Edib Smolo is Associate Researcher at the Islamic Banking Unit, International Shari'ah Research Academy (ISRA) for Islamic Finance. He obtained his undergraduate double-degree in Economics and Islamic Revealed Knowledge with Honors as well as Master in Economics from International Islamic University Malaysia (IIUM), Malaysia.
Prior to joining ISRA, Mr Edib worked for an insurance company in Bosnia and Herzegovina and at the same time he was Assistant Professor at Faculty of Economics, Sarajevo School of Science. He participates in conferences and seminars related to economics, business and finance. He published several papers on Islamic microcrediting, economics, and finance. His interests and areas of specialization are in Islamic banking and finance, microcrediting, fiqh muamalat, risk management, and Islamic capital market products, among others.
Islamic finance is at the crossroads. On one side the global economic crisis provides a golden opportunity for the Islamic finance industry to establish itself better and prosper due to its conservatism towards speculation (maysir) and interest (riba). However, on the other side, the Islamic finance industry is also faced with numerous challenges.
A recent legal ruling in Malaysia regarding the validity of BBA (bay' bithaman ajil) is one example. Initially, the High Court of Malaysia ruled out that ten Bank Islam Malaysia Bhd (Bank Islam) contracts were structurally faulty and that defaulters did not have to pay more than the original financing amount, thus depriving Bank Islam of the profit arising from the transaction. Following the appeal filed by Bank Islam, the Court of Appeal held that the BBA facility offered by Islamic financial institutions is valid and legally binding. This decision was unanimously made by judges of the Court of Appeal, namely Datuk Md Raus Sharif, Datuk Abdul Hamid Embong and Datuk Ahmad Maarop, on 31 March, 2009.
The said decision reaffirmed that Bank Islam's practices in relation to BBA contracts are Shari'ah-compliant and valid. The Court of Appeal also reiterated that a BBA contract is a sale transaction and therefore, it must not be compared to a loan transaction. The unanimous decision in the appeal in the Bank Islam Malaysia Bhd v Ghazali Shamsuddin & two others, and nine other cases would mean a certain relief to local Islamic banks that had earlier feared a potential avalanche in defaults of Islamic contracts, especially for home financing. Although the Court of Appeal approved the practice of BBA, this practice is still overshadowed with a lot of issues, the most important being its application of bay''inah (buy-back) contract.
In addition to this case in Malaysia, a recent ruling by the OIC Fiqh Academy, in its 19th session held in Sharjah, United Arab Emirates from 26-30 April 2009, against organized tawarruq practices delivered another shock to the Islamic finance industry. According to the Fiqh Academy, organized tawarruq is "when a person (mustawriq) buys merchandise from a local or international market on a deferred-price basis. The financier arranges the sale agreement either himself or through his agent. Simultaneously, the mustawriq and the financier execute the transactions, usually at a lower spot price." Reverse tawarruq, they argued, is similar to organized tawarruq. However, in this case, the mustawriq is the financial institution, and at the same time it acts as a client.
In its Resolution 179 (19/5), the Fiqh Academy stated that "it is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occur between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation. This is considered a deception, i.e. in order to get additional quick cash from the contract. Hence, the transaction is considered to contain the element of riba."
Raising issues about current practices within the Islamic finance industry should be welcomed and addressed with the true intention of improving them. The time is ripe for Islamic finance to step forward and find its way out of the chains of the conventional finance domain. An attempt should be made by both practitioners and scholars to come up with genuine products that are free from controversies and based on Islamic principles stipulated within Islamic law, Shari'ah. Current issues and problems with BBA and tawarruq arise from their similarity to conventional practices explicitly based on riba. Many scholars as well as sincere practitioners see them as ruses (hila) to provide legal justification for interest.
To continue replicating conventional products and practices will lead to the convergence of Islamic finance with the conventional sector. If this is the case then Islamic finance is doomed to fail, as it will be following in the footsteps of its stepmother, interest-based financing. Islamic finance, being currently a part of a larger, more sophisticated and better established conventional system, will face huge resistance if it tries to distinguish itself and change the rules of the game. The recent resolution issued by the Fiqh Academy is going to put more pressure on Islamic banks, as they will have fewer instruments for their operations. At the same time, it will put more pressure on them to come up with a new product(s) that will (hopefully) be Shari'ah-based so as to avoid further misunderstanding and problems.
One thing is for sure: as long as Islamic finance is dressed and breast-fed by the conventional financial system and covered by an artificial "hijab" it will not be able to realize its full potential until and unless it frees itself of the conventional system's chains. Both the financial crisis and recent fatwas are timely in order to awake the Muslims and provoke new solutions for the financial industry. Shari'ah is (and should remain) a backbone of Islamic finance, and it should be better merged with the practices of Islamic financial institutions. Without solid Shari'ah backing, Islamic finance will be just one more market player bound for failure.
Your feedback and comments are very important to us, please feel free to
contact the author via email.