Cultural, Rerceptional and Religious Perspective - Research Paper Example

?Research Paper Challenges faced and the acceptance of Islamic finance in the Western world This paper examines the major challenges faced by Islamicfinance providers and promoters in the West, especially from cultural, perceptional and religious perspectives, and the acceptance of Islamic finance in the western world, i.e. non-Islamic countries, with a focus on the situation in Australia. The issues discussed include what Christian people think about the provision of loans based on Islamic principles, the concerns raised about the sources of funds and how the income is utilized, why it is called Islamic finance and not humanitarian finance for example, and the perception that Islamic bankers will be biased against non-Muslims. Also discussed is the concern over Islamic finance allegedly supporting terrorism, and why some western countries equate Islamic finance with supporting terrorism. Some implications are highlighted and recommendations are then made based on the research as to how to deal with such issues and overcome the barriers to making Islamic finance more acceptable in Western countries. Although most Islamic banks are concentrated in Muslim countries, they are also to be found in many non-Muslim countries, especially in Europe and the U.S.). In addition, some conventional banks have also begun to offer Islamic financing schemes such as the HSBC Amanah division of HSBC Group established in 1998. Also, although several studies have been conducted on attitudes towards Islamic banking and the patronization of Islamic banks with reference to IFIs located in Muslim countries, some studies, albeit very few have also been conducted to gather the views and preferences of Western customers. A selection of these IFIs located in Western countries is also the focus of attention and the few studies referred to above are mentioned. General perceptions of Islamic finance It proved to be difficult to ascertain the perceptions of Westerners towards Islamic finance due to a lack of studies in this area. Most studies have examined customers from Muslim and other developing countries. To give an example of one significant study, Erol & El-Bdour (1989) studied attitudes towards Islamic banking in Jordan. They used a nine-part question/statement instrument and showed that religious motivation was not such an important factor as a fast and efficient service, reputation and image, and confidentiality. Nonetheless, a general awareness of Islamic banks and their methods was evident. Sudin et al. (1994) conducted a more extensive study among both Muslims and non-Muslims in Malaysia. The three most important criteria for non-Muslims were firstly, friendliness of staff, secondly a fast and efficient service, and thirdly the bank’s image and reputation. Another study on Malaysian customers showed that although most of them did not have a complete understanding of Islamic financial products, they did not differentiate between products from Islamic and conventional banks (Hamid & Nordin, 2001). In another study, Gerrard & Cunningham (1997) surveyed the attitude towards Islamic banking among Singaporeans where Muslims are in a minority. It was found that non-Muslims were generally lacking in awareness of Islamic banking. Furthermore, whereas Muslims were mainly motivated by religious reasons besides profitability, and had little interest in getting a high interest rate on savings, it was the opposite situation for non-Muslims. It is a similar situation in Turkey (Okumus, 2005). Even in non-Muslim countries like India where Muslims form a significant proportion of the country’s population, awareness of IFIs was low at the turn of the present century (Munawar & Llewellyn, 2002: 188). Less than half of the 720 persons interviewed knew that they even existed. This general finding of non-Muslims being more motivated by reasons other than religious ones could be the case in Western countries as well among non-Muslims that do use Islamic finance. However, during the past decade there has probably been an increasing awareness of Islamic finance and Islamic banks in the West. This could be true given that IFIs have been growing at double-digit rates and are now present in over 75 countries (Azmi, 2007). However, with few exceptions, such as Bank Melli in Iran, IFIs are generally smaller players as compared to conventional banks. Islamic finance in the West The major centre of Islamic finance in the West is London, as it is also a major financial hub for conventional banks. London is an attractive location because of the diversity of its population, which includes a sizeable Muslim population. Offering Islamic finance is in line with its existing diversity of financial products and services (Baba, 2007). Banks offering Islamic finance in the UK include Al Baraka International Bank, the Islamic Bank of Britain, and more recently after abolishing double stamp duty, HSBC Amanah and Lloyds TSB. In comparison to the United States, the UK Financial Services Authority has been more supportive of Islamic Finance. A study based on interviews by Karbhari et al. (2004) sought to investigate the challenges and opportunities for Islamic finance in the U.K. Almost all of the respondents were in favour of adopting Islamic modes of finance as it would help to raise the understanding of both Muslim and non-Muslim customers and promote Islamic banks. However, they also felt the government was not doing enough to support Islamic finance in the UK. An early study by Omer (1992) showed that among Muslims in the UK, awareness concerning Islamic principles of finance was poor despite religion being a significant motivating factor in preferring Islamic banks. As far as the attitudes of businesses in Australia are concerned, two studies are prominent. Jalaluddin & Metwally (1999) conducted a survey in Sydney in which they asked 385 businesses about their attitudes towards the Islamic system of profit sharing. Religion was not a significant factor. Instead, factors that were relevant included the degree of risk sharing compared to business risk, borrowing costs compared to other lenders, and the rate of return that was expected. The method of profit/loss sharing was generally seen as positively related to business risk levels, to interest rates and the expected rate of return. In another study by Jalaluddin (1999), around 60% of the respondents comprised largely of non-Muslims were interested in the profit/loss sharing method of Islamic finance. Their main motivation for obtaining funds using this Islamic financing method was to acquire funds from high-risk ventures where the cost would otherwise have been prohibitive (Jalaluddin & Metwally, 1999). At the same time however, some Australians were reluctant to use this method due to lack of knowledge and for reasons related to the terms and conditions. Jalaluddin (1999b) also studied the views of other financial institutions in Australia, on whether they would be willing to lend money according to the Islamic profit/loss sharing method. Over 40% were receptive, mentioning the need for greater mutual business support, the problem of defaults (under conventional banking), greater potential for higher returns and for general growth in the banking sector. The only hindrances however, were lack of familiarity with the conditions, some managerial complications and the issue of risk sharing working against lending along the Islamic lines. Cultural challenges for Islamic finance in the West Islamic banks situated in Western countries also face additional challenges. The main challenges relate to legislation and coping with the increasing anti-Muslim sentiments. Cultural and legislative challenges are thus the main two challenges. Religious differences underlie all the challenges depending on the degree to which particular groups of Westerners are religious in their own religion and tolerant of other religions. As the customer base is largely unfamiliar with Islamic finance as highlighted earlier, communication barriers are also responsible for preventing Islamic finance becoming more widely accepted. Media distortions of Islam also compound the problem. In addition, Islamic banks tend to face a shortage of skilled professionals (Bokhari, 2007), which leads to deficiencies in customer service (Elhiraika & Hamed, 2009), which in turn increases the likelihood of a negative impression on customers. The first practical hurdle however is gaining recognition, i.e. acceptance from the central banks in Western countries, and the processes vary between countries. Islamic banks also have to apply for special licenses to operate after first meeting statutory requirements and other regulations. The tax laws in Western countries tend to pose the greatest difficulty because they are framed contrary to the Islamic philosophy of finance (Gafoor, 1995). Customer demand is the main driver for providing Islamic finance in the West while profitability sustains their existence. Therefore, aside from any personal prejudices, “there is no inherent objection or bias against such products if the selling potential is favourable” (Wilson, 2007: 430). According to Wilson (2007), the reason for other European countries not showing the same degree of interest in Islamic finance is not any inherent hostility but simply a lack of awareness and knowledge of Islamic finance and the issues involved. Furthermore, he claims that as Muslims are the main customers, many banks are not so interested in offering Islamic modes of finance because of their low socioeconomic status. They tend to be “unemployed, or in casual and sometimes illegal jobs, paying low wages” (Wilson, 2007: 431). The underlying reasons however, could be more to do with cultural acceptance than economic. This state of affairs is best illustrated by the experience of Ahmad Al-Najjar (1993: 32) in Germany in the 1960s and 1970s. He established Mit Ghamr Saving House in 1963 and Nasser Social Bank in 1970. Although the German form of interest-free financing also inspired the founder, he used local names instead of Islamic ones because he feared public opposition. The zakah fund for example, was called a ‘social service account’ instead. He therefore disguised the Islamic identities of his institutions to help them succeed at a time when anti-Muslim sentiments were rife. Eventually, the Islamic nature of the bank became known and as feared, there was a backlash. He was forced to merge with interest-based banks and leave the country. Kahf (2004) claims it was not an Islamic bank because of its name, but the naming was precisely in order to disguise the true identity and allow it to thrive in a harsh socio-political environment. The strongest objections to Islamic finance in Western society generally, come from non-Muslim religious groups because they see the spread of Islamic finance as a direct threat to their own religion. It makes them feel uneasy and powerless but they express their opposition mainly vocally and through vitriol. Secondly, the most damaging threat to Islamic finance comes from those who seek to associate it with terrorism. Each of these two dimensions of Islamic finance in the West will now be examined in turn. Religious perspectives of Islamic finance The fear over Islamic finance on religious grounds was demonstrated in a recent court case in Michigan, in the United States of America. A case was registered in which an Islamic business named AIG was charged with promoting religious doctrine. This is in the context of many Americans perceiving Islamic finance as a vehicle for funding terrorism. Fortunately, the district judge rejected the claims. Although the aim was most probably to discredit Islamic finance, the positive outcome has the potential to boost the acceptance of Islamic finance in the U.S. because the ruling “debunks the myth that Islamic finance is unacceptable and unlikely to withstand legal challenges to its validity in court” (Hassan, 2011). In response to the UK government’s openness to allowing Islamic finance, mainly to consolidate London’s position as a global financial centre, some minority hard line Christian groups such as Christian Concern for our Nation have voiced opposition (Christian Today, 2009). The underlying fear of such groups is that the changes are leading to the spread of Islam. It is pointed out for example that the House of Lords found Islamic law to be incompatible with human rights and the European Court of Human Rights found it to be incompatible with democracy. Islam actually granted many rights several centuries before modern Western civilization as pointed out in Table 1, and public consultation (shura) is an integral part of the Islamic system of governance. The real issue then, is a lack of understanding of Islam in the West, especially owing to historical reasons and a general fear of anything that is unfamiliar. Another aspect of the religious dimension relates to usury, which Islamic finance prohibits. Many westerners object to the basic principle of interest-free banking because they are accustomed to the conventional interest-based system. However, the Islamic prohibition of usury is not unique to the Islamic religion. As pointed out by Lewis (2007), usury has been prohibited in all the major religions, but this gradually led to accepting some interest and regarding usury as applying only to exorbitant rates of interest. In the New Testament, interest-free dealing is praised in Luke (6:35). In the Old Testament, usury is more clearly prohibited in Exodus (22:25). The problem of association with terrorism The dramatic stunt pulled of in America by having the World Trade Centre (WTC) in New York blown up in September 2001, and its role as a pretext for commencing the ‘war on terror’, which would more aptly be described as ‘war by terror’, have had a significant impact on attitudes towards Islamic finance in the West, and indeed on Muslims and Islam in general. The aforementioned event is regarded by many as a turning point in relations between the West and the Muslim world. Whatever the ulterior motives are, there is evidently an onslaught underway on Muslim countries that have intensified in this century. From the perspective of the Western public indoctrinated by the mass media, Muslims are engaged in terrorism, and this association is seriously damaging their reputation. The anti-Muslim hysteria generated at the time of the WTC demolition was so perverse that even “Many credible financial institutions of Muslim countries were accused of ‘racketeering, wrongful death, negligence and conspiracy’ in a lawsuit dismissed later” (Islahi, 2006). The adverse consequences also resulted in diminishing deposits in Islamic banks for a few subsequent years. The erroneous link with terrorism is in large part due to Islamic finance not being properly understood, especially in America (Warde, 2004: 52). Thus, Islamic banks were prime targets of the suspicion. Actually, no Islamic institution in the West was immune to suspicion and animosity but IFIs especially had to contend with the charge of funding terrorism in addition to the general antipathy. This paranoia is also present in Australia. The feelings were openly expressed during 2010 when Senator Nick Sherry, the assistant treasurer tried to allay fears against the wider implementation of Islamic finance in Australia. The Australian Islamist Monitor epitomises the perspective of extremists. The thrust of their argument is based on concern over the spread of terrorism and its use “as a vehicle to promote the world domination of Islam over other faiths” (Clark, 2010). According to Madzian Mohamed Hussein, author of ‘Demystifying Islamic Finance: Correcting Misconceptions, Advancing Value Propositions’, Islamic finance has been hindered by “bias, prejudice and ignorance” (Lawyers Weekly, 2010). He enumerates 15 major misconceptions. Some of these are due to bias but most of these are related to ignorance, and the link with terrorism is among the misconceptions. Islamic finance is seen as an instrument of jihad. Many Muslims also have misconceptions such as equating Islamic finance with welfare over and above the profit motive. However, the misconceptions among Westerners such as the association with terrorism are not only irrational but also damaging. The issue of terrorism highlights the extreme of ignorance on one hand and a deliberate ploy of the West in marring the good reputation of Muslims on the other, in which IFIs become an obvious target. This is despite the fact that the Muslim world is largely at the receiving end of terrorism, and the USA is the largest state sponsored terrorist in the World with possession of an arsenal of weapons of mass destruction and military engagements in several Muslim countries. No amount of reasoning can combat ignorance, malicious intent and aggression, so attention is now drawn to segments of the Western population that are receptive to the promotion of Islamic modes of finance. The acceptors of Islamic finance Those who accept Islamic finance more readily in the West include congenially minded people inclined towards ethical banking and investment and supporters of corporate social responsibility as well as investors purely motivated by profit who hold no prejudice. Stakeholders of IFIs view Islamic finance favourably mainly because of their ethical and social goals and practices, and they also tend to promote sustainable development and help to alleviate poverty (Dusuki, 2008). The principles of ethical banking and investment and corporate social responsibility are by no means alien to Islamic finance. It can be shown that not only are these aspects of banking relevant to Islamic finance, but also that Islamic finance is inherently an ethical and socially responsible system. Moreover, whereas CSR derives from relatively recent secularist morality in the West since the 1950s, the system of Islamic finance is rooted in divine revelations revealed several centuries earlier. The Creator has a far better understanding of what is in the best interests of individuals and society. Any concerns over whether Islamic finance is capable of allowing for ethical and socially responsible practices can be allayed by drawing parallels between CSR as practiced in the West today and the moral principles underlying the Islamic mode of finance. Some of these correspondences are related in Table 1 below as evidence. Table 1 Some parallels between the Western concept of CSR and Islamic commandments Western concept of CSR Islamic sources Human rights Equality and rights mentioned in the Holy Prophet’s farewell sermon; Repeated guidance against oppression and promotion of rights in the Quran and hadith Human resources Rights of employees, e.g. to feed and clothe, not to overburden, to help out, and paying his wages Philanthropy Emphasis on sadaqah (charitable giving) Environmental considerations Respect for environment, e.g. HQ 2:205 and 7:56 There really is no need therefore for the educated and ethically aware Westerners and environmentalists to be concerned about the ethical foundations of the Islamic system. Islamic finance is well grounded in high ethical and moral standards and is well poised to meet the growing need to be socially responsible and to care for the environment. The scope of Islamic finance is much wider however, as it also involves a deep commitment to equitable distribution of wealth, brotherhood, justice, and the general well being of mankind. Indeed, as pointed out by the International Association of Islamic Banks (IAIB), social goals are an integral and therefore inseparable part of the Islamic finance model “that cannot be dispensed with or neglected” (IAIB in Al-Omar & Abdel-Haq, 1996: 27). Abul Hassan & Hjh Salma (2009) have highlighted the role and benefits of CSR with respect to IFIs and recommended a collective approach to further their goals by forming strategic links with charitable organisations and businesses. That said, it should also be made clear that Islamic finance seeks to balance the two goals of social obligations on one hand and the profit making objectives on the other. What is disliked is “making excessive profits at the expense of their customers or the local community at large” (Dasuki & Dar, 2005: 396). Furthermore, patronage studies of Islamic banking have found that a number of factors other than religious motivation also exist for people selecting Islamic banking services. Some Western investors are also drawn towards Islamic investment products as a means for diversifying their portfolios (Querubin, 2008). The sukuk for example, is a very popular Islamic finance product among Western investors. According to the International Financing Review (2008), as of 2007, they account for up to 80% of the sukuk buyers. This is despite the fact that the sukuk has characteristics different from conventional bonds including restricted transferability and that it involves tax complications. Implications and recommendations The attitudes towards IFIs in terms of what customers seek and expect are in many ways similar to those in respect of conventional banks. However, there is the added factor of religious motivation, which exists in customers to a greater or lesser degree. A common deficiency that came across in this research, which is more acute in the Western world, is a lack of awareness of Islamic finance and understanding of Islamic financial products. This situation is best addressed by promoting greater awareness, providing information about Islamic finance and through education. The challenges related to legislation and communication factors could be overcome by greater collaboration between IFIs and strengthening their representation so that issues can be resolved collectively. Cultural and religious challenges pose more difficulties for IFIs in the West. They require more long-term strategies because they need to focus on changing people’s ingrained attitudes. There is a need to reinforce the positive aspects of Islamic finance and highlight its great potential for supporting socially responsible practices, and the similarity with other religions in its stance against usury and the promotion of equity. 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