OPINION - Islamic finance as ethical finance?

An issue that comes up periodically with Islamic finance is that the Arabic terms used to describe the products and the underlying prohibitions driving the industry (e.g. riba, gharar or Shari'ah-compliant).  There are many areas where Islamic finance overlaps with ethical finance and, therefore, Moinuddin Malim, the CEO of Mashreq al Islami Bank said that the industry should 'Westernize' the labels: "Why is it Islamic banking? It is ethical banking.  A lot of people think that it is only for Muslims, and it is not - it is for everyone. [...] But the problem is that it doesn't appeal to non-Muslim investors in Europe, primarily because they do not understand the various Arabic phrases".

There are many reasons why the industry should use more 'familiar' terms for the products being used and some of the resistance might due to fears that it will move the industry outside of its niche.  Not all Muslims are native Arabic speakers so the use of Arabic terms may create a need for more explaining of products than is necessary if they were called by a different name.  However, there are differences between the products used and the products they might be called (e.g. ijara versus a lease).  If a product is substantively different (for example, in the rights and responsibilities of the two parties as in an ijara compared with a lease), the use of 'lease' instead of ijara could be misleading.

There is a more fundamental reason, I think, that Islamic finance should retain the use of the Arabic terms for products: the industry is created to cater to the specific prohibitions within Islam.  It is not in and of itself ethical finance.  The industry does not universally adopt an ethical stance that would be expected by many investors, even some Muslims.  For example, even within Islam, man is placed as caretaker of the earth, yet many Islamic financial products finance activities that are destructive to the environment.  There is not even a delineation between whether the financed companies use industry best practices or are egregiously destructive to the natural environment.

The industry was created and is designed to serve investors who want to avoid that which is prohibited in Islam according to the scholars who advise the financial institutions offering the Islamic financial products.  It is not necessarily even created for the needs of all Muslims; there are some Muslims holding a different view of what is permissible in financial services and if those views are outside of the consensus within the Islamic finance Shari'ah scholar community, then the Islamic financial industry may not be suitable for them.

This is not meant to be a critique of Islamic finance.  It serves a valuable place in the financial services industry globally by providing an alternative to a significant proportion of Muslims who believe that the way the rules on finance are applied by contemporary Shari'ah scholars is correct.  It does a good job at catering to those individuals' needs, even if there remain significant gaps in product offering to actually meet all consumers' needs.  However, it would dilute the purpose of Islamic finance and confuse it's methodologies if it were marketed as 'ethical finance'.

There are two things that should happen if my description is accurate.  First, the Islamic finance industry would reach out to non-Muslims who can see the ethical features of Islamic finance.  For example, using non-Muslims' frustrations with large international banks who are using their deposits to finance either unethical or overly risky products and who present a systemic risk to the financial system (and therefore to the economy as well).  An approach to this group of potential consumers would b to explain the terms used in Islamic finance, but emphasize the fact that Islamic commercial banks by and large are much more pure intermediaries.  They take in deposits and make loans.  Depositors are paid based on the profitability of the financing.  This is an approach that has been successfully applied by credit unions (at least, I switched from Wells Fargo to a credit union for a similar reason, but I think others did too).

Another example would be to appeal to other consumers with an Abrahamic background who are looking for the 'basics' in terms of screening.  They want to avoid pork, gambling, alcohol and tobacco companies and those producing weapons or distributing pornography.  These are areas where Islamic finance has a well developed methodology for more than just investment: from banking to private equity.  With a proper understanding that the economic outcome of most Islamic banking products is the same, just with different labels, they could be convinced that an Islamic financial institution would be able to meet their needs.  The one area where a change of terminology might be helpful to appeal to new consumers would be by finding an alternative to the 'Islamic' label.  Even with Arabic terms, the gap can be bridged by explaining how an ijara works, but some consumers may not even ask the question if they think that the financial institution is working only for Muslims based on its 'Islamic' label.  This has been done before: Turkish Islamic banks are called participation banks, for example.

Moving to the second way that Islamic finance could attract more non-Muslims without changing its use of Arabic terms: if the industry wants to take on the broad 'ethical' name, it should widen its restrictions beyond the prohibitions it uses now.  Of course the expansion of mandate should be vetted by scholars to ensure that they are Shari'ah-compliant, but with few exceptions, that should be an easy test to pass (for example, the mitigation of excessive environmental damage financed by Islamic financial institutions).  This would provide a better base for Islamic financial institutions to credibly claim that they are concerned with the wider 'ethical' ideas, beyond those that are prohibited explicitly within Islam.

There are ways that Islamic finance can be opened to non-Muslims more than it has so far, but just changing the terms used or adopting new marketing approaches that use a broad 'ethical' label are unlikely to be successful.  Islamic finance can be ethical finance (in fact, for many people it already is), but it depends on the consumer's view of what is ethical and many people's understandings would find gaps in the screens used by Islamic financial institutions today.  Reaching out to non-Muslims is important--in many countries it is essential for Islamic financial institutions to grow.  However, just changing the names and hoping people understand the industry better and thus choose to use it is not going to be sufficient. 

Source :
http://investhalal.blogspot.com/2010/11/islamic-finance-as-ethical-finance.html