The Islamic finance sector, having grown by leaps and bounds over the last few decades, is no longer confined to retail borrowing or lending or partnerships and joint ventures. At its inception, Islamic finance as a global phenomenon was mentioned as if it were merely a fantasy. It was regarded more as a kind of spiritual escape route for those who were more religiously inclined. Many skeptics even linked it as part of some type of voodoo economics that would only appeal to backward Muslim countries.
And even after these initial prejudices were overcome, and business common sense prevailed, a host of factors operated against the industry and saw a lack of interest in Islamic funding particularly for long-term projects. There was the belief that compared to the conventional funding, Islamic financing was uneconomical, or that the returns were not commensurate with the risks taken.
There was this persistent myth of the lazy and inefficient Muslim enterprise where things tend to grind to a halt and delays are legendary. Thus, a typical loan transaction would incur increased costs apart from the greater burden in administering the loan. Or if push comes to shove, Islamic funding merely served as a last resort to cover shortfalls in funding.
But the reality tells us a different picture. Islamic funding has not only shaken off that undeserved association but has proven to be able to cater to large-scale infrastructure projects. In the wake of the recent financial crisis, Islamic finance institutions stepped up to the challenge to fulfill the funding needs for many of the large infrastructure projects which were once the exclusive turf of the conventional finance market.
I’m sure the experts will be talking about the development of the Islamic capital sector as well considering the phenomenal growth of the sukuk market. It is noteworthy that this sector which also incorporates Shari’a compliant securities, unit trusts and other related products is moving in tandem with the conventional capital market. But as the saying goes, there is no such thing as a recession-proof bond market as the recent sukuk default shows. But having said that, one must caution against throwing the baby with the bath water. Though investor confidence must never be unconditional, it should not be irrational. In this regard, it can be said without exaggeration that the Islamic finance and capital markets have weathered the recent financial crisis quite well. As things have emerged, Islamic funding has now become not just accepted but widely used.
To begin with, Islamic funding in development must be seen in holistic terms in as much as it is Shari’a compliant. And as we know, the Shari’a is not piecemeal but holistic. It is a comprehensive scheme of human behavior and a code of law as well as a code of morals. The first proposition therefore would be that the role of Islamic funding in development may not be gauged purely in legalistic terms. I believe the overriding concern must remain the promotion of justice and equity.
This flows naturally and logically from the concept of the Maqasid al-Shari’a, and today much discourse has been generated on the maslaha or public good of Islamic finance. I only wish to emphasize that the categories are not closed. Hence, the maslaha pertaining to development apart from setting the critical physical infrastructure would also encompass the protection and maintenance of the environment, the eradication of poverty, and generally the promotion of social justice.
Viewed in this light, any assessment of the role of Islamic finance must therefore look beyond the issue of Shari’a compliance though that must remain a prerequisite to the validity of the transactions. But it needs to be emphasized that adherence to Shari’a requirements is not the same thing as the realization of the maslaha. There is often the danger or the temptation to overlook the principles of equity and good conscience in the pursuit of profits.
The demands of a holistic approach mean that Muslims need to integrate all aspects of life within a just and equitable system. In this regard, we cannot overstate the importance of supporting strong families, education, and protecting the environment or fighting poverty and redressing other social inequities. There should also be a corresponding commitment to public works, consumer protection regulation and community welfare.
The time is ripe for the emergence of a global Islamic finance architecture defined by the highest standards of corporate governance, accountability, and transparency. As poverty eradication still remains low in priority, we could begin by giving more attention to those areas where funding is needed most. The finance industry should also introduce social safety net programs while initiating modern infrastructure in order to integrate the economy into the global networks of commerce and industry.
Islamic banking and financial market is now well diversified in the various subsectors and is still expanding. There is no doubt that the world is watching the pattern and trajectory that the growth will be taking.
I was personally involved in the formative years of the industry, and as Finance Minister had spearheaded several key areas in the capital and corporate banking and takaful arenas. Today, as some have said, gulf states and Malaysia are at the pole position but new entrants are already working overtime to catch up and should there be any slacking the rivals may soon beat Malaysia at the finishing line.
Innovation would therefore be at the top of the requirements for increasing competitiveness. Simply offering Shari’a compliant substitutes to conventional products won’t be sufficient. In this regard, mere provision of funding will not work in the long term. Drawbacks in regulatory infrastructure must be urgently addressed. Inadequate sector diversification will also be detrimental.
Even companies continue to demonstrate leadership in making international forays, they need to move out of the comfort zone, into greater profit and risk sharing losing sight of their social obligations. The impending entry of the mega Islamic banks may be boon or may be disaster. The ball is at the court of the financial institutions. They must respond accordingly.
Winds of change across the Middle East
I now come to the winds of change blowing across the Middle East. Much has been said about the so-called Arab spring but there is the danger of using terms too loosely which at best may just end up as convenient clichés signifying very little. It was in Doha more than five years ago at the U.S.-Muslim World Forum that I sounded the call for leaders in the region to seize the day for reform, and that democratization in the region would be sooner than later.
We know that the tide of political reform may rise and ebb according to the strength or weakness of our commitment to democracy and freedom. As I’ve said before, if this progress is to be meaningful, it must strengthen the cause of democracy and not weaken it, improve governance and not condone corruption and cronyism. Commitment to this change should enhance economic growth with clear commitment to ensure economic justice and equitable distribution of income.
Those who are under the impression that the reform movements sweeping the region appear to have just sprung up overnight could do well to remember that many of the states in the Middle East, particularly those of the GCC, had already initiated progressive measures in the direction of freedom and democracy. I myself have spoken on several occasions regarding this matter and have gone on record to remark that the countries in the region were not averse to upholding the system of international rules in the economic sphere. In the political arena, the question was whether we still need to be harangued by the world into taking the path that we know is good for us, or should we instead seize the day and embark on it ourselves.
The lessons of Tunisia and Egypt remind us that in an enduring democratic society, power and authority must be based on the rule of law. Greater openness and transparency must be promoted in the administration of the state. Hence, some of the GCC states took the initiative, as first steps, to holding free and fair elections.
The question arises as to whether all freedom and democracy will jeopardize development particularly for nascent economies. As a firm believer in the role of business as a catalyst towards reform, my answer therefore is a definite ‘no’. The only rider to this is that business must be subject to a culture of corporate governance that values transparency and ethical practices. There must be the political will to fight corruption and stop rogue corporations from colluding with autocrats to rape the land and destroy the environment. We see this happening in the Middle East and Southeast Asia.
Political reform goes in tandem with economic reform. Economic planning must carry a clear social program to bring about a humane economy. State resources must therefore be put to an effective social agenda which includes poverty eradication, public health and housing, and substantive investment in human capital development.
The problems that plague the Arab world are not unique to the Middle East. Muslim countries all over the world save a few are plagued by similar problems – gross inequities of income, poor infrastructure, antiquated education systems, inadequate health care and rising food prices and the costs of shelter.
As the storm of democracy swept across the sands of Tunisia spreading eastward to Egypt, then to Jordan and then Yemen, it has left in its trail a region completely transformed. It has made the unthinkable, thinkable. When the East Europeans rampaged through their capitals and brought down their leaders, it was never really seen as something quite extraordinary. Sure, there was much media attention but there was no suggestion that democracy was not the definitive answer to autocracy. However, when it comes to the Middle East both perceptions and expectations take on an entirely different dimension. For the West, the news is treated at least initially, with alarm rather than excitement, reluctant resignation at best rather than unbridled joy that freedom and democracy has finally reached the shores of North Africa and the land of the Pyramids.
We see the Western powers, particularly the United States, dragging their feet while weighing their options and engaging in linguistic waffling. This ambivalence has spread to Southeast Asia where leaders of sham democracies continue to get red-carpet treatment from administration officials.
The time for rhetoric is past. The region is fundamentally changed. Now it is true that in the Middle East, the accretions of historical influence and cultural conditioning impacted the polemics about Islam and democracy and impaired the ability and undermined the conviction to bring about the convergence of Islam and democracy.
European colonization gave rise to a deep-rooted sense of resentment understandable considering the past glory of Islam’s own vast empire. Thriving on parasitically to this “influence of anxiety” – with apologies to Harold Bloom – autocrats, dictators and kleptocrats in the Muslim world present themselves as moderate and progressive Muslims who will be the bulwark against Islamists, in fact against the ascendency of Islam itself. The West therefore must throw their weight behind them or risks the eventuality of Islamists taking over. That has been the logic and that has been the rationale hitherto.
If the U.S is really serious about promoting freedom and democracy it should begin by setting priorities in its foreign aid programs. For instance, rather than military aid, I believe Egypt needs more economic aid and this would help to promote social justice, help reduce poverty, increase employment opportunities and raise the living standards of the people – these are essential safeguards against radicalism and extremism.
The Arab winter of discontent can only turn into spring when constitutional democracies are finally established in place of the old systems. Civil liberties must be guaranteed and basic institutions of civil society be allowed to flourish. The transition to democracy must ensure the existence of an effective check and balance against executive powers, violation of fundamental liberties and maintain the rule of law.
Thank you.
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