The Need for an Information System for the Dissemination of Knowledge on Islamic Banking Ahmad Shaharudin Bin Abdul Latiff Abstract The Islamic banking industry is relatively new compared to the conventional banking, yet it is much more complex and built from a number of Islamic Shariah abiding principles. The complexity had inadvertently created numerous issues, and amongst them the issues of public awareness, shortage of human capital with expertise in Islamic banking principles, legislations, and also non-uniformity of opinions. These issues if not attended will affect the image of Islamic banks and the trust that has been given by its customers. Islamic banks could not rely on religious motivations alone, but have to take initiative to reduce the gap of understanding and the differences of view amongst its stakeholders. Hence, an information system will be necessary to facilitate dissemination on Islamic banking knowledge. I. INTRODUCTION Islamic banking plays a vital role in the Islamic economies and finance. It has grown significantly within the global landscape since its inception slightly more than three decades ago. It was reported that the global Islamic banks assets has reached US$1.3 trillion in 2011, which represents one percent of the global market [6]. As compared to its conventional counterpart which is debt-based and allows risk transfer, the Islamic banks idealize on asset-based and risk sharing philosophy. It possess fundamental differences from the conventional bank; the businesses of Islamic banking is not confined to receiving deposits and provisions of finance like its conventional counterpart, but built from numerous Islamic Shariah abiding principles which could be generally categorized into profit-loss sharing, sale and purchase, feebased, free-service and ancillary businesses. The main concepts in Islamic banking had originated from Islamic religious references and had been adapted to be made suitable for modern banking activities. The primary sources of reference to Muslims such as the Holy Quran and Sunnah of the Prophet Muhammad (peace be upon him) were used by Islamic scholars to build the Islamic banking principles. These banking principles, which provide some general business concepts applicable for the Islamic banking practices, are usually referred to in Arabic terminologies. The bankers then applied modern banking and finance concepts with the Islamic banking principles to produce Islamic banking products. Many of these banking products also use Arabic names to give competitive edge and appear catchy for marketing purposes [3]. Ahmad Shaharudin Bin Abdul Latiff was the Executive Director of Ashtech Systems Sdn Bhd, Malaysia. He has several years of experience in the banking industry in Malaysia and currently a PhD candidate at the Faculty of Computer and Mathematical Sciences, Universiti Teknologi Mara, 40450 Shah Alam, Selangor, Malaysia (e-mail: alshaharudin@gmail.com). Unlike the modern conventional banking system which came into existence in 1587 with the establishment of Banco Della Pizza di Rialto in Venice; the earliest formal Islamic bank, Mit Ghamr Savings Bank in Egypt was only opened in 1963 [22]. As such, it could be anticipated that some teething issues will prevail during this infancy stage. Amongst other issues, the commonly raised grievances related to the Islamic banking industry pertains to public awareness, shortage of human capital with expertise in Islamic banking principles, legislations, and also non-uniformity of opinions. This paper highlights the necessity for a specific information system for dissemination of knowledge pertaining to Islamic banking. In Section II, we briefly describe the objectives and principles of Islamic banking. In Section III, the common issues relating to Islamic banks are detailed out. In Section IV, the consequences when the prevailing issues on Islamic banking are not dealt with properly are enlightened. In Section V, we describe how a specific information system for Islamic banking can be useful in dealing with the issues. In Section VI, we summarize the necessity for an information system to disseminate knowledge pertaining to the Islamic banking industry. II. OBJECTIVES AND PRINCIPLES OF ISLAMIC BANKING A. Objectives of Islamic Banking The objectives of Islamic banking are to provide banking operations and activities that are founded on Islamic Shariah rules which emphasize on the following [12]: Ensuring that the products do not involve any element of riba (interest), Prevention of gharar (ambiguity) in contracts, Prohibition of maysir (betting or gambling), Undertaking of business activities on the basis of a fair and legitimate profit, and Prevention of monopoly and hoarding. B. The Principles of Islamic Banking As compared to the conventional banking business which activities are defined as receiving deposits and lending monies; the concepts of Islamic banking businesses are much more complex. It is built from the Islamic banking principles which could be classified into five categories [22], which are namely: Profit and loss sharing principles, - Mudharabah (profit-sharing) - Musharakah (partnership)
Sale and purchase principles, - Murabahah (sale of goods at an agreed profit margin) - Bai mu azzal (deferred payment sale) Fees or charges based principles, - Ijara (lease) - Ijara wa-iqtina (lease purchase financing) Free service principle, - Qardh hasan (benevolent loan) Ancillary principles - Wadiah (safekeeping) - Rahn (pledge or pawn). There are also other principles which are being used in certain countries only, such as bai-aldayn, thumma al-bai, alwakalah, al-hiwalah, and al-ujr which are practiced in Malaysia and jo alah, muza arah and masaqat which are practiced in Iran [22]. III. ISSUES FACED ON ISLAMIC BANKING In general, the Islamic banking industry is still facing teething problems in several aspects, which include issues related to public awareness, shortage of human capital with needed expertise in Islamic banking, legislations, and also non-uniformity of opinions, amongst others. A. Lack of Public Awareness and Misconceptions Conventional banks have been in operations for many decades prior to the establishment of Islamic banks, and have rooted in the mind of the banking communities as well as the public globally [24]. Thus, lack of awareness by the public [1][8][20][24] during the infancy stage of the Islamic banking industry is inevitable. Nevertheless, misconceptions on the business activities of Islamic banks are partly due to the banks practices. The Islamic banking system actually possesses fundamental differences compared to its conventional counterpart. While the conventional banks businesses are deemed as receiving deposits and providing loans [13]; Islamic banks do not actually deal with loans, except for benevolent loans (qardh hasan). In spite of this, the public still expect similar functions of the conventional banks from the Islamic banks [13]. Besides being ill-informed on the financing methods of the Islamic banks [8], this confusion is partly due to the business practices of the Islamic banks. The investors, Shariah advisors, top level management and regulators of the Islamic banking industry are generally much more concerned with the viability and sustainability aspects of the banking business[4]; hence caused the banks to deliberately and systematically avoid the profit-loss sharing activities such as mudharabah and musharakah [4][15]. Hence, more than 95% of the Islamic banks asset consists of debt-based instruments which produce the similar net result as the conventional banks [4]. This draws skepticism amongst the customers who feel that the Islamic banking products are actually similar with the conventional banking products, except that they use different names [1][4], and that interest in a real sense has not been eliminated in the Islamic banks [1]. B. Shortage of Human Capital with Necessary Expertise in Islamic Banking It was frequently raised that there are lack of professionally trained Islamic bankers [1][2][9][10][20][21]. This shortage is being identified as one of the biggest hurdles in the advancement of Islamic banking. Training of Islamic bankers has not kept pace with the development of the industry [2]. A survey on Islamic bank managers in Malaysia had disclosed that the managers were more familiar with the concepts sales and purchase (murabahah), benevolent loan (qardh hasan), and lease (ijara) activities; but not on profitloss sharing activities of mudharabah and musharakah [19]. Shortage of expert staff in Islamic banking may affect the capability of the banks in running its business efficiently. According to an IMF (International Monetary Fund) survey, the shortage of human capital with expertise in Islamic banking is deemed as part of the cause of the decline in the profitability of Islamic banks during the recent global economic crisis of 2007-2008 [10]. It has been suggested that the needed human capital with expertise in Islamic banking be developed [10]. C. Legislative Issues In several countries, the legislations of the country have yet to provide full support for the development of Shariah defined practices in the Islamic banking industry [14][17][18]. This had inadvertently constrained the activities of the Islamic banks and indirectly persuaded them to design their products imitating those of the conventional banks [18], but with the underlying Shariah compliant principles [4][18]. In the case of Malaysia, the Section 124(6) of the Banking and Financial Institutions Act 1989 (BAFIA) had provided that The Act shall not apply to Islamic banks [4]. Yet, the Islamic Banking Act 1983 (IBA) merely defined Islamic banking business to mean banking business whose aims and operation do not involve any element which is not approved by the religion of Islam [11], without a proper definition of banking business [17][18]. This blanket definition is very ambiguous and could positively be interpreted to motivate the banks to practice universal banking [18]. However, by virtue of the Civil Law Act 1956; the definition of banking business was interpreted to be similar to the conventional banking [18]. The conventional banking s BAFIA states [5], Banking business means: a) the business of i) receiving deposits on current account, deposit account, savings account or other similar account; ii) paying or collecting cheques drawn by or paid in by customers; and iii) provisions of finance; or b) such other business as the bank (Central Bank of Malaysia) with the approval of the Minister, may prescribe.
This situation has left the Islamic banks with exactly similar businesses to the conventional banks, but with the exceptions that the aims and operations of such banking business should not involve any element that is not approved by the religion of Islam. Another legislative issue pertains to the jurisdiction of the courts. In Malaysia, cases involving Islamic banking transactions come within the jurisdiction of civil courts which was modeled on the English system and not under the Shariah court system [18]. This means that the civil court procedures will apply in Islamic banking cases. For example, in the case of Affin Bank Berhad v. Zulkifli Abdullah, and Bank Kerjasama Rakyat Malaysia v. Emcee Corporation; of which the latter was the precedent applied for the former case [13]. A question arose during the proceedings of the former case; whether the provider of an Al-Bai Bithaman Ajil facility can, in the event of a default before the end of tenure, claim as part of the sale price the profit margin for the unexpired tenure of the facility. Instead of referring the issue to the National Shariah Advisory Council under the BAFIA, the judge of the former case had decided that it is not an issue of Shariah law and concluded the question in the civil court. The judge had concurred with the preceding decision of the latter case in which it was stated that despite the facility is an Islamic facility does not mean that the law applicable is different from the law that is applicable if the facility were given under conventional banking [13]. D. Non-Uniformity of Opinions The different interpretations of Shariah rules amongst Shariah scholars are another issue of concern on the Islamic banking industry. In turn, it creates confusion among the general public as well as the banking communities. The difference of opinion applies not only on products, but also on the operations of the Islamic banks [12]. For example, there is no uniformity in opinion pertaining to the principle of mudharabah in business transactions [22]. The juristic schools or mazhabs of Maliki and Shafii are of the view that mudharabah should be confined to trade and trade-related activities only, and should not include the activities of manufacturing. According to them, contract for manufacturing should be excluded from mudharabah, which is a profit-loss sharing contract; but formed under the specific contract for manufacturing which is termed istisna. However, the mazhabs of Hanafi does not object the application of mudharabah principle for the manufacturing activities, while the Hanbali mazhabs allows two separate agreements using mudharabah and istisna principles as long as the two agreements do not impose condition upon each other [22]. IV. CONSEQUENCES OF THE PREVAILING ISSUES The prevailing issues on Islamic banking have generated the following effects to the industry: The misconceptions and confusions pertaining to the principles and practices of Islamic banking will continue to persist. The public will see no difference between the conventional banks and Islamic banks [1][4], and assume that interest-based activities still persist in the Islamic banks [1]. As a result, the customers will be more profit-motivated and patron the Islamic banks merely to obtain profits from savings and investment [22]. There will be no longer religious motivations to choose an Islamic bank as they do currently [8], and the customers may opt away to conventional banks whenever they see a drop of profit from the savings or investments in Islamic banks. This situation will be unhealthy for the industry. Grievances pertaining to the products and services of Islamic banks will build up amongst the public. For example, it was reported that the Association of Islamic Banking Institutions Malaysia had to deny allegations by the Muslim Consumers Association of Malaysia (PPIM) that the Islamic banks in Malaysia are burdening the public and reaping excessive profits 16]. This corresponds to the grievances of PPIM that has received about 4,000 complaints against Islamic banks since 2003 to early 2012 [23]. Continuous and increasing grievances from the public are not good for the industry s image, and will indirectly promote loss of trust amongst the public on the Islamic banks. The Islamic banks will not be able to design innovative banking products and improve their services to customers without ample human capital with expertise in Islamic banking. Being improperly equipped with knowledge on Islamic banking principles, the bank managers and employees will not be able to handle the risk factors affiliated to their industry and foresee good business opportunities. Eventually the bank will not be resilient to major economic crisis. Managers, employees and customers of the bank will not be wary on the legal implications of their actions and dealings with the banks. The conflicts between the Shariah rule implementation and civil courts decisions will only generate confusions amongst the managers, employees and customers of the banks. Indirectly, it provides bad publicity on the implementation of Islamic banking. Non-uniformity of opinions amongst the Islamic scholars from different mazhabs will generate confusions amongst the bankers, the customers as well as the public. The customers will not really understand what are the dos and don ts of the Islamic banking industry, and make their own personal interpretations. This situation is unhealthy for banker-customer relations; as both parties may each have different interpretations. V. THE NECESSITY FOR A SPECIFIC INFORMATION SYSTEM TO DISSEMINATE INFORMATION ON ISLAMIC BANKING Like most other industries, the Islamic banking industry requires the support of its stakeholders. Therefore, and effective knowledge management environment for its stakeholders communities is crucial as knowledge is a key success factor for businesses and communities [7]. Amongst the several options of media available to
disseminate information to the public, internet is deemed as the most suitable to disseminate knowledge pertaining to Islamic banking. Other media, such as broadcasting may not be able to meet everyone s information need for such a complex and diverse range of products of Islamic banking. Even face-to-face attendance will not be able to serve all the stakeholders requirement of information on Islamic banking in a short duration of time. The internet, on the other hand, is more flexible and be able to attend the huge on-demand request of information simultaneously. Consequently, there have been numerous efforts of the Islamic banking community, institutional and individual, trying to address the problem of public understanding and lack of dissemination on Islamic banking system through the use of the internet. Yet, there is currently no specific information system developed to attend the need for retrieval and dissemination of knowledge for the Islamic banking industry, except for the existing web search engines which are mostly keyword based and does not take into account any peculiar characteristics of the industry. Thus, a specific information system to enable dissemination of knowledge pertaining to the Islamic banking industry is highly desirable. The information system will: Facilitate the public in gaining holistic understanding and knowledge on the wide range of Islamic banking products according to its various principles, Improve the knowledge of the managers and employees of Islamic banks on the Islamic banking principles and practices in order for them to be able to discharge their duties more effectively and efficiently, Remove misconceptions and misunderstandings amongst the managers, employees and also customers pertaining the principles and practices of Islamic banking systems, Facilitate the Islamic scholars, managers, and employees of the Islamic banks to understand the grievances of the customers and to find the means to improve their business innovatively, Enable managers, employees and also customers of Islamic banks to be wary of the legislative issues and equip them with needed knowledge to protect themselves. Facilitate exchange of knowledge amongst the Islamic scholars from different mazhabs in order to promote mutual understanding amongst each other, Facilitate managers, employees and also customers of Islamic banks to make quick reference on the various interpretations of the Islamic banking principles according to various mazhabs. VI. CONCLUSION The Islamic banking industry is still facing teething problems and requires a specialized information system to disseminate knowledge pertaining to its concepts and processes. The information system should meet the peculiarity of the industry and attend to the current issues in the industry. In turn, the information system will also catalyze further development of the industry by improving the understanding of the banking communities and the public on the industrial needs and motivate transparency of each others objectives for mutual benefit of the various stakeholders of the industry. 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