Young People Attracted by Crowdfunding for Good Reason

Q&A with Professor Rusni Hassan, who is an Associate Professor and Deputy Dean at the IIUM Institute of Islamic Banking and Finance.

Q: Professor Rusni Hassan, as a much-published scholar sitting on the shariah committees of a number of Islamic finance institutions, what are the main issues you have to grapple with when it comes to ensuring compliance?

Shariah compliance is a fundamental principle in Islamic Finance. It is a duty for every Muslim to comply with Shariah and this applies more to Shariah scholars. As scholars, it is their duty to not only abide by the shariah but also to ensure others’ compliance to the guidelines of shariah. 

Shariah governance is an important means to ensure Shariah compliance with the industry. It requires the establishment of Shariah Committees, which will be the main organ in regulating and supervising Shariah compliance. The Board of Directors and the management of Islamic financial institutions need to give due regard to the decision made by the Shariah Committee. This is to ensure the Shariah Committee’s independence in making decisions, in order to reach the best decision without any partiality. 

Without any doubt, there are some challenges faced by the Shariah Committee and among them is the issue of support from the Board of Directors and senior management in ensuring the decision made by the Shariah Committee has been complied with. 

Another issue faced by the Shariah Committee is the clarity of shariah issues to be decided. More often than not, the issues put forward to the Shariah Committee is not merely on shariah aspects but it is may involve complex business and financial issues or even the image of the Islamic financial institution itself. Thus, it is paramount for the Committee to have complete, sufficient information and a comprehensive overview of the issues at hand before making decisions. 

Full disclosure of the information, good deliberation and understanding of the matter at hand is of primary importance. Not only that the Shariah Committee members must have in-depth shariah knowledge, but also have the capability to make a comprehensive and integrated evaluation of the issues dealt with.  

Primarily, it is the obligation of the Shariah Committee to preserve the Shariah sanctity of the products and services offered by the Islamic finance institutions and also to ensure that the institutions’ overall operations, business, affairs and activities are in compliance with shariah. Indeed, that is a paramount duty and responsibility of a Shariah Committee member.

Related: Shariah Issues in Penalty and Compensation in Financial Commitments

Q: How would you assess the success of shariah screening of the products and services Islamic banks and financial institutions offer?

It is essential for a comprehensive process to be adopted in order to ensure end-to-end Shariah compliance aspects of the products and services. Shariah screening is among the various required processes in ensuring a product is Shariah-compliant. Not only the Shariah assurance process needs to be adopted in product development and structuring but also screening the nature of the business of the clients applying for the financing. A robust screening process is needed to ensure that there are no changes of the nature of the business into a non-Shariah business that may lead to termination of the facilities given.

Another prerequisite is to have ongoing processes such as shariah review and shariah audit. These processes are the regular assessment to provide assurance on the Shariah compliance aspects of the products and services and also other business activities of the Islamic finance institutions. Of importance also is the shariah risk management process to identify and monitor any events or activities of the Islamic finance institutions that may cause them to become shariah non-compliant.

The effectiveness of these shariah screening or assurance processes very much depends on the competency of the shariah officers performing the functions and the robustness of the reporting structure. Generally, it is a matter of the efficiency and efficacy of the shariah governance process. The shariah governance process will definitely be better with the support of the board of directors and management.

Q:  Besides the internal Shariah audit, do you think there is a need for an external shariah audit as well?

To answer this question, we must look at the regulatory framework of the respective countries as it differs from one another. Few countries require only internal audits but other countries make it a requirement to have both internal and external Shariah audits. 

Countries like Malaysia do not require external Shariah audit. But control is made through having an effective and robust internal Shariah audit structure, having competent Shariah auditors and regular reporting and supervision from the regulator. However, that does not undermine the need to have an external Shariah audit exercise in a situation where Shariah compliance cannot be objectively assured by the internal Shariah audit process.  

Notwithstanding, both internal and external Shariah audit purposes are to ensure end-to-end Shariah compliance. Regardless of whether it is an internal or external audit, the most important point is that the objective to provide an independent assessment on the overall Shariah compliance of the Islamic finance institutions is achieved. 

Related: Shariah Compliant Investments & Social Impact

Q: How do you think Islamic investments can be made more appealing to the younger generation? Many young people are concerned about not only profit but also the environmental cost of investments. What is your take on this?

The younger generation is more educated with high awareness and concern regarding matters involving their future. There has been much research conducted on the youth’s concern on the religiosity of their transactions and commercial dealings. The younger generation puts more focus on the transparency of their transactions, investments and dealings. It is crucial for the Islamic finance industry to respond to their future investors i.e. the younger generation. 

Services and products must not only be innovative but imbued with good values such as Sustainable Development Goals (SDGs) and Value-Based Intermediations (VBIs). Furthermore, the digitalisation of products and services cannot be compromised. Youth are looking for an expeditious and seamless process in matters involving their transactions. Thus, high-end technologies like Artificial Intelligence, Big Data, and FinTech are necessary in order for the industry to get connected with the younger generation. 

Q:  Crowdfunding is growing very fast among the younger generation. What do you think are the reasons for this and are there any ways such providers can improve their reach and services?

Crowdfunding is one of the best and successful examples of the digitalisation of Islamic finance products and services. The youth are enticed by the flexibility, speed and social cause promoted by crowdfunding. It is one new means that can be put to good use fast to raise finance without having additional fees as traditionally charged by Islamic finance institutions. It is also attractive to both youth and even older investors as it grants access to track the progress of their investment/crowdfunding campaign

One of those crowdfunding players includes Ethis Group, a pioneer of fintech for Islamic finance. They are one of few firms licensed to operate investment platforms in multiple countries, most notably for P2P financing by the Financial Services Authority Indonesia and Equity Crowdfunding by Securities Commission Malaysia. They are concurrently exploring acquiring approvals to launch new platforms in the region and the Middle East.

Related: Everything You Need To Know About Equity Crowdfunding

Transparency is not the only value-added feature of crowdfunding, which is important to youth, but it is also convenient and seamless. Hence, it is best for crowdfunding providers to enhance their services by offering innovative products that are imbued with good values such as SDGs, also at the same time ensuring transparency and convenience. 

Crowdfunding products embedded with online banking and saving accounts for youth, digital payments and money transfer services, appropriate insurance products for young people and digital tools for personal financial management are among the products and services that imbue these values that will improve providers’ reach to the younger generation.

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