The Dispute over Islamic Bonds
By Lahim al Nasser
Previously, I had discussed the dangers of the jurisprudential dispute over the spread of Islamic bonds. This dispute came as a result of Sheikh Abdullah Bin Manei’s statement, which was a response to Dr. Hussein Hamid’s words. I had hoped that it would not escalate, however the developments have been unexpected.
Islamic bonds have managed to propel Islamic banking from being a local industry to becoming a global one in a short period of time no longer than seven years since when Islamic bonds (sukuk) were first issued in 2000 and were worth no more than US $336 million. In what is nothing short of an unprecedented leap, these bonds were estimated to be worth US $30.8 billion in 2007 according to Bloomberg. However, many clerics have stated through the media that 85 percent of Islamic bonds do not conform to Shariah law.
Some have justified the permission of the formulas used to the fact that they were only temporary and that the fatwa committees had aimed to bolster the industry. Some have also stated that now was the time to review these fatwas (religious edicts) after this tool [Islamic bonds] has proved its worth in domestic and international markets.
In fact; I was surprised by the way in which the issue was first disseminated through the media before it was debated by the specialist jurisprudential scholars in order to draw a sound jurisprudential conclusion with regards to the issue. This method is far removed from the true scientific method employed to discuss controversial issues.
Moreover, the justification that has been employed to temporarily permit these bonds is deemed illegitimate in accordance with Shariaa, and likewise; the approach is unacceptable in the finance industry which requires stability and standardized tools, especially in the capital market because of its global nature.
These statements prove that from the point of view of global institutions that set the standards of the banking industry on an international scale, such as the Bank for International Settlements (BIS) and its subcommittees like the Basel Committee and the Basel II Framework do not take the particularities of Islamic banking into account when formulating their conventions. The justification for that is that there exists no criterion that is agreed upon for the Islamic banking industry.
The statements that have been issued with regards to the legitimacy of the circulating Islamic bonds will undoubtedly reflect negatively on the Islamic banking industry both locally and internationally. This is because it will result in weakening the confidence in the fatwa committees and their resolutions, especially with the knowledge that the bonds have been stamped with official certified seal by the fatwa committees.
Add to that is the reluctance of many Western financial institutions and markets to expand in the Islamic banking industry by virtue of the absence of clear criteria and the fact that it is subject to the discretion of a group of clerics whose jurisprudential views are not stable.
Perhaps the reason for the present agitation around the fatwas in Islamic banking is the outcome of mechanisms that have been selected by the members of fatwa and methodological committees. The member fatwa committees have come to exercise a monopoly on some of the renowned names in the industry.
For example, one such member is affiliated to 70 financial institutions worldwide, which begs the question: When does he have the time to study and examine the products that are presented to him? Also, the prevalence of these names [of member fatwa committees] results in a lack of representation of the jurisprudential schools within these fatwa committees.
Furthermore, the scientific methodology and process for issuing fatwas based on studies and research is incomplete in many of the fatwa committees because of the lack of time available for members of these bodies to conduct these studies. The outcome is that the decrees issued for any given institution is not based on the scientific principals for religious edicts. Additionally, the breach of resolutions issued by the jurisprudential academies also results in decrees being subjected to criticism and change.
* Lahim al Nasser is an adviser in Islamic banking