Policy Recommendations from the ICR 4.3 (July 2013)

Mohamed Azam Mohamed Adil, Catherine S.F. Ho, Mansor Md. Isa, Ezani Yaakub and Mohammad Mahyuddin Khalid, Shariah-Compliant Screening Practices in Malaysia

• The move to use financial ratios in addition to the simplification of the current non-permissible income screening may be considered as the right combination to move foward.
• Shariah screening would result in only a subset of the entire market being available to Islamic investors, putting them at a disadvantage from the perspective of an efficient portfolio.
• It is hoped that more securities would be encouraged to be shariah-compliant in the future and in the meantime investors should aggressively screen international securities to expand their investment universe in order to achieve equitable returns.
• Debt is a worrying problem and a major driver of financial crises. Hence the limits on debt-based trade and finance should be carefully observed. This recommendation stands for both Islamic and conventional finance.
• Furthermore, regulatory authorities and governments should reconsider the tax incentive given to debt-based financing. At present debt- and credit-based financing is preferred to asset-backed transactions simply because of the tax advantages for debt, which make it more appealing. These incentives should be considered.

Karim Douglas Crow, Islam, Capitalism and Underdevelopment: Timur Kuran and Murat Çizakça on the Great Divergence

• For centuries in the past, Muslim scholars and scientists were thought to be leaders of innovative ideas and made significant contributions to Western science. This could not have occurred if Islam itself had been a source of backwardness for Muslims. There is no definitive proof for Kuran’s somewhat surprising claims that have little precedent in mainstream scholarship. Muslim thinkers should certainly forge ahead with making fresh contributions to Islamic disciplines, including the burgeoning IBF sector.
• If there is a case for Islam’s renaissance and renewal, it must surely be inspired by Islam’s own resources and a renewal from within. During the colonial period and now since the onset of globalisation, Western ideas and institutions have admittedly been somewhat overwhelming for older traditions but not so for Islam. A keen awareness of this factor is necessary for innovative scholarship.
• Muslim scholars and researchers should adopt ideas and institutions that are conducive to the development of their communities while ensuring that all adaptations remain compatible with Islamic principles.
• There is evidently much imitation and superficial adaptation of conventional ideas and products in IBF, often at the expense of innovative thinking and ijtihad, which have yet to become an engaging reality of IBF.
• IBF should utilise equity instruments and participatory forms of financing such as common shares and sukuk on a wider scale. Risk sharing and participatory finance, which are foundational to IBF, have hitherto remained marginal and merit renewed attention.
• Innovation in science and technology needs to be more vigorously promoted and generously funded. This would also require that universities and other centers of higher learning are granted greater autonomy and that they put in place substantial incentives for the attainment of excellence.
• Training programmes for Shariah scholars and advisors should integrate professional know-how and practice of IBF with foundational knowledge of Shariah.
• IBF has come under criticism for its adherence to the fiqh rules on contracts and transactions, often in total disregard of the higher goals and purposes, or maqasid, of Shariah, which should now be an integral part of the teaching and training of Shariah advisors.
• A more rigorous system of monitoring and periodic self-assessment of the successful implementation of the above measures needs to be established and consistently pursued.

Sheila Ainon Yussof, The Islamic Financial Services Act, 2013: Malaysia’s Model Framework for Shariah-compliance and Stability

• In using the CBM Shariah Governance Framework (SGF 2011) guidelines, we recommend a restructuring and re-engineering of the Shariah Governance system in terms of the composition and formalisation of Shariah boards under the IFSA as a point of reference. Similarly, appointment and tenure of Shariah Committee members should be revised. There is a need for greater clarity on responsibility, accountability, independence and objectivity to prevent conflict of interest and self-review situations; competency building through a comprehensive training programme to preserve or increase the quality of Shariah advisory; and succession planning to ensure continued leadership in this area.
• A separate professional body should be established to govern Shariah advisors similar to the Bar Council for the legal profession: either as a public body under CBM or as an independent regulatory body not governed by the CBM. This professional body may be known as the Governing Council for Shariah Advisors or Association of Shariah Advisors and will decide on fit and proper qualifications and good governance principles and ensure the quality of Shariah advisory services through talent development as well as the setting up of a Disciplinary Board for Shariah advisors or SC members.
• A Central Compensation Fund should be set up by CBM to remunerate Shariah Committee members directly; or alternatively a standard fee imposed by CBM requiring all IFIs to pay at the same rate for hiring the services of SC members to ensure equitable compensation among SC members, to prevent Shariah arbitrage, and erosion of SC members’ independence.
• A public policy requirement should be made for Shariah Committee’s decisions on product development to be based on a matrix of legality of transactions visà-vis maqasid impacts (to achieve social justice or public good). A Product Development Framework must show both the legal effect and ethical impact (socio-economic, environmental, etc.) before the product can be approved or certified as Shariah-compliant, or preferably Shariah-based products.

Abdul Karim Abdullah (Leslie Terebessy), Debt and Economic Activity

• Public education is required to facilitate the conversion of debt-based to asset-backed financing.
• It is necessary to explain the advantages of financing on the basis of risk sharing.
• Economic theory that is not based on interest-based financing needs to be developed.
• Sellers should be legally permitted to sell directly to buyers on an instalment basis, while meeting the condition that the credit price be the same as the spot price in order to avoid interest. This should apply to both the product and resource markets.
• The debts of those unable to repay should be forgiven: if not the principal amounts, at least the interest portions of it.
• Tax breaks currently encouraging borrowing at interest rather than issuing equity have to be transferred to issuers of equity and equity-type instruments such as participatory sukuk.

Lateef Kayode Adeyemo and Kamil Koyejo Oloso, Islamic Banking and Finance Today: Issues and Implications

• Governments or their agencies in each of the jurisdictions where IBF operates should, in conjunction with standard boards, come up with codes of conduct not only for the practitioners but equally for Shariah advisors and advisory boards;
• More universities and colleges should introduce relevant programmes to cater for the growing need for trained personnel in the industry;
• In order to ensure the effective global operations of IBF, all regulations, laws, and fatawa should be properly codified and harmonised and made easily accessible;
• There should be regular conferences, symposia and seminars where scholars, university and college dons as well as researchers exchange ideas, cross fertilise them and proffer solutions to challenges as they arise, to further develop the industry;
• Research grants, scholarships and endowments should be offered to motivate scholars and researchers to engage in further in-depth enquiry;
• Scholars who make ground-breaking discoveries or contributions should be recognised through suitable awards and prizes of varying degrees to motivate innovative scholarship;
• There should be a paradigm shift from mere Shariah compliance to laws based upon the foundations of Shariah, a shift which should be reflected equally in syllabi for training personnel and in training materials;
• Civil courts that have no experts in Fiqh Mu’amalat (Islamic Commercial Law) should not be allowed to adjudicate on matters relating to IBF without the presence of qualified Shariah experts;
• There is a need to harmonise major terms and technical expressions used in IBF in order to avoid confusion.

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