Professor Datuk Dr. Rifaat Ahmed Abdel Karim has an international reputation as a leader and authority in the Islamic financial services industry (IFSI), at both professional and academic levels. He has played a pioneering role in the development of Islamic finance globally. His leadership in the setting of accounting, auditing, governance, Shariah and regulatory standards, as well as in the development of high quality short-term financial instruments to facilitate liquidity management for Islamic financial institutions, has been highly instrumental. He is also a recipient of numerous globally accredited awards. In 2016, he was conferred the Royal Award for Islamic Finance by the King of Malaysia, His Majesty the Yang di-Pertuan Agong. The Banker has also identified him as one of the most respected figure in the Islamic financial sector, and Euromoney has named him as one of the top 20 individuals who have so far come to the forefront of the industry. With that, I-FIKR Digest is delighted to be able to publish excerpts from his interview conducted by Dr Shariq Nisar and Prof. Dr. Umar Farooq in Doha, Qatar.
Q1. Please tell us briefly about yourself.
Dr. Rifaat: I was educated at the University of Khartoum, Sudan from 1971-1975. I then went to the United Kingdom (UK) in 1976 for one-year Master’s Degree at University of Birmingham, which was fully funded by my illiterate mother. After going back to Sudan briefly after my Master’s Degree, I then received a scholarship from Kuwait-based University to do my Ph.D. at the University of Bath, UK which I completed in 1981. After serving University of Gezira for four years, I then went to Kuwait University in 1985, where I taught at the Department of Accounting until 1990, the year which Saddam Hussein decided to enter and conquer Kuwait. Due to the political instability there, I decided to take my wife (who was pregnant), our three children and domestic helper (who was from Sri Lanka) to Jordan by car. To do that, we had to cross Iraq. From there, my wife, children and our domestic helper took a plane provided by the Government of Sudan to Khartoum, Sudan. Both my wife’s cousin and I waited for a vessel to take us and our cars to Port Sudan where we gave our cars to a relative who then sent them back to Khartoum, Sudan. Even though my mother was illiterate, she ensured that my ten siblings and I all grew up according to the Islamic norms, and education has always been her top-most priority. Unfortunately, my father passed away when I was only 12 years old.
Q2. What brought you into Islamic finance? Were you always interested in the subject or was there some event?
Dr. Rifaat: When I finished my Ph.D. in 1981, which was in conventional accounting specifically on UK Price Control, I told myself that I will never go back to doing research in conventional accounting. This is because my passion has always been Islamic finance. I was greatly influenced by my father-in-law, who passed away in 1981. During that time, none of the infrastructure institutions were established except for only a few Islamic banks.
I remember the late Professor Trevor Gambling who taught me at University of Birmingham. After returning from University of Bath to University Gezira, I wrote to him and told him that in his book titled Societal Accounting where he defined accounting as culture and for which he was very famous for at that time will collapse if we introduced the factor of Islamic finance. He accepted my suggestion and asked me if we could develop a joint paper on this, which we did. The paper was published in one of the top journals in the UK, Journal of Business Finance & Accounting. When I went to Kuwait University, I was in correspondence with Professor Trevor and he wrote to ask if I would be interested in developing the paper into a book. I accepted Trevor’s offer. Being a young professor at that time, I wanted to learn and write more. Every time either of us wrote a chapter, we would send it to the other person and once we had completed the manuscript, we called it Business and Accounting Ethics in Islam. It was published by Mansell Publishing in UK on May 1991. This was my first book.
Q3. Being an instrumental figure for AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), please briefly explain some of your experiences in AAOIFI.
Dr. Rifaat: AAOIFI is basically a market player organisation as it was not established by governments. When it was first established, it did not address any of these factors – auditing, Shariah ethics and governance standards.
When the Shariah Board was established in 1998, there were many challenges to be addressed. For example, would the standards be considered as fatwas? Would the members who have the right of dissent also document the standards? Would there be a due process to follow in issuing Shariah standards as was the case in the accounting standards? Would the members accept to issue an exposure draft, as well as to hold a public hearing session in which the public could question the basis on how the standards were derived? The members were convinced that the standard was not a fatwa and hence, they should not be worried about writing their dissent in the standard. However, the dissent would be recorded in the minutes of the meeting. The members were also agreeable to the need to have a due process for issuing the Shariah standards, as well as to issue the standard initially as an exposure draft. Issuing an exposure draft of the standard would enable the public, among other things, to check the issues in the standard that would be issued. The members of the Shariah Board were very understanding of such requirements and were cooperative.
Q4. Moving on to Islamic Financial Services Board (IFSB) which was initially thought to be a part of AAOIFI, can you please briefly explain how it ended up in Kuala Lumpur, Malaysia?
Dr. Rifaat: I wrote a paper which was published in the UK in 1996 on the “Impact of the Basel Capital Adequacy Calculation on the Financial and Marketing Strategies of Islamic Banks”. I said, given the model of Islamic banks, in that you mobilize funds from investment accounts, how would you treat investment accounts in capital adequacy? Would investment accounts be treated as absorbing loss funds like equity in the banking sector? I came up with four or five scenarios. And the one I chose, I believe was adopted independently in the standards laid down by IFSB on capital adequacy before the alpha factor. I remember my colleague, Simon Archer, who was the consultant for IFSB remarking how much I was ahead of those people because my paper was published in 1996, while the first prudential standard of capital adequacy was published by IFSB in 2006, three years after IFSB began operations in 2003. He told them that this man was ten years ahead of you. I didn’t want to influence the working group there. It was up to them to come to the formula of how I arrived at it in 1996. Basically, how would you treat investment accounts in the calculation of capital adequacy because according to the Mudaraba contract, if the loss was not due to misconduct and negligence, then it should be borne by the account holders? This was enough for me to trigger who would bear the loss. Would you treat them as equity holders or no? That depended on the investment account holders. On the ability of the bank to mobilize investment accounts because it could have nothing. It also depended on the strategy of the bank whether it will focus on marketing its current account, for example in a market where the bank will not be able to mobilize more of investment accounts.
Initially, IFSB was supposed to be in Bahrain as part of AAOIFI, but then when the idea was floated at the end of 2000, it was then presented to the governors of relevant jurisdictions at the side meeting of the IMF held in Czechoslovakia in 2000. In that meeting, the Governor of the Central Bank of Bahrain (then known as Bahrain Monetary Agency), stated that the Bahrain Monetary Authority wanted this board not to be a part of AAOIFI, but it should remain in Bahrain.
Almost all of the Central Banks’ Governors consented that it not be a part of AAOIFI but they deliberated whether it should be in Bahrain or Kuala Lumpur. I think initially, Bahrain got the support of almost all of the other Islamic Banks except those who were with Malaysia. The Malaysians had to work hard. Once they proposed that they wanted to share IFSB with Bahrain, my friend in IMF said it was like a cat among the pigeons. The Malaysians had to work very hard to convince other countries to support them when it came to where to locate IFSB. To do that, for the Malaysians to host the location of an international organisation for the first time, it offered to grant the IFSB tax exemptions and appointed lawyers who were advisors of the Bank of England to draft the articles of agreement of the IFSB. But then the mistake was to exempt all the secretariat members from tax. They did not take into consideration that the secretariat could be made up of Malaysians and foreign nationals. I don’t think it was acceptable for a Malaysian not to pay tax in his home country. I think that was a mistake. Later on, when I identified and resolved the question whether all secretariat members are exempted from tax, regardless of their nationality, it became an attractive benefit to all the Malaysians who were keen on Islamic finance to work for IFSB. And by the way, they liked working with IFSB very much.
It came to an extent that the lady from the Inland Revenue Board of Malaysia wrote to us that she will bar all the Malaysians working for IFSB from travelling overseas. I wrote to the Malaysia Ministry of Finance and Ministry of Foreign Affairs to inform them of the articles of agreement by which all the countries have agreed to become part of IFSB in Malaysia. And so the Ministry of Finance wrote back to the lady in charge of taxation to inform her that interpreting the law, which was enacted by the Parliament of Malaysia, is not part of her purview. Thus, we got the tax exemption. The same issue came into question for the International Islamic Liquidity Management Corporation (IILM). I think the Ministry of Finance reminded the concerned people that it will not give any Malaysians tax exemption. These are the main differences between IFSB and IILM.
1. Malaysians working for IILM will have to pay tax.
2. Since IILM was to issue short-term sukuk for liquidity management, it would, therefore, be a profit-making institution and it was decided that it should be set up on commercial basis. This meant that the staff at the IILM can sue the organisation.
3. Similarly, for example, if any financial institutions that wanted to deal with the IILM knew that it would lose in a court case when disputed, then why should it be involved in a transaction with the IILM? So that is why only these two categories, staff and financial institutions, were allowed in the IILM Act to sue the IILM.
I think these are the three major differences.
In the case of IFSB, it was not possible for any staff or external entity to sue the organisation. I remember one of our staff who filed a case against us with the Employee Provident Fund (EPF) (Malaysia retirement savings fund). We met with the CEO, who admitted that our position is secure under this powerful Act. However, we did write to the staff at the IFSB and told her that we are granted special permissions by the Act of Parliament, and this was part of our article of agreement. We were advised by the CEO of EPF that if we wanted the case to be crossed out, we would have to get a written opinion by a law firm confirming our claim that we cannot be sued. A law firm did that for us after going through the article of agreement. And subsequently, the case was withdrawn.
Q5. How did you ended up serving as the Chief Executive Officer of International Islamic Liquidity Management Corporation (IILM)?
Dr. Rifaat: In 1995, I wrote a commentary on liquidity management for the then Association of Islamic Banks, now known as The General Council for Islamic Banks and Financial Institutions (CIBAFI). The meeting was held in Jakarta, Indonesia. In February 2009, I drafted the whole concept paper, post global financial crisis, which eventually led to the establishment of IILM. During my meeting with the then governor of Saudi Arabian Monetary Authority (SAMA) in my capacity as the CEO of IFSB, I told him that we need a senior person to take the IILM idea further, which he agreed. He then asked me whom do I propose? I said if we can get a governor to chair the committee, it will be a high-level task force. Finally, it was agreed at that Council meeting that the then Governor of Bank Negara Malaysia would chair the Committee.
Q6. How will you compare IILM with any other international organisation?
Dr. Rifaat: It is not comparable with any other infrastructure institution. In IILM, only central banks were allowed to be shareholders.
Q7. In addition to sukuk amounting to USD22 billion, which IILM had raised, what other achievements according to you are noteworthy?
Dr. Rifaat: In IILM, the issuance of sukuk itself was a significant achievement for us. We made our first profit in 2014, which continued to increase in 2015 and 2016, to an extent that we informed our shareholders that we can cover the capital by 2018. Hence, being on the path of self-sustainability was a significant achievement for us.
Q8. Inter-agency coordination is another area and since you have been part of both AAOIFI and IFSB, do you think it is important for these organizations to work together or they are completely separate entities?
Dr. Rifaat: I think they definitely need to coordinate, and one way to do that coordination is to take into consideration the specific mandates of each institution. For example, with IFSB Council, it has governors as council members, and therefore you cannot have Ministers of Finance on top of the governors. This is because none of the governors would accept as their constitution requires them to be independent. Therefore, when APEX was promoted by IDB to have it in Dubai, unfortunately, it failed. When I was in IFSB, I remembered we contested it bitterly. But when I read the minutes later, it wasn’t accurate, and I had never agreed to what was written in it. We never agreed to that proposal. I knew that central banks would never allow having someone on top of them. Therefore, taking the requirements of each central bank into consideration is essential while conducting the coordination.
Q9. What made you chose to retire? You still have at least two decades of work left in you.
Dr. Rifaat: I am already 64 years old. Sheikh Abu Sattar asked me my age? I said 64. He told me you cannot be 64 years old because any person who has achieved so much, he has to be at least 70 years old and above. Alhamdulillah when I retired, as per the terms of employment in IILM, I was paid two months of the last salary for each year I spent in the organization. Besides I had also received my EPF savings. Altogether this is enough for me to retire and build my house in Sudan where I am staying now. Also, I am a person who is not too keen on travelling. In the past, I was travelling practically every week. My tenure with IFSB and the IILM required a lot of travelling, and I just do not like travelling now.
Q10. Finally, you have made tremendous contribution to the industry. How do you look at the future of Islamic finance?
Dr. Rifaat: I think the Islamic finance industry must invest heavily in human capital. Presently, there is a huge shortfall of qualified people. Most of the professionals in Islamic finance today are trained in conventional finance. However, there is an ongoing effort towards promoting human capital in Islamic finance. For example, in Malaysia, there is INCEIF, the Global University of Islamic Finance, which offers postgraduate Islamic finance courses. This was preceded by the Higher Institute for Banking Studies in Sudan, which was promoted by the Central Bank of Sudan. Today, the same is also happening in Pakistan and other countries. With proper human capital in place for Islamic finance, the future of Islamic finance is bright and promising.