Although Islamic Banking, Finance and Investment has been rising steadilyin the second half of the twentieth century, there has been some setbacksand pitfalls, that every Muslim should be aware of.
Whether you are an individual looking to invest in an Islamically-Correct®way or an enterpreneur willing to provide Muslims with an investment opportunity, you have to watch for several things.
The morale of the discussion below is "let the buyer beware!". If you lookaround, you will find respectful institutions that offer competitive good services. Just watch out for the few "bad apples".
Pitfalls of Islamic Finance, Banking and Investment
- Non-Compliance with Islamic Sharia Regulations Many institutions and organizations claiming compliance with Sharia principles, simply do not follow these principles, to varying degrees, ranging from totally ignoring them, to minor violations in limited areas.
- Non-Competitive or Sub-Optimal Service Many institutions do not offer the level of service that non-Islamic institution offer. This can be anything from long teller lines, to limited product offering, to plain "I don't care" attitude.
- Frauds and Scams Perhaps more than anything, frauds committed in the name of Islamic Investment were the most damaging to Islamic Finance as a whole. This is specially apparent in Middle Eastern countries (e.g. Egypt, Saudi Arabia) where to this day, Islamic Investment's image still suffers due to these frauds. They commonly take the form of a Savings and Loans, with an underlying Pyramid Scheme that eventually collapses, causing many innocent people to lose their life time savings. For example, in Egypt during the 1980s, several companies (El Rayyan, El Saad, ICC, ...etc.) started accepting deposits from the public in return to huge profits in the form of monthly payments. At the time, the concerned government authorities "looked the other way", while the problem grew bigger and bigger as more people put their life savings in those companies. Later, the government froze those companies activities without notice, thus arguably causing more damage. In Saudi Arabia, in the 1980s as well, similar schemes developed and collapsed as well. These incidents have caused a severe image problem for Islamic Finanace as whole, as lay people thought:
Islamic Investment = Fraud!
Causes of Pitfalls
- Ignorance and/or Negligence In many cases, the employees of the institution are not well trained in how their operation differs from a non-Islamic one, and thus act on their own in violation of Islamic principles. In other cases, it is management that do not enforce the systems in place to make sure that all their operation is in compliance with Islamic Sharia. Yet another area for non-compliance is the lack of systems that insure implementation of Sharia Advisory Board rulings into day-to-day operations. Sometimes, Sharia Advisory Board rulings are treated as "recommendations", and "theoretical" in nature, thus they do not get implemented into products, contracts, and transactions. Only when these are treated as binding laws that get translated into practical implementation would they take effect at all. It has to be noted that many managers and staff of Islamic institutions are hired from non-Islamic counterparts, and thus they have not been "brought up" with the Islamic Financial culture ingrained in their thinking and day-to-day way of doing business. Only adequate systems, training and awareness, and close monitoring of the implemetation of systems will insure that the above are satisfactrily addressed.
- Malice Although this is quite rare, its mere occurance is a problem due to the bad publicity that Islamic institutions as a whole have to suffer, for years at times.
- Monopoly or Oligopoly In many cases, some institutions have a monopoly on certain market segments or demographics. Examples would be insurance companies, housing cooperatives, and banks. Due to the fact that only one or two are present in a certain area causes them to get away with sub-optimal service, because they know that they are a monopoly for the Muslim demographic. Examples here are given without naming the specific institutions exhibiting such behavior. An Islamic Bank, which is the only such bank in its country, has the worse service in that country, ranging from limited products (no Credit Cards, No Debit Cards), low technology (no ATMs, , no Internet/Telephone Banking) Statements every six months), to long teller queues. The fact that this is the only 100% Islamic bank in the country guarantees that a certain percentage of the population will bank with them, despite all the drawbacks of the service. An Islamic Housing Cooperative is one of few advertising an Islamically acceptable way of financing a home purchase. They place restrictions on what you can do and not do with the house, such as limitation on rental of portion of the house, no home rennovation without prior approval, ...etc.) So, it is apparent that the problem is too few institutions that serve a certain area, or too low a Muslim population to allow more than one institution of that kind to exist. Again, strength is in numbers, and Muslims are too large a demographic pool to ignore. The answer could very well be Internet Based Global Islamic Institutions