Sheikh Ziyaad Mohamed is a Shariah Adviser and Islamic Finance Consultant. He is certified and trained in Islamic Jurisprudence, Quranic Science, Arabic and Islamic Traditions by scholars in South Africa, Syria, Eqypt and Jordan. In this interview with Daily Trust, he said Islamic banking will help in transforming Nigeria's economy and that it is beneficial to all people irrespective of their religious belief. He advises CBN to provide more information to educate the masses.
Why do you think the proposed Islamic banking is generating controversy in Nigeria?
Certain countries seem to be more sensitive to the introduction of Islamic banking primarily due to the religious connotations and misunderstanding of its principles.
The reality is that Islamic banking has already been embraced by many other countries with secular, Christian and Islamic systems. There has perhaps been a realization in those countries that the philosophy makes sense. It is profitable for all those involved, it promotes a high ethical standard, it is highly transparent and has a significant sense of disclosure. Even the United States and United Kingdom have introduced Islamic Banking.
The UK for example, has a minority Muslim population (+-4%), yet they have amended regulation to cater for Islamic banking. South Africa also has a minority Muslim population (+-2%) that has had Islamic banking since 1989. They have also amended regulation to allow for the successful functioning of Islamic banking.
Even Japan, who is a member of Islamic Financial Service Body of Malaysia (IFSB), has begun the introduction of Islamic banking. China is also introducing Islamic banking. Countries across Europe, Africa and Asia, notwithstanding the significant presence of Islamic banking in the Middle East, have begun embracing the Islamic finance and investment philosophy.
Some of the reasons that Nigerians are so concerned about introducing Islamic banking are perhaps due to mis-communication, misunderstanding and fear of the unknown. However, the underlying philosophy is open to all religions and stands to benefit anyone who wishes to participate in ethical banking.
Islamic banking is about ethical business transactions. It is about removing the moral hazard. It is about removing the practice of interest which is not something only unique to Islam. Other monotheistic religions including Christianity also do not accept usury. Islam is not the only religion that denies or prohibits usury; it is perhaps because the rules of prohibition are quite prescriptive and structured that it has achieved world prominence in a short space of time.
Islamic or non-interest finance focuses on the existence of a real, tangible asset. The rental of money (interest), the trade of a currency for anything except at par, is not permissible as it is seen as exploitation to some of the parties in the transaction.
The rules of Islamic economics can be applied easily as the legal maxim considers everything permissible in business transactions except what is specifically prohibited. These prohibitions include interest, uncertainty without due consideration (calculated risk), gambling, unfairness and injustice and the purchase and sale of unlawful products and services. These prohibitions are practical, moral and beneficial to all parties concerned. These restrictions are universal morals where most are accepted in all religions.
In Malaysia, you have two separate methods of finance. Conventional finance exists alongside Islamic finance, co-existing in harmony.
Islamic and conventional banking are existing and even working together in many instances around the world.
The implementation of Islamic banking is for the benefit of the entire community as it strives to promote socio-economic empowerment and upliftment through ethical means that restrict the use of the interest, etc.
Why is it as if Islam is coming out with something new? Muslims have a right to practice what they believe in as anyone does. Even so, Islamic banking can be practiced by anyone. It is open to everyone: Christian, Muslim, Atheist, anyone. It needs not be called Islamic banking, it can be called ethical banking or non-interest banking. Therefore, I personally feel that the suspicion around the introduction of Islamic banking can be resolved through basic knowledge on what it stands for.
Since Islamic banking is a non-interest banking, how do you make profit without charging interest?
The concept of interest is simply rent on money. Islamic economics, a 1,400 year-old system, is saying that the objective should not be rent on money. The focus should be the sale and rent of assets. If you own an asset you can rent it and make a profit from it. If you want to finance an asset, why not buy the asset and sell it and make profit. The profit is what is actually received by an Islamic bank that is then distributed to shareholders and depositors as dividends or profit. Islamic banks can therefore be highly profitable.
Interest has become the core of modern economics. The problem is that we have been programmed into believing that interest is the only way for an economy to progress and when we hear alternative philosophies, we think there is something dubious about it.
Most of us have lived a life of interest; we have taken and charged interest and we have implemented an interest rate but it was realized in 2009 that the entire world economy can collapse on the basis of interest and the sale of non-existent assets backed by securites (CD's, etc.). The evidence is public knowledge.
Why was it that Islamic banking did not suffer the worst of the crisis whilst conventional banks were collapsing?
It is because of an over reliance on interest and an over reliance on highly risky, toxic financial methods. Islamic financing does not allow that. Isn't that beneficial to the community and the country as a whole? Whether you call it Islamic or not is not the issue, adopt the philosophy, it makes sense.
Are you saying Islamic banking is based on certainty?
Therefore, we can say that transactions that are speculative in nature like the purchase of company shares due to a hunch or hot tip, property speculation and even the purchase and sale of assets that do not exist are all prohibited. One can remove as much uncertainty in a transaction as is possible.It is based on calculated risk. There is nothing that is certain in life except death. However, the nature of transactions in conventional banking are focused upon the repayment and the interest on the principle, ignoring the real asset.
How?
Avoid any transaction that is highly risky. Avoid gambling and do not invest in derivative instruments because they would fall under the gambling definition. The financial crisis of 2009 has shown us that derivative instruments for example, have extremely levels of risk ultimately being the primary contributor to the collapse of world markets.
Why would anyone not want to adopt a philosophy that in fact moves nations out of poverty?
How does risk sharing in Islamic finance operate?
Islamic economics identifies inherent risk in equity transactions. The legal maxim clarifies that the one who takes the risk has the right to share in the reward. Islamic economics is simply saying that guaranteed returns via fixed interest rates place parties at a disadvantage, even the banks. The objective is for fairness in the transaction. If the investment returns a profit, the partners should be entitled to it according to a pre-agreed profit-sharing ratio. However, if there is a loss, both should share in the loss as well. This is both more equitable and more sustainable in the long-run.
How does the Islamic bond, the Sukuk, differ from the conventional bond?
The conventional bond is based on a coupon rate that provides you with a guaranteed return of interest but Sukuk is based on a return that is derived from investment in an asset. The returns that are derived are now distributed to the shareholders. It is based either on equity transactions, rental transactions, manufacturing or even a hybrid. However, the risk levels are comparable to bonds as they can be underwritten by governments and rating houses, providing credibility and assurance of repayment.
What advice would you give to the Nigeria government which is in the process of introducing Islamic financial system?
will say they are not the first to introduce it. Many countries around the world have introduced Islamic banking. They can learn from them and avoid the many errors that others have made.
Secondly, communication to the masses is the most critical aspect in the acceptance of Islamic financing. There would naturally be skepticism and fear in introducing any new system. Communication at all levels; at school level; at university level; at academic level; at banking level is very important.
The initial driver would probably have to be the Central Bank. Communication is critical to the understanding of Islamic banking. Islamic banking has no intention of Islamizing any economy but instead it is focused upon providing financing and return on investment through ethical methods, ultimately attempting to remove poverty and uplift the economy as a whole.
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