INTERVIEW WITH ECONOMIST & LAWYER OF INTERNATIONAL REPUTE
SUKUK POSSESSES POTENTIAL OF LIBERATING ECONOMIES FROM CHRONIC CYCLES OF POVERTY AND STAGNATION.
Apr 16 - 22, 2012
Prof. Dr. M. Mahmud Awan is a leading Professor of Islamic Finance who has been the Chief Academic Officer and Dean of the Faculty at INCEIF Global University in Malaysia. Currently, he is serving as Chairman/CEO of Global Studies Institute, USA.
Prof. Dr. M. Mahmud Awan is also practicing attorney, legal counsel, and Sharia Adviser with over thirty years experience as a Corporate Lawyer and Industrial Economist. He has demonstrated exceptional record of leadership in Global Islamic Finance strategy direction and Sharia compliant financial transactions. He is a Key Metrics Expert specializing in Sharia compliance, audit and measurement, institutional development, and management accountability. He has multiyear international experience as a bank and insurance company adviser. He has worked successfully with the government and industry in achieving Shariah implementation goals for securities, mutual funds, Takaful companies, asset management firms, and commercial banks.
Prof. Dr. M. Mahmud Awan is also author of numerous books and articles on Islamic Law of Finance, Foreign Capital Utilization, and Regulatory Compliance of Investment Products.
Dr. Awan received his Ph.D. in Economics from Clark University in 1976. He received his LLB law degree from Punjab University before receiving his LLM degree in Comparative American Law from Boston University Law School in Boston, Massachusetts. He is a practicing attorney specializing in Constitutional Law, Islamic Law of Finance and International Law. He is a member of the International Bar Association and the American Trial Lawyers Association (AAJ). He has been a Professor of Business Law and Finance at several American and foreign Universities including the National University of Sciences and Technology (NUST) Pakistan, where he served as the Professor Emeritus. He is a globally recognized trainer of Sharia scholars and serves as the Sharia Adviser for several banks and Takaful companies in Malaysia and elsewhere.
In an exclusive interview with Pakistan and Gulf Economist (PAGE), during his current visit to Lahore, Prof. Dr. Awan, shared his views on the state of Pakistan's economy. He presented an extremely challenging picture of Pakistan's economy, saying radical changes are urgently required to avert collapse of the economy. He said the recent IMF and Asian Development Bank reports on Pakistani economy are alarming in the sense that they paint a dark scenario because of heavy debt burden and poor governance of the economy.
He said, "The current economic scenario in Pakistan calls for major "surgery" if the patient is to survive," adding, "We must urgently explore the option of introducing Islamic Finance as a surgical solution for such economies that include many countries in Asia and Africa in addition to Pakistan."
According to him, financial discipline, slashing non-developmental expenditures by abolishing all the ministries/ divisions except foreign affairs, defense and finance, privatization of all the state entities, enlarging tax base and improving revenue collection are some steps required for putting the economy back on track.
Prof. Dr. M. Mahmud Awan said that privatization as per Islamic principles can help revive the economy of Pakistan. In this regard, he suggested privatization of all state entities through introduction of Sukuk without any government control or favoritism.
Dr. Awan praised Pakistan's private sector which despite manifold challenges has shown exceptional resilience and earning precious foreign exchange.
Talking about US economy, Dr Awan said the US economy is called a "War Economy" because it has thrived on production required for global wars. But almost all the defence production factories in the US are working under private sector control and are regionally distributed in all parts of the US States. "If the war is over, or the supplies are no longer needed for the anticipated and planned wars, these factories would be closed down rendering thousands of people jobless in key parts of the country. The US economy is still conditioned to function within a war-driven past."
About restoration of Nato supplies from Pakistan, he said, "Pakistan had a golden opportunity to say goodbye to the US by saying "No" to its participation in the war against terror." However, he said the real issue is personal stakes of different stakeholders in Pakistani economy who are playing their own game of vested interests instead of thinking about the strategic interests of the country.
Talking about the historic role of Islamic finance operating within the confines of western financial systems, Dr. Awan said that Islamic finance has generally operated within the broader framework of conventional finance and has conformed to globally acceptable conventional rules, prudential regulations, and financial standards. Therefore, its impact on national growth and development is also expected to be consistent and similar but its portion of total finance is still relatively small.
He said the pace of new Sukuk launches has picked up after the decline witnessed because of the global financial crisis of 2008 but the supply of new Sukuk still falls short of the demand from investors for fixed income securities. He said, "We can review the precedents from the conventional bond market to explore the creation of new classes of Sukuk for institutional investors and consumers alike that will enhance the potential for government projects financing in developing countries. It will not only ensure deepening of the Sukuk driven capital markets but will also provide a mechanism for Sharia conscious consumers to adopt Sukuk as a long term savings tool. Examples and case studies of public utilities financing and municipal bond financing can be looked at as viable basis for new Sukuk ownership certificates as the alternative to widely marketed savings bonds in these countries."
He further said the popularity of both Sovereign and private Sukuk in major markets such as Malaysia and UAE suggests that large population Muslim countries such as Indonesia, Pakistan, and Bangladesh will benefit from the issuance of new fixed income securities in these markets. Development banks such as IDB and ADB should work in collaboration with the World Bank and other multilateral organizations in broadening the base of such Islamic finance instruments that are positioned to create a positive transformation of these economies, he added.
Prof. Dr. M. Mahmud Awan called for enhanced Western participation in financing of Sukuk driven development projects in the Muslim countries going through Arab Spring phenomena.
He called for a new era of cooperation between Islam and the West as the Muslim majority countries go through this unprecedented period of protest against the past policies of exploitation, injustice, and indifference towards the plight of the masses.
Highlighting his research findings based on data collected from on-site visits to Egypt, Jordan, Lebanon, Iraq, Turkey, Bahrain, Saudi Arabia, UAE, Kuwait, Qatar, Oman, Malaysia, Indonesia, Pakistan, and Bangladesh, Dr Awan said introduction of Islamic Finance instruments especially Sukuk are having a stabilizing influence in these divergent economies, operating in different political and economic environments. He blamed governmental corruption and excessive centralized control of all productive resources of the economy in a few hands as the primary reason for Arab Spring protests and the demands for change. Even after toppling of several unpopular governments and their dictators, people have not seen any change in their daily life of economic inequity and injustice.
Newly installed governments, though more aware of the power of popular revolt, are still struggling to find practical ways to give people a greater sense of participation and empowerment, he said, adding, "This requires denationalization and privatization of the military and central government owned enterprises that have concentrated the economic resources in the hands of select few."
Dr. Mahmud Awan highlighted the positive examples of Malaysia and United Arab Emirates. He maintained that Sharia compliance protocols that the industry has adopted, however, have led to sub optimal solutions for the economy in some cases thus undermining the original Sharia objectives of fairness, inclusiveness, equity, and economic justice. That is not to suggest that classical Islamic jurisprudence principles or the underlying traditional Islamic operational contracts such as Murabaha, Ijara, Musharaka, Mudaraba, Wakala, or Salam, have not been correctly applied in the development of either the retail consumer products or the asset/wealth management products for the high net worth individuals.
Talking about the industry constraints, Dr Awan said the conventional character and performance of Islamic finance products limits their religious or inspirational impact on a Muslim society. He said, "Central bankers, securities commissions, stock exchanges, and other government regulators have all followed conventional guidelines in approving and standardizing Sharia compliant products without developing a coherent national economic policy that distinguishes or maximizes the benefits from such products. Islamic finance industry has remained satisfied in using the newly Islamized nomenclature products for sheer profitability and market share gains at the expense of their conventional competitors."
Talking about emergence of Sukuk as an instrument of development, Dr Awan said the experience of the last thirty years has taught us that Islamic Finance products do not all originate or perform in the same fashion in their respective markets.
Lack of macroeconomic planning in favor of Islamic Finance products and instruments has curtailed the use of Islamic Finance for broader national agenda, he said, adding, "Some of Islamic Finance products, however, do have the potential of making a real impact on Muslim countries if they can be brought under the umbrella of nationally planned economic strategies for growth and development."
The most promising of these products are the Sukuk which are the oldest financial transaction facilitators in Muslim societies. They have been in use for centuries long before any financial intermediation products were developed. They were the instruments of choice for the transfer of financial obligations resulting from mutual trade and commerce commitment. The authority for written obligations like Sukuk can be traced directly to Quran (Al-Baqarah 2: 278-283). Recently launched Sukuk in Asia and the Middle East have the potential of setting the stage for new fixed income securities that could be useful for the developing countries in managing their heavy debt burdens and initiating a new growth strategy for their economies, he added.
Regarding his idea of privatization of government controlled enterprises through Sukuk, Dr Awan said the stage has been set for the Muslim majority countries to privatize government controlled enterprises with the help of new Sukuk securities issued under AAOIFI approved standards. Numerous studies have shown that problems of poverty are related to poor governance, excessive governmental control, and corruption. Privatizing publicly owned enterprises through issuance of high yielding Sukuk is a viable alternative that has the potential of liberating these economies from chronic cycles of poverty and stagnation, he added.
According to him, structuring of these Sukuk can satisfy the enhanced Sharia compliance criteria since the yield to maturity of these securities will be different from those of conventional bonds. Such a scenario becomes possible once the concerned governments and their policy makers realize that people will not be pacified simply by their use of Islamic rhetoric. Sukuk can become powerful economic multipliers, acting beyond their current role as a liquidity/treasury management and project financing tool.
It can be an instrument of empowerment for the people who are yearning for a sense of ownership in an economy that they feel has robbed them of their basic right to health, education, and economic freedom.
Sukuk can also serve as a savings tool for the masses while providing a reliable instrument for debt financing, as the savings bonds have done in the conventional finance.
For Pakistan, this can lead to an end of militancy and Talibanization because the country can neutralize extremism only with extremely creative Islamic solutions that are not only in compliance with Quran and Sunnah but also ensure a path to prosperity for all, thus fulfilling the objectives of Sharia, and the original creation of this Islamic Republic.