Almost Somewhere

In Malaysia, the Islamic banking system was started in the 70s. Since conventional banks are not allowed to engage in buying and selling of property, the Islamic banking act was enacted to allow Islamic banks, or Islamic windows to perform property transactions which led to the use of the musyarakah and mudharabah instruments.

However, in the beginning, facing a non-Islamic bank-to-bank financing, it was quite hard for an Islamic bank to be innovative. So, the main mode of financing was sale with deferred payment (al-bai’ bi thaman ajil). However, recently, with more and more banks (almost all), including conventional and international banks participating in the Islamic financial market, bank-to-bank financing can be done on shari’ah principles too.

This resulted in more innovative methods that are even better than the conventional banking methods such as the musyarakah al mutanaqisah (reducing partnership financing – very fair and just to both the bank and the customer) and the non-compounding ‘interest’ on credit cards (no interest, just a one time fee at a percentage of the purchase charged).

However, the main problem today as demand for Islamic financing almost surpasses conventional financing, banks providing Islamic windows start to charge a higher profit rate for Islamic financial product. They know that Muslims, given the high exposure to Islamic financing thanks to government promotion, would insist on Islamic financing – at least those who care about Islam more than their money.

In the end, some times I feel like I am at the losing end… paying more for what others are paying less with non-Islamic loans. Well, I’d rather pay more than go against the word of Allah.

To guard Muslims from being abused by banks, due to their belief, the government must control the banks through laws that would specify that Islamic financial products must not be more expensive than conventional products. After all, theories in Economics would predict that Islamic financial products have less moral hazards – those who consciously chose Islam over convenience would have higher moral threshold and would be better paymasters.

Collectively, there is already an Islamic world bank known as the Islamic Development Bank (IDB) based in Jeddah and affiliated under the Organization of Islamic Countries (OIC). It’s purpose is to help finance the development of Muslim communities, whether in Islamic countries or not, with Islamic financing.

However, political will may be needed to also increase it’s role in bank-to-bank financing so that it can be a seed bank for Islamic banks all around the world – fully Islamic banks, not Islamic windows. That way, fully Islamic banks will have a better competitive advantage. Being fully Islamic, these banks cannot compete on conventional market so it has less competitive advantage. If they can get lower rates from Islamic seed banks, they can compete effectively and the higher profits can help in further research and investment.

As individuals, I believe that every Muslim anywhere in the world should insist on Islamic financial products – even if it’s more expensive, less convenient, or perceived as being exactly the same as the conventional one albeit having a different name. A bit of economic sacrifice from each Muslim for the future of Islamic financial system in the whole world.

One day, when the system is strong, Muslims will benefit with banking systems that are just, fair, and beneficial spiritually as well as financially to both customers and banks. InsyaAllah.