I am under the impression that fatwa-shopping refers to the e-fatwa that proliferates on the Internet where one can pick and choose the fatwa (religious edict of a Mufti) that is in alignment with one’s own view or interest.
This cherry picking of fatwa is often done to ‘whack’ the views of others that one differs from in matters of peripheral differences of opinion on some religious issues. Very often too, this pick-and-choose fatwa is used to reinforce one’s view in a controversial religious issue by exclaiming: “I told you so… this fatwa is proof that my position is right.”
But don’t be surprised that this phenomenon of fatwa-shopping may occur at the professional discipline of Islamic Finance.
The issue was first raised in 2009 when Sheikh Muhammad Taqi Usmani of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global Islamic Finance industry, said that 85% of sukuk, or Islamic bonds, were un-Islamic.
This was later reiterated by financial journalist John Foster, a former editor of Islamic Business & Finance magazine. Here’s his account:
“… this new generation of Islamic bankers had cut their teeth in the City and Wall Street, and were used to creating sophisticated financial products.
“They often bumped heads with the Sharia scholars who authorised their products as Sharia compliant.
“However, these bankers had a way of dealing with this, as one investment banker based in Dubai, working for a major Western financial organisation explains:
“We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari’ah compliant].
“If he doesn’t give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic.”
But I don’t think most Syariah scholar sitting on the Syariah Supervisory Board (SSB) of Islamic financial institutions (IFIs) are easily compromised though I’m very much surprised by the magnitude of sukuk that Sheikh Muhammad Taqi Usmani claimed to be un-Islamic (read: non Syariah compliant).
Furthermore, there are genuine differences of opinion among the asatizah on some aspects of Fiqh Muamalat (Commercial and Transaction Laws in Islam).
In this regard, Malaysian small investors of Islamic financial products are fortunate because there is now the Ombudsman Financial Services (OFS), which began operation on Oct 1.
Bank Negara gave its seal of approval for the operationalization of the OFS to provide a fair and efficient avenue for financial consumers to resolve disputes against financial service providers.
This means consumers that have issue with the Syariah compliance of an Islamic financial product or service that they have bought may bring it up to the OFS, which is an independent redress mechanism with minimum formality for financial consumers to resolve disputes with financial service providers.
To those of my asatizah friends who happen to sit on SSB of IFIs, I hope you have the integrity to realise that religious injunctions are not for sale. My doa that you’ll be given the guidance by Allah to act in an honest, just and equitable manner, Aamiin.
A global federation of educators to bridge gap between theory & practice of Islamic Finance
By Jamari Mohtar
Focus Malaysia | Oct 22, 2016
KL Declaration calls for Centre for Islamic Economics IIUM to play key role as Secretariat to the proposed International Federation of Islamic Economics and Finance Educators (I-FIEFE)
I NODDED in full agreement when the Kuala Lumpur Declaration at the end of the 11th International Conference on Islamic Economics and Finance (ICIEF) held in the capital of Malaysia recently, made a clarion call for the setting up of an International Federation of Islamic Economics and Finance Educators (I-FIEFE) to bridge the gap between the theory and practice of Islamic Economics and Finance, and produce qualified manpower for the industry.
The KL Declaration also calls for the Centre for Islamic Economics, International Islamic University, Malaysia (IIUM) to play a key role as the Secretariat for I-FIEFE. The secretariat is expected to commence work immediately with support from all parties including the government of Malaysia as well as agencies such as the Islamic Research and Training Institute (IRTI) of the Islamic Development Bank (IDB) Group and to have visible and tangible output within one year.
It’s high time that the practitioners of Islamic Finance pay heed to the fundamentals of Islamic Economics as the foundation of their activities in providing Islamic financial services and products so that both theory and practice move in unison and in equilibrium in order that Islamic banking and finance serve the genuine needs of the ummah.
“This requires policy measures that are not only pro-growth but also will ensure the attainment of equity and the socio-economic progress of all segments in society,” says Professor Mohamed Aslam Haneef, chairman of the Conference, who read what become known as the Kuala Lumpur Declaration on Oct 13, at the end of the three-day Conference.
Explaining on the theme of the Conference which is Rethinking Islamic Economics and Finance: Paving the Way Forward for Inclusive and Sustainable Development, Professor Aslam tells FocusM: “The rethinking theme is in response to the much muted unhappiness among academics and the common man who are increasingly critical of the present day practice of Islamic Banking and Finance (IBF).”
Professor Aslam who’s also IIUM’s Director, Centre for Islamic Economics also poses the question: “Do IFIs (Islamic financial institutions) play any developmental role and are helping to solve the major socio-economic problems of the ummah or just a bank for rich Muslims and corporations?
“For too long, IBF has become an ‘industry’ for the shareholders and moved away from it being a ‘movement’ with an ummatic vision. Yes, they are syariah-compliant but not necessarily ethically rich and concerned,” he sighs, reflecting a sense of disappointment at the way Islamic Economics and Finance have evolved since the inception of the first International Conference on Islamic Economics at Mecca 40 years ago which gave birth to the nascent discipline of Islamic Economics in the first instance, and IBF subsequently.
Among the priorities of the proposed I-FIEFE are:
- Develop a global database of Islamic economics and finance education, which would cover programmes, curriculum and ‘talent’ development and is to be published as an ‘Islamic Economics and Finance Education’ report with the support of IRTI and other partners;
- Holding international workshops/seminars and continuous education programmes for university lecturers to improve the standards of teaching and research in Islamic economics and finance, especially in the OIC-Member states; and
- Conducting and coordinating greater research collaboration and academic/student exchange between member institutions.
The 11th Conference was held under the auspices of the IIUM, co organized with IRTI of the IDB Group, the International Association for Islamic Economics (IAIE) as well as the Ministry of Finance, Malaysia as a strategic partner.
Risk sharing to replace existing risk transfer/shifting system
In his keynote address at the Conference, Professor Abbas Mirakhor of the Malaysia-based International Centre for Education in Islamic Finance (INCEIF) which is dubbed by analysts as the Global University of Islamic Finance, lamented at how a risk transfer or a risk shifting in the context of risk sharing in a debt based system often ends up with the taxpayers assuming the risk without their knowledge.
“Although the 2013 Declaration of the 9th Conference at Istanbul stipulated that the essence of Islamic Economics is risk-sharing, nonetheless a risk sharing arrangement that is the result of a risk transfer taking place without the knowledge of the one who now assumes the transferred risk on why the risk is shifted to him or her, is obviously haram.
“The party that is being subject to a risk transfer must be informed at the beginning, not at the end of the transaction that he is subjected to a risk transfer in order to make the transaction Syariah-compliant,” adds Professor Abbas.
Hearing Professor Abbas, my mind was transported back to the time some 30 years ago when I was among the pioneer batch students of Islamic Economics at the IIUM where I often wondered why my lecturers sanctioned the idea of a loss-offsetting reserve for a theoretical Islamic Bank where in good times, the investors/depositors were not given their maximum rate of return but instead that amount which was more or less equivalent to what an investor would earn in an interest based system.
The excess that was being withheld from the investor was placed in a loss-offsetting reserve so that the theoretical Islamic Bank in bad times can still dish out a rate of return which was more or less the equivalent of the interest rate earned by an investor/depositor in a conventional bank via drawing out funds from the loss-offsetting reserve. And the investors/depositors were not told of this mechanism in advance.
The rate of return by definition is a variable amount whose final value is dependent on the risk undertaken for a given period of time by the depositors/investors. Because of this variability in amount, a distinction is made between an ex-ante rate of return and ex-post rate of return in which the former refers to an estimated as opposed to actual average rate of return over the life of an investment, while the latter refers to a calculation of the actual rate of return over the life of an investment. In cases where there was uncertainty as to the rate of return before the investment was made, one calculates the ex-post rate of return after the completion of the investment to determine how closely the investment matched its estimates.
The rate of interest, on the other hand is a fixed amount that an investor/depositor is always entitled to, regardless of the risk undertaken. Making the rate of return riskless is tantamount to transforming it into an interest rate, for in economics, a riskless rate of return is another name for interest rate.
Granted that the first Islamic bank needed to use interest rate as a shadow rate of return for benchmarking purpose, otherwise its viability would be affected at its pioneering stage, it would be mind boggling that this need for a shadow rate of return based on the movement of interest rate is still justified after 30 years of Islamic banking, and with the mushrooming of Islamic banks the world over.
Continuing this practice goes against the grain of economic theory because in conventional economics, it is for the rate of interest to follow the rate of return instead of the other way round. For instance, when the rates of return are high, people will move their funds out of a debt system like banking to the equity system like the stock exchange, and this in turn will drive up the interest rate to stop the exodus of funds to the equity market. Conversely, when rates of return are falling, people will move their funds out of the equity market to the banking system. This exodus of funds into the banking system in turn will drive down the interest rates.
It is on this basis that Muslim economists are unanimous in declaring that interest rate is an institutional reality rather than an economic necessity! The rate of return, on the other hand, is both an economic necessity and an institutional reality.
No risk, no reward
The above discussion has ramification on the providers of Islamic financial services and products in that they have a duty to inform their clients on the risk profile of their products and services based on the maxims of “no risk, no reward” and “high risk, high reward”.
Risk here refers to the total or partial erosion of the initial capital of their clients while reward refers to the prospect of earning more than an average rate of return by their clients. It is impossible for all financial institutions (FIs) including Islamic ones to guarantee at the same time both the preservation of the original capital, along with earning a more than average rate of return.
This is the point that lay investors seldom realise and thus were easily taken in by the promise of such double guarantees by unscrupulous representatives of FIs, which were often the cause of global financial instability if this subtle “trickery” occurs on a massive scale.
That is why the Singapore’s Monetary Authority (MAS) has made it mandatory on FIs to rate their financial services and products based on the risk profile of their clients in order to educate them on the risky nature of all their products and services.
At one end of the spectrum are products that guarantee the preservation of the initial capital with a modest rate of return for risk-averse investors, while at the other end are the products meant for risk-taker investors that offer a more than average rate of return with no guarantee of preservation of the original capital. Hence, risks are known and shared equitably.
Financial ombudsman scheme may mitigate fatwa-shopping in IBF
THE Ombudsman for Financial Services (OFS), which has commenced operations since October 1, as the operator of the financial ombudsman scheme, may put a damper to the phenomenon of fatwa-shopping in the Islamic Banking and Finance landscape in Malaysia, if the phenomenon indeed exists here.
Bank Negara gave its seal of approval for the operationalization of OFS beginning October 1 in a media statement on Sept 28. Its operationalization comes under the Financial Services Act 2013 and Islamic Financial Services Act 2013 to provide a fair and efficient avenue for financial consumers to resolve disputes against financial service providers.
The phenomenon of fatwa shopping arises because Syariah scholars sit on the Syariah Supervisory Board (SSB) of Islamic Financial Institutions (IFIs) where their decision on the syariah compliance of the Islamic financial products is very crucial to the offering of the products or services by the IFIs. Many of these scholars are highly regarded, with their opinions having the potential to move markets.
Hence, some analysts have raised some concerns that since syariah scholars are generally employed directly by the financial institutions, their independence can be compromised, since bank managers use their influence to gain more acceptable opinions. This has been commonly referred to as “fatwa-shopping” or “Shariah advisory à la carte”.
The issue was first raised in 2009 when Sheikh Muhammad Taqi Usmani of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic.
With the operationalization of OFS in Malaysia, this phenomenon can be mitigated as consumers that have issue with the Syariah compliance of an Islamic financial product or service that they have bought may bring it up to the OFS. This is because OFS serves as an independent redress mechanism with minimum formality for financial consumers to resolve disputes with financial service providers.
But as pointed out by Associate Professor Dr Syed Musa from the IIUM’s Institute of Islamic Banking and Finance (IIiBF), the OFS is an alternative to, and not a replacement for legal actions taken in a court of law, and disputes filed must not exceed RM 250,000.
“The key is still the focus on effective Syariah/corporate governance mechanisms, transparency and product disclosure towards customer care and intimacy to mitigate the Syariah non-compliance risk, without unduly inhibiting the innovative spirit of the industry to come out quickly with various range of products to suit the customers’ varied needs,” he adds.
“The availability of this dispute resolution mechanism may also lower the cost of Islamic financial products since they are viewed as relatively costly vis-à-vis conventional financial products, albeit a perceived one, as brought up by one of the speakers in the Conference.”
Dr Syed Musa is referring to the 11th International Conference on Islamic Economics and Finance held in Kuala Lumpur from Oct 11 to 13. The relatively lower cost alluded by him could be the result of the harmonization process in which both the Islamic and conventional financial products come under the ambit of the OFS.
The services of the OFS are offered free of charge to financial consumers. It operates in accordance with the principles of independence, fairness and impartiality, accessibility, accountability, transparency and effectiveness. A retired Federal Court Judge, Tan Sri James Foong has been appointed as its Chairman.