By design, Islamic finance must pass the test of transparency, as well as traceability. These two requirements are beyond compromise. As a matter of fact, these two requirements not only satisfy the Shariah compliance requirements but also, more importantly, reinforce the best practices of doing banking.
The last thing we want to do is to enter into a dubious, unclear and unknown contract, which could strike against us from nowhere anytime. Then, it will be too little and too late to do anything about it.
In all honesty, transparency and traceability could also be part of the requirements in conventional finance, but not necessarily all the time. Indeed, this is quite logical and conceivable for conventional finance.
The main underlying subject matter of conventional finance is money or money lending. Aspects of transparency and traceability surrounding money lending are very limited.
What matters most is how the borrower would be able to repay the loan on time. In the case when there is a collateral attached to the loan transaction, the issue of transparency and traceability might be more relevant, as the subject matter – in the pledge contract - has moved away from money to other types of assets.
So, in a nutshell, what does Islamic finance do? Islamic finance purchases and sells, and sometimes leases an asset, be it tangible or intangible. Occasionally, Islamic finance invests in certain projects or ventures, either through banking or sukuk products.
In order for Islamic finance to conscientiously document its rights and liabilities, Islamic finance needs to know exactly and precisely what kind of asset or service or venture it’s going to put its hands on. Well, we do have to look both ways before we cross the road, right?
In the bigger scheme of things, the approximation of these underlying assets is not good enough. The knowledge needs to be exact and precise. This is important to ensure a bona fide and real transaction, though this can be a little harder to do.
If we issue a Letter of Credit (LC) or Letter of Guarantee (LG), the Islamic banks must see the whole value chain of this transaction, to the extent of knowing what is being stored in the warehouses at the ports and airports.
It goes without saying that Islamic finance would denounce any investment in highly speculative instruments, to the extent that the appreciation of the behaviour of the products is half measured. The matter escalates when some products have many wrappers. In Islamic finance, we need to unlock each slice of these wrappers.
by Dr Mohd Daud Bakar
