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Ibrahim: How Shariah-backed Islamic financial system can bridge the gap in the global economic imbalance

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By: Ibrahim Mohamed 

On the first week of May, the United Nations Secretary General Mr. Antonio Guterres paid a courtesy call on President Dr. William Ruto at Statehouse, Nairobi. In his speech, the Secretary General drew attention to the worsening unparallel economic realities that exists between many of the developed and the developing countries—especially in the post-Covid era—and in the context of the ongoing Ukrainian-Russia war.

To exemplify those realities, Mr. Guterres used his country of birth and citizenship, Portugal—a member state of the European Union where he once served as Prime Minister—and few other African countries, including Kenya. Some of the areas highlighted in that speech is outlined below:

▪ That during the recent covid pandemic outbreak, Portugal had an easy access to the covid vaccines and within a short period was able to vaccinate it’s large segment of its population. The scenario was in sharp contrast to African countries where access was difficulty constrained by financial resources availability and even where the funds were mobilized, the access to purchase the vaccine was an uphill task.

▪ That in the post covid recovery period, many of the developed countries went on to print money to increase its supply, and by extension spur consumption in economy and ‘jump start’ the economy; a concept referred to as quantitative easing in economics. The foregoing was however cited as one of the factors that contributes to inflations. Central banks in the world have recently been hiking their base rates upwards to tackle the issue of inflation. On the other hand, many of the developing countries lack the fiscal space to undertake such financial engineering, but are equally suffering the pain of the hike in interest, making access and servicing of credit a difficult task.

▪ That in the post covid period, Portugal was able to benefit the special drawing rights enjoyed within the Bretton Woods Institution members, funds that were critical in undertaking economic reconstruction or revitalization. The EU (which Portugal is a member state) has a population of slightly below 50 million people, accessed about $60 billion.

The foregoing was in sharp contrast to African countries that despite having a population of about five times to that of EU, only accessed $34 billion based on the special drawing rights concept.

▪ That under the current international financial architecture, Portugal has an easy access to international credit at a very low interest rates well below 4% and sometimes averaging about 1% or even below 0% compared to Kenya that first might not be easily access international credit and when it does so, comes at high interest rates. This is notwithstanding that Portugal has a higher national debt to gross domestic product (GDP) ratio compared to Kenya. Portugal’s Debt to GDP stood at about 116% in 2022 while Kenya’s debt to GDP level of about 67% in the same period.

Reflecting on some of the issues outlined above brings us back to our subject matter of Maqasid-ul sharia and its role in sharia compliant financial system. Maqasid-ul sharia is loosely translated as objective, intention or purpose in sharia or Islamic law and principles. From a classical jurist perspective, another closely related legal doctrine is the concept of Maslaha, which basically interprets the purpose of sharia from the lens of public good or interest. Based on maslaha interpretation, Islamic scholars have observed and broadly summarized the purpose of Islamic laws and principles as; protection of the religion (against shirk & apostasy), protection of life, protection of intellect (against intoxication & drugs), protection of lineage (for dignity and against lewd behaviour) and protection of property (against robbery, stealing, misappropriation etc.)

For Islam, the undertakings of a Muslim are all Ibadah under the maxim of enjoining oneself in what’s is good (Maaruuf) and preventing of evil (Muunkar). Human endeavors will generally be either activities of spiritual nature (ibadah) or worldly nature (muamalat) which must all be within the limits or permits of sharia. Islamic finance generally falls within the ambits of muamalat.

Under Islamic finance, maqasid sharia has been expanded not only to draw directly from sharia principles or rulings (legal aspects of sharia) but to its substance too.

In Islamic financial system, the maqasid of sharia can be enumerated to include prevention of exploitation via charging of interest, hoarding of products, establishing the sanctity of contract, promoting ethical and fair dealings in business, poverty reduction through wealth redistribution, rewarding entrepreneurship and risk taking etc.

Most of the issues expressed by the UN Secretary General in our context can easily find solutions in Islam, and by extension in a sharia compliant financial system. At the core of Mr. Guterres’s concern is equitable dealings between the global north (developed countries) and the global south (developing countries). However, the unbalanced dealings are not only unique to inter-countries engagements, but are also pervasive within the same society dealings; hence a global challenge.

The question then begs: what role can a sharia compliant financial system play in fixing some of the global financial challenges, whether it relates to access, exercise of equity and fair dealing etc?

Islam has envisaged a situation where honest dealings forms the core of any business undertaking. While in practice it is equally a requirement in any conventional legal contract, ours is different in the sense that it’s presence or lack of it has an impact that transcends beyond this world to akhara (the hereafter).

Such a practice is presumed to give muslims incentive to be forthright and positively impact on transaction cost (as exemplified by history where muslims merchants in many southeast Asia countries was the pull factor in indigenous inhabitants embracing Islam).

One of the biggest hidden costs in commercial transactions is the factor of the unknown (in terms of character which secures a margin of predictability, by extension informing default risks) which if apparent should lower the cost associated with access to finance. Imagine a world where being a muslim will be your guaranteed positive credit listing!

Relating to honest dealing is the requirement of full disclosure in a transaction, Islam requires full disclosure in a financial contract and in trading of goods. Defects or weaknesses are to be made visible so that contracting parties engage from point of information thereby eliminating exploitation.

From an economic perspective, the issue of counterfeited and substandard goods is a big concern that robs genuine business of millions of shillings and puts the population at risk. Counterfeit and substandard goods in the form of food stuff and pharmaceuticals has the potential of posing serious health risk to unsuspecting end users.

Islam frowns upon at one-sided contract where one party gains at the expense of the other (this does not include mutual negotiation and value discovery). The direct cost of counterfeiting to the world economy is estimated at $250 billion per year. Same can be said for weight, measure and scale fraud which Islam has clearly taken a clear position on.

To protect the weak and reduce gaps between the “haves and have-nots”, Islam has prohibited hoarding of not only products but also money. Muslim are encouraged to invest their funds in halal businesses that generates profits. Idle funds get reduced through the levy of compulsory zakat maal payments (which is another form of wealth redistribution).

Even where an individual is a custodian of bequeath relating to orphans, they are encouraged to considerably invest the same to generate returns. Investing in halal ethical enterprises is one of the surest ways of putting money in circulation benefiting the society by way of employment created, encouraging competition as well as availing affordable goods and services.

The reward for such honest business is not only the profits to be earned but also the barakah (blessing) that Allah (S.W.) inserts. A twin issue on the opposite end of the spectrum is the exploitative rent-seeking behaviour relating to earning interest on idle money. Interest earning on idle funds destroys entrepreneurial posture of the society where individuals get insulated from the risk-reward trade-off matrix.

The result is the accumulation of wealth by a section of society at all cost. Islam instead encourages participatory financing in resources mobilizing. Even where there is lender-borrower relationship (Islam allows debt within affordable limit only), Islam has encouraged prompt payment of debt and delay (where the party is capable) is seen as a form of injustice.

Islam has also encouraged voluntary writing-off of debt as a form good deed and among the classes of individuals who qualify for zakat is the debt-ridden. However, emphasis lies in individuals living within their means and to be content with what Allah has granted them.

Other economic injustices that are condemned include payment of bribe (rishwa), use of deception (ghish) and cheating (tadlis), uncertainty in transaction (gharar), greed, stinginess, arrogance, exclusiveness, individualism, and wastefulness. On the other hand, virtues such as generosity, friendship, cooperation have been encouraged. Indeed, many of the issues that are addressed in the Environmental, Sustainability and Governance (ESG) principles, which has become a buzz word in the financial sector, have elaborately been addressed with the maqasid of sharia.

While we can not entirely exhaust all objectives of the sharia as far as Islamic finance is concerned, the challenge is for the muslim to appreciate solutions offered therein to today’s many societal economic challenges. The honor is first for the muslims to fully embrace the concept and then project its benefits to the rest.

Indeed, ALLAH knows best!

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Ibrahim Mohamed is the Head of Business at Salaam Microfinance Bank

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