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Islamic Finance: The Original Wisdom behind Its Establishment

Updated: Thursday 11 October 2012 - 22:00 Kategori: Umum Posted by: Administrator

Islamic banking and finance is growing globally in Muslim majority countries and non-Muslim countries. Many countries that previously objected the idea are currently showing their interest in the industry and have even been declaring their willingness to become an Islamic financial hub. For example, the world’s major financial centers such as London, New York, Singapore and Tokyo are competing with each other to attract wealthy Muslim investors by offering them so-called Shariah compliant investments. This phenomenon is further spurred by the increase in oil prices during 2007 to 2008 leaving Muslim oil producing countries in the GCC countries with excess liquidity to be invested. Despite these positive signs, Muslim investors must critically know of the original wisdom behind the establishment of Islamic banking and finance. Islamic banking and finance was created as a result of Muslims’ efforts to dedicate all aspects of their lives to the teachings of Islam. Watt, a non-Muslim, did a comparative research on the meaning of religion for a secular westerner and the meaning of religion for a Muslim. He found that for a secular westerner religion has little or nothing to do with commerce or economics or politics or industrial relationships. However, he found that for a Muslim, religion is seen as a complete way of life including forms of worship, political and economic theories, and detailed codes of conduct. One of the results of viewing religion as a complete way of life in the economy is the creation of Islamic financial institutions such as Islamic banks, Takaful companies and Islamic investment companies. All the financial institutions mentioned above must comply with Shariah law in their activities. There should be no prohibited elements in Shariah such as riba, gharar and maysir involved in their operations. Besides that, most importantly, they must also direct their activities towards realizing the objectives of Shariah (Maqasid Shariah).

In general, the objectives of Shariah can be divided into three categories namely education (Tarbiyah), justice (Adalah) and the welfare of the society (Maslahatul Ammah). Each objective of Shariah should be reflected in the operations of Islamic financial institutions (IFIs). For an example, the role of an Islamic bank in education is to increase the awareness of its staff and the public on Islamic banking products. Practically, this objective can be achieved through close cooperation with training institutes, the mass media and higher learning institutions. In a collective action, IFIs can establish an endowment fund intended to sponsor potential students to attend Islamic finance programs held by reputable higher learning and training institutions. In fact, the Central Bank of Bahrain has initiated the establishment of a Waqf fund funded by IFIs in Bahrain with the purpose of sponsoring top graduates in accounting, economics and finance from the University of Bahrain to attend a diploma in Islamic finance program at the Bahrain Institute of Banking and Finance along with internship programs in the respective IFIs. The program is intended to solve the shortage of qualified human resources in the Islamic finance industry. The program is also expected to be a continuous bridge that connects practitioners and academicians in order to update the public with the latest developments in the Islamic finance industry. Adalah (justice) principle implies that all IFIs must establish justice in their operations. This objective can be achieved through transparency in financial reporting, fair distribution of profits from the investment and fair charges on services provided to the customers. In practice, IFIs should take care of the interests of all stakeholders equally. Unlike a conventional financial institution whose main goal is to maximize the shareholders’ wealth, IFIs’ main goal is to ensure fairness to all parties dealing with the institutions. This is also due to the fact that in Islamic economics all factors of production have equal weight.

The welfare of the society (Maslahah) can be achieved through allocating financing to the area that can enhance Islam and Dakwah in general and benefit a large number of people. It is not supposed to focus only on areas that benefit a few, even though they are the most profitable ones. For example, if a large number of people in the society need agricultural financing, there must be a significant percentage of financing allocated by an Islamic bank to the sector, although real estate financing offers the highest rate of return. In fact, the improvement in the welfare of society in which IFIs are operating is one of the more important success indicators of the operations of IFIs. However, the objectives of Shariah described above do not mean that Islam is against the principle of profit maximization. Basically, an IFI should only be involved in profitable businesses since it holds a significant amount of public money that can be considered as a trust (Amanah). Therefore, in order to ensure the sustainability of the trust, being profitable is a must for IFIs. However, the profit should not be achieved at the cost of other stakeholders’ interests. In conclusion, there must be a balance between commercial objectives (profit maximization) and social and religious objectives promulgated in the teachings of Islam. The description of the objectives of Shariah above is intended to ensure no deviation in the operations of IFIs from the original wisdom of their establishment.

Sutan Emir Hidayat, Chairman of The Indonesian Association Of Islamic Economist in Bahrain, Lecturer of Islamic finance, University College of Bahrain, Email: Sutan specializes in principles and practices of Islamic banking, Takaful and re-Takaful, Islamic economics and Islamic financial system.