gif Islamic Finance


When the ball was set rolling, it was hoped and presumed that a bidirectional conver- gence of Islamic and conventional finance would evolve. Prudential risks were consid- ered to be as high for Islamic intermediaries as for conventional ones, because the dif- ference between instruments used by each sector was found to be less significant than was usually imagined.


Prof. Dr. Zubair Hasan, Professor of Islamic Economics, Economics & Governance Department


Prof. Zubair Hasan completed his education in India getting his M.A (Economics) M. Com and PhD degrees from Agra and Meerut universi- ties. He joined the teaching profession in 1957 and having worked at a number of educational institutions in India - mainly the University of Delhi - and abroad, he joined the International Islamic University Malaysia (IIUM) in 1990. There, he served as Head of the Department and helped to formulate and promote the PhD programme. In May 2009, he was awarded the 1430H IDB Prize in Islamic Economics by the Islamic Research and Training Institute of the Islamic Development Bank (IDB) in recognition of his accomplishments and tireless efforts in the promotion of Islamic Economics as well as Islamic Banking and Finance. He introduced several new courses, especially in the areas of Islamic Economics and Environmental Stud- ies at the undergraduate and graduate levels. Three Theses and 17 research papers at the Master’s level were written under his supervi- sion, some of which were presented by the stu- dents at conferences or published in academic Journals. He is on the editorial board of a cou- ple of reputed academic journals and works as a referee for others.


He has presented papers, organised ses- sions on Islamic Economics and served as discussant at scores of conferences, national and international. He has exten- sively published books, articles, chapters in books, comments and reviews in reput- ed academic journals worldwide. Some of these have been translated and pub- lished in languages other than English. His academic contributions can mostly be downloaded from LoGEc or ‘Zubair Has- an at IDEAS’. On some of the download criteria, he is ranked among the top 5% authors of the world in economics. Email: zubair@inceif.org


Note: This article was published in “ISRA International Journal of Islamic Finance”, volume 2, issue 1, June 2010.


Convergence has benefited Islamic finance, and contributed to its rapid growth, in many ways. Early literature on the topic literature helped scholars and financiers to critically evaluate the role and character of interest- based finance, and to explore the hindranc- es which interest poses to the achievement of growth, equity and stability in modern economies. Convergence helped to avoid the isolation of Islamic finance from global structures: dealings with international or- ganisations such as the World Bank, the IMF and the WTO remained intact.


More importantly, product designs were readily available, easily modified to meet Shari’ah requirements. Convergence with Western financial institutions is seen as a great facility. In fact, a jurist sitting on the Shari’ah boards of a couple of banks con- firmed to me that scholars on such boards invariably avoid initiating the development of new products. Instead, they prefer to ask the (traditionally Western) bank managers for details of the conventional product for which they need to have an Islamic coun- terpart. It is much easier, he said, to put an Islamic face on a product than to structure an entirely new one. Imitation is easier than innovation, and so it abounds. However, this need not imply that Islamic finance has completely been devoid of innovations; in fact, there have been many and varied, some even genuinely novel. Despite this, it remains true that the supremacy of conver- gence has been a mixed blessing.


The fast expansion in volume of Islamic fi- nance in recent years has led many to see a clear functional parallelism between mod- ern Islamic and conventional financing in- struments. This has extended as far as the overt postulation that Islamic finance, in most areas of economic activity, is at a par with the capabilities of mainstream banks. In any case, the expansion has led to a con- vergence whose essence is unidirectional. The conventional system, because of its size, age and maturity, has exercised a tre- mendous magnetic pull which the nascent Islamic system could hardly resist. Islamic products are, and will increasingly be, struc- tured for the global marketplace- and this factor is hastening convergence with univer- sally accepted mainstream norms. Policy- makers for Islamic finance are relentlessly pushing the system to that destination. The


24 Global Islamic Finance February 2011


governor of the State Bank of Pakistan was candid on the point, when she observed, “Practically, the Islamic industry currently is bank based. Product diversification, albeit slow, is emerging but returns are engineered to ensure conformity and convergence with conventional industry”.


The convergence of Islamic finance towards mainstream positions has resulted in the creation of Islamic instruments which are seen as a sub-set of those available in con- ventional finance. The pressure to simplify products in order to appeal to customers, and to diversify them in order to conform to mainstream standards, is being insisted upon as more competitive. I find it strange that countries have so often advanced and used the infant industry argument to protect their manufactures, insurance and ship- ping (e.g.), but initiators of Islamic finance ventured to challenge the giant from day one? Palpably, the sort of convergence be- ing forged must serve the interests of de- veloped countries more than convergence within other industries; and this is true for two main reasons.


1. The conventional banks which dominate and control the global financial system are able, in the area of Islamic finance, to do what they cannot do within the conventional system. For instance, in the mainstream sys- tem the rate of interest must observe the central banks’ ceiling, there are yet no such restrictions on alternatives to interest, such as the mark-ups used in Islamic transac- tions. In participatory finance, using interest rates to benchmark the return to depositors enhances leverage benefits for bank own- ers. Therefore, Islamic finance is potentially more profitable for them.


2. Currently, there is a lot of liquidity in Mus- lim countries, especially in the Middle East, due to high and frequently rising oil prices. Most of this money originally came from the developed countries. Islamic finance prom- ises an increased possibility of a larger flow of this money back to where it came from. In this possibility, Western countries have spotted an effective potential control over the use of this wealth. This point alone is an important topic for research.


The compulsion towards unidirectional convergence has put experts and scholars alike under the pressure of making Shari’ah norms somehow adaptable to the demands of modern finance, and its increasingly will full mechanisms. Islamic finance now op- erates more as supplement to the conven- tional system than as a parallel competitor. This has turned public opinion in the Mus- lim world to another, probably more potent issue: the convergence between the instru- ments which Islamic finance has been utilis-


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