Islamic Bankers Perception of Al-Ijarah Thumma AlBay - Research Paper Example

Chapter Four 4.0 Findings and Analysis 4.1 Summary of Findings The data collection and analysis helped postulate some key findings as presented and analyzed hereunder. Due the nature of data collection instrument employed, face to face interviews with 20 respondents, the findings were themselves either repetitive or disorganized. The researcher found it prudent to organize them in a way that could ease interpretation and analysis. The findings presented here are grouped and collated into five major findings. Each of these findings is presented and analyzed individually and in a consecutive manner. The five major findings also incorporate other minor findings, which have been incorporated, based on their relevance. The five major findings of the study can be listed briefly as: a) While some Islamic banks maintain that their AITAB fashion is Shariah-compliant, there is a need to make AITAB fully Shariah-compliant. This can be done by achieving a consensus among the Islamic banking and financial institutions. Such compliance could be better achieved by standardizing the products and services already in the market under a national Islamic hire purchase legal and structural framework. b) Currently, AITAB is being overseen and implemented based on the conventional Hire Purchase Act 1967. AITAB itself is a hire purchase product construed in the spirit of Ijarah, an Islamic banking protocol. This presents a problem in that, a conventional legal framework is administrating an Islamic banking product. While the act allows for individual banks to implement a version of AITAB approved by their Shariah compliance committee as well as the Bank Negara Malaysia approved Shariah Advisory Council, there is a rich minefield of variations and confusion in how AITAB performs in the Malaysian market. c) Based on the two findings above, the study also found that a solution for the existing discordance in implementing AITAB to its full potential, lay in the development and enactment of a separate Islamic Hire Purchase Act in Malaysia. As such, for AITAB to function as a Shariah-compliant product in Malaysia, there is a need to institute a national Islamic Hire Purchase Act prescribing the legal parameters of AITAB products and services in the true spirit of Islamic Banking principles and separately from the conventional hire purchase practices. d) The fourth major finding of the study was that there was a need to initiate reform platforms inclusive of all stakeholders in the Malaysian Islamic banking industry, both public and private. Such an initiative would achieve the needed legal and structural changes. As the study found out, AITAB has enormous potential in Malaysia today if only it attains a uniform practice, regulation and implementation. Such changes as the study revealed would lead to great benefits such as national development, eradication of poverty, industry growth and development of an internationally acclaimed Islamic banking hub in Malaysia. e) Finally, the fifth major finding of the study was that the implementation of AITAB in the majority of Malaysian Islamic banks was wrongly based on the financial lease principle, instead of the more appropriate operating lease principle. All Islamic banks in Malaysia presently practice financial leasing while offering AITAB. The problem with this is that financial lease is seen by the majority of Shariah scholars as to be non-compliant to Shariah since it does not correspond to the true spirit if Ijarah (where the lesser retains all maintenance costs and ownership). The study had sought out to seek the banker’s perception on why they offered AITAB on the financial principle which makes AITAB not Shariah compliant as per the Ijarah spirit and not the fully Shariah compliant operational lease. Closely linked to this finding was the fact that most AITAB providers are still operating under huge risks due to the lack of legal frameworks directing and adjudicating property ownership during an AITAB lease. The elimination of such risks would also help the providers commit more investments in the AITAB products and services with the anticipation of guaranteed returns. If investors were not exposed to such undue risks, the AITAB market would receive voluminous growth that it in accordance to its true potential. 4. 2 AITAB and Shariah-Compliance 4.2.1 Overseeing AITAB’s Shariah Compliance AITAB is an Islamic banking product. Its only difference with the conventional hire purchase practices lies mainly in the fact that AITAB operates based on the provisions of Islamic banking protocols. For instance, it is or is supposed to be, necessarily Shariah-compliant. When Malaysian Islamic banks decide to offer AITAB products and services, they develop the product, get it approved by their contracted Shariah committee or board members and it is sent to Bank Negara Malaysia for approval. Bank Negara Malaysia then mandates its incorporated Shariah advisory Board to evaluate such product. If the Council feels the product is Shariah compliant, the bank is allowed to launch the product in the market (Gintzburger 2009, 61). This is the basis on which most of the respondents felt and insisted that their AITAB products and services were Shariah –compliant. However, in a closer view, it emerges that these banks may actually be offering variant products and services, already approved by the Bank Negara Malaysia and its organized Shariah Advisory Council. All these variant products are offered in the general name of AITAB. The approved products and services offered by the 18 Islamic banks in Malaysia have been developed differently, at different times and all individually reviewed by the council. In effect, most Malaysian Islamic banks offered AITAB only as an alternative product. As noted earlier, banks use the financial lease principle which places the liability of maintenance costs and ownership on the customer and in direct opposition to the spirit of Ijarah which requires that the maintenance costs and ownership remain with the lesser (bank). To make AITAB fully Shariah compliant, then the banks must necessarily adopt the operational lease principle. What they have done presently however, is to formulate AITAB products and services on the financial principle and then use their constituted Shariah boards to endorse the same products and services as Shariah compliant. 4.2.2 Standardizing AITAB’s Shariah-Compliance This non-standardized criterion of Shariah-compliance portends grounds on which one can argue that AITAB has not in itself been made Shariah compliant. Rather, it is the AITAB products and services developed by individual banks that have been scrutinized for Shariah-compliance. As such, there is an urgent need to make AITAB itself, as a banking and financial product. This can only accrue if there is consensus among the Islamic banking and financial institutions offering the different versions of the product, as well as a standardized adjudication at the national level (Gintzburger 2009, 63). Were AITAB to become fully Shariah-compliant on a national level, the study revealed that most of the Islamic banks would offer AITAB products as the default products and not as an alternative. Until Shariah compliance is administrated centrally and in a standardizing manner such as on the basis of one legal and structural framework, then AITAB itself will remain not fully Shariah-compliant since it will not truly satisfy the spirit of Ijarah. As suggested in later sections of this chapter, AITAB would easily be made fully Shariah-compliant if all the variant products and services already in the market, were based on a singular, functional, national Islamic hire purchase legal and structural framework. There are still, a host of changes necessary to make AITAB fully Shariah compliant. The study established that this would require nothing less of industry-wide infrastructure changes as well as general restructuring within the banks themselves. As the study determined, achieving full Shariah-compliance with AITAB would also help the current Islamic banks to drive their entire product portfolio through a standardized Shariah-compliance national framework. Denying that AITAB is not yet fully Shariah compliant as yet, will hinder this innovative and beneficial product a much needed growth. There is a need to employ national industry-wide strategies that can improve the AITAB product itself. This should be done by removing those elements contained in the variant versions offered by individual banks that are not Shariah compliant. Again, this stresses the need for an enabling structural and legal framework for a wide scale implementation. 4.3 Shariah Compliance in Malaysian Islamic Banking 4.3.1 The Need for Standardization In 2001, Bank Negara Malaysia and other stakeholders formulated a working group with the mandate of identifying whether there was a need to develop an accounting standard for Ijarah in Malaysian (MASB, 2010). The group was also mandated to ensure that such a proposed standard was consistent with the envisioned development of Islamic-based transactions, as well as, the requirements imposed by the current laws and regulations in the Malaysian banking industry (MASB, 2010). The group chaired by a former Malaysia Accounting Standards Board member and incorporating numerous representatives from statutory bodies, professional accountants, the corporate sector and other stakeholders, as well as, the Shariah Advisory Council, resolved that such a standard was not yet functional in Malaysia and that interim measures should be adopted to approximate standardization before the framework was developed (MASB, 2010). On the other hand, AITAB cannot be condemned to the same fate. The changes needed in the implementation of AITAB are urgent, and as the study established, most bankers believe, overdue. Currently, AITAB is being overseen and implemented based on the conventional Hire Purchase Act 1967. AITAB itself is a hire purchase product construed in the spirit of Ijarah, an Islamic finance protocol. In simple terms, AITAB is currently administrated by a legal framework that does not recognize and facilitate the Islamic concept of Shariah-compliance in its provisions. The conventional Hire Purchase Act does not have provisions or even acknowledgement of Shariah-compliance meaning that by using it as the basis of AITAB’s implementation, there notion of Shariah compliance is left to the implementer to concede to or ignore. This scenario presents a problem in that, a conventional legal framework is administrating an Islamic banking product without providing for a central maxim that defines Islamic banking, Shariah compliance. While the facility allows for individual banks to implement a version of AITAB approved by their Shariah compliance committee as well as the Bank Negara Malaysia approved Shariah Advisory Council, there is a rich minefield of variations and confusion in how AITAB performs in the Malaysian market. It is actually left to the banks themselves to conceive their version of Shariah-compliant AITAB based on their contracted Shariah advisors. When Bank Negara Malaysia approves of such product with advice from the Shariah Advisory Council, it is done much more in good faith and an arbitrary manner, rather than based on existing standardized legal provisions. Malaysia has two central Shariah boards for the Security Commission and the central bank, Bank Negara Malaysia (Gintzburger 2009, pp. 60). As Gintzburger notes (2009, pp. 61), Malaysia relies on the overarching Shariah Council constituted by the central bank to come with Shariah compliance rulings. These rulings are then implemented by the individual banks based on what their own advisory boards deemed fit (Gintzburger 2009, pp. 61). The Shariah Advisory Council is an arm of Bank Negara Malaysia established by the Central Bank of Malaysia Act 1958 (Gintzburger 2009, pp. 61). The role of the council is to advice the bank on matters related to Islamic banking and Islamic financial transactions, under the oversight authority of the central bank (Gintzburger 2009, pp. 61). Today, SAC’s resolutions have been used as reference in numerous Shariah rulings involving Islamic finance and banking court cases (Gintzburger 2009, pp. 61). The important thing to note here is that SAC is the reference body in Malaysia that validates all Islamic banking and financial products on the basis of their compatibility with existing Islamic commercial laws (Gintzburger 2009, pp. 61). As such, in the absence of any Islamic hire purchase law in Malaysia, the SAC has no basis to validate any of the AITAB products they receive. Yet they are and have been entrusted with the validation of all existing AITAB products so far, regardless of having the fact that Malaysia does not have a Shariah-compliance hire purchase legal guideline. Again, there is pessimism on the notion that the Shariah Boards charged with advising individual banks of Shariah compliance are under the employ of the banks themselves can help administrate Shariah compliance effectively. Gintzburger (2009, pp. 62) notes that, there are two approaches used in Malaysia to administrate Shariah compliance namely the central advisory body (SAC) and the private Shariah boards. Gintzburger (2009, pp. 62) correctly identifies the risk that such private Shariah boards cannot be objective and non-partisan since they belong with a market forces’ environment that to a regulatory one. They are employed on a contract basis by the individual banks and can therefore not be trusted to yield tangible standardization influences. These arguments are thus consistent with the findings that a national infrastructure administrating Islamic hire purchase act (inclusive of provisions and guidelines of Shariah compliance) is over due in Malaysia. Such an act could formulate a standard platform for SAC to adjudicate the Shariah compliance of the AITAB products in the market currently and those to be introduced in future. 4.3.2 The Concept of Ijarah Ijarah is a financial contract that is not Shariah compliant but Shariah neutral (Gintzburger 2009, pp. 97). In common practice, the property and asset lease allowed by Ijarah is however compliant with Shariah demands (Gintzburger 2009, pp. 97). It was a finding of this study that most Islamic banks in Malaysia employed the concept of Ijarah as the guideline for their AITAB products and services. Ijarah is a central principle of Islamic commerce, denoting a financial contract of property leases (Gintzburger 2009, pp. 97). In Ijarah, one party normally transfers its right of using an item it owns to a second party for a tenure lasting a specified period of time in exchange for a mutually agreed fee (Gintzburger 2009, pp. 97). Colloquially therefore, Ijarah has been called Islamic leasing. On closer consideration however, the appellation that Ijarah refers to the Islamic version of leasing is misleading. Ijarah is not necessarily and exclusively applicable to leasing financial arrangements. It can also be employed in non-leasing financial arrangements like employment contracts. This therefore means that the mere fact that banks in Malaysia claim to have based their AITAB products and services on Ijarah does not mean that such products and services are fully Shariah compliant, they can at the most, only Shariah neutral (Gintzburger 2009, pp. 97). Nonetheless, Ijarah has been used in the Malaysian Islamic banking industry as a financing product deemed equivalent to conventional banking system’s hire purchase contracts. According to Gintzburger (2009, pp. 98), Malaysian Ijarah contracts are of two types namely Ijara muntahia bil tamleek and Ijara Thumma al bai’ (AITAB). While ijara muntahia bil tamleek constitutes a leasing contract where the ownership of the asset or property is transferred at the end of the leasing tenure, AITAB is equivalent to conventional hire purchase contracts (Gintzburger 2009, pp. 98). The original Ijarah concept was construed to function on an operational lease of Shariah neutral transactions (Gintzburger 2009, pp. 98). The lack of an Islamic hire purchase law has forced variant applications in the market. These divergent interpretations have actually led to a departure from the original Ijarah contractual leasing intention to a financing hire purchase facility with complete transfer of ownership after the tenure of a lease. Ijarah operates best on the operational lease principle which does not transfer the ownership or the maintenance costs. However, banks have transformed this lease into a hire purchase transaction with the costs and ownership transferred to the customer under the financial lease principle, against the true spirit of Ijarah. Gintzburger (2009, pp. 98), agrees that this scenario requires urgent Shariah ‘attention’ on the Islamic banking laws. 4.4. AITAB and Islamic Hire Purchase Act The two findings discussed above lead to a consensus that a solution for the existing discordance in implementing AITAB to its full potential is needed urgently. Such a solution as the study found out lies in the development and enactment of a separate Islamic Hire Purchase Act in Malaysia. According to the study findings, AITAB cannot be effectively administrated by the Hire Purchase Act 1967, which is tailored in favor of conventional hire purchase. For AITAB to function as a Shariah-compliant product in Malaysia, there is a need to institute a national Islamic Hire Purchase Act prescribing the legal parameters of AITAB products and services in the true spirit of Islamic Banking principles and separately from the conventional hire purchase practices. Re-packaging AITAB along the lines of Conventional Hire Purchase is the norm among most Islamic banks in Malaysia. Indeed, the only legal platform that can be used to administrate AITAB is the Hire Purchase Act 1967, which as discussed above, does not provide grounds for Shariah compliance. When the SAC and private Shariah boards approve ‘Shariah-compliant’ AITAB products currently, it is based on an arbitrary practice and not a standard legal platform. This has in turn caused variations and discordance that cannot allow AITAB to grow and develop to its full potential. There was a wide consensus among the sampled bankers in this study, that using the Hire Purchase Act 1967 in implementing AITAB was a self-defeatist approach since AITAB and conventional HP are two different products. AITAB will remain a re-packaged conventional hire purchase product in the continued absence of an Islamic Hire Purchase Act. It is understandable why the study conclusively found that the approach of re-packaging the conventional hire purchase into AITAB would mean that AITAB never becomes fully Shariah compliant. Only a separate Islamic Hire Purchase Act would provide the basis of determining Shariah compliance in hire purchase practices for both the SAC and the individual bank’s Shariah boards. 4.5 Stakeholders Role in the Malaysian Islamic Banking Industry As the study found out, AITAB has enormous potential in Malaysia today if only it attains a uniform practice, regulation and implementation. The study established that most bankers (who constituted the majority of the study sample) felt that AITAB products and services had a great potential in the Malaysian market. There was consensus on the numerous benefits that would accrue from transforming AITAB and the entire Islamic banking industry but only if AITAB was made Shariah compliant and that a nationally enforced Islamic Hire Purchase Act was formulated. Such benefits as identified by the study include increased consumer benefits, increased banking returns, national development and poverty eradication, transformation of Malaysia as a regional and global hub and promotion of Islamic banking to international prominence. Based on this premise, the fourth major finding of the study was that there was a need to initiate reform platforms inclusive of all stakeholders in the Malaysian Islamic banking industry, both public and private. Such an initiative would achieve the much-needed legal and structural changes. Consequently, the study established that the stakeholders including the Bank Negara Malaysia, Association of Islamic Banks of Malaysia, Domestic Consumer Ministry and the Ministry of Finance Malaysia must necessarily consider franchising an independent and fully operation Islamic Hire Purchase Act, as well as a separate infrastructure for Islamic banking. This is a responsibility of all stakeholders inclusive of the Islamic banks themselves, their consumers, the private corporate bodies and the relevant government agencies. It is important for the industry players to realize that the responsibility of enacting the legal and structural framework of an Islamic Hire Purchase Act remains not just a mandate of the government agencies but also of the banks themselves and their collective bodies. There is also a great need to increase inter-bank cooperation as one of the ongoing strategies to help the Islamic banks operate from a standardized platform. 4.6 AITAB and its Implementation 4.6.1 Operational and Financial Lease Finally, the fifth major finding of the study was that the implementation of AITAB in the majority of Malaysian Islamic banks was wrongly based on the financial lease principle, instead of the more appropriate operating lease principle. All Islamic banks in Malaysia presently practice financial leasing while offering AITAB. The problem with this is that financial lease is seen by the majority of Shariah scholars as to be non-compliant to Shariah since it does not correspond to the true spirit if Ijarah. Ijarah requires that in all manners of leasing, the maintenance costs and the ownership remains with the lesser (bank) while the lessee, only purchases the right of use/benefit from the leased item. This is what would happen if AITAB was offered on the operation lease principle. However, given that banks want to pass on the maintenance costs to the customer, and ultimately the ownership of the asset after termination of the AITAB tenure, the banks therefore opt for the more conventional financial lease principle which allows them to do just that. That is why for as long as AITAB is offered on the financial lease principle as it is now, it will never be accredited as fully Shariah compliant. So, the aim of making AITAB Shariah compliant will necessarily mean offering AITAB products and principles on the more ideal operational lease principle. Yet by making AITAB fully Shariah compliant (based on operation lease principle), the products and services would be unprofitable for banks since they will have to bear all maintenance costs. That means that before banks can employ the operational lease principle, making AITAB fully Shariah compliant, there needs to a repeal of the legal provisions on the issue of maintenance costs and ownership. This would require the presence of enabling legal and structural frameworks pointed out above, to eliminate the barriers that make most bankers opt for the financial lease approach (maintenance costs and the issue of ownership). 4.6.2 Other AITAB Implementation Findings Closely linked to the finding that most banks were offering AITAB based on the less appropriate financial lease principle instead of the fully Shariah-compliant operational lease principle, was the fact that most AITAB providers are still operating under huge risks due to the lack of legal frameworks directing and adjudicating property ownership during an AITAB lease and several other issues. The elimination of such risks would also help the providers commit more investments in the AITAB products and services with the anticipation of guaranteed returns. If investors were not exposed to such undue risks, the AITAB market would receive voluminous growth that it in accordance to its true potential. It also emerged that the bankers perceived conventional banking practices and hire purchase products as more popular with the masses and more available from the Malaysian banks than the Shariah-based products such as AITAB. Consequently, the study established the need for these banks to promote the AITAB products and services more than the conventional hire purchase products, if AITAB is to attain optimal potential in the market. It became evident that AITAB would not gain prominence if it is promoted with the current unaggressive, protracted and even cautious strategies such as offering AITAB products in a few branches. Ideally, the banks need to introduce more asset-backed financing packages using AITAB. According to study, it was found that adding value to the AITAB products by improving quality and reducing pricing ranges would make them more appealing and beneficial to customers. Similarly, it was found that, there needs to be increased promotions of AITAB to both the general public and the banks themselves. This would help create public and provider awareness on the benefits of AITAB over conventional hire purchase practices. According to the study findings, there is also a great need to increase inter-bank cooperation as one of the ongoing strategies to help the Islamic banks operate from a standardized platform. The current situation is that banks are operating AITAB from isolated perspectives and without collaboration. The study also established that the banks must also educate their staff internally on the concepts of AITAB before going out to create awareness among the general public. Read More