Insights on Islamic Finance

By Donovan Sim

The Discovery+ Series is a series of events, delivered through online digital solutions, which give students the chance to speak directly with working professionals, and learn about careers they aspire to enter. Given the developments in the COVID-19 situation, Advisory is keen to provide support to the many students who are experiencing woes in this time of disruptions, by digitalising professional mentorship.

The Discover+ Panel on Islamic Finance, held on 7th July 2020, was graced by

• Mohamed Shehzad (Moderator), Chief Executive Officer at Ethis Malaysia;
• Abdullah Hidayat Mohamad, Co-Founder and Director of Business Development at Ficus Venture Capital;
• Ahmad Khalis, Of Counsel at K&L Gates Straits Law LLC ;
• Norzulkarnien Nor Mohamad, Head of Islamic Banking and Senior Vice President at Maybank Singapore; and
• Dr. Shamsiah Abdul Karim, Executive Director and CEO at Pergas Investment Holdings.

Attendees included students at various levels of education with a desire to know the different career paths in Islamic Finance, and how to best position themselves for such roles.

What is Islamic Finance?

Essentially, Islamic Finance refers to a way of practicing finance that is governed by Islamic laws (Shariah). To ensure that financial corporations abide by these laws, all products and operations are subject to the policies of regulatory bodies. One important principle is the prohibition of usury (riba), or the charging of interest. Instead, financiers share in the profits of borrowers. As conventional banks charge interest, Muslims who wish to abide by this prohibition are unable to borrow from them. Hence, they turn to Islamic banks. Islamic banks engage in profit sharing, instead of charging interest, to lessen the risk that borrowers take in business ventures. This is driven by the idea that those who have more resources should be willing to share them with those who need it.

Some Islamic financial institutions exist as standalone entities, while some are entities which are bonded to a larger conventional financial corporation. Generally, there are two levels of regulation for Islamic financial institutions — both internal and external. Internally, every Islamic bank would have an advisory board of Shariah scholars, which is responsible for reviewing the business’ operations, structures, practises, and so on. There is also a team of reviewers that ensures that decisions of this board are carried out. There are also auditors who carry out other checks. Checks made by Islamic banks are very strict. Externally, banks are regulated essentially by one of two organisations: the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) based in Manama, Bahrain, or the Islamic Financial Services Board based in Kuala Lumpur, Malaysia.

How is Islamic Finance distinct from and similar to conventional finance?

Islamic Finance distinguishes itself in that there is an emphasis on ethics in business operations; the ideal Islamic bank cannot do without the pursuit of Sustainable Development Goals (SDGs), which could include environmental and social causes. There is no tension between Islamic values, and the generation of profits in the industry. Both these goals can co-exist. Ultimately, the ability to generate profits depends on the skill and talent of the bankers. Also, companies that are unethical in their pursuit of profits ultimately do so to their own detriment. There are many Muslim consumers who consider issues of ethics to be important, and the ethical practises of Islamic banks and financial institutions will appeal to these consumers.

Islamic Finance is otherwise very similar to conventional finance. For instance, FinTech aids transactions in the Islamic finance industry just as it does in the conventional finance industry. There are Islamic retail banks, fund houses, securities brokerages, and Islamic legal firms. However, the Islamic finance industry is still in the process of mirroring other structures present in the conventional finance industry. This continual adoption of best practices contributes to its rapid growth — statistically, it is the fastest growing segment of the financial industry.

How does the Islamic Finance industry interface with religious practices, like Wakaf (Islamic endowments)?

The concept of Wakaf has always been a central tenet of Islam. Now, in Singapore, there are about 100 Wakaf endowments, with assets worth about SGD700 million to SGD800 million. Most of these endowments are property-based. However, there are also cash endowments that some trusties in Singapore manage. Naturally, there are also Islamic laws that deal with Wakaf. There is a huge opportunity for endowments to go into investment-based products, so that Islamic finance can thrive. Aid from Wakaf is not only offered to the Muslim community. It is meant to be extended to the community at large.

How should someone begin their career in Islamic Finance?

Islamic banks are structured quite similarly to conventional banks, with accounting departments, sales departments, legal departments, and so on. If you were formerly an accountant in a conventional bank, you can simply apply to be an accountant in an Islamic bank. However, there are also alternative career paths into the industry. One can, for example, gain Certified Information Management Professional (CIMP) certification through self-study, and then be eligible to apply for a job at an Islamic bank. People from all vocational backgrounds, such as human resources and marketing find employment with Islamic banks. One does not necessarily need to be a Muslim.

Ultimately, the Islamic finance industry requires people who can plan, budget, conduct operations, administer systems, and so on. Each of these sub-processes require skills, but not all of these skills require university degrees.

Financial institutions put a lot of emphasis on professional development. There are also many courses on Islamic legal training organised by the bank, and those who wish to be certified in such fields will also find opportunities to upskill.

Every profession will have its own professional jargon, and Islamic Finance is no different. Terms with Arabic roots, in particular, may be difficult to pronounce initially. However, please be assured that even in Singapore, some of the best known lawyers in Islamic Finance, for example, are non-Muslims, from firms such as Rajah and Tann. Anyone willing to learn can do well in this industry.

Why should someone pursue a career in Islamic Finance?

Besides faith-based reasons, current projections suggest that the industry is destined to become a trillion-dollar industry. In Singapore, market penetration by Islamic banks continues to grow. Indonesia in the past five years has experienced economic growth which runs in parallel with the expansion of its Islamic finance industry. The global Muslim population is growing, and so are Muslim households’ incomes. Hence, there is a lot of potential for the industry to grow.

Islamic banks are also on the forefront of sustainable growth, because ethical business practises have always been integral to their operations.