Category Archives: Challenges and criticisms

Unity in diversity? Shariah scholars and Islamic finance

Unity in diversity? Shariah scholars and Islamic finance
Source: http://www.themalaysianinsider.com/business/article/rock-star-scholars-a-risk-for-islamic-finance/

Islamicfinance1

Decades of parsing turgid legal documents have not dampened the enthusiasm of octogenarian Islamic scholar Sheikh Hussein Hamed Hassan. He gets agitated as he searches for a paper among piles of documents strewn across his posh Dubai office.

Wearing a dark grey suit with no tie, the Egyptian-born academic talks to a visitor for almost two hours about Islamic banking, which he has been instrumental in developing over half a century of writing and lecturing.

“Listen to me. You have to understand the basics of sharia, what’s allowed and not allowed in Islam. If you get it, then you’ll write it. And the whole world will understand,” he says.

Sheikh Hussein is one of the world’s most sought-after scholars in applying sharia or Islamic law to finance, chairing no fewer than 22 of the boards which rule on whether products and practices in the industry obey religious principles.

One position in particular stands out. As chairman of the sharia advisory board of London- and Dubai-based consultants Dar Al Istithmar, he is having to answer some searching questions on behalf of one of its most high-profile clients, US investment bank Goldman Sachs.

Last October Goldman announced it would issue as much as US$2 billion (RM6 billion) in sukuk or Islamic bonds, making it one of the first top Western banks to raise money in that way. But the plan has run into controversy among potential investors over whether it follows Islamic principles, as Dar Al Istithmar insists it does. There is also controversy over the fact that Goldman publicly named at least three Islamic scholars as potential advisers on the sukuk even though they had not even seen the prospectus.

“A copy of the Goldman Sachs sukuk prospectus was sent to these scholars for consultation but they never responded back,” Sheikh Hussein told Reuters. “They could be busy or did not approve the structure, but we didn’t hear from them. Their approval is not necessary anyway.”

The controversy over the Goldman sukuk illustrates some of the weaknesses of the Islamic finance industry. These are leading to growing pressure for reform of the scholar system, though the power of entrenched interests, and the difficulty of coordinating policy in an industry where authority is spread across the Middle East and Southeast Asia, may slow any change.

Scholars such as Sheikh Hussein command great influence but their opinions, lacking definitive legal sanction, are often challenged, creating an uncertain regulatory environment. And some scholars sit on scores of boards, leaving them open to charges of conflict of interest and making it hard for them to keep up with all areas of their work.

“The big problem is that there just aren’t enough of them,” said one Dubai-based banker in the industry, who declined to be named because of the sensitivity of the issue. “It’s a bit like being a rock star. They are disproportionately recognised, with people saying: ‘I want that name in Malaysia, I want that name in Bahrain.’“

Capacity

Islamic finance, based on principles such as bans on interest and pure monetary speculation, has grown rapidly over the last several years because it draws on pools of investment money in the oil-rich Gulf and Asia that have been relatively untouched by the global financial crisis.

The industry’s global assets are expected to rise 33 per cent from 2010 levels to US$1.1 trillion by the end of 2012, according to consultants Ernst & Young. Islamic finance will remain far smaller than conventional finance, with its tens of trillions of dollars, but the gap may continue narrowing; Ernst & Young expects Islamic banking in the Middle East and North Africa to expand over the next five years at a compound annual rate of 20 per cent, versus less than nine per cent for conventional banks.

Sharia scholars, with expertise in both religious and conventional law, are key to this growth. Investors will not buy instruments without believing they are religiously acceptable, so most wholly Islamic financial firms have their own board of sharia scholars which certifies products and monitors the firm’s business. “Independent” sharia boards also exist, offering their services to financial firms for a price.

There are over 400 sharia scholars worldwide but only around 15 to 20 prominent and experienced ones, which creates demand for scholars to sit on multiple boards. The top 20 scholars hold 14 to 85 positions each, occupying a total of around 620 board positions or 55 per cent of the industry, data compiled by investment research firm Funds@Work show.

The shortage of scholars is a capacity constraint for the industry, said Sheikh Muddassir Siddiqui, a sharia scholar and Harvard-trained attorney at law firm SNR Denton. He is a member of the sharia standards committee of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), a Bahrain-based body setting standards for the industry.

“If you engage a lawyer or a doctor you would naturally want someone with a big name and reputable,” said Siddiqui.

“But unlike a rock star who can entertain thousands of people at once, a sharia scholar’s role should be viewed more like a doctor’s — it is natural to ask how many surgeries a doctor can perform in one day. It is a question of capacity.”

The capacity problem is worsened by the fact there is no single, universally accepted interpretation of religious principles. So firms seek out the scholars who they think will carry the most weight with investors; in effect, a scholar’s reputation becomes a currency used in completing a deal.

“The reason the Islamic finance industry is still emerging is that governance standards are not as well established as in other industries,” said Murat Ünal, CEO of Funds@Work.

“It’s like a social network. People and their relationships play a very important role. If you have a prominent scholar on board, this increases trust and makes up for the lack of governance standards. Institutions sell their products via the reputation of the scholars, so you better make sure you have accepted scholars on board.”

And this leads to sky-high fees paid to the top scholars. A senior banker at an Islamic lender said some scholars could be paid US$1,000 to US$1,500 per hour of consultation — in addition to an annual bonus of between US$10,000 and US$20,000 per board seat.

Sheikh Hussein and other scholars strongly reject the idea that there is anything improper in the fee system.

“What’s wrong with getting paid for issuing a fatwa or reviewing the sharia compliancy of a financial instrument?” Sheikh Hussein said. “We’re just like auditors, lawyers. Each one of us has years and years of experience in sharia law. We do our job and get paid for it. Nobody is allowed to question our honour, integrity and truthfulness.”

Frustrations

Nevertheless, the system is open to accusations of conflict of interest because scholars head or sit on the boards of the industry’s standard-setting bodies, such as AAOIFI, at the same time as they are being paid handsomely by the firms which are being regulated.

In some ways the situation is similar to that of credit rating agencies in conventional financial markets. The agencies are paid by the companies they rate, which may have made them slow to downgrade debt before the global financial crisis, allowing imbalances to build up that triggered the crisis.

“Certainly there is a need for improvement in the way sharia supervisory boards play their role,” said Sheikh Siddiqui.

“There needs to be some sort of enforcement body that stipulates who is qualified, how to protect against the conflict of interest, and other reasonable conditions for the conduct of a sharia board.”

Sheikh Siddiqui also advocates separating some of the duties of sharia boards so that scholars, who may now effectively act simultaneously as lawyers, product developers and auditors for instruments, do not end up “judging their own work.”

The impact of individual scholars on the Islamic finance industry can be huge. In late 2007 and early 2008, sukuk issuance slowed after Sheikh Muhammad Taqi Usmani, chairman of the board of scholars at AAOIFI, suggested that about 85 per cent of sukuk might not comply with Islamic law.

Haissam Arabi, chief executive of Gulfmena Investments, a Dubai-based asset management firm, says he has personally experienced the pitfalls of the scholar system: products have been approved for investment by his firm’s sharia board, only for their sale to be delayed by the boards of other firms.

“Here is a crack in the system which needs to be remedied,” he said. “When you can’t sell or distribute because your board is different from my board, you end up not being able to achieve scale and you’re left with a very expensive product. That’s what’s hindered the development of sharia asset management.”

Another area of frustration in the industry is the lack of transparency in the way that sharia boards reach their findings and communicate them, industry participants say.

“Sharia scholars’ opinions are not published and in some cases not even circulated,” said Oliver Agha, partner of Agha & Co, a sharia-compliant law firm in Dubai.

Mohammed Akram Laldin, executive director of Malaysia’s International Sharia Research Academy for Islamic Finance, said few boards disclosed their methodology. This is dangerous, he said, since as the industry grows and products become complex, investors need to be sure scholars understand the markets.

“Scholars are no doubt well-versed in Islamic law,” he said. “But sometimes they might not be as well-versed on the market side.” In other cases, he added, scholars may not even be fully informed of the ultimate purpose of a product — an important issue for them to consider when forming a judgment.

“They only see a half-cooked structure… Something is not being disclosed to the scholar, and some who have more disclosure might ask more questions.”

Reforms

There are signs that the industry is moving towards reform of the scholar system. The Goldman case is one impetus for reform, because it underlines the large amounts of new business that could be generated in the industry if Western financial institutions become heavily involved; they are likely to demand a more transparent and predictable environment.

The shortage of experienced scholars is unlikely to be remedied quickly, but proposals within the industry include setting minimum quotas for the number of young scholars on sharia boards, and introducing apprenticeships to give young scholars more experience. Some companies may begin adopting these measures even if the industry’s standards-setting bodies do not decide to recommend them universally.

“We do need more trained sharia scholars, but it’s beginning to happen because of demand pressures,” said Jasseem Ahmed, secretary-general of the Malaysia-based Islamic Financial Services Board (IFSB), another industry body.

Scholars are likely to face stricter guidelines for their behaviour from bodies such as AAOIFI. The organisation’s assistant secretary-general Khairul Nizam said it was discussing internally proposed new standards for scholars; they are expected to be issued by the end of this year as part of a strategic review of AAOIFI standards, he said. A draft is likely to be distributed to the industry at mid-year for consultation.

The new standards will try to give more guidance on scholars’ responsibilities, their relationship with banks, the issue of confidentiality, and the terms of reference of sharia boards, which should be similar to those that govern bank boards in conventional finance, Nizam said.

Regulations imposed by Malaysia’s central bank could provide one model for the AAOIFI reforms. Among other rules, scholars in Malaysia cannot sit on the board of more than one bank; sharia board members must attend at least three-quarters of the board’s meetings each year, and two-thirds of a board’s members must be present for the board to meet.

Pressure is also growing for action to reduce the differences of opinion and conflicting judgments between the sharia boards at individual companies.

The central bank governor of the United Arab Emirates, Sultan Nasser al-Suweidi, is among those who have suggested the creation of a global body that would provide legal guidance to boards around the world.

“The solution here may lie in the establishment of a supervisory or a control body that would issue fatwas or rulings on the general policy of Islamic banking,” he told Reuters.

Once again, Malaysia could be a model; a Shariah Advisory Council (SAC) established by that country’s central bank acts as “the apex authority for the determination of Islamic law,” helping to resolve differences of interpretation between scholars or companies.

Obstacles

Globally, however, the Islamic finance industry is unlikely to achieve the strictness and consistency of regulation seen in Malaysia any time soon.

A source familiar with AAOIFI’s review of standards, who declined to be named, told Reuters that the review would probably not look at restricting the number of board positions that scholars could hold, or at setting up a global version of Malaysia’s SAC to iron out legal disputes.

“Such steps are years away,” the source said.

The industry is so diverse that without the intervention of central banks and governments, it may be unable to agree on strict regulation of itself. And outside Malaysia, most central banks and governments have hesitated to take on the responsibility of setting standards for the industry.

Many in the industry are wary of inviting official intervention, arguing that it could curb their freedom to innovate and slow the market’s growth.

“If you have a central sharia board the government will be more involved, and as we know bureaucracy kills growth,” said Mohamed Elgari, a prominent scholar. “Centralised government entities should be concerned about risks but should refrain from sharia issues.”

Others believe that an industry based on the interpretation of religious principles is never going to achieve the same consistency and predictability as conventional finance.

“On the whole there is some convergence that has taken place, but we can never aim at 100 per cent. It is just the nature of Islam — people have different approaches,” said the IFSB’s Ahmed.

Islamic banking ideal to boost ‘green finance’, CEO Doha Bank

Islamic banking ideal to boost ‘green finance’, CEO Doha Bank

 

 

 

 

“Islamic Banking is the right platform to boost ‘green financing’ as it is based on the concept of promoting good practices and values,” said R Seetharaman, Chief Executive Officer of Doha Bank, delivering the inaugural address at a seminar on Islamic economics, organised by the Indian Islamic Association – Qatar (IIAQ), under the title “Towards an Alternative Economy” at Omar Bin Al Khattab Preparatory School for Boys in Doha on Friday.

Seetharaman said Islamic banking is not just a financial system but it is part of a total value-based social system that seeks to enhance the general welfare of society as a whole.

“Sustainable environment development, developing water resources, facing global warming, ensuring women’s participation and promotion of small-scale enterprises are all part of green financing. This is clearly an area where Islamic Banking can play a pivotal role,” he said.

Seetharaman, however, noted that Islamic Banking is currently in its infancy and faces several challenges. Young people should be encouraged to take up these challenges to ensure that this significant economic system carries through and plays a leading role in the current global financial stage.

He added that Islamic Banking is growing in popularity as Japan has just issued five Sukook Ijara (Islamic leasing bonds) and many other countries including Italy, Canada and Spain are showing great interest in such products and services of Islamic banking. In the UK, there is a full-fledged Islamic bank, called the Islamic Bank of Britain, and there are 22 counters at conventional banks that offer Islamic banking services and products.

Seetharaman noted that infrastructure development projects in India can attract foreign investment if the country opens up its banking sector to Islamic banking. India’s 11th Planning Commission has earmarked $542bn for this sector, but hardly any money comes from the Gulf-based financiers as they are reluctant to deposit in an interest-based system.

P P Abdur Rasheed, former Head of Economics Dept at Government College, Malappuram, India, and K Abdullah Hassan, Head of Research at Islamic University, Santapuram, India, also delivered speeches on ‘Fundamentals of Islamic Economics’ and ‘Basic Principles of the Zakah System in Islam’.
Nizar Kocheri, lawyer and noted humanitarian activist, delivered a felicitation speech and Abdul Wahid Nadvi, Acting President of Indian Islamic Association, Qatar, presided over the ceremony. V T Faisal, General Secretary of IIAQ, welcomed the guests and Taj Aluva proposed a vote of thanks.

Source: http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=444799&version=1&template_id=36&parent_id=16

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Pakistan Mutual Funds Push for More Sukuk Issues to Invest Cash

Fund managers in Pakistan are urging the government to increase offerings of Islamic debt, saying a 13-fold rise in sukuk sales this year isn’t enough for them to invest inflows of cash.

The central bank plans to auction 45 billion rupees ($525 million) of three-year sukuk in the domestic market on March 1 and another 55 billion rupees in the three months ending June 30. The sales will take the total for the fiscal year to 189 billion rupees, compared with 14.4 billion rupees in the previous 12 months.

Pakistan’s Islamic banking assets climbed an average 30 percent annually in the past four years to 411 billion rupees as of June 2010, 6 percent of the financial industry’s total, according to a central bank estimate in October. Pakistan aims to double that share to 12 percent by 2012 and plans to issue two more Shariah banking licenses that will take the total to seven, the monetary authority said in October.

“The government has relied too much on the conventional debt market without realizing how much liquidity is in the Shariah-compliant industry,” Sajjad Anwar, who helps manage the equivalent of $187 million at NBP Fullerton Asset Management Ltd., a unit of the nation’s biggest lender National Bank of Pakistan, said in a Jan. 11 interview from Karachi. “Islamic funds and banks are just waiting.”

Banking Licenses

Pakistan needs to finance a budget deficit that may reach 6 percent of gross domestic product, or 1 trillion rupees this fiscal year, exceeding the government’s target of 4 percent, according to a report from the State Bank of Pakistan on Oct. 25. The shortfall was 6.3 percent last year, according to data on the Finance Ministry’s website.

The yield on the three-year debt will rise to 13.89 percent from 13.39 percent at the prior offering on Dec. 13 as the central bank may increase interest rates to temper inflation, said Karachi-based Abdullah Ahmed, treasurer at Meezan Bank Ltd., the nation’s biggest Shariah-compliant lender.

“In an environment when everyone is expecting a hike in interest rates, the demand for such paper will remain high,” Ahmed said in an interview on Jan. 12. “Islamic banks are desperate to deploy their funds.”

Inflation stayed above 15 percent for a fourth month in December after unprecedented floods in August destroyed roads and damaged crops worth $3.3 billion.

Inflation to Slow

“The inflation rate will start falling from next fiscal year to average 13 percent as the government aims to reduce borrowing and impose additional tax measures,” Mohammed Sohail, chief executive officer at Topline Securities Ltd., said in an interview yesterday from Karachi.

The State Bank of Pakistan increased its discount rate by half a percentage point to 14 percent on Nov. 29, the third policy tightening since July. The central bank has raised borrowing costs from a record low 7.5 percent in 2005. Policy makers will increase the rate by 50 basis points to 14.5 percent at the Jan. 29 meeting, according to Meezan Bank’s Ahmed, who said he will buy sukuk at the next auction.

Pakistan’s central bank uses the yield on its six-month non-Islamic treasury bills as a benchmark for pricing debt. The yield rose to 13.55 percent at a sale on Jan. 12, nine basis points more than the previous offering. The rate was 12.05 percent a year ago, Bloomberg data shows.

Global sales of sukuk, which pay asset returns to comply with the religion’s ban on interest, fell 15 percent to $17.1 billion in 2010, according to data compiled by Bloomberg. Issuance reached a record $31 billion in 2007.

Islamic Debt Returns

Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in developing markets gained 12.2 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate shrank eight basis points this month to 281, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Average yields dropped 13 basis points to 4.61 percent.

The yield on Malaysia’s 3.928 percent sukuk maturing in June 2015 rose two basis points to 2.8 percent today, according to prices from Royal Bank of Scotland Group. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed one basis point to 330 today, Bloomberg data show.

Government Debt Sale

The government sold 37.2 billion rupees of Islamic securities on Dec. 13 and got orders for 57.7 billion rupees. At the previous sale on Nov. 8, it raised 51.8 billion rupees after receiving offers of 64.7 billion rupees. Pakistan had local- currency debt of 5.35 trillion rupees outstanding, including 94 billion rupees of sukuk as of November 2010, according to the central bank’s website.

Pakistan is attracting investors even as the country battles an eight-year insurgency with militants in its border region with Afghanistan. The U.S., a major financial donor, is pushing President Asif Ali Zardari to intensify that crackdown. A policeman assassinated secular politician Salman Taseer on Jan. 4 for opposing an Islamic blasphemy law.

Albaraka Banking Group BSC, Bahrain’s biggest publicly traded Islamic lender, boosted its branch network to 90 after acquiring Pakistan’s Emirates Global Islamic Bank Ltd. in 2010. Meezan Bank, controlled by Kuwait’s Noor Financial Investment Co., plans to open 225 new outlets in the next four years.

The central bank predicts the economy will expand 2.5 percent this fiscal year, faster than last year’s 1.2 percent. The Karachi Stock Exchange KSE100 share index reached a 2 1/2- year high today. The gauge rallied 28 percent last year after soaring 60 percent in 2009.

“For Islamic banks, sukuk will remain attractive because the sovereign notes offer the least risk and high returns,” Pervez Said, chief executive officer of Dawood Islamic Bank, 35 percent owned by Bahrain’s Unicorn Investment Bank BSC., said in an interview yesterday from Karachi. “Political and security problems have always been associated with Pakistan. The issue is where do we invest?”

Source: http://www.bloomberg.com/news/2011-01-17/pakistan-funds-push-for-sukuk-to-invest-cash-islamic-finance.html

To contact the reporter on this story: Khalid Qayum in Singapore kqayum@bloomberg.net; Haris Anwar in Islamabad at Hanwar2@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net.

Malaysian Shariah Governance Framework can be blueprint for industry: Arabnews interview with Dr. M. Elgari

Malaysian Shariah Governance Framework can be blueprint for industry: Arabnews interview with Dr. M. Elgari
by Mushtak Parker| Arab News

At a time when the global Islamic finance industry is debating whether Shariah advisory should be regulated and scholars restricted to advising only a small number of institutions, Malaysia almost in passing adopted on Jan. 1 a new Shariah Governance Framework (SGF) for Islamic financial institutions (IFIs) that supersedes the Guidelines on the Governance of Shariah Committees of IFIs introduced by Bank Negara Malaysia (BNM), the central bank, in 2004.

According to the Malaysian central bank, the primary objective of the SGF is to enhance “the role of the board, the Shariah committee and the management in relation to Shariah matters, including enhancing the relevant key organs having the responsibility to execute the Shariah compliance and research functions aimed at the attainment of a Shariah-based operating environment.”

One prominent international Shariah advisory to the Islamic finance industry, Muhammed Elgari of Saudi Arabia, who sits on several Shariah committees of such organizations as the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Dow Jones Islamic Market Indexes, and a number of banks, agrees that Malaysia’s Shariah Governance Framework for IFIs could become a blueprint for other countries to follow.

In an exclusive interview with the author, Elgari stressed that he can see the need for such a framework, which “most certainly” can be developed into a blueprint, even though he has yet to study the full details of the SGF.

Shariah advisory has been in the news in recent weeks following reports that the AAOIFI is in the process of drafting rules to regulate the shareholdings and the number of supervisory boards individual Shariah advisories can sit on. Market players have long been concerned by the small pool of experienced Shariah advisers serving the Islamic finance industry and that an elite few sit on multiple Shariah advisory boards, a practice which they claim could lead to conflicts of interest and is not consistent with best practice in terms of advisory.

Research by entities such as Funds@Work have added fuel to the fire, although the methodology of the research is not very detailed and transparent. According to Funds@Work, there are 1,141 overall Shariah advisory board positions available in 28 countries. The average board size is 3.33 scholars per board, across the entire universe. Perhaps more importantly, the Top 10 scholars hold 450 out of 1,141 board positions that are available and represent 39.44 percent of the universe. Two Shariah advisories sit on a staggering 85 boards while another on 79 boards.

Some of the top Shariah advisers, not surprisingly, have reportedly spoken out against any efforts to restrict their trade by restricting the number of boards on which they can sit.

“There is no justification in my mind to single out a profession to set rules that are not applied to any other. There is no dispute about the fact that a human being does have a limited capacity or let us say a finite one. But this can’t be measured by the number of boards. The real test is quality of work and ability to meet the expectations of the other party. It should be self evident that if one lacks both, it will not help him to have a limited number of boards,” said Elgari.

Elgari, who also has a doctorate in economics from the prestigious University of California in Berkeley, dismisses any suggestions that Shariah advisories “make too much money” and “they are monopolizing the trade” which he maintains are both lies and naive.

In his experience, none of the banks and organizations he serves as an advisory have expressed any concerns to him about the above issues. In fact, his relationship with his clients remains cordial and commands the utmost professionalism. As such, these supposed concerns are a smokescreen and are really serving the agenda of certain groups who are keen to get a slice of the Shariah advisory business in Islamic finance.

“What is being observed lately is that certain groups want to intermediate between banks and Shariah scholars. In other words they would like to ‘broker’ the Shariah advisory and they believe, correctly, that their negotiating power with the banks is much stronger than individual scholars. Hence they can extract much more from banks. They tell us why should you be concerned, you will not suffer any reduced income (negating the very argument that we make too much). But in principle we do not see it fitting to create an exchange where we sell our services to someone to sell them to a third party at a higher price,” he said.

Elgari, who is one of a very few number of foreign Shariah advisories registered with the Securities Commission Malaysia to give Shariah advisory to the Islamic finance industry in the south east Asian country, maintains that nobody is more concerned about bringing up the second generation of Shariah scholars in the global Islamic finance industry than the current scholars. As such, it is wrong to think that they are threatened by the thought of restrictions and regulation.

“On the contrary our nightmare is for Shariah boards to disappear when we cease to exist. We always request institutions to include in their Shariah board a younger scholar so that the next generation is brought up by the current generation. Recently, we met with the officials from the Waqf Fund (set up by Central Bank of Bahrain) to try to design a program that can be adopted by an academic institution for this purpose,” he said.

Some observers, including regulators, invoke the “conflict of interest” argument to support their desire to restrict the number of boards Shariah scholars can sit on. Elgari in fact believes this is a fair concern and in several instances he has emphasized that Shariah board members should be conscious of it and try to avoid it. He confirms that in several instances he was offered shares in companies he was giving Shariah advisory but he has always declined because he was always aware of a potential conflict of interest. He suggests greater transparency by fellow Shariah advisories, especially in showing their awareness of the issue of potential conflict of interest.

For Elgari, who has also been an economics don at King Abdul Aziz University in Jeddah for many years, the contemporary Islamic finance industry has witnessed over the last three decades the emergence the birth of a new discipline, which combines Shariah, economics and law. “Unless universities recognize this as a new discipline, not much will be done by them. If these professors themselves can’t do it, how can they teach it? The most effective way is apprenticeship, or a program for study designed by the current Shariah scholars,” he said.

The fact remains that the Shariah governance process in Islamic finance has been steadily evolving and gaining maturity. Last year, for instance, Elgari was the first prominent scholar to emphatically call for a scientific approach to Shariah compliance. This follows a similar call by another prominent Shariah scholar, Sheikh Esam Ishaq of Bahrain, that Shariah advisories serving the Islamic finance industry should be regulated.

Elgari then called on fellow Shariah advisories to adopt a scientific methodology in reaching their deliberations on Islamic finance. “To be respected,” said Elgari, “Shariah scholars should follow scientific methods to reach their conclusions. We have seen many mistakes where declarations have been issued. Only the correct resolutions will prevail. Shariah is not a group of infallible people. It is a science. It requires methodology, and resolutions require peer review and market consultation.”

He is also a big supporter of the codification of Fiqh Al-Muamalat, which could contribute immensely to clarifying the rubrics and the contentious issues relating to products and services in the nascent Islamic finance industry. Similarly, he believes that greater transparency in the Shariah governance process; more professional articulation of the resolutions and statements; and prior debate and consultation between scholars and other stakeholders in the industry, could go a long way in mitigating the misconceptions and confusion that has arisen as a result of some recent Shariah rulings.

Source: http://arabnews.com/economy/islamicfinance/article236465.ece

Push for asset-backed Sukuk framework lifting demand

Push for asset-backed Sukuk framework lifting demand

 

 

 

 

 

It’s good to see a move towards asset-backed Sukuk rather than asset-based Sukuk, which are obviously more close to the spirit of the Shariah. In asset-backed Sukuk, investors become owners of the underlying assets in case of default, whereas asset-based Sukuk give no such recourse.

DUBAI, Jan 10 – Investor worries over the impact of defaults in Islamic bonds is driving a push for a better structure for asset-backed instruments that should help alleviate concerns, bankers and lawyers said.

Islamic finance industry body IIFM is looking to develop a template in 12 to 18 months that will help reduce some of the legal and operational complexities surrounding asset-backed Islamic bonds, or sukuk, said its chief executive Ijlal Alvi.

The Nakheel property arm of Dubai’s state-owned conglomerate Dubai World [DBWLD.UL] staved off default on a $4.1 billion Islamic bond after a last-minute bailout from Abu Dhabi in 2009, after Dubai World announced plans for repayment on $26 billion in debt, spooking global markets.

Also still ongoing is Kuwait Investment Dar’s <TIDK.KW> discussions with creditors over a $100 million sukuk it defaulted on in 2009.

Asset-backed sukuk are seen closer to the spirit of Islamic law as they involve a transfer of tangible assets — investors become the legal owners of these in the case of default.

Investors were taken aback as they realised the majority of sukuk were asset-based and that these could not be accessed directly by sukuk holders following a default.

“People didn’t really talk about asset-backed sukuk until the stress tests were applied,” said Tim Ross, partner at Latham & Watkins in Dubai. “Some investors were caught off guard — they had an unsecured payment claim.”

As investors cried foul, market watchers hoped the industry would shift toward a securitised model, but that has yet to happen, as more than 90 percent of transactions are still structured as asset-based sukuk.

“While asset-backed transactions, both conventional and Islamic, have been done in the Gulf, they are more difficult and costly for companies to undertake,” said Gregory Man, senior associate at Clifford Chance in Dubai.

He added that such transactions also face tougher legal and analytical requirements imposed by rating agencies and many companies in the region lack sufficiently robust internal systems to service and report on the assets to investors and agencies.

A master agreement would aim to provide a standardised base from which issuers could structure the sukuk in line with their own jurisdictions and increase awareness about the product.

“In this credit environment, creditors would prefer direct recourse to the assets,” Alvi said. “Although asset-based is a valid structure as well, I think it is preferable to encourage increase in asset-backed sukuk over the medium to long-term.”

Despite the challenges, companies would look to issue more asset-backed sukuk if investors demanded it, bankers said.

“Among investors, there is still no real drive to do it,” said one Gulf-based Islamic banker. “Much of the corporate world comes from a conventional background so asset-based sukuk is closer to the debt model they are used to working with.

“Most investors simply don’t care enough, despite all the frenzy following defaults.”

Source: http://sg.news.yahoo.com/rtrs/20110110/tbs-assetbacked-sukuk-7318940.html

Ernst & Young projects mixed outlook for the Islamic finance industry

Ernst & Young projects mixed outlook for the Islamic finance industry

Islamic financial institutions are at cross roads entering 2011, said Ernst & Young. The industry is expected to continue to show resilience in the face of a challenging economic scenario. This is despite the fact that growth levels of the Islamic finance industry, at more than 20 per cent per annum for the past several years, came under tremendous pressure in 2010.

Ashar Nazim, Executive Director and MENA Head of Islamic Financial Services Group at Ernst & Young says: “Having achieved the critical volume estimated at US$1 trillion in Islamic assets, the question reverberating across board rooms, and among users of Islamic financial services, is about differentiation, or the lack thereof, that Islamic financial institutions have on offer.  Effectiveness of the existing Shari’a governance framework, as well as synthetic product structures commonly in use are especially under discussion.”

No longer business as usual

Scarcity of data and under-investment in analytical tools means that Islamic banks’ focus remains limited to a handful of asset classes while their operating costs are, in many cases, higher than their conventional peers. Future opportunities may no longer come from traditional captive clientele. Instead, Islamic financial institutions urgently need to upgrade their business models to tap mainstream segments.

Ashar Nazim added: “Decision makers at Islamic financial institutions need research and tools to assist in making informed decisions on the future growth trajectory of their businesses. Implications of Shari’a rulings on governance, product structures and markets need to be appropriately incorporated at the planning phase itself.”

Ernst & Young was voted the Best Islamic Advisory Firm and also won the award for Best Islamic Research at the 2010 Islamic Business and Finance Awards organized by CPI Financial. Ernst & Young’s Islamic Financial Services team was acknowledged for its original thought leadership to help steer the industry through the difficult business environment.

Ernst & Young also recently joined hands with AAOIFI*, the leading standard-setting body for Islamic finance industry, to provide product and contract certification that would strengthen universal acceptability of Shari’a compliant products offered by Islamic financial institutions.

New direction for the industry

Ernst & Young’s World Takaful Report highlighted the fluid nature of the takaful industry, as well as tremendous growth potential. The industry is expected to grow three-fold from an estimated US$9 billion in 2009 to $25 billion by 2015. “The biggest challenge for the takaful operators is to bring out the differentiation, its unique Islamic proposition, for its stakeholders. This was the key message for the industry during 2010,” said Ashar.

Ernst & Young’s Islamic Funds and Investment Report 2010 confirmed that more than half the Islamic fund managers may be operating with less than the minimum assets under management needed to remain viable. The opportunity is for global fund managers as well as for consolidation within the industry. Islamic endowment, or Waqf, with an estimated US$105 billion wealth pool, was highlighted as a key emerging sector that could potentially stimulate strong liability generation for Islamic banks, as well as help revive the Islamic fund management industry.

Source: http://www.zawya.com/story.cfm/sidZAWYA20110109091715

Female Shariah sholars in Islamic finance

Female Shariah sholars in Islamic finance

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Asian Islamic financial institutions are attracting more female executives and scholars to fill a shortage of talent, setting a precedent for companies in the Middle East.

Malaysia’s Shariah Advisory Council appointed a second female scholar to its 11-member board in November. Indonesia has six women on its panel of 35 experts, Ma’ruf Amin, chairman of the country’s National Shariah Council, said in an interview Dec. 30. Malaysia’s central bank and the securities commission are both headed by women, while Liza Mohd Noor is chief executive officer at RAM Rating Services Bhd., which provides ratings for Islamic bonds.

“Previously, it was difficult for women to enter the industry; now people have broken that boundary, especially in Malaysia,” Aznan Hasan, associate professor at the Kuala Lumpur-basedInternational Islamic University Malaysia, said in a Dec. 20 interview. “More women are coming in and this is good because we need people.”

Encouraging women to work in Islamic finance will help meet demand for experts in an industry the Islamic Financial Services Board estimates has been growing 20 percent annually since 2000, with assets exceeding $1 trillion. About 50,000 professionals will be needed globally over the next five to seven years to meet demand, Ishaq Bhatti, the director of Melbourne-basedLa Trobe University’s Islamic banking and finance program, said in a Dec. 10 interview in Kuala Lumpur.

Cultural Barriers

The lack of prominent female banking executives stems from “history, culture and perceptions of women,” said Nida Raza, senior vice president of capital markets at Unicorn Investment Bank BSC in Manama, Bahrain.

In Saudi Arabia, a Sunni Muslim-majority country where women are required to have a male guardian, about 15 percent of the labor force was female in 2009, according to a report by the Geneva-based International Labor Organization, a United Nations agency.

“Getting a visa to Saudi is really difficult, and even when I’m there I face various challenges,” Noripah Kamso, chief executive officer of Kuala Lumpur-based CIMB-Principal Asset Management Bhd., a unit of CIMB Group Holdings Bhd., the world’s biggest sukuk arranger, said in an interview on Dec. 23. “I was once chased by a Saudi police officer because I entered from the wrong door, and travelling without a male colleague is impossible.”

Global Sales

As interest in the industry grows, women, including those from the Middle East, are likely to play a greater role, said Engku Rabiah Adawiah Engku Ali, the first female appointee to Malaysia’s Shariah Advisory Council and an associate professor at the Ahmad Ibrahim Kuliyyah of Laws, International Islamic University Malaysia in Kuala Lumpur.

Global sales of sukuk, which pay returns based on asset flows to comply with the religion’s ban on interest, fell 15 percent in 2010 to $17.1 billion, according to data compiled by Bloomberg. Issuance reached a record $31 billion in 2007.

Shariah-compliant bonds returned 12.8 percent last year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows, compared with 19.8 percent the previous year. Debt in emerging markets gained 12.2 percent, from 29.8 percent in 2009, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

The difference between the average yield for sukuk in developing nations and the London interbank offered rate has narrowed 178 basis points, or 1.78 percentage point, to 290 last year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Average yields dropped 252 basis points to 4.74 percent.

Male Scholars

The yield on Malaysia’s 3.928 percent dollar sukuk maturing in June 2015 rose seven basis points today to 2.99 percent and is 12 basis points higher than on Nov. 30, data compiled by Royal Bank of Scotland Plc show. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s was at 338 basis points, down from 398 basis points at the end of November, according to the data.

A shortage of scholars increases the risk of conflicts of interest as many sit on various advisory boards at the same time, according to the Manama-based Accounting & Auditing Organization for Islamic Financial Institutions, an industry standards setting body.

Sheikh Nizam Yaquby of Bahrain and Syria’s Abdul Sattar Abu Ghuddah, who each serve on 85 boards of Islamic financial institutions, ranked first by the number of seats among the top 20 religious experts in an October report from Zawya, an online Middle East business news and directory, and Funds@Work AG, a Kronberg, Germany-based consulting company.

‘Talent Pool’

In Malaysia, regulations are aimed at limiting such conflicts of interest. Under Bank Negara Malaysia regulations, a Shariah scholar can sit on only one board for each type of Islamic financial institution, meaning an expert on the panel of an Islamic bank can only sit on the board of another non-bank entity such as an insurance company, or takaful.

The rule “enlarges the talent pool and gives more opportunities,” said Engku Rabiah, who was once appointed on the board of six to seven Islamic banks and takaful companies before the rule was passed in 2004.

Unicorn Investment Bank’s Raza said the shortage of women in Islamic finance is easing as more female Westerners enter the market.

“This will have a knock-on effect on” the Middle East, Raza said in an interview Dec. 30 fromNew York. That “may lead to a rise in women in the Islamic finance industry,” she said.

Source: http://www.bloomberg.com/news/2011-01-02/female-shariah-scholars-say-gender-gap-closing-on-growth-islamic-finance.html

To contact the reporters on this story: Suryani Omar in Jakarta at somar6@bloomberg.net; Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net