Is the  change in philosophical foundation  the  panacea? Muyanja Ssenyonga

Perhaps the most challenging responsibility held by anyone is that of being an analyst in an any field, let alone in the realm of banking where the conditions can at best be described as vacillating, uncertain, and unpredictable by any stretch of the imagination. Let us get straight to the current state of the banking industry as it is today in relation to what most want it to be, a list that does not of course include those that fish in murky waters anymore that Judas Iscariot would be called the savior! Many experts with quite abundant doses of experience and better masterly of hindsight, prefer to be called observers rather than analysts as the word, call it, comment made by the  latter carries more responsibility and weight than that of the former. While economic agents can use projections made by analysts without any qualm, to use recommendations made by observers as the basis of economic policy is an onus of the  individual in question  as observations made often carry ‘implicit, disclaimers. Many suggestions have been tabled, some have come to pass, while some have stood ground. One such issue that apparently gaining prominence   is the  debate over the philosophical foundations of the banking industry; should it be conventional or Islamic law based. The stance taken here is that of an observer for obvious reasons hinted earlier on! Proponents of conventional foundation of course have arguments to back their side of the argument: the need for an incentive to induce the owner of funds to postpone consumption today for consumption in future, which is only possible if the purchasing power of the funds in funds is higher than it is today. This underlies the reason why interest rate has to be paid to the owner of funds. The higher the risk in the future outcome of the funds (investment) the higher the expected return. The implication is that in an economic environment where the probability of the outcome of investment of one’s funds is less than one, which is the normal state of the world, if it can be so called, then, the investor requires an inducement to make available his resources to those who may use them or channel them to those who may make use of them. Well and good. Another argument put forward by proponents of the conventional banking system is that the saver has an upfront commitment to get something from the borrower irrespective of the state of the world that occurs. This serves as reward for expenditure and attendant enjoyment foregone by the owner of funds, and at the sane time creates a compelling force among the borrowers (investors) to use the borrowed funds prudentially and productively, as they have to meet the obligation made upfront to the providers of funds.

Proponents of the conventional banking would argue that it is the lack of such an incentive in developing countries, a product of state intervention in credit and money markets over the years to ensure state funding of a cacophony of social projects, both productive and otherwise, that has hampered the financial development in developing countries. It is in response to that that a series of financial deregulation policies were implemented in developing countries, sometimes mere replicas of similar policies that had been carried out  in developed countries years and sometimes a decade earlier.

Now time for some of the arguments proponents of the Islamic law banking system. The most quoted is the Riba concept, which is underscores the injunction from the Holy Qur’an that prohibits Muslims from accepting interest on money lent. The arguments here are a nonprofessional’s standpoint; hence, we will not go into the related intricacies. Those with funds entrust them with those who use them without any prior commitment to any return set upfront. The user of the funds does his best to employ the borrowed funds to make it productive for it is the productivity of the economic activity where funds are invested that is shared between the owner and user of funds. There is an underlying principle here on which such a system works, which is trust: the owner of funds entrusts the lender with his funds, and is sure  of no ‘cooking books’ to borrow Bush’s phrase, as pertaining to the economic performance  of  the banks. The advantages the Shariah system of banking (from the standpoint of layman) include:  gives the borrower of funds the right to use funds without a set expected return which he must achieve, which reduces the tendency to invest funds in risky ventures, enables the owner of funds to be on the right path with regard to the dictates of his faith, and so forth.

If we borrow a leaf from the causes of the ‘ongoing’ banking crisis, one word cab suffice to describe it: the difficulty of managing the human element! Affiliated lending beyond legal limits, un-hedged offshore borrowing, imprudent credit policies, speculation, theft(bank owners overstating the dire state of their banks to get as much bank Indonesia liquidity support as possible, improper supervision of a fledgling banking system comprising many bank offices and  branches, the flight for safety as the baht took a nose dive! With this in perspective, a comment can be made about the likely performance of Shariah banking in this country. Prudential banking is necessary in both systems of banking. While for Shariah banking it is seen as a religious obligation, the conventional banking system without such moral burden on the minds of the users of funds (the custodians), the state apparatus through the moneraty supervision authorities do that job. Of course, in both systems, moral responsibility is a factor, but as experience is the judge, it is easier said than done. The challenge here is how to convert individuals with the mindset bent on borrowing as mush as possible without much consideration on how repayment will be made! It is not the philosophical foundation that was surely at stake rather the abuse of it by the individuals with minds set to self-aggrandizement at any cost. Banks attracted peoples’ savings by offering high interest rates and   rewards, people deposited in droves. However, it is not that interest rate too high ton repay deposits on demand, rather funds were lent to sometimes-unworthy causes, unproductive investments, or virtually siphoned off to some remote safe tax havens. With such a mindset, is not there the possibility that Shariah banking will be used as a means to collect people’s funds as much as possible, this time without much upfront commitment, which transfers the risk from the banker squarely onto the insufficiently informed saver. Depositors in shariah banking are virtual ordinary shareholders whose fate depends on what the managers of the bank declare in their annual income statements, which might be cooked to show poor performance as long as the depositors can hardly monitor the activities of the banks, operations of the firms where funds are invested! Shouldn’t an entirely new set of information disclosure have been the precursor to adopting shariah banking system, as it makes the owner of the funds a passive recipient of whatever outcome managers announce? Another query concerns conventional banks that also run shariah system banking in some of their branches: how is it possible for them to separate the operations (source and use of funds) within their branches to ensure that funds deposited in shariah branches do pot cross over to conventional bank branches to cover fund shortages (this is crucial because many savers are driven by the need to avoid Riba).

Whatever system of banking that is in use is largely influenced by the readiness or lack of it of the underlying structural framework (legal, infrastructural, manpower, standard operating procedures, name it). The government to date continues to perfect the above for conventional banking system, yet the embezzlement of Rp.1.7 trillion embezzlement could not be sniffed before hand, how about the budding shariah banking system?  One only hopes bankers are not championing the Shariah banking cause to take advantage of its benefits for their own interests! The hope is that such thinking is wishful at best!