Is Syariah compliance enough?

Dr Humayon Dar

ISLAMIC and finance has emerged as a legalistic phenomenon, perceived to be different from conventional banking and finance primarily in its legal form. It attempts to achieve the economic effects of almost all banking and financial products in ways that comply with the requirements of Islamic law (Syariah). Critics view most Islamic financial products as Syariah-compliant caricatures of conventional products. While these products may offer mental satisfaction to religiously motivated users of financial services, they have yet to appeal to the Muslim masses. An estimated 75 per cent of Muslims reject Islamic banking and finance on the grounds that it does not offer any real economic value, different from what conventional products otherwise provide. In some countries (particularly Pakistan), some sort of organised movement by religious leaders (‘Ulama) against the current practices in Islamic banking has already started taking shape.

Given the current downturn in financial markets, Islamic banking and finance faces an even greater challenge than what many Islamic banking practitioners and observers yet perceive. This is the time for those involved in Islamic banking to take a pause and reflect on the developments in the industry, to assess both its progress and shortcomings. Although many analysts argue that Islamic banking & finance is more resilient to financial crises, the real question to ask is: which Islamic banking?

While one can unambiguously claim that Islamic banking in theory works better than conventional banking, the answer is not necessarily straight forward when we refer to the practice of Islamic banking.

Some industry observers have for some time called for developing more Syariah-based rather than mere Syariah-compliant products to add authenticity to the Islamic banking practice. Apparently, the notion of Syariah basis is gaining grounds among a new generation of Islamic banking supporters.

A financial product is deemed Syariah-compliant if it fulfils Islamic legal requirements in terms of the prohibition of interest (riba), contractual uncertainty (also called Gharar), gambling and other activities involving unethical products and services.

Some industry analysts suggest that there must be another category that of Syariah tolerance even before Syariah compliance. They say most of the Islamic financial products offered at present in the market are merely tolerated in Syariah due to the lack of development of Islamic financial infrastructure. A notable example of Syariah tolerance is that of Islamic mutual funds based on the contemporary Syariah screening methodologies. Based on these screenings, certain prohibited activities (like interest-based borrowing and financing) are tolerated to some extent (33 per cent debt equity ratio) in the wake of a lack of Syariah-compliant businesses. This view holds that something tolerated in Syariah (in accordance with the principle of necessity) should not qualify as Syariah-compliant.

The proponents of the Syariah-based approach, nevertheless, maintain that Syariah tolerance of compliancy of a financial product is not sufficient; rather, such a product should offer more than just compliance with the Islamic law. One such view suggests that Islamic financial products should be structured so as to fulfil the Objectives of Syariah (or Maqasid al-Shari’a).

The objectives of Syariah are commonly defined in terms of Imam Ghazali’s classification of unrestricted public interest (known as Maslaha Mursala), in terms of the protection and preservation of religion, life, intellect, property and progeny. Thus, Islamic financial products based on (the objectives of) Syariah must attempt to enhance unrestricted public interest. According to Imam Shatibi, public interest can be divided with respect to: essentials, necessities and what is known as luxuries in economic literature. The preference order on these runs from essentials, to necessities, to luxuries that are least the preferred. Accepting this classification implies that a financial product serving better interest in terms of provision and facilitation of essentials is preferred over another, which serves less in terms of provision and facilitation of essentials or equal interest in terms of provision and facilitation of necessities or luxuries. For example, education for children is an essential, while shelter for family is a necessity. A financial product that facilitates provision of education to children contains more public interest than a home financing product.

Thus the distinction between Syariah compliance and basis with respect to the objectives of Syariah has a social dimension, as evidenced by public interest. Any financial activity or banking product that enhances public interest is deemed Syariah-based. Syariah compliance remains a necessary condition for Syariah basis; while public interest is a sufficient condition. This means that while all Syariah-based products must be Syariah-compliant in addition to offering unrestricted public interest, merely Syariah-compliant products do not contain significant public interest.

A second possible explanation of Syariah basis may refer to a debate of “substance over form”. Many critics object to Islamic financial products on the grounds that they are different only in terms of legal documentation and execution processes that aim to achieve economic effects of conventional products.

A third group believes that Islamic financial products must offer a distinctly different economic value proposition. This, in their view, can only be achieved by observing the spirit of Islam rather than merely relying on Syariah-compliant legal documentation.

The author is regarded as among the world’s foremost Syariah technicians. The CEO of BMB Islamic is renowned for pioneering numerous industry setting innovative techniques in Islamic banking and finance, and publications say his name is synonymous with many of the most sophisticated Islamic products currently on offer.

source : TBT

Islamic finance sector needs more sharia scholars

As the world financial industry sheds jobs by the tens of thousands, the $1 trillion Islamic banking sector has a growing load of work for sharia scholars but few candidates coming forward to do it.

Experts steeped in the Muslim scriptures are critical to Islamic finance, which requires a religious stamp of approval before a bond, mortgage contract or other financial product can be marketed as moral according to the standards of the holy Qur’an.

But qualifying for this work takes much more time and effort than other jobs in finance require. Candidates must first study Islamic law or sharia for many years, and then master finance.

Globally, and especially in Europe and America, there is a shortage of scholars familiar with both fields,” said Mufti Abdul Kadir Barkatulla, an Indian-born imam in London who sits on sharia boards for six banks including Lloyds TSB Bank.

“A few scholars are going around the world [advising banks] and new scholars are not being trained fast enough to take their place,” he said at an Islamic finance conference in Paris.

Part of the problem is linguistic. Many Middle Eastern scholars work only in Arabic, the language of Islam, but the global market needs scholars fluent both in Arabic and in languages such as English or French.

A study for Paris Europlace, an industry group trying to develop Islamic banking in France, said there were fewer than 100 scholars in the world qualified to sit on sharia boards.

Demand for Islamic banking has grown in recent years and expanded from the Middle East as more of the world’s 1.3 billion Muslims seek investments that comply with their faith.

The current financial crisis has also hit the Islamic sector, but Islamic banks say they are better placed to weather it because of their more conservative stance.

“We’re not immune, but we’re not failing catastrophically,” said Sheikh Nizam Yaquby from Bahrain, who advises the Islamic units of HSBC and BNP Paribas , among others. “The scholars stopped us from buying subprime loans.”

Islamic law bans fixed interest rates and trade in companies dealing in alcohol, pork or pornography. But like sharia in any other field, there are no fixed rules that all scholars accept.

“About 90 percent of all sharia board rulings are consistent so there’s only about 10 percent difference,” Yaquby said.

Some differences are theological. Malaysia, home to over half the global Islamic bond market, follows the Shafi school of Sunni Islam and is the most flexible with debt.

Saudi Arabia, with its Wahhabi form of the Hanbali school, is the strictest, while the Gulf states chart a middle course. Islamic finance in western countries generally follows the Gulf.

Shi’ites used to have some striking differences, such as the view that the interest ban did not apply to interbank lending, “but now they are joining the mainstream,” Barkatulla said.

Mufti Ahmed Said Louqman Ingar from the French Indian Ocean island of Reunion said an investment fund there almost failed despite approval by an international sharia board. “Clients wanted approval by local French-speaking scholars,” he said.

One sharia board might reject an airplane leasing deal because the airline served passengers alcohol while another might ignore that and approve the contract, he said.

There are also no set fees for sharia advisers, who Gulf media say can earn up to $100,000 per fatwa, or religious edict, on a contract. But Barkatulla said money was not the issue.

“There is enough economic rationale for people to get trained,” he insisted. “This will not be a problem.”

Islamic finance sector needs more sharia scholars

images28by Tom Heneghan

Experts says there is a shortage of scholars qualified in both sharia and finance. (Getty Images)As the world financial industry sheds jobs by the tens of thousands, the $1 trillion Islamic banking sector has a growing load of work for sharia scholars but few candidates coming forward to do it.

Experts steeped in the Muslim scriptures are critical to Islamic finance, which requires a religious stamp of approval before a bond, mortgage contract or other financial product can be marketed as moral according to the standards of the Koran.

But qualifying for this work takes much more time and effort than other jobs in finance require. Candidates must first study Islamic law or sharia for many years, and then master finance.

“Globally, and especially in Europe and America, there is a shortage of scholars familiar with both fields,” said Mufti Abdul Kadir Barkatulla, an Indian-born imam in London who sits on sharia boards for six banks including Lloyds TSB Bank.

“A few scholars are going around the world [advising banks] and new scholars are not being trained fast enough to take their place,” he said at an Islamic finance conference in Paris.

Part of the problem is linguistic. Many Middle Eastern scholars work only in Arabic, the language of Islam, but the global market needs scholars fluent both in Arabic and in languages such as English or French.

A study for Paris Europlace, an industry group trying to develop Islamic banking in France, said there were fewer than 100 scholars in the world qualified to sit on sharia boards.

Demand for Islamic banking has grown in recent years and expanded from the Middle East as more of the world’s 1.3 million Muslims seek investments that comply with their faith.

The current financial crisis has also hit the Islamic sector, but Islamic banks say they are better placed to weather it because of their more conservative stance.

“We’re not immune, but we’re not failing catastrophically,” said Sheikh Nizam Yaquby from Bahrain, who advises the Islamic units of HSBC and BNP Paribas , among others. “The scholars stopped us from buying subprime loans.”

Islamic law bans fixed interest rates and trade in companies dealing in alcohol, pork or pornography. But like sharia in any other field, there are no fixed rules that all scholars accept.

“About 90 percent of all sharia board rulings are consistent so there’s only about 10 percent difference,” Yaquby said.

Some differences are theological. Malaysia, home to over half the global Islamic bond market, follows the Shafi school of Sunni Islam and is the most flexible with debt.

Saudi Arabia, with its Wahhabi form of the Hanbali school, is the strictest, while the Gulf states chart a middle course. Islamic finance in western countries generally follows the Gulf.

Shi’ites used to have some striking differences, such as the view that the interest ban did not apply to interbank lending, “but now they are joining the mainstream,” Barkatulla said.

Mufti Ahmed Said Louqman Ingar from the French Indian Ocean island of Reunion said an investment fund there almost failed despite approval by an international sharia board. “Clients wanted approval by local French-speaking scholars,” he said.

One sharia board might reject an airplane leasing deal because the airline served passengers alcohol while another might ignore that and approve the contract, he said.

There are also no set fees for sharia advisers, who Gulf media say can earn up to $100,000 per fatwa, or religious edict, on a contract. But Barkatulla said money was not the issue.

“There is enough economic rationale for people to get trained,” he insisted. “This will not be a problem.”

(Reuters)

Islamic bond scholars toughen rules on Sukuk sales

images37Religious scholars are imposing tougher rules on the sale of Islamic bonds to investors after stating that most of the securities may not fully conform to the teachings of the Muslim faith.

Investors bought $30 billion of so-called sukuk in the past year that avoid breaching Shariah law prohibitions on the payment or receipt of interest by using property or other assets to provide an income, according to data compiled by Bloomberg. New guidelines demand that investors become the legal owners of those assets rather than nominal holders, the Bahrain-based Accounting & Auditing Organization for Islamic Financial Institutions said on its Web site.

The rules from AAOIFI’s board of 18 religious advisers led by Chairman Sheikh Muhammad Taqi Usmani will make it harder for companies to issue Islamic debt at a time when borrowing is already shrinking because of the global credit crisis. Sales of sukuk dropped to $856 million so far this year from $4.7 billion in the first quarter of 2007, Bloomberg data show.

”This is a paradigm shift and will make life difficult for chief financial officers used to the existing structures,” Moody’s Investors Service analyst Khalid Howladar said in a phone interview from Dubai today.

Shariah restricts investors to transactions based on the exchange of assets rather than money alone, so interest payments are banned. Working with Islamic advisers, banks including Citigroup Inc. and HSBC Holdings Plc have built the market for sukuk to $60 billion from almost nothing in a decade, based on Bloomberg and Standard & Poor’s data.

Blemishes

Borrowers and their bankers until now created a fixed income for investors by promising to buy back the assets underlying sukuk at their face value on maturity, irrespective of whether the assets made or lost money, Moody’s Howladar said. These types of agreements are banned under the tougher rules because Shariah demands buyers and sellers share profits or losses from their transactions.

”Blemishes” have crept in that the industry must now ”rid” itself of, AAOIFI’s board of scholars said last month. As much as 85 percent of sukuk sold to date may not comply with all the precepts of Shariah, the board said.

The new rules force issuers of sukuk to legally transfer the ownership of assets to bondholders. The assets must be tangible rather than a cash flow.

”What the scholars are trying to do is make sukuk asset- backed rather than just asset-based,” said Arul Kandasamy, the Dubai-based head of Islamic finance for Barclays Capital.

Sukuk Sales

Borrowers won’t have to restructure bonds already sold to comply with the new guidelines, AAOIFI financial consultant Majd Bakir said in a phone interview from Bahrain.

Jebel Ali Free Zone FZE, Dubai’s state-run operator of a business park adjoining the Jebel Ali port, raised $2 billion in the biggest sale of sukuk from the Gulf in the past six months. Buyers of the bonds have no legal claim on the underlying assets and have an ”implicit guarantee” the issuer would cover any payment shortfalls, S&P said in a report in January.

Banks and borrowers rely on approval from recognized Shariah scholars to be able to sell their sukuk to devout Muslims. Sheikh Usmani advises the Islamic finance unit of HSBC, the No. 2 underwriter of sukuk last year, according to Bloomberg data. Usmani didn’t respond to two e-mails seeking comment on the rules.

Fellow AAOIFI board member Sheikh Mohammed Elgari advises Citigroup and Merrill Lynch & Co., and Sheikh Nizam Yaquby advises banks including BNP Paribas SA, Lloyds TSB Group Plc and Standard Chartered Plc, according to HSBC.

Higher Costs

AAOIFI accounting standards are binding in six Arab countries and the Dubai International Financial Centre, a base for banks including Goldman Sachs Group Inc. and UBS AG. Regulators in countries including Malaysia, Saudi Arabia, Australia and South Africa base their rules for sukuk on AAOIFI’s guidelines.

While the rules will mean ”slightly” higher costs on sukuk until the new structures become commonplace in about a year, clarity on the guidelines is positive for the market, said Haris Irfan, a Deutsche Bank AG director responsible for Islamic finance in Dubai.

It will ”give comfort to some investors who had shown concern” about the scholars’ comments on Shariah compliance, said Irfan. ”We’re already moving away from guaranteed returns to more risk-sharing structures” for planned sales, he said.

Companies planning sukuk sales include Bahrain Islamic Bank, which on March 11 said it plans to raise as much as $664 million from the securities to finance expansion. The U.K., Japan and Thailand are among governments that may sell sukuk, helping the market grow to $200 billion by 2010, Moody’s said in a report last month.

”The likely impact of this is that either the sukuk market becomes more based on Islamic securitizations or it bifurcates, with some sales becoming truly asset-backed and other issuers choosing to continue with existing structures,” Moody’s Howladar said.

 Source: Bloomberg

Indonesia ulama to back Islamic finance sector

imagesINDONESIA’S Council of Ulama said in Jakarta yesterday it would assist the growth of the Islamic finance sector by issuing market-friendly fatwas or edicts, a move that would enable Indonesia to fund its growing budget deficit by issuing more Syariah debt.Ma’ruf Amin, a senior official with the Ulama Council, or MUI, said the religious authority supported the government’s efforts to develop the market for Islamic products.

“We are encouraging innovations among industry players who are planning to introduce new products,” said Amin, who is head of MUI’s commission in charge of fatwas or edicts related to sharia financial products.

“We have just completed drafting a fatwa on sovereign Islamic bonds which will be issued shortly. We will send it to the government after we hold a plenary hearing,” Amin told Reuters in an interview in his office at the sprawling Istiqlal Mosque complex in Jakarta.

In April, Indonesia’s parliament passed a new bill on Islamic sharia debt, which paves the way for the government to sell its first Islamic bond and tap a wider array of global investors.

The government hopes to raise as much as $2 billion from the bond, or sukuk, to help plug a budget deficit which is forecast to widen this year due to higher fuel subsidies.

With higher inflation and a food and energy subsidy bill that’s set to top $20 billion in 2008, Indonesia’s cost of borrowing using conventional debt instruments is likely to rise.

Indonesia, the largest economy in Southeast Asia and the world’s most-populous Muslim nation, has been slow to tap the fast-growing Islamic finance market, for example to fund its huge infrastructure needs.

It lags neighbouring Malaysia and Singapore in developing the Islamic financial market.

brunai times