www.bt.com.bn - ISLAMIC banks or financial institutions may not be able to compete with their conventional counterparts with respect to investment accounts since the returns cannot be guaranteed under Syariah or Islamic rules, a Universiti Brunei Darussalam (UBD) academic said.
"One of the normal criteria which the investors always look (for in) investment products is whether their capital will be intact, protected or whether there will be side effect or risk on their capital," said Hairul Azrin Hj Besar (pic), a senior lecturer of the national varsity's Faculty of Business, Economics and Policy Studies (FBEPS). (source)
"One of the normal criteria which the investors always look (for in) investment products is whether their capital will be intact, protected or whether there will be side effect or risk on their capital," said Hairul Azrin Hj Besar (pic), a senior lecturer of the national varsity's Faculty of Business, Economics and Policy Studies (FBEPS). (source)
While conventional banks compete with each other by offering different types of products, Islamic banks will differentiate themselves with the types of Murabaha contract use offered, with the norm being Mudarabah accounts.Explaining Brunei's Islamic financial sector to international participants of a seminar last week organised by the standard-setting body Islamic Financial Services Board (IFSB), Hairul Azrin said that the most common of these in the Sultanate was the unrestricted Mudarabah account.
Even though this was reflected on the balance sheet, it would be placed under the name of "equity of unrestricted investment account holders", which did not fit the definition of a deposit or an investment account, he pointed out.
Due to this, there was the issue of clarity of the accounts when they were co-mingled with other funds.
"The problem with this is, if it is normally co-mingled (with) a pool of funds, consisting of different kinds of deposits under different types of Muamalah contracts, the respective performance is not seen because the whole fund is invested into the respective investment avenues. It will be hard to say how much will be linked back to the investment account holder."
"So caution has to be exercised to ensure this is properly appropriated, because as part of the Syariah requirement, investment account holders have profit sharing ensured. So profit will be shared in accordance to this agreed profit sharing ratio with clients," he added.
Mudarabah investments could be seen as high risk, since both capital and return could not be guaranteed to the investors or fund providers (Rab'ul Mal) because Syariah did not allow the Mudarib or facilitator (the bank) to guarantee returns.
"If it is looked at the performance of the Mudarabah account, it might not be consistent. There will be a time when it performs highly and there might be a time when it performs poorly," the UBD scholar said.
"So one period of time, it might be 17 or 20 per cent and in some other (time), it might be one per cent or less," he added.
"With that kind of instability of return, (Islamic) banks might not be able to compete with their conventional counterparts, where the returns are promised and stabilised."
Reserves were then used to smooth income so that Islamic banks or financial institutions can "shadow" their conventional counterparts.
"This has raised the issue of displaced commercial risk (DCR), where Islamic financial institutions might lose, especially looking at the Mudarabah accounts, against the conventional counterpart," he said, adding that the calculation of the DCR was provided in the IFSB standards.
The two types of reserves practiced were profit equalisation reserve and the investment risk reserve.
For the first type of reserve, expressed permission was needed from the depositors to use the returns generated as reserve funds since the returns were rightfully owned by the depositors.
"If you were to take reserve, which is normally taken from the returns of the usage of this fund, it should be known to them," said the senior lecturer.
In the event that a depositor chooses to close the account, a right provided for under Mudarabah contract, the said depositor can allow for his funds in the reserve to passed on to other depositors. This gave way for issuance of whole returns based on the reserve.
"If I were to open an account today, and we are doing well and the bank has provided 50 or 70 per cent of the returns as reserve; but two months later, I stop the account and somebody else comes in and at that point of time, the performance was not so good, so they do not have any high returns, reserve will be taken to equalise these returns," he explained. "And when this happens, the receiver of the returns is the new depositors."
However, he raised the question of how this process can be properly monitored and regulated.
The investment risk reserve, on the other hand, aimed to protect the capital. But since the Mudarib or Islamic bank was not allowed to provide capital under the Mudarabah contract conditions, the investment risk reserve mechanism made it "seem" as if the banks were protecting the capital, Hairul Azrin said, adding that this could raise some Syariah issues.
With the bank not being tied up to the capital in such investment accounts, the UBD academic also pointed out that this would do little to meet the capital adequacy required of Islamic banks or financial institutions.
"If capital is not a liability to the bank, it might not raise some weight to the capital adequacy requirement as the capital in the Mudarabah contract is not guaranteed."
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