Interview with Mr Rehan Waheed — Islamic Finance Expert
Profile: Mr Rehan Waheed started his career with Meezan Bank in 2006 through its first batch trainee program and received comprehensive training at the Institute of Bankers Pakistan before his placement in the Bank. After serving at multiple positions in branch banking, he is currently leading the Bank’s Shariah Advisory Unit – a position he is currently serving at in the Investment Banking & Shariah Advisory department of Meezan Bank. At Meezan Bank, he has been actively engaged in developing unique and complex Sukuk structures including Sukuk at discount to face value, etc. As part of an organization that is heavily invested in Islamic banking awareness and educational initiatives, he also plays his role by serving as a visiting faculty member at one of the leading business schools of the country.
PAKISTAN & GULF ECONOMIST had an exclusive conversation with Mr Rehan Waheed vis-à-vis ISLAMIC FINANCE. Following are the excerpts of the conversation:
The evolution of Islamic finance is divided into three periods i.e., experimental, amorphous and metamorphosis periods. During the experimental period from 1940 to mid-1970s, the initial idea of Islamic finance was attributed to the Indian Muslims and specially to Abul A’la Mawdudi (1903-1979) who wrote a book “Sood” i.e. Interest, published in 1960.
Later, we see two experimentations for interest-free banking in 1960s; one in the form of a savings bank/investment house based on profit-sharing model in Mit Ghamr in Egypt and the other as Tabung Haji (Pilgrim’s Savings Fund) in Malaysia. The amorphous period started from mid-1970s to 1990.
Islamic Development Bank was established in 1974 followed by Dubai Islamic Bank, Jordan Islamic Bank, Kuwait Financial House and Islamic Bank Malaysia, etc. During this period, we witness banks seeking fatawa (religious opinion) from Shariah scholars on various banking issues and transactions and we may call this period as infancy stage of Islamic finance.
I believe we are now in the metamorphosis period since 1991. Countries like Malaysia and Bahrain have played a pivotal role to bring ‘modernization’ in Islamic finance. An autonomous corporate body AAOIFI was established and vested with the objectives to develop various standards including accounting, auditing, governance and Shariah standards for Islamic financial institutions to compete with their conventional counterparts. Ijtihad (independent legal reasoning/judgement) was made to legitimate innovative financial products to achieve maqasid-e shariah (the very purposes of law) while considering maslahah (benefits for human interests), urf (customs) and darura (necessity).
As per Islamic Finance Development Report 2021, the number of Islamic financial institutions has reached 1,595 with total Islamic finance assets of US$ 3.4 trillion, which recorded 14% growth in 2020. In Pakistan, Islamic banking marked its footprint in 2002, when the State Bank of Pakistan issued the first Islamic commercial banking licence to Meezan Bank Limited. As of December 2021, there are five full-fledged Islamic banks and 17 conventional banks having standalone Islamic banking branches. Total assets stand over Rs. 5.5 trillion and deposit base at Rs. 4.2 trillion.
Islamic banking and finance is based on the principles of risk sharing unlike a conventional financial system. It is one of the main distinguishing features of Islamic finance. A conventional bank is primarily a borrower of funds on one hand, and a lender on the other. An Islamic bank however, a partner with its depositors, as well as with the entrepreneurs, sharing profit or loss on both sides of the balance sheet, while avoiding riba (interest) gharar (excessive uncertainty) and qimar (gambling). There is a common mis-conception that risk lies only in participatory modes like Musharakah. However, it is important to understand that each Shariah-compliant product has inherent associated risks, which may differ from product to product. For instance, it is well known that in participatory mode like Musharakah, an Islamic bank takes exposure in business activities and shares loss with the customer. Similarly, under Ijarah and other sale-based modes like Murabaha, Musawama, Tijarah, etc., the bank, as the owner takes the risk of destruction of asset or goods.
In short, Islamic financial institutions are exposed to various risks as per the nature of the product, which may be mitigated through various risk management tools, but cannot be eliminated completely.
Ijarah means ‘to give something on rent’. In Islamic jurisprudence it is a transfer of usufruct of a particular property, for a specified time, in exchange of consideration for the benefit gained from the use of asset i.e., rent. Under Ijarah, only the right of use of asset is transferred to the lessee and not the ownership of the asset. The corpus of the leased asset remains in the ownership of lessor. All ownership related liabilities, major maintenance, damages, destruction and associated risk of asset is borne by the lessor.
Sukuk is not a ‘borrowing’ rather it is a participation. With the emergence of Islamic finance Sukuk issuance has become popular to raise funds in a Shariah-compliant manner. Yes, Sukuk may be issued for acquisition of a new asset under various modes of financing. Common Sukuk structures are Ijarah and Diminishing Musharakah including sale and lease back. Though Sukuk based on Shirkat-ul-Aqd are also getting popular. Similarly, Sukuk may be issued to pay off the existing debt/conventional financing. A company may issue Sukuk either against the existing asset owned by the company under the common structures discussed earlier or Sukuk may be issued under Shirkat-ul-Aqd. The funds so acquired through issuance of Sukuk will then be used to repay the existing debt/conventional financing.
In Islamic jurisprudence, prohibition of riba, gharar and qimar are the fundamental principles to be taken care of in all financial transactions. Gharar has a broad meaning including excessive uncertainty, risk, fraud, deceit or hazard which lead to destruction or loss. Gharar occurs in all transactions where either subject matter does not exist or the price is not agreed upon. Speculative activities, derivative instruments, and short-selling are the common examples of gharar. For instance, an ‘option’ is just a right and not an asset with clear description or specifications and hence Islam prohibits all transactions involving excessive risk or uncertainty. Similarly, Islam forbids all sort of gambling i.e., acquisition of wealth by chance and prohibits any business activity where profits and gains are derived merely on chance or speculation.