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EDITORIAL

Islamic nance

Islamic nance: from sacred intentions to secular goals?

Roszaini Haniffa
Bradford University School of Management, Bradford, UK, and

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Mohammad Hudaib
Nottingham University Business School, Nottingham, UK
Abstract
Purpose The paper seeks to examine the political and socio-economic circumstances in three different periods of the evolution of Islamic nance and how the fundamental aim of its existence altered over time. Design/methodology/approach Based on the existing literature on the evolution of Islamic nance, this paper explores the tensions and conicts with reference to the dynamic changes in the political and socio-economic landscape to understand how intentions changed over time. Findings The sacred intentions to help Muslims fulll their religious economic obligations especially with regards to riba (usury) have been distorted with secular goals as a result of the intervention of political-economic and social events as well as the dynamic interactions with the conventional sector. Maqasid al-shariah (purposes of the law) has been unduly used to justify the innovation of nancial products to compete and converge with conventional banking. Originality/value This editorial paper enhances the understanding of the status quo of Islamic nance in general and paves the way for country-specic research on this indispensable issue. Keywords Islam, Finance, Politics Paper type Viewpoint

1. Introduction Islam is not merely about religious beliefs and rituals but a complete way of life including involvement in economic activities. In fact, commercial activities are highly regarded in Islam, and Muslims, besides fullling their religious duties, are encouraged to work hard and participate in economic activities as stated in the Quran:
O ye who believe! When the call is proclaimed to prayer on Friday (the day of assembly), hasten earnestly to the remembrance of Allah and leave off business (and trafc): That is best for you if ye but knew! And when the prayer is nished, then may ye disperse through the land, and seek of the bounty of Allah: and celebrate the praises of Allah often (and without stint): that ye may prosper (Al-Jumuah 62: 9-10).

Management and disposal of resources truthfully help believers to fulll their covenant with God which is to act as His khalifah[1] (vicegerent) including as temporary trustee of all His resources on this earth[2]. In the post-independent states of the Muslim world in the 1960s, developing economic activities that conform to shariah was on top of the agenda. Avoiding involvement in riba (interest-based) activities was the priority as the Quran emphasized on the implications of engaging in such activities[3]:

Journal of Islamic Accounting and Business Research Vol. 1 No. 2, 2010 pp. 85-91 q Emerald Group Publishing Limited 1759-0817 DOI 10.1108/17590811011086697

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O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are Indeed believers. If ye do it not, take notice of war from Allah and His Messenger: But if ye turn back, Ye shall have Your capital sums; Deal not unjustly, And ye shall not be dealt with unjustly (Al-Baqarah 2: 278-9).

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However, the emergence and evolution of modern Islamic nance and nancial institutions are to a large extent inuenced by the dynamics of political and socio-economic circumstances within as well as beyond the Muslim countries. Consequently, over time, the implicit and explicit intentions and goals change and affect the nature and structure of Islamic nance and nancial institutions that exist today. Hence, in this editorial paper, we attempt to describe the evolution within the dynamics of the wider socio-political and economic context and the tension and conicts from both within and outside the majority and minority Muslim countries in each distinctive period based on a review of the literature. We will show how sacred intentions become perplexed with secular goals in the globalization age. To discuss our analysis of the literature, the paper is organised as follows. Section 2 describes the socio-political and economic environment and the major events and their impact on the development of Islamic nance in each period. Section 3 provides the conclusions. 2. The various phases in the evolution of Islamic nance For the purpose of analysis, we divide the evolution into three periods which we labeled as the experimental, amorphous and metamorphosis periods. 2.1 The experimental period (1940 to mid-1970s) The idea of reviving Islamic economic system and Islamic nance came about during the time when colonization[4] of Muslim states was coming to an end and the process of Islamization[5] began. According to Warde (2010), the initial idea of modern Islamic nance may be attributed to the Indian Muslims in the 1940s especially to Abul Ala Mawdudi, the founder of Jamaat-i-Islami and author of the book Al-riba, who called for behavioral norms based on the Islamic traditions. Other inuential writings include those by Quraishi (Islam and the Theory of Interest) and Sayyid Qutb (Social Justice in Islam) (Kahf, 2004). Their discontent with western-style economic and banking system, which was largely based on interest, prompted Muslim economists and political Islamists to focus their attention on developing economic activities that are more compatible to Islamic shariah. Two major experiments on interest-free institutions[6] took place in Egypt and Malaysia in 1963, i.e. the Mit Ghamr savings/investment houses and the Lembaga Tabung Haji (Pilgrims Savings Fund Board), respectively. Although both institutions did not explicitly make reference to religion, they were in some way successful in trying out a prot-sharing model, i.e. by collecting small savings from the mass, investing them in various projects and sharing the prots earned instead of paying interest. The idea of modern commercial banking and short-term placement was never part of the aim or goal of founders of these two institutions (Kahf, 2004; Warde, 2010). Both the Egyptian and Malaysian Governments at that time fully support the establishment of these two institutions as they help to induce savings among the poor in society as well as improve the social status of such group. Being neither connected to any Islamic movements or parties nor with any government-appointed Muslim religious scholars at that time (Warde, 2010), there was minimal intervention on the

operations of both institutions in their attempt to fulll the goals of shariah, which is to restrain from dealing with interest-based activities and to achieve socio-economic justice. In other words, the sacred intentions[7] and goals were on top of the agenda of the newly independent Islamic states following the struggle against western colonialism and secularism[8]. 2.2 The amorphous period (Mid-1970s to 1990) Islamic nance entered a new phase in the mid-1970s as a result of two politicaleconomic events: changes in oil prices in the Arabian Gulf States and pan-Islamism (Warde, 2010). The newly found wealth in the Gulf states through petrol money need a more sophisticated system to channel the idle funds and satisfy the nancing needs of regular businesses especially for the purpose of import, export and domestic trade and credit. In terms of politics, the newly independent Muslim countries were divided between two ideologies: Egyptian President Gamal Abdel Nassers pan-Arabism goal of Arab and Third World solidarity against western colonialism (Mortimer, 1982), and Saudi Arabian King Faisals pan-Islamism political movement with the goal of unifying the Muslim world under the guise of ummah (solidarity among Islamic communities)[9]. The idea of Islamic banking was appealing to all interested parties. For the developed world, it serves as a promising tool to control the political-economy of Islamic countries under the New International Economic Order (NIEO)[10]. For the Islamists[11], it marks the beginning of the Islamization process and the desecularisation of law. For Saudi Arabia, an ally of the West, to set its footprint as the custodian of the ummah by channeling its abundant wealth through the creation of institutions that are deemed to be consistent with shariah and also viable for modern functioning of the economy, as well as to protect the survival of the regime. Two large-scale banking initiatives came into existence during this period: the International Islamic Developmental Bank (IDB), championed by the secular head of states of Saudi Arabia, Somalia and Algeria who deemed such institution as vital under the guise of pan-Islamism; and the Dubai Islamic Bank (DIB), initiated by a reputable entrepreneur with social-political connections with the ruling family. This was later followed through private initiatives by personalities such as Sami Hamoud (Jordan Islamic bank), Ahmed al Yasin (Kuwait Financial House) and Abdul Halim Ismail (Islamic Bank Malaysia Bhd). Since the driving force behind the establishment of the modern form of Islamic banks during this period were bankers with experience in conventional banking, they have limited knowledge on the modes of nancing that can be used in interest-based lending and also how to conduct banking affairs in order to be compatible with Islamic shariah. Hence, each of these institutions separately started to establish relationships with shariah scholars seeking their fatawa (religious opinions) on specic issues related to certain aspects of their activities and transactions. Since new legislations are needed for establishing the banks based on shariah, they face complications not only due to most of the newly independent Muslim countries adopting the secularised law left by their colonizers but also deciding on which madhhab (Islamic school of thought) to form the basis of the legislation. Nevertheless, these enthusiastic pioneers of Islamic banking strive to fulll their sacred intentions despite the various obstacles common of any system in its infancy stage.

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Besides the bankers, another gure providing the impetus for the growth of Islamic nancial institutions during this period was the Saudi Prince Mohammed who seized the opportunity to exert his power and inuence through ambitious expansion plans worldwide under the pretext of Islamic solidarity. To help achieve his goals, he created the International Association of Islamic Banks (IAIB) in 1971, which initiated the publication of the Handbook of Islamic Banking written by leading Islamic scholars to provide additional coordination and advice to the sector (El-Nagar, 1980). In 1981, he managed to rally leading Islamic political and religious leaders to establish Dar al-Maal al-Islami (DMI Group) to endorse the setting up of a worldwide network of Islamic nancial institutions in Muslim countries (Wohlers-Scharf, 1983) as well as in non-Muslim countries. In the mid-1980s, Islamic banking entered yet another phase. Unlike the earlier decade, the decline in oil prices and the nancial crunch experienced by most governments together with the spread of neo-liberal ideology, have profound effect on Islamic banking. However, the major turning point was the fatwa in 1989 by the Grand Mufti of Al-Azhar, Sheikh Tantawi, who legitimised interest by allowing for new pragmatism in the interpretation of riba as interest (Mallat, 1996). This fatwa provided Islamic bankers more bargaining power to expand globally. In short, this amorphous period began with genuine sacred intentions by individual Islamic bankers who visualize a banking system that comply with the goals of shariah. Their limited knowledge and experience of qh left them with no option but to consult well known names in qh for guidance as well as commitment to abide by the rules of shariah not only related to the prohibition of interest but also in terms of shariah compatibility of nancial transactions. There also exist another group of neo-liberal Muslim entrepreneurs or Muslim bourgeois who were more interested in enhancing their economic and political reputation under the guise of Islamic solidarity. Such individuals managed to charm and captivate the common minds in accepting their reasoning and practices although at times pushing the boundaries of shariah. Their motive in interacting with qh scholars was to get their endorsement in liberalising the industry. Their attempt bears fruit with the fatwa from Sheikh Tantawi. Hence, this period marks the start when sacred intentions became mixed with secular goals facilitated by the alliance with highly respected shariah scholars. 2.3 The metamorphosis period (1991-present) Several events from the 1990s onwards left considerable impact on Islamic politics and nance. The New World Order marked the beginning of the globalisation era and the emergence of new global rules, norms and institutions (Henry and Springborg, 2001). The role of the state, especially in developing countries, were discredited under the Washington Consensus[12] as their policies were deemed to be backward, inefcient and a major obstacle to development. Structural reform became the sine qua non in exchange for international aid and terms of borrowing from the international markets were determined based on Moodys and Standard & Poors ratings (Warde, 2010). The outcomes of privatization, deregulation and technological change include removal of restrictions on capital movements, more interconnected nancial markets and loss of independence of nancial market regulators over their regulatory territory (OBrien, 1992). The formal scrapping of the 1933 Glass-Steagall Act [13] in 1999 allowed nancial institutions to reinvent themselves and central bankers are granted more legal

independence which increases their power considerably (Solomon, 1995). The outcomes of some of those policies have been detrimental as can be seen in the recent global nancial crisis. Similarly, the 1991 Gulf War and the September 11 events aroused the religious sentiments in the Muslim world for rapid Islamization of political and economic life and a rise in pietism (Warde, 2010). Consequently, Islamic nance is allowed to grow by most governments as it is a less costly and less risky option to appease the demands of their societies (Warde, 2010). The new geo-economics of the Islamic world have shifted from Saudi Arabia, Egypt and Pakistan to new territories with the Malaysian[14] and Bahraini Governments playing active roles in modernizing Islamic nancial institutions through setting of accounting, auditing and corporate governance standards and promoting innovation of products in order to compete in the global market. The divergence in the interpretations of the shariah, which results in the so-called Arab and Malaysian models, is fast converging to further consolidate the power for Islamic nancial institutions to compete with their conventional counterparts. Ijtihad ( juridico-ethical reasoning and argumentation) for legitimating innovation of nancial products was made based on the unduly application of maqasid al-shariah (purposes of the law) which takes into account the degree of benets for human interests (maslahah) as opposed to harm (mafsadah). Other adaptive mechanisms in legitimising the modernization of Islamic nance and nancial institutions include urf (local custom) and darura (necessity). Besides deregulation of the nancial sector resulting from the policies of the new world-order, greater alliance between bankers, governments and shariah scholars facilitate the innovation of shariah-compliant products as opposed to shariah-based products (i.e. based on the sacred goal of Islamic nance). In short, over the years, the ardent sacred intentions were slowly suppressed and secular goals promoted and the process intensied in the neo-colonial global economic and debt-peonage era. 3. Conclusion and contribution of papers in this issue The growth of Islamic nance to become part of mainstream global nance is not driven purely by sacred intentions of fullling religious obligations but also a powerful political-economic weapon for control. Over the years, Islamic nance had to undergo transformation in order to become acceptable as part of the global nance community and in the process, the traditional sacred intentions of fullling religious obligations and acting as part of the act of worship became perplexed with the secular goals of modernity. Will this trend continue in the foreseeable future or will it enter another phase bringing it back to its root? Only time will tell. But based on the conditions of the present, we can anticipate the future as mentioned in the Quran:
Verily never Will Allah change the condition of a people until they change it themselves (with their own souls) (Al Rad 13: 11).

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Notes 1. The Quran states: Behold, thy Lord said to the angels: I will create a vicegerent on earth. They said: Wilt thou place therein one who will make Mischief therein and shed blood? Whilst we do celebrate Thy praises and glorify Thy holy (name)?. He said: I know what ye know not (Al-Baqarah 2:30).

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2. The Quran states: Believe in Allah and His Messenger, And spend (in charity) out of the (substance) whereof He has made you Heirs. For, those of you who believe and spend (in charity) for them is a great reward (Al-Hadid 57:7). 3. There are four verses in the Quran condemning riba. The other three verses beside the above are Al-Imran 3:130, An-Nisa 4:161 and Ar-Rum 30:39.

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4. This refers to end of formal colonialism (military) through independence granted to Muslim countries but indirect or informal colonialism continues through cultural imperialism and globalization (neo-colonial global economic power and debt peonage). 5. This refers to the process of a new society wholeheartedly committed to the teachings of Islam in their totality and striving to abide by those teachings in its government, political, economic and social organizations, its relation with other states, its educational system and moral values and all other aspects of its way of life (Idris, 1976). 6. A number of interest-free saving and loan societies have been established in the 1940s in the Indian subcontinent but on a relatively small scale. 7. Sacred intentions in the context of this paper refer to the noble intentions to live in compliance with the will of Allah as prescribed by the main sources of shariah: the Quran and Hadith. The motive for turning noble intention into an act of worship is to seek reward in this world and hereafter. 8. Secular, derived from the Latin root saeculuris, refers to devotion to the temporal world as opposed to the spiritual world while secularism is a system of doctrines and practices that disregards or rejects revealed religion and any form of religious faith and worship in everyday life especially those that pose threat to the secularised socio-political life in a society. Hence, ontologically, secularism (post-modernism) disregards religion and metaphysics. 9. It is worth noting that the idea of pan-Islamism is inconsistent with the sacred notion of Islamic solidarity as it promotes secularised Islam, i.e. dividing the Muslim communities but unite the secularised regimes that rule Muslim countries. 10. This refers to the outcome of discussions between industrial and developing countries whereby a set of proposals were put forward by the latter asking for greater participation in the worlds economy by improving their terms of trade, increasing development assistance, reducing developed-country tariff, and other means. It is also known as the North-South Dialogue (UN, 1974). 11. This refers to those who favour for Muslims to return to the roots of their religion and unite politically. 12. It is a term describing a set of ten specic economic policy prescriptions in the standard reform package by US-based institutions such as the IMF and World Bank to crisis-wracked developing countries (Williamson, 1989). 13. This legislation separated the commercial and investment banking but over the years the barriers slowly disappeared. 14. Since 2006, Malaysian Central Bank introduced tax incentives to encourage overseas institutions to operate in Malaysia as well as holding up to 49 per cent of the Islamic banking units of Malaysian banks.

References El-Nagar, A.A. (1980), One Hundred Questions & One Hundred Answers Concerning Islamic Banks, International Association of Islamic Banks, Cairo.

Henry, C.M. and Springborg, R. (2001), Globalisation and the Politics of Development in the Middle East, Cambridge University Press, Cambridge, MA. Idris, J. (1976), The Process of Islamization (Fourth printing, 1983), Islamic Society of North America, Plaineld, IN. Kahf, M. (2004), Islamic banks: the rise of a new power alliance of wealth and Sharia scholarship, in Henry, C.M. and Wilson, R. (Eds), The Politics of Islamic Finance, Edinburgh University Press, Edinburgh. Mallat, C. (1996), Tantawi on Banking, in Masud, M.K., Messick, B. and Powers, D.S. (Eds), Islamic Legal Interpretation: Muftis and their Fatwas, Cambridge University Press, Cambridge, MA. Mortimer, E. (1982), Faith and Power: The Politics of Islam, Random House, New York, NY. OBrien, R. (1992), Global Financial Integration: The End of Geography, Council on Foreign Relations Press, New York, NY. Solomon, S. (1995), The Condence Game: How Unelected Central Bankers are Governing the Changed Global Economy, Simon and Schuster, New York, NY. UN (1974), Declaration for the establishment of a new international economic order, United Nations General Assembly Document A/RES/S-6/3201 of 1 May 1974, available at: www. un-documents.net/s6r3201.htm (accessed June 2010). Warde, I. (2010), Islamic Finance in the Global Economy, 2nd ed., Edinburgh University Press, Edinburgh. Williamson, J. (1989), A short history of the Washington Consensus, available at: www.iie.com/ publications/papers/williamson0904-2.pdf (accessed June 2010). Wohlers-Scharf, T. (1983), Arab and Islamic Banks: New Business Partners for Developing Countries, OECD, Paris. Further reading Ali, A.Y. (1989), The Holy Quran: Text, Translation and Commentary, Amanah Corporation, Brentwood, MD. Corresponding author Roszaini Haniffa can be contacted at: r.haniffa@bradford.ac.uk

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