ISLAMIC FINANCE IN SECULAR SOCIETIES

1. ISLAMIC FINANCE IN SECULARSOCIETIES AUSAF AHMAD Presentation at the Azerbaijan Marketing Society Baku, February 2008

2. 9/2/2012 2 This Presentation Discusses the role, relevance and logistics of Islamic Finance in Secular Societies Is divided in three parts: Part I deals with theoretical issues Part II presents some empirical evidence. Part III provides some suggestions and conclusions.

3. 9/2/2012 3 PART ITHEORETICAL ISSUES

4. 9/2/2012 4 Background Progress of Islamic Finance in the last 30 years. As a theoretical construct As a financial institution As an industry [size: Estimates of Total Assets range from dollars] Most of this progress has remained confined to Muslim Majority countries. More than 42 percent institutions in S and SE Asia More than 80 percent funds handled in the Gulf.

5. 9/2/2012 5 Present Scene of Islamic Finance Islamic Finance in the organized Corporate sector [Arabian Gulf] Islamic Finance in the organized public Sector [ Iran, Sudan] Islamic Finance in the Mixed sector [Malaysia]F Islamic Finance in the international Financial Market. Islamic Finance in the unorganized markets

6. 9/2/2012 6 THE POSER What is the relevance of all this to Secular Societies? One third of total Muslim population live as minorities in different countries, most of which are secular societies. Even as minorities, Muslims exhibit absolute large numbers: INDIA, CHINA, RUSSIA, E UROPE. AFRICA

7. 9/2/2012 7 SOME REFLECTIONS Apparently Secular Philosophy and Islamic Finance would be contradiction in terms. Western View of Secularism: Confrontation of Church and State, Separation of worldly affairs from the Church. Eastern View of Secularism: Equal respect for all religions, Freedom to practice your own religious beliefs. Permitting Islamic finance to operate, does not affect secular character of societies. Example: UK Secular institutions are practicing Islamic Finance. Examples: Citibank, HSBC, They are just offering a product to the preferences of their clients. Minority and Majority are modern numerical concepts, alien to Islamic philosophy and ethos. Operational definition of a Minority. The Islamic economics literature assumes predominant Muslim societies. The minorities do not have the power to reshape economic and financial system.

8. 9/2/2012 8 Reflections [contd.] Islamic Laws are universal because of their moral nature. No exemptions on the basis of differences in time and space. The minority Muslim community are as eager to conduct their financial affairs in accordance with Shari�ah as majority Muslim communities.

9. 9/2/2012 9 IS RIBA PERMISSIBLE IN NON MUSLIM SOCIETIES? TWO VIEWS: A. Riba based transactions between a Muslim and non-Muslim are permissible in Non Muslim lands under the conditions of War[ Abu Hanifa, Ibne Taymia, Imam Mohammad]] B. Riba based Transactions are not permissible under any circumstances.

10. 9/2/2012 10 DAR AL ISLAM AND DAR HARB The Relevance of these concepts needs reconsideration. No single country may qualify as Dar al Islam. No Non-Muslim country in modern era may be considered as Dar al Harb. Muslims have many rights including profession and practice of their religion in Non Muslim countries. Muslims are free to apply the Sharia�h principles in their personal lives.

11. 9/2/2012 11 Present Day Muslim Minority Countries are not Dar al Harb The Classical distinction is not relevant for the following reasons: Single Political Entity vs. 54 independent states Not adjacent to each other Migration is in the reverse order Visa Restrictions Muslim countries could not be described as Dar al Islam because of non application of Shari�ah

12. 9/2/2012 12 PART IIEMPIRICAL ISSUES

13. 9/2/2012 13 NEED FOR ISLAMIC FINANCE The needs of minority communities for Islamic finance are as urgent and pressing as those for Muslim countries. Needs of justice, efficiency and growth. Many communities are plagued with poverty and deprivation. That poses a big challenge to Islamic Finance. Can it help these people?

14. 9/2/2012 14 FINANCIAL NEEDS OF MUSLIM MINORITY HOUSEHOLD

15. 9/2/2012 15 Islamic Banking in organized Sector REQUIRES: Large Capital Large size of Market Favorable Political Climate Institutional and Legal Framework Negative Mental block against Islamic banking is a big barrier against it in the Muslim Minority countries.

16. 9/2/2012 16 ADVANTAGES OF THE COOPERATIVE SECTOR Insulates from unhealthy competition from the Corporate Sector Requires much less capital and is much less regulated. Institutions in the Cooperative Sector are offered many incentives Cooperative institutions are quite elastic with respect to size. Cooperative System is amenable to different purposes.

17. 9/2/2012 17 Islamic Financial Institutions in the Unorganized Sector Exist in all parts of the world. More so, in the non-Muslim countries. Misnomer to describe them as Islamic Banks Societies registered under Societies Act. Many remain unregistered. Different sources of funds Lack control and regulation due to absence of legal framework. Lack of professionalism Non Banking Financial Companies and Islamic Investment Companies. High rates of Failure.

18. 9/2/2012 18 Shari�ah Compatible Solutions of Minorities� Financial Needs Personal Finance may be looked after interest free credit societies. The interest free cooperative credit societies may also take care of financial needs of small business, petty trade, etc. For housing finance, special cooperative societies may be formed on interest free basis. For investment needs one may approach international financial market.

19. 9/2/2012 19 WHAT WE CAN LEARN? Strength of religious zeal and moral commitment are no substitute for professional competence. A legal framework is necessary for the conduct of financial activity no matter how small is the scale. Failure brings a bad name to Islamic Finance.

20. 9/2/2012 20 Pre-conditions for successful functioning of Islamic Finance Transparency Accountability Efficiency Professionalism in Management

21. 9/2/2012 21 THANK YOU FOR YOUR PATIENCE