address, attention and the priorities have shifted. Nevertheless Hong Kong is quietly stepping up efforts to compete with its geographically closest Islamic banking neighbours, Kuala Lumpur and Singapore.

Regional Islamic giant Malaysia is currently the leading global hub for Islamic finance, analysts say, with Indonesia, Pakistan and Singapore competing, and providing formidable competition for Hong Kong's embryonic Islamic banking scene.

'Hong Kong appears to have the potential to become a hot spot for the development of Islamic banking,' says Endang Rosawati of BNI Syariah. 'Given that Islamic banking is applicable to Muslims and non-Muslims, it is possible for Hong Kong to be conducive for Islamic banks to grow. They have enormous potential to grow as an internationally acknowledged economic system.'

The chief of the National Bank of Pakistan (NBP) in Hong Kong, Mumtaz Rafi, is similarly upbeat. 'Islamic banking works very well for both customers and the banks that serve them,' he says. 'The global banking crisis has had no impact on Islamic banking.'

This revealed the strengths of its products, its mechanisms and protective power of its ethical dimension. At the NBP, in common with many other banks, we are seeing that Islamic banking is enjoying increasing popularity around the world.'

Islamic philanthropy, like sharia-based banking, is seen as a means of earning merit and maintaining harmony in society across the Muslim world.

The concept of ownership of wealth in Islam is that all wealth, after necessary personal and family expenses are factored in, belongs to Allah. It is up to the individual to decide how much of this excess wealth he or she should give back to Allah. There are two types of Islamic charity. Zakah is obligatory and involves the well-off giving 2.5-3 per cent of their yearly savings to the poor. The other is Sadaqah, or voluntary charity, which depends on need and the amount of excess wealth.

Islamic philanthropy emphasises that charity should not be used to gain unfair tax advantages or to win personal credit and attention, but only for the love of Allah.

For many, the most conspicuous Islamic philanthropy player on the world stage is the Aga Khan Development Network, founded and guided by the Aga Khan.

It brings together several development agencies, institutions and programmes that work primarily in the poorest parts of Asia and Africa. The network conducts its programmes without regard to faith, origin or gender.

Its agencies operate in social and economic development, as well as in the cultural field. The network seeks to strengthen the role of the private sector in developing countries.

While each agency pursues its own mandate, all co-operate within the network framework to ensure their different pursuits interact and reinforce one another.

Their common goal is to help the poor achieve a level of self-reliance, whereby they can plan their own livelihoods and help those even more needy than themselves. Sustainability is a central tenet.