by Osman Hafeez CPA
Hundreds of years in practice yet Canadians have only heard of Islamic Finance concepts “IF” in recent years. Smart business professionals have already started to tap into this market with intent of gaining market share within the global arena. IF introduces interest free borrowing and was first practiced during the rise of the Islamic empire. There was a deep reliance on Interest-based trade prior to introduction of Islam, much like the way today’s World markets operate. Given the historical popularity of such theories and benefits seeped by their practice, IF has gained little headway in Canada. I recently read an article in the CGA magazine called Fair Play in which Hussein Warsame, an Accounting professor at Calgary’s Haskayne School of Business whose comments are well versed in the business World, explains how the core principle of IF embedded in the general concept of Sharia (Islamic Law) is ‘fairness’. “Islamic Finance is founded on ethics, in comparison to conventional western banking, which is founded on contract law, with ethics tacked on as an afterthought” he comments. Canadians maybe skeptical towards IF and perceive it as an Eastern World mystery. Yet given the recent financial phenomena, Canadians may begin to view IF through a different glass.
IF introduces concepts which are in line with Sharia and instill business transactions based on trust and fairness. When we talk about trust in today’s World, it is a dying concept as far as Business is concerned. With the recent conundrums within the financial markets, it makes one think about the future of our economy. What could be an anticipated result of unfair trade practices and accounting frauds? – A highly regulated economy. It almost feels impractical to see businesses relying merely on trust when executing business transactions. But our history tells us that society is capable of not only conceptualizing a trust based economy but applying this humane characteristic to making World a better place.
Now, why do I relate trust to Islamic Finance? The concept of interest introduces excess compensation without due consideration. This means that the mere purpose of any business transaction is to extend ones wealth – a truly capitalistic way of conducting business. But small business and venture start ups have a different viewpoint on conventional lending structures. True capitalistic practices constrict small businesses to acquire assistance without worrying about the liability of excess compensation to the lender. Small business make up more than 60% of our markets and without a financial framework which addressed the needs of the middle class, this economy will continue to struggle. IF introduces concepts similar to venture capital investments, where the investor and financial entity enter a partnership, with both parties contributing an agreed capital investment to the business/asset. The potential earnings are rewarded based on the equity share of the partnership. This concept also known as Mudaraba, can be of particular interest to investors who are looking to share the returns of a proposed investment while thinning the risk for each stakeholder.
As I mentioned earlier, few progressive Global financial institutions are beginning to offer customers products that adhere to IF theories. A recent study prepared for the Canada Mortgage and Housing Corporation reported evidence indicating that the demand for sharia-compliant mortgages currently exceeds supply. Within a Global context, North American based investment bank, Morgan Stanley has launched a global family of Islamic indices through its subsidiary MSCI Barra. These indices are designed to reflect Sharia investment principles while retaining reliability for international investors. The question remains will these initiatives attract the mainstream local investor or befall a route to attract global companies? – Osman Hafeez, CPA