BY: SHABANA M. HASAN
Jhordy Khashoogie Nazar, aged 25, is a young Indonesian Islamic economist in the making. He recently completed an MSc in Islamic Finance from the University of Durham, United Kingdom (UK). Prior to that he earned a Bachelor of Economics (Hons) from the International Islamic University of Malaysia (IIUM). He is an up and coming name in the Islamic finance arena who has been actively contributing his knowledge of Islamic finance and fresh insights on it to many reputable Islamic finance publications worldwide such as Global Islamic Finance Magazine, Opalesque Islamic Financial Intelligence, Republika Newspaper and others.
Being interested in the views of the budding generation of contributors to Islamic finance, who have acquired the intellectual tools to assess it and are driven by noble aspirations to bridge the gap between ideals and realities, we asked Jhordy to sketch his vision for the future development of Islamic finance and to identify the pressing issues currently facing the industry. The following are excerpts from the interview.
1) Four decades after the establishment of Islamic finance, how would you assess the direction it has taken?
Islamic finance is on the right track to achieve sustainable growth in the foreseeable future, based on the fact that the global Islamic financial industry is currently worth over USD 1.2 trillion. The important issues for the next phase of Islamic finance’s development are how it can sustainably grow with genuine Shari‘ah differentiation from conventional counterparts, connectivity with the real economy, and embodiment of benevolence (ihsan) and social justice (‘adl). With that approach to development, Islamic finance can converge with the true values that Islamic economists envisioned for it in the early stage of Islamic banking four decades ago.
2) There have been arguments that too much focus has been given to the 'form' (that is, whether individual documents are Shari'ah compliant) instead of the 'substance' (where the focus is on the documentation as a whole and the intention of the parties). This has raised concerns about the authenticity of some Islamic finance transactions. From the perspective of a young Islamic economist, what do you have to say about this view?
The form-over-substance debate is an ongoing topic in the recent development of Islamic banking and finance. Looking into the actual practices of Islamic finance, some Shari‘ah scholars have not given much consideration to product substance for Shari‘ah approval but, rather, overemphasize the legality of the structure or the form of the contract. In this regard, Shari‘ah scholars are expected to play a more important role as gatekeepers of the Islamic financial industry who ensure that there are genuine Shari‘ah products in Islamic banks’ product suite.
3) Do you think the present focus on form over substance will hamper the future growth of Islamic finance?
I don’t think it will, actually. Islamic finance can still grow by commercialising conventional products and easily making hefty profits out of that. But, I’m just worried that there will be a misconception of the public, especially Muslim communities, about the difference between products and services offered by Islamic banks and conventional banks. I expect that Islamic banks should be balanced between maximising profits and building the image of true Shari‘ah values to the world.
4) Even though the Islamic finance industry is experiencing rapid growth compared to other banking sectors, more efforts still need to be put in place for the industry to move forward. Can you please explain what should be done?
The key pivotal effort for me is solid synergy amongst the stakeholders of Islamic finance to realise some improvements and reforms needed in the industry. My wish list includes standardisation and streamlined regulations for Shari‘ah products that can be applied in various jurisdictions, financing that favours small and medium enterprises (SMEs), micro-finance, and connectivity between the Islamic financial system and the real sector. Although my wish list is idealistic, I do believe it can be realised in the long term.
5) What are the current pressing issues faced in the Islamic finance industry that needs to be tackled for the industry to move forward?
I think we need a centralized Shari‘ah board at the international level represented by qualified Shari‘ah scholars from various jurisdictions and schools of thought. The function will be Shari‘ah advisory, Shari‘ah audit, and unanimous fatwa decisions for Islamic finance products that are binding on the stakeholders of Islamic banks across the globe. With the establishment of a centralized Shari‘ah board, there will be binding unison Shari‘ah opinions globally, and Shari‘ah scholars can be more focused so as not to overlook the Shari‘ah substance of Islamic banking products.
6) Some Islamic finance observers argue that some, if not all, of the Islamic finance industry's operations today are misguided because they simply reflect adherence to the letter of Islamic law at the expense of fulfilling its spirit. Do you agree with this statement and, if so, why?
Yes, I do agree, based on the real evidence of Islamic finance legal cases. There are still conflicts between Western law and Shari‘ah when the products are brought to court in cases of default. The experience from these cases is that Western law always prevails over the Shari‘ah. Hence, to make it optimal, the lawyers and Shari‘ah scholars should sit together to build the Shari‘ah framework as well as appropriate methods for resolving legal conflicts. The goal would be that, in the event of default, the case could be resolved pursuant to the said Shari‘ah framework without compromising Shari‘ah principles.
7) Can you please mention some of the Islamic finance products that replicate the conventional ones as an example of what is wrong with Islamic finance today?
In my opinion, any Islamic finance products whose essence and nature contribute to the occurrence of social evils (mafsadah) from the Shari‘ah point of view should be phased out from the Islamic finance market. My views on mafsadah here are negative impacts on the society and economy as a whole, such as promotion of unnecessary debts that make Muslim societies live beyond their means. Another major mafsadah is speculation. Both of these are likely to cause financial crises.
8) Some Islamic finance observers assert that Islamic finance is a work in progress, and that taking imperfect steps in the direction of a holistic Islamic financial system is better than nothing. Do you agree?
I respect that idea. But there are different approaches on how to develop a holistic Islamic financial system. Just take the example of Indonesia’s Islamic finance development. Indonesia is taking perfect steps by preserving the Shari‘ah authenticity in every product and service offered by Indonesian Islamic banks and nurturing Islamic microfinance institutions (Baitul Mal Tamweel) to alleviate poverty. Although Islamic finance has a meagre market share of the Indonesian banking industry, Indonesia is ensuring that the holistic Islamic financial system will reflect the true Shari‘ah values. Hence, it depends on the respective country’s regulators, which approach to take in developing a holistic Islamic financial system.
9) Is it true that if Islamic finance does not continue to replicate conventional products, it would render Islamic finance institutions unprofitable and could bring Islamic finance projects to a grinding halt?
No, that is not the case, in my opinion. There are still prospective projects and initiatives that Islamic finance can tap on to increase its growth and profitability. For instance, there is a new emerging asset class in Islamic finance, which is the halal industry. It needs more capitalisation to flourish. Malaysia constitutes the biggest share of the halal industry in the SAMI (Saudi Arabia, Ankara, Malaysia, Indonesia) cluster. Islamic banks can engage with the halal industry to finance their capital goods and to arrange for capital injection through private equity ventures in the form of musharakah and mudarabah financing. Moreover, Islamic banks can do project financing with ijarah muntahiyah bit-tamlik sukuk for resource mobilisation within SAMI or even the OIC.
10) If Islamic finance continues to employ a strategy of replicating conventional finance products, where do you foresee Islamic finance in the next 20 years?
If that truly happens, I foresee that Islamic finance will be going in the opposite direction from the aspirations of Islamic economists in the early stage of its development and, more importantly, away from the values enshrined in maqasid al-Shari‘ah. Moreover, there is a need for a paradigm shift in Islamic banking development so that Islamic banks strive to achieve common social good in the society and have direct impact on the real economic sector.