Socially Responsible Banking?

By Daniel Chandranayagam

As the year turns just fourteen days old, more and more people and businesses are turning to centuries old religious tenets for the regulation of their financing. Professor Bala Shanmugam of Monash University Malaysia was reported recently to have said,

Islamic finance is also known as socially responsible banking because we tend to think of what the consequences are of this. It’s not just lending money for the sake of lending and making profits off of this.

Understandably, with crumbling financial markets, an ethical financial framework based on fairness sounds desirable. As such, the growth of Islamic Finance in institutional finance markets is unsurprising. In November 2006, Ethical Corporation reported that hydrocarbons conglomerate, Saudi Basic Industries Corporation, issued a three billion Saudi riyal (USD800 million) Sukuk, Islamic Finance’s equivalent of a bond. At that time, it was also stated that Kuwait Finance House was to issue a USD200 million Sukuk for a Chinese company financing expansion of a power plant.

Money by Psyrax

More recently in October, Malaysia’s central bank governor, Dr. Zeti Akhtar Aziz, stated, during her keynote address at the State Street Islamic Finance Congress 2008 in Boston, that the outstanding amount of Islamic private securities amounted to USD79 billion. She also added that the number of Shariah-based unit trust funds had increased to a net asset value of over USD5.2 billion.

Why?

According to Malaysia’s central bank governor, Dr. Zeti Akhtar Aziz, the strengths in Islamic Finance are derived from Shariah principles. During her keynote address at the State Street Islamic Finance Congress 2008 in Boston, Dr. Zeti stated that these principles, based on Islamic law, “require that the financial transactions be accompanied by an underlying productive activity, thus giving rise to a close link between financial and productive flaws.”

Because gambling and the exacting of interest are prohibited, Islamic financiers are required to innovate in order to come up with comparable instruments to lend, invest and insure. The instruments for these activities are usually based on contracts that require both parties to share profit and loss equitably.

Dato’ Vaseehar Hassan Abdul Razack, Chairman of Unicorn International Islamic Bank, was reported to have said that Islamic banks “will follow through exactly what you want to do and be your partner holding your hands from day one, until the project is completed, and then make sure it is properly completed and that the cash flows are generated according to what they are projected, and then they share an equitable proportion of the profit.”

Money for? by Ferruh

This sounds like a good enough reason to consider Islamic banks as conducting their corporate social responsibility in the course of their business.

There’s more…

It is said that Islamic laws covers the entire social order. Islam protects the right to private property, but these rights should also take into consideration the rights of others in the community, including the right to proper natural resources. Because these natural resources, like water, forests, air and sunlight, are the property of society (and the world at large), an individual is held accountable for their use or repair if he causes harm to them.

It has been noted that some Islamic Finance products provides better deals than those of conventional banking. Managing Director of DVA Consulting Sdn Bhd, Daud Vicary Abdullah, was reported to have said, “… an example that I often use is a deposit-based product, where you are penalised if you break a fixed-term deposit in the conventional world and you get less interest. But in the Islamic world, you get the profit that you’re due, up to that point in time when you break the deposit.”

Formerly the Chief Operating Officer of Asian Finance Bank, Mr. Daud was also quoted on INSEAD Knowledge as saying,

There is a significant potential for socially and ethically responsible financing … not just in terms of ethics, but also the opportunity in terms of the structure in development of some of the green funds, waste recycling, green forms of energy, and so on. There is under the tenets of Islam a clear alignment between what Islam represents and what is ethically and socially responsible.

Credibility Problems

On the basis of the tenets discussed above, it can be said that Islamic Finance products, through their very nature, are eco-friendly.  However, there are some challenges to Islamic Banking. For one thing, it has been suggested by industry practitioners to the t CSR Digest that some Islamic Finance Institutions possibly “close one eye” as to whether or not what they are funding will cause detriment to the environment.

Furthermore, Ethical Corporation comments in its Special Report, “Islamic Finance – Ancient Values in a Global Economy” that the “lack of transparency even on contractual compliance matters is disquieting”. Ethical Corporation pointed out in 2006 that Shariah board members, at least in the UK, are paid by banks to deliver fatwah (Shariah rulings). Although, institutional clients might be advised on the reasons behind the rulings, private consumers and affected communities were usually just left to accept the fatwahs made by people “chosen and paid for by the other team”.

Money Money Money by Ivy046

Dr. Zeti pointed out, “Against a backdrop of an increasingly uncertain global environment, Islamic finance, as a form of financial intermediation in the international financial system, has continued to be viable and competitive.”

Norton Rose’s Head of Islamic finance and an adviser to the British government was reported to have said on the Huffington Post:

Islamic finance does demonstrate good banking behavior that has been perhaps lost over the last 10 years or so… Islamic banking is saying we are close to our clients and we’re only going to do genuine transactions where we can see the asset, we understand the asset, we can make an assessment of that asset: whether it’s financing a ship or an aircraft they will go and have a look at the business. It’s giving guidance as to what banking should be.

A very tall order, and the world watches.◊

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