How do you measure progress with regards to Islamic finance?
ISMAIL: There are generally two ways of measuring progress: qualitative or quantitative. In a qualitative way, I think that we just look at the number of Islamic banks and other Islamic institutions that we have been able to establish in a particular country. Then we look also at the branches, and also at the range of the products that the banks offer. But this is not a definitive measure; it is more a cursory measure, so to speak.
The better way is the quantitative way. Here, we measure the assets, exactly the assets of the Islamic banks and Islamic institutions. We compare the assets year by year if we want to look at the rate of close of the banks in a particular country, or we compare asset of a particular bank compared with another bank, if we want to make an inter-bank comparison. Or sometimes, we want to see whether in a particular country, if the level of penetration is big enough where we measure, then, the asset of all Islamic banks in that country as opposed to the total asset of the banking system of that country.
How do Shariah advisory councils function?
ISMAIL: There are many variations with regard to the placing of the Shariah advisory council in Islamic banks and Islamic institutions. In some countries, individual banks will have their own Shariah Advisory Council. In some other countries, this is placed at the central bank, while the individual banks are allowed to have their own Shariah advisory council, but the one at the central bank is supreme, so to speak. Malaysia adopts that model. Still, there are some countries where there are banking groups in the sense that there is a group headed by a particular bank in a particular country, and in that case, perhaps, the Shariah advisory council is placed in the major bank of the group.
The Shariah advisory council functions, really, to make a study of Shariah compliance of various products and services to be offered by the banks and their various constituents to the customers. Members usually consist mainly of Shariah scholars, but there is also the input of the professionals, the economists, the legal experts, constitutional experts, and so on and so forth.
So usually, let me take the situation in Malaysia: a particular bank, say, wants to introduce a new product or a new service. First of all, that particular bank will have to study, submit to its own Shariah Council, to make a study as to the efficacy of Shariah, as to the viability in terms of Shariah of that particular project, particular product. Now, once the study has concluded that it is allowed in Shariah, then people will have to be prepared and submit that to the Shariah Council of the central bank.
At the central bank, it has its own secretariat, quite strong Shariah secretariat where Shariah officers, economists, and bankers, are placed. They are all central bank officers. They will make a study of the paper, will go get in touch with the submitting bank, and discuss modification and so on and so forth and finally, submit that to the Shariah council of the Central Bank, and then the Shariah council will consider it and then make a decision whether to ask for the original bank to modify or to drop the project, or perhaps to approve the project. Now, the decision of the council usually is then on the consensus basis and the decision of the apex council is final. So this is roughly the function of the Shariah supervisory council with regard to the resolutions, with regard to the fatwa that it issues to the banks.
What are the greatest challenges to Shariah compliance today?
ISMAIL: I personally do not see challenges as challenges. I personally see that challenges are things which need to be overcome. Only then, perhaps, we will be a success. But there are great challenges, which are difficult to overcome. It is a big challenge to Muslim communities in countries, in regions, whereby regulation, Islamic banking, or at least Islamic banking operations are not allowed. So you can begin to set up, or to operate Islamic banking. Before you face any other hurdle, you face the biggest. So this is the biggest challenge, it is difficult to overcome.
How significant is the World Islamic Economic Forum (WIEF) in the overall global economy?
ISMAIL: When we talk of WIEF, it is with reference to Islamic economy. So you are asking the significance in the global economy. I suppose it can contribute to the Islamic economy, then, it will contribute to the global economy. Now, the global economy has many, many meeting places, meeting points, so to speak, where they discuss about economic development, economic advancement, innovations, and so on and so forth. To quote one example is Davos, which is a very well-known kind of annual meeting of the, shall we say, conventional economy. Now, if WIEF can develop into something that worked for the Islamic economy, I think it will have an impact on the global economy. It will contribute a lot to the Islamic economy, and at the same time, have an impact on the global economy.
What role does the Malaysian Securities Commission play in supporting the Islamic economy?
ISMAIL: In Malaysia, we take the model that there are two institutions which supervise the banking system, the financial system. There is Bank Negara that supervises banking and takaful, and the Securities Commission that supervises the Islamic capital markets. So with regard to Islamic operation, Bank Negara supervises Islamic banks and takaful, and the Securities Commission supervises Islamic capital markets. Now, I could say, perhaps, that a large part of the development of Islamic capital markets in Malaysia today, which is quite developed, the credit should belong to the Securities Commission.
Now, the first thing that it did was, it set up its own Shariah advisory council again. Now, it has asked the Shariah advisory council to screen the stocks or shares listed on the Kuala Lumpur stock exchange, today called Bursa Malaysia, to see which are Shariah compliant. So at least it's built up on Shariah compliant securities and it is traded, of course, on the stock exchange. Now, from there, the Securities Commission gives licenses for stockbroking companies to deal in the stock. Conventional stockbroking companies have also been dealing with stocks, but in order to make Islamic capital markets more pronounced, it specifically gives licenses for Islamic stockbroking companies and it has been allowing quite a number of capital market instruments based on the shares.
I'm proposing that Islamic banking and finance should be made more inclusive to encompass the social welfare sector.
For example, it has allowed Islamic unit trust, or Islamic mutual funds, so to speak, or Islamic private retirement funds, and various other funds as well. That is in the area of securities, stocks, and shares. In the area of Sukuk, it also manages the issue of Sukuk, which are based on capital market instruments. Just like it does for the shares, the Sukuk will be placed in front of the Shariah advisory council. Once it is approved, it is given the approval to the issuer. Malaysia is the largest issuer of Sukuk in the world. In conclusion, the Securities Commission has contributed a lot to the development of Islamic capital market in this country, and therefore, contributed to the Islamic economy.
What kinds of innovation do you anticipate in the future with regard to Islamic financial products?
ISMAIL: It is very difficult to anticipate what will happen in the future because there are many things that have happened that I did not anticipate. For my 30 years in Islamic banking, I did not anticipate many things and many things did happen. I would have thought that new development should occur in the financing using the Mudharabah, or profit sharing. In Islam, you see, the interest is replaced by profit sharing. There are two ways: either sharing in the project or profit in terms of sale and purchase. So in terms of sale and purchase, it happens quite a lot, the first sale and so on and so forth. But in profit sharing contracts, it is used for deposit-taking quite extensively, but it is used more in the capital markets where shares are organized along the limited companies, which is profit sharing.
People buy and sell shares, participate in funds; all of this is profit sharing. I mean, they take the risks of losing the capital, losing a large part of capital as well as the possibility of profit. But with regards to bank financing, the bank giving loans to customers, not many projects are given on the basis of profit sharing. This is because of the high-risk nature of the project. Now, I would anticipate in the future, perhaps people would innovate in terms of managing the risk, reducing the risk, maybe by sharing the project, maybe by, I do not know, perhaps by including a takaful part in the projects and so on and so forth, and make this more amenable, make this more available for the customers to use.
Another, well, if I humbly may say, I have a proposal recently that Islamic banking at the moment lacks something in terms of the Islamic teaching. It has been concentrating on two sectors. It has left out one particular sector of the economy. The Islamic economy, actually, the way Muslims see it, consists of three sectors: the public sector, which is a government sector, the private sector, this is where you and I are operating, where we earn our living, we do business and so on and so forth. There is a third sector, which is the social welfare sector. These are the unfortunate people, who cannot care for themselves; who need to be given some assistance. In Islam, when you organize the economy, you have to organize it for everybody; you have to include everybody.
So I'm proposing that Islamic banking and finance should be made more inclusive to encompass the social welfare sector. I do not know whether this will take on or not, but this means truly allowing banks, or giving licenses, to the banks to set up Sadaqa houses. Sadaqa is donations. So, allow banking groups to set up Sadaqa houses with the idea of collecting funds from the public. The government sector is taking care of itself. Of course it does collect taxes and use taxes to pay for the needy and the poor, but the private sector does not quite respond to that, to play that role. So let banks collect this from the private sector and then because the bank is in the financial area, it could handle the financial management for the fund that is collected.
For example, there is a kind of Sadaqa in Islam, which is called Sadaqa Jariya. This is highly valued. A kind of charity, which, given at one time, that charity will be there permanently. Only the profits will be utilized to pay for the poor. Now, the bank can do that through fund management; so it can collect the funds, manage it in terms of fund management, and the profit, pay this to the poor. Now this can go on year in and year out. There are so many products that could be organized along the Sadaqa concept, waqf concept, and also hibah, which is a gift concept. I do not know whether this will take on or not, but suppose it does take on. Then we have a very inclusive kind of Islamic banking and finance where everybody is covered by the banking system.
Oh, by the way, I'm suggesting this to be done by the bank not as a charity but at no loss to them. They can charge a fee and commissions for doing the work and the funds. If the funds really grow, the funds will be there forever for them to manage. So in that sense, they would derive certain benefits. Of course if they like or if they want, they can modify the profit motivation in this particular area, but it is at no loss to them. So this is our proposal in a nutshell, which I'm trying humbly to foster at the moment.