Amid the global financial crisis there is a section of people who strongly believe this crisis is the result of unethical financing and could have been averted. Dr Hussain Hamed Hassan, a well-known Shariah scholar, argues that Islamic finance is the universal remedy for this sort of crisis. "Trading in debt is wrong as money is not a commodity to be traded, rather it should be only used for investments," says Dr Hussain. During an interview, he told Emirates Business the region will see conversion of more conventional financial institutions into Islamic entities in the future. He expressed his confidence in the revival of sukuk market.
Do you think more Islamic banks will enter the banking industry?
After the financial crisis, the present capital system has raised key questions. Many have started recognising the merits of Islamic financial system, which is Shariah-compliant and hence ethical.
The factors that led to the 'near collapse' of the present capital system are not found or existent in the Islamic financial system. Islamic financial system, which works for the welfare of the humanity, does not have a single cause that led to the current crisis.
Can you explain this aspect?
The Islamic financial system does not allow trading in debt, which has been the root cause for the present crisis.
So what about trading in sukuk, which is the Islamic equivalent of conventional bond?
No, it is not true. Sukuk clearly represents equity ownership and has no linkage to debt. Let us take the example of the most popular form of sukuk – sukuk ijara. The issuer of this sukuk is selling an asset to the holders of the sukuk. The sukuk holders are the owners – means lessor and they are entitled to the rentals generated by the asset. Take the case of other forms of sukuks, say, mudharaba or musharaka; here too the proceeds of the sukuks become the capital to finance a project for which the sukuk has been issued and this project will be owned by the sukuk holders who raised the capital. So how can one argue that sukuk represents debt.
Why is Islamic finance so much averse to interest?
Interest is the basis for all financial evils. If it goes up it creates crisis and if it falls also, it could trigger problems. In a high-interest scenario, people will obviously think why should they invest in projects and run high risk, but rather prefer to park the funds in banks and enjoy good interest earnings. If the interest rate falls, everyone will naturally go for loans, and as is quite obvious, this was the main cause behind the mortgage loan collapse in the US, which in turn paved the way for the present crisis.
Can you explain this a bit more?
When the interest rates were low people were keen to borrow money to buy house and banks were more than happy to lend as well. Banks kept part of the interest with them and securitised these mortgages and sold in capital markets. These debts were insured by insurance companies and were carrying high ratings from international agencies. When the borrowers were not able to pay back the loan, the whole system collapsed.
Let us come to the key highlights of Islamic finance. Which are the other things prohibited in Islamic finance?
Islamic finance doesn't allow short-selling, margin trading etc. It is estimated that the total value of derivative trading globally comes to around $600 trillion (Dh2,203trn) against a total wealth of $60 billion.
How are risks hedged in Islamic finance?
There are some Shariah-compliant mechanisms used to hedge risks. These Islamic alternatives need endorsement from Shariah scholars before being put into use. Shariah has its own risk assessment and risk management tools.
What are the main risks identified by Islamic finance industry?
They are mainly trading risk and uncertainty risk, among others.
You said members of the Islamic financial system have withstood the crisis much better than their conventional counterparts. Do you expect more Islamic banks entering the financial system in the near future?
Yes I do. Kazhakstan has recently passed the Islamic banking law and this has been approved by the parliament there.
What happened to India's plans?
I know that India has been doing something in this direction and hopefully the regulatory approval for this should be in place within two or three years.
Any other countries in the queue?
We have recently been approached by a team from Holland to convert a conventional bank there into Islamic. We have received enquiries from Moscow to convert two conventional banks into Islamic. We are moving ahead with these plans seriously. Moreover, many European countries have amended their legal systems to allow the establishment of Islamic banks. Turkey has gone far ahead on sukuk regulations.
How do you view conventional banks running Islamic windows?
Almost all conventional banks now have Islamic windows or sell Islamic products. I believe this is a good trend.
We hear some banks are committing profit rate to depositors even before the money is invested and the profit is generated. How do you see this?
I don't think this is true. Also it is not right on the part of banks to promise any profit rate beforehand.
The sukuk market is almost dead now. When do you think it will recover?
The market is not dead, rather the sukuk market is taking rest and before six months from now, I am sure, we will start hearing about new issues hitting the market. My expectation is that the UAE will see sukuks worth at least $5bn to $6bn being issued in the market during the course of the current year.
PROFILE: Dr Hussain Hamed Hassan Shariah scholar
Dr Hassan is considered one of the most celebrated brains in Islamic finance. He received his PhD from the faculty of Shariah at the Al Azhar University in Cairo in 1965 and holds two degrees in law from the International Institute of Comparative Law, University of New York. Dr Hussain had also served as the attorney-general for the Government of Egypt between 1969 and 1970. He serves on the Shariah boards of about 20 financial institutions, including that of the Accounting & Auditing Organisation for Islamic Financial Institutions and Dubai Islamic Bank, where his career started. Hassan trained the first batch of staff at the bank when it was established in 1975.
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