‘Don’t look to Malaysia for prototypes of Islamic banks’
BANDAR SERI BEGAWAN
LOOK not to Malaysia for prototypes of Islamic banking and financing products or you risk dishing out investment instruments hounded by questions about their similarities to non-Islamic or conventional loans.
This was the advice offered yesterday by Dr Adbulazeem Abozaid, an expert in banking and finance syariah compliance, during the second day of the Islamic Financing and Investment Contracts seminar held at Universiti Brunei Darussalam.
"If Brunei is following the Malaysian model of financing, then they are practising the back-to-back financing or debt-based financing, which has many question marks about it because it doesn't serve the society as the equity-based financing does," said Dr Adbulazeem Abozaid who is facilitating the seminar.
"Equity-based financing would serve the society in a way that it would help develop the smaller businesses, by allowing the bank to be a partner in the business, whereas debt-based financing requires the repayment of the financing to be more than what they have given, which is like the conventional loan but has been made to be Islamic."
Debt-based financing is not that different from conventional loans, he said, noting that this is the reason it is quite controversial.
"When the financing was first conceptualised, they had proposed equity-based financing which should be implemented in the Islamic banks which is like a contract called Al-Musharakah (joint enterprise or equity participation), which is basically a form of partnership, and they deemed this mode of financing as beneficial to the society because it helps people with small businesses or projects get financing like microfinancing, from the banks, which they cannot get from conventional banks.
"But later on these Islamic banks have deviated from this idea, so to speak, and they offered debt-based financing which is like a conventional bank loan, so this is the problem," he said.
Dr Adbulazeem added that Malaysia has already started to branch away from the debt-based financing in its Islamic banks as it has failed to attract emphasis from the Middle East.
"Equity-based financing is more syariah-compliant and it serves the same purpose where profit is concerned. There is more risk taking and what bankers hate the most is taking risks," he added. The reason it is quite risky is that the bank shares in the profit and the loss of the company taking out the financing, and that the entire financing is based on trust, he explained.
"There are many ways we can integrate this system. For one, the Islamic bank could secure some securities from these people, in case there is a misconduct, the individuals will be held payable for the money that has been given by the Islamic bank. Another way is that the Islamic bank could set certain conditions for the use of the fund or they could be asked to be referred to in the case of important decision making — a consultant; or the bank could monitor their investment and people." he said. "But, we cannot eliminate the parties from the partnership as it doesn't become musharakah."
The Brunei Times