SUPERIORITY OF THE ISLAMIC FINANCIAL SYSTEM

It is not just an article of faith that the Islamic financial system is superior to the conventional system in many ways. The Islamic system is a just and equitable system that promotes win-win relationships between economic agents. For example, the relationship between financiers and users of capital is based on co-operation and the equitable sharing of risks and rewards. It abhors oppressiveness and adversarial, asymmetric relationships. It is meant to be efficient in wealth distribution and, perhaps more importantly, the system demands that capital be used for productive purposes and abhors the hoarding of capital resources. All these a recritical i s sues that have to be addressed in an economy that needs to grow fast.


Adaptation and Innovation

Islam was sent down as a mercy to mankind, and in the Quran and the examples of the Prophet s.a.w., there is a full array of tools required for success. But the success of a tool depends on how well it is used and adapted to the task. Creativity and constructive thinking are therefore key to using the tool of Islamic finance to adapt it for the required purpose. The roots of the conventional or Western financial system were developed in another era and based on a different system of values .

For the Islamic financial system to be successfully used as a means of competitive advantage, the users need to return to the root values and principles of Islam and Syariah. The Islamic ummah lives under different circumstances from the underlying conditions of the world that are quite different. It is quite clear that adaptation is necessary to apply Syariah principles in an Islamic financial system in today’s world.

Innovation, is therefore necessary. Yet, at the same time, we should take gre at care that this innovation and adaptation should not budge from the core values and principles of Islam. A tree may have many branches but they necessarily sprout from a single set of roots.

Many are afraid of innovation but this fear is unfounded if we are clear of the root principles of Syariah. Form may vary, but substance should be maintained. What should be more feared is the absence of innovation. By failing to innovate , by being rigid in our interpretation and by being satisfied with blind adaptation of products from the conventional Western financial system, there is the danger of building an Islamic financial system based on a tree rooted upon a different set of values.

In form, it looks different and “Islamic” but in substance, it is based on the same set of unIslamic values. It is of course, not wrong to adapt from another system, as long as the root values and principles are compatible with Islam. Classical Islamic scientists and scholars did not discover all knowledge from a zero base, but learned from the Greeks and Romans , among others, handpicking what to use and what to reject based on the core values and principles of Islam. As the Holy Prophet s.a.w. said in an often quoted hadith: “Wisdom is the lost asset of a Muslim; he is the most deserving of it wherever he finds it.”

The challenge to innovate and adapt, while remaining true to Islam’s core principles, is crucial for the current phase of development.

The earlier phases of Islamic finance initially concentrated on a somewhat captive Muslim audience. These customers tend to, literally, bank on faith, often with little regard on the actual substance and competitiveness in terms of cost and service quality of the Islamic financial products. For example, there are Islamic mortgages that in effect cost considerably more than conventional mortgages, compounded further by badly designed legal documentation that makes refinancing an economic impossibility for the borrower. It is perhaps no surprise that there is today some cynicism that many so-called Islamic products are merely poor quality substitutes of conventional products, dressed with an Islamic veneer. This may be unders tandable, if not excusable, in the earlier phases of a nascent system in an overwhelming sea of riba. However, from he reon, the honeymoon would be increasingly over. Customers are justifiably getting more discerning. The growth and continued relevance of the Islamic financial system necessarily rests on the ability of financial institutions and is suers to innovate structures and instruments that are closer in substance to the Islamic principles of justice and co-operation based on a more equitable risk and reward sharing.

The acid test must be products that are genuinely superior to the conventional instruments, in terms of i ts value proposition of quality and cost effectiveness . Further, as service establishments, we must also remind ourselves that basic business principles such as efficiency, customer and service orientation and ease-of-use are also basic Islamic principles.


Private-sector Led and the Enabling Environment

While in the earlier phases, much of the development of Is lamic finance was government-led, the onus of the next phase now rests squarely with private economic agents and intermediaries. Innovation and adaptation must necessarily come from private economic agents . In the case of Malaysia, the government has already provided a comprehensive enabling environment for the private sector to take the lead.