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Face Value: ‘Infinite Market Potential’

August 2015

Dr. Mahmoud Abdelaal, CEO of aafaq Islamic Finance, tells Wealth Monitor that the Islamic finance industry is responding to a growing demand from the public for more ethical banking

Do you think that Islamic banks are safer and less risky than conventional banks?
It is not that Islamic banks are safer than conventional banks; they share risk with their clients as they work on a ‘profit and loss’ basis and not on ‘interest’ model. They do not lend money in formal terms, instead they buy and sell assets and get involved in the ownership of assets. Conventional banks do not deal in such activities, as these are considered too risky and are not within the framework of their money lending business model. Three key principles govern Islamic finance: equity, participation, and ownership. If fully complied with, these principles ensure appropriate leverage and help limit speculation and moral hazard.

Why the Islamic finance industry is tilted more towards debt-financing than equity-based financing?
Islamic finance, since its inception, has been biased towards debt-based financing which is compliant by any standard. However, as a step up, it should be coupled with equity-based financing, as debt and equity complement each other. Ideally, equity-based financing is the core of Islamic finance as it equates more with the Islamic structure. It has been engaged in the industry through dealing with Al Mudharabah (profit-sharing partnership) transaction and Al Musharakah (ownership partnership).

How can Islamic finance be made more appealing to non‐Muslims despite the fact that Shari’ah compliance is the constitutive element of Islamic finance?
Islamic finance is gradually gaining interest worldwide and is increasingly appealing to non-Muslim countries who find the Shari`ah-compliant service much fairer than traditional banking. Since Islam forbids Muslims from receiving or paying interest on loans, Shari’ah-compliant Islamic banking operate by sharing profit or loss with its clients.
In my opinion; there is infinite market potential for Islamic finance, where Shari’ah compliance as the constitutive element of Islamic finance is in itself rather irrelevant for non-Muslims. It could be macro-systemic or micro-commercial or ethical implications of the observance of Islamic law which make it appealing to non-Muslims.

Are standardization, harmonization, regulation and supervision challenging issues in Islamic finance?
Standardization of Islamic products across different countries remains a challenge and a further regulation for Shari’ah-compliance would benefit Islamic financial institutions. The Islamic finance industry requires a standardized and internationally recognized set of regulations to ensure financial stability at the global level. There is a need to strengthen the banking supervision and regulation framework with a set of comprehensive, cross-sectoral prudential standards for Shari’ah-compliant institutions and markets. Shari’ah harmonization, regulation and supervision are some of the most important aspects we may discuss for this industry.

Although Islamic finance in theory is founded on strong ethical precepts, as it prohibits interest (Riba), products with excessive uncertainty (Gharar), gambling (Maysir), short sales, as well as financing of prohibited activities, do you believe in actual practice Islamic finance is 100% ethical? If not, should it be 100% ethical?
The ethical principles of Islamic finance help to bring banks closer to their clients which should mark every financial service. Islamic finance is based on religious worldview and is thus considered to be ‘ethical finance,’ as it ties financial transactions to activities in the real economy and share entrepreneurial risks.
The Islamic finance industry is responding to a growing demand from the public for more ethical banking, socially responsible investment, and increasing concerns of regulators in relation to more genuine Shari’ah-based financial innovations with an explicit ethical profile and a consistent link to real economy.

To what extent Islamic finance is really Islamic or Shariah-compliant? Are Islamic banks mimicking conventional banking products in many ways?
The key difference between Islamic banks and their conventional counterparts is that the former abides by the principles of Islamic law (Shari’ah). However, criticizing Islamic banking products for not fulfilling the Shari’ah requirements and mimicking conventional products is partly due to external factors that are not under the control of Islamic banks, as products have to comply with the laws and regulations of the country they operate in, restricting the type of product that Islamic banks can offer.

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