Islamic Banking and Sharia External Auditing
Riyadh, Asharq Al-Awsat- From the outset, I would like to affirm that the goal behind criticizing some aspects of Islamic banking is intended for guidance not defamation.
Having said that, there will be some mention of various non-Shariah compliant practices in Islamic banking that are intentionally committed whilst overlooking the rulings issued by the legitimate Shariah authorities, and at times even exploiting the absence of monitoring to further and conclude such practices.
Likewise, the Shariah authorities demonstrate excessive confidence in their subjects when it comes to dealing with parties in the industry, which I believe contradicts the authority's role to preserve the Shariah and take into account the interests of customers and investors who have faith in the reports and decisions of such bodies.
Among these violations are the ones committed in Murabaha funds, or what are commonly referred to as Mutajara (trading) funds, whether in Riyals or other currencies. Many of the fatwa committees have stipulated that the debts in these funds must not exceed the average of 33 percent to 51 percent of the total assets; however the aforementioned authorities differ over this range.
When the debt units in a fund exceed the percentage that is set by a given fatwa committee, then the banking institution should declare these units as non-Shariah complaint and stop their circulation since it means that the bank is selling debt units, which is a practice that is governed by different stipulations that this article will not delve into.
However, an examination of the assets in these funds would reveal that they are based on debts and some currency – in return for the redemption plans. In fact, one of the banks stipulated that the fund assets should be comprised of 50 percent Murabaha and 50 percent Ijarah (leased), which is an incorrect formula. I have verified this matter through a concerned party in an authoritative position.
Yet despite that fact, there was no action taken by the legitimate authorities to rectify this, neither did they issue a statement to say that they had made changes to their ijtihad (interpretation) with regards to the legitimacy of circulating the units of these funds without any restraint (meaning that it would be permissible to buy and sell them). Since they are effectively debts that are bought and sold by individuals who are not in debt, it is in direct contradiction with Islamic jurisprudential academies that have prohibited this practice. I do not think that there is any legitimate fatwa authority that allows this practice with the exception of Malaysia; jurisprudents in the Arab Levant disapprove of it.
Moreover, some fatwa committees amend interpretations on certain aspects that concern customers in these banks without notifying them of these changes. For example, a bank would state that it has the right to impose a fine on customers for late payments in Islamic finance operations, however the contract states that the money is allocated to charitable causes and that the banks do not derive any benefits from it.
Fatwas such as these could result in turning away many customers from Islamic banking since they would claim that certain practices are no different from usury [which is prohibited by Shariah]. Some banks do not announce that they implement such policies so as to attract customers even though they practically apply them.
As such, we see many Islamic banks, or those that offer Islamic banking products and services trying diligently to exclude external auditing of their banking transactions. External auditing is conducted by legitimate neutral bodies, such as the International Islamic Agency for Rating or accredited independent auditing offices. However, auditing in such banking institutions is undertaken internally by an employee, which enables the bank to control what it reveals and conceals during the auditing process.
In fact, many of these auditors frequently complain about the amount of violations that they witness and cannot discuss since they [the records] have been tampered with. Add to that the passive attitude adopted by the legitimate authorities in the face of these violations and their lack of firmness in dealing with them.
I believe the time has come to allow external auditing into Islamic banking institutions. Moreover, these institutions must abide by the rules and stipulations entailed, including the issuing of auditing reports in the annual financial report so as to bring about transparency and ensure that they deliver what they have committed to their customers. This would also create fair competition between all Islamic banking institutions so as to prevent the exploitation of religion for financial gain and straying away from its regulations.