Interview: Mazin Al Nahedh
To what extent can Islamic instruments serve as a long-term alternative to conventional instruments in relation to financing?
MAZIN AL NAHEDH: The international community has previously accepted sukuk (Islamic bonds) that are issued by sovereigns or companies. Being asset-based, they are more viable to investors because they are more secure. All of these factors add value to Islamic financing and, in particular, sukuk, which are the long-term alternative to bond funds on the conventional side.
South Africa and the UK have been increasing the rate of sukuk issuances, which is positive for the sector and a good sign for the long-term viability and sustainability of sharia-compliant finance. South Asia and, in particular, Malaysia – a pioneer of Islamic banking – continue to form core markets for the sector, demonstrating their ability to innovate and develop new products, particularly on the issuance of debt through sukuk. The types of sukuk that they issue are based on Murabaha or Ijara (Islamic leasing bonds).
We have seen a significant uptake in Islamic banking in the Middle East. Take Kuwait for example: Islamic banks represent a total of 40% of the market share by assets. Much of this comes down to religious guidance more than anything else. I expect that we will see more growth coming from Turkey and Europe over the coming years.
What are the primary reasons for people switching to Islamic banking?
AL NAHEDH: Islamic banking is synonymous with ethical banking in the sense that interest is not charged and, in the case of a loss-making venture, Islamic banks tend to be more understanding of one’s capacity to service one’s debts. One of the core tenets of Islamic finance is profit and loss sharing among the wider depositor pool. The faith-based approach to conducting business drives a person to behave in a certain fashion, different from conventional banks. Depositors are mostly driven by faith, while some are driven by the service, the diversity and increasing sophistication of the products on offer. Wakala (agency contract) transactions, innovated at the beginning of 2015, mean that we can pre-promise a rate to a client. In the past, this was not a mainstream product and would not have been available.
What measures will help integrate Islamic banking into the wider academic curricula, and will this lead to more long-term growth?
AL NAHEDH: It’s important to have the basic tenets of Islamic finance taught. However, it is difficult to go beyond a certain depth, given the array of sharia boards, which represent the differing compliance philosophies and governing standards of their respective banks. The Accounting and Auditing Organisation for Islamic Financial Institutions are working to standardise Islamic banking practices as far as they can, taking into account the differing philosophies.
If a depositor wishes to move banks, they must ask themselves, “Do I fundamentally agree with the sharia board of this institution or not?” In the end, consumers do not debate the sharia board’s judgement and generally accept its decision. It is about understanding the scholar on the sharia board, and if the board is well versed about what it needs to understand and pass judgment on. This is where differentiation in the sector emerges.
The other element to consider is that certain scholars may choose to forbid a certain product. However, if the product is approved elsewhere, usually a debate ensues about the merits of the product, and a fatwa then emerges. Sometimes boards can overturn their initial decisions.
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