Contemporary Issues in Islamic Social Finance

Hussain Mohi-ud-Din Qadri, M. Ishaq Bhatti, Hussain Mohi-ud-Din Qadri, M. Ishaq Bhatti

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000426229
• Edition: 1
• Topic: Business
• Subtopic: Islamic Banking & Finance
• Index: Business

The development of Islamic banking and finance (IBF) previously centred around three regions of the world: the Middle East, Southeast Asia, and South Asia. However, in recent years, this has expanded, as interest in IBF has gained momentum in Australia, the USA, and Europe, especially in the UK. Several Western market players have established their own Islamic window or subsidiaries to cater to the need of growing Muslim populations in these regions.

This book examines the recent developments in IBF, particularly in the context of Islamic social finance instruments, such as Islamic microfinance, halal education, takaful, mutual funds, and waqf. It covers the religiosity, spirituality, and tawhid index, which promotes social well-being and empowerment. The book is interdisciplinary, and theories, practice, and key issues are presented simultaneously, introducing new ideas and techniques to the IBF community. Moreover, the book examines topics such as innovation in Islamic social finance instruments, advanced techniques of risk mitigation in Islamic capital markets, marketing and the halal industry, and shari'ah-compliant instruments, which are critical to Islamic finance.

The book is an essential reference text for academics and research students at the master's and doctorate levels in IBF.

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Contemporary issues in Islamic social finance

Hussain M. Qadri and M. Ishaq Bhatti

DOI: 10.4324/9781003050209-1

1.1 Preamble

Recent studies and data evidence from PEW Research¹ Centre confirm that almost all Muslims in the world either living in Muslim majority and/or non-Muslim minority countries are facing serious socio-economic and ethno-religious problems. Some of these problems include ethnic cleansing of Muslims (e.g., Myanmar , India, China, Kosovo, Indian-Kashmir, and Palestine), spread of poverty in Muslim countries, outstanding external debt and extensive unethical behaviour, unemployment, drug abuse, and higher crime rates among Muslim communities in non-Muslim majority countries (e.g., countries in Australia, China, Europe, India, and the USA where Muslims are in minority). Some contemporary scholars relate these problems with wars imposed on Muslim countries (Afghanistan, Iraq, Iran, Libya, Palestine, Syria and Yemen ) and also the economic embargoes and the crippling policies of former colonial administrations, whereas others point to the governmental incompetence and corruption that result in socio-economic injustice to Muslims (see Mohsin 2020). Some of the aforementioned factors may have catalysed a worsening of the socio-economic condition of Muslims in many countries. This may be due to corrupt politicians and ignorant policy makers with regard to Islamic socio-financial institutions, including zakah (alms), khairat (charity), sadqat (donations), waqf (Islamic endowment), takaful (insurance), and sukuk (social or green bonds). These institutions were conceived to spread ethical behaviour, eliminate riba (usury/interest), empower the poor and needy, encourage financial inclusion, and eliminate poverty.

This edited volume comprises the best papers presented at the third World Islamic Economics and Finance Conference (WIEFC) that was held during 25–26 January 2020. The theme of the third WIEFC was, ‘People Empowerment, Social Innovation and Role of Islamic Economics and Finance’. The conference was organized by the Minhaj University Lahore (MUL) in collaboration with La Trobe University, Melbourne, Australia along with knowledge partners, the Islamic Development Bank’s Jeddah-based Research Institute (IRTI), Cambridge Institute of Islamic Finance, United Kingdom, the State Bank of Pakistan, AAOIFI Bahrain, and the College of Banking and Financial Studies, Oman. In the subsequent sections of this chapter, we will discuss in brief the topics of interest covered in this book. Section 1.3 presents a summary of the chapters. The final section contains some concluding remarks.

1.2 Brief description

This edited volume contains 23 chapters including this introductory chapter. The book is based on selected articles; each chapter is reviewed by a reviewer and an editor. This volume begins with a preface by the eminent Professor Azmi Omar, Vice Chancellor and President of INCEIF University, Malaysia. The book covers the following important topics related to Islamic social finance;

• - Capital structure of Islamic banking and finance (IBF) products under inclusion (taqlid al-madahib)
• - IBF well-being tawhidi index
• - Risk-management issues in IBF
• - Performance measures of IBF
• - Behavioural and social aspects of IBF
• - Zakat, waqf, and other charity institutions in IBF
• - Inclusive and sustainable growth in the IBF industry
• - Islamic marketing and customer care
• - Auditing and reporting of social aspects of IBF
• - Credit and musawamah cards in IBF
• - Halal industry and the role of IBF
• - Islamic insurance – Islamic bonds (sukuk)

1.3 Chapter-wise structure and summary

This chapter presents an introductory note in the area of contemporary issues in Islamic social finance. Chapter 2 is authored by Johaina Khalid and Dawood Ashraf (Islamic Development Bank, Saudi Arabia) on the issue of capital structure in IBF by analysing its profit-sharing aspects. They argue that Islamic banks are different from conventional banks, both in terms of their assets and liabilities due to profit-sharing investment (PSI) accounts, a quasi-equity, and a buffer to bear the financial risk structure. It compares the impact of deposits on market value, earnings per share (EPS), and financial risk of shareholders. It observes significant positive relationship between PSI accounts and EPS. Contrary to the general belief, we find evidence that higher growth in PSI accounts leads to elevated financial risk. The higher financial risk can be attributed to the income-smoothing practices of Islamic banks as they announce the profit rates of PSI accounts like the deposit rates offered by their conventional counterparts.

Chapter 3 deals with the development of a spiritual index model to measure human prosperity under the objectives of shari’ah by an established Canadian scholar Masudul Alam Choudhury. This chapter proposes a unified model for the standardization and harmonization of the universal law of primal ontology originated by the Qur’anic universal education of peace, spirituality, and prosperity. The chapter concludes by proposing a general method of computing indices that can be adopted by the global development agenda to meet millennium and sustainability goals.

The next three chapters are associated with the study of risk management and risk sharing in IBF. Rodney Wilson in Chapter 4 presents a case of risk management and risk sharing in IBF. He argues that community-based social solidarity is far better than individualistic gain at the expense of others. Risk cannot be avoided as it is inherent in economic and commercial relations and business cycles, as identified by Ibn Khaldun. Wilson further points out that businesses cannot isolate themselves from these macroeconomic developments, and risk sharing can help in mitigating some of the negative effects.

Chapter 5 concentrates on debt, risk and Islamic moral economy, authored by Toseef Azid, Osamah Al Rawashdeh (Saudi Arabia) jointly with Muhammad Omer Chaudhry. They used the quantitative method to study the nexus between lenders’ rights and borrowers’ duties. They claim that Islamic moral policy to lend resources as a financial support to socially deprived community members is a duty of the rich on zero-interest money. They proposed an Islamic financial institution that is patronized by the state to train society on shari’ah’s different dimensions of debt and how to help the poor to ensure real socio-economic growth.

In Chapter 6, Atiq ur Rehman outlines the role of the State Bank of Pakistan’s policy rate in an economy that is operational on both Islamic and conventional finance. The markup in IBF debts is associated with the bank’s policy rate. The higher the policy rate, the higher would be the ‘markup payments’ on domestic debt. Due to the increase in policy rate during the tenure of the present government, the markup payments in IBF on the domestic market formulated to 35% of the federal budget, making it the single-largest head of expenditure in the budget. The higher policy rate by central banks causes an increase in inflation owing to the cost and markup payment channels. This chapter discusses how the policy of adapting a better policy rate has contributed to the economic suffering of Pakistan using the so-called markup rate in IBF.

Chapter 7 is authored by the editor Hussain Mohi-ud-Din Qadri on the topic of religion, culture, and Islamic marketing. It attempts to build a bridge between religiosity-based marketing values for IBF clients to make purchasing decisions on the choice of day-to-day consumer products. This chapter overarches the discussion on the link between religion and culture and Islamic marketing values. In Chapter 8, Anwar Shah (Pakistan) developed the theoretical model for job creation at the micro level and highlighted the role of the IBS in enhancing the living standards of the clients and local communities. In the model, IBS allows payment over and above the available fund on behalf of household (overdrafting), which the household can remit to the bank on a monthly basis later. The incentive of banks is the commission to be deducted from the company’s bill. It is a win-win transaction for both clients and the participating banks. The proposed model is likely to create demand for home services such as plumbing, electricity, glass fitting, etc., leading to the creation of jobs for skilled people and their absorption into the market.

The title of Chapter 9 is ‘Lessons from the UK’s dedicated Islamic banks’, authored by Mohammed Amin. This chapter analyses the practical aspects of IBF in the United Kingdom. The author reviewed six Islamic banks’ performance and activities that can provide extensive lessons to Islamic banks in Western countries. In this study, a qualitative research methodology is used to reveal that poor planning caused losses because the bank was unable to take on the risk of providing home purchase plans until after it was taken over and received a significant capital injection. Some of the other Islamic banks also look sub-scale and therefore appear virtually condemned to steadily lose money. These banks’ operations and poor execution of fund in comparison with conventional banks incurred heavy losses. The chapter proposes careful management, execution, and precaution to improve the running of financial institutions.

Chapter 10 is contributed by Salman Ahmed Sheikh who discusses how Islamic finance promotes sustainable economic growth through its principles, values, institutions, and instruments. It presents a theoretical analysis under equilibrium to demonstrate optimal funds allocation to Islamic capital market portfolios. The proposed circular model is likely to result in boosting the aggregate demand components of consumption and investment, and it outlines the intervention strategy used by various Islamic instruments and institutions for achieving each of the UN’s 17 sustainable development goals (SDGs). The provision of money-based lending in the current banking practice locks a huge amount of liquidity in the money market instruments and fails to achieve the needed SDGs.

In Chapter 11, Syed M. A. R. Shah, Muhammad Umar Farooq, and Muhammad Akmal contribute on the topic of ‘embracing Islamic banking as a new engine towards the growth of dual banking system in Pakistan’s economy’. It uses data from 13 Islamic banks, between 2005 and 2017, for the analyses on bank-specific and macroeconomic variables using econometrics methods and observed a causal relationship between the selected IBF variables and economic growth, which is consistent with the supply-leading view of Schumpeter. The chapter concludes with favourable recommendations to policy makers for providing a comfortable environment and institutional support to increase the share of IBF to achieve the objective of sustainable inclusive economic growth, especially in countries with Muslim majority: Malaysia, Indonesia, Pakistan, Qatar, UAE, Egypt, Kazakhstan, Turkey, Bahrain, Saudi Arabia, and Kuwait.

Chapter 12 is on the role of zakat in poverty reduction. The author of the chapter is Aminu Alhaji Bala from Sokoto, Nigeria. He presents a case of the social aspects of IBF products that can alleviate poverty. The author argues that zakat mechanism has been proven to be successful by a case study of the Zakat and Endowment Commission of Nigeria that helped the local community overcome poverty. In this chapter, the author explains how endemic poverty challenges bedevilling the Muslim residents of Sokoto state and it has been resolved by utilizing the Islamic social security system (the zakat model).

In Chapter 13, authors Mohammad Ayaz, Khurram Faisal Jamal, and Sadaf Shaheen address an important issue of handling the Charity Fund Account (CFA), created from non-shari’ah banking activities, like minor interest earnings (less than 5% of the total profit) and late-instalment penalties and fines to IBF clients. The authors investigated a case of M-Bank from Pakistan on the function of a CFA account in which all non-shari’ah M-Bank’s earnings are maintained for six years between 2014 and 2019. The pattern of the distribution of this account for charity was studied under shari’ah compliancy. It is observed from M-Bank’s financial statements that though the bank maintained full disclosure record, some inconsistencies of fund flow to charities were noted as there were no strict guidelines of its disbursement from the State Bank of Pakistan. The authors suggested regulators should develop uniform disclosure policies of CFA type charity funds for the rest of the IBFs in the country and regions by an international body.

In Chapter 14, the idea of the Islamic bank’s musawamah card versus credit card is presented, and some future opportunities, challenges, and solutions are mentioned by three well-known, award-winning young experts: Imam Uddin, Muhammad Shujat Saleem, and Abdur Rahman Aleemi. The authors investigated the development of the musawamah-based (credit) card in line with conventional credit cards. They used the qualitative method to identify the opportunities and challenges in the adoption of a musawamah-based credit card by Islamic banks in general and specific to Pakistan. For this purpose, experts’ interviews have...