Ethical Banking – delivering on Islamic finance’s charitable responsibilities

By Dr Abdul Halim
The last decade has been transformative for Islamic banking. While the practices involved in Sharia-compliant finance have been around for over a thousand years, it is only recently that the wider world has opened up and Islamic finance has ‘gone global’.
Last year, non-Muslim majority countries as diverse as South Africa, the UK, Hong Kong and Luxembourg issued debut Islamic bonds, or ‘sukuks’, while Goldman Sachs issued $500m worth of shariah-compliant bonds. Already a $2.1tn industry, it is estimated that the Islamic economy has further potential to reach a value of $6.7tn, with Islamic banking and the sukuk market accounting for 95 per cent of the industry’s assets worldwide.
With the industry going from strength to strength, it is incumbent upon us, as Islamic financiers, to consider how the industry can evolve to provide a wider range of products and services, while remaining true to a central pillar of Islamic finance, and Islam itself: charitable giving.
To sustain the growth of the industry we must consider how to effect real change, particularly in areas where we have the opportunity to better the lives of those who need help most. We have the knowledge and expertise to manage and grow wealth, so why not use it as a force for good?
Many people are prepared to donate to charity in order to help those in need, but often remain unaware of the channels through which they can give. We need radical new ways of facilitating donations to society’s most needy, and it makes sense to put those with the greatest financial knowledge in charge of developing new ways of generating the biggest possible sums of money.
Conventional banks have created financial products and services to serve governments and the public. But no bank, at the moment, looks at the needs and requirements of the social welfare sector. It’s time we made Islamic banking and finance more complete in the sense that it should be inclusive and cover all the Islamic population or all the population of a country.
My proposal calls for the central banks of the Asia-Pacific region to issue licenses to Islamic banks allowing them to set-up new ‘Sadaqah Houses’. These are modelled on traditional charitable institutions, designed to collect donations for the poorest sections of our communities. As financial institutions, they would of course come under the supervision of the central bank or other monetary authority for licenses, audits and regulations.
Each Sadaqah House would be a subsidiary, owned and controlled by a banking group. These groups would have investment management houses, unit trusts and wealth management functions. Subsidiaries would be tasked with managing the funds and generating income, sustaining the charity in perpetuity.
I would suggest that central banks allow those involved to keep money within the banking group, to let the banks make some income by charging minimal fees and commission.
In addition to facilitating and managing donations, these financial institutions would also develop a raft of new products based on charitable principals, making it easier for people who care to donate. The new foundations would initially serve families living below the breadline, the homeless and the long-term unemployed.
Let’s assume a central bank issues licenses to five banking groups allowing them to compete and develop creative ways of working. That would encourage competition and innovation for more new financial products, generating more donations that would help the social welfare sector.
Malaysia, where the Islamic finance industry has been in existence for over 30 years, could be the test-bed. But as businesses increasingly put legacy-planning front and centre and want to stand for something more than just what they sell, it won’t be long before banks all over the world – Islamic and traditional – adopt such measures.
With the global banking crisis still in the recovery state, and the need to restore the public’s faith in financial institutions, this proposal would show that the financial and banking industries can be a genuine force for good.
Dr Abdul Halim is former chairman of the Foundation for Economic Assistance of Malaysia and recipient of The Royal Award for Islamic Finance 2014.