Category Archives: Challenges and criticisms

Sukuk: Issues and the Way Forward

Sukuk: Issues and the Way Forward


Sukuk represents a new development in global capital market. It is one of the
fastest growing sectors in Islamic finance and is considered by many as the most
innovative product of Islamic finance.

As a relatively young asset class in the global capital market, the sukuk market
inevitably faces problems typical of its early stage of development. In this relation, some Muslim scholars have questioned its level of compliance with the Shariah law, particularly on how they are structured. The main criticism was from Sheikh Muhammad Taqi Usmani1, a prominent scholar who has taken the view that 85% of the current structures of Gulf sukuk do not comply with Islamic law2, in particular Sukuk Al Musharaka, Sukuk Al Mudaraba and Sukuk Al Istithmar.

Following that, the Shariah Board of Accounting and Auditing Organization for
Islamic Financial Institutions (“AAOIFI”) had studied the subject of the issuance of sukuk in three sessions between 2007 and 2008. After considering the deliberations in these meetings and reviewing of the papers and studies presented therein, the Shariah Board of AAOIFI issued its resolutions in February 2008 to highlight the various areas in sukuk which were found to be non-Shariah compliant. Accordingly, Islamic financial institutions had been advised to adhere to the principles set out in the relevant AAOIFI Standards in sukuk issuance.

This paper attempts to explore the controversies or issues surrounding sukuk, in particular the observations and resolutions issued by the Shariah Board of AAOIFI.

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Sukuk: Issues and the Way Forward

Islamic Finance and Mobile Banking: Could, Would, Should

Islamic Finance and Mobile Banking: Could, Would, Should

Islamic Banking has developed rapidly over the last 30 years. Islamic Banks have proliferated in number and in geographic reach, with services now offered regularly on four continents. A number of innovative, successful financial products have also been developed, enabling Shariah compliant bonds, mortgages and savings accounts. The values of assets held by Islamic Banks are expected to top one trillion by 2010. Perhaps most important, millions of clients now have access to services which serve their financial needs without placing them in a religious dilemma.

While this success should be lauded, it should not lull Islamic Banks into complacency. Rather, the banks should remain vigilant for new opportunities that enable equally vigorous growth over the next 30 years. One key opportunity for Islamic Banks has emerged in the dynamic growth of mobile financial services. Over the last decade mobile financial services have been transformed in offerings and scope, from niche products providing account information to a plethora of applications which enable access to bank accounts, move funds, and allow for the transfer of remittances; all from the security and convenience of mobile phone. The increasing ubiquity of mobile phones, especially in developing nations, has allowed consumers to benefit from the accessibility of the system, enabling some to open and regularly access bank accounts for the first time in their lives. Banks have benefited from the low costs of running the systems and the massive increase in their potential client/depositor pool.

While mobile financial services have been adopted widely, they have yet to be utilized heavily in many traditionally Islamic nations. This lack of use is all the more curious, given that in many of those nations high rates of mobile phone ownership exist side by side with generally minimal access to formal banking. This presents an opportunity for Islamic banks, potentially allowing them to both expand their consumer base and assist the needy in their communities. Three questions should dictate whether Islamic banks adopt mobile financial services: could Islamic Banks utilize mobile financial services, would they benefit those companies, and should, in light of their underlying philosophy, Islamic Banks adopt such services?

Could Islamic banks adopt mobile financial services? Both Islamic banking and mobile financial services share complementary, fee based business models. At an operations level, Islamic banks would have to partner with mobile network operators to provide the service, though this would not be a serious hindrance. Most, if not all, mobile phones sold today are capable of handling the technology for mobile financial services. To avoid engagement in situations involving riba, Islamic banks should investigate the finances and operations of the partnered telecom with care. However, especially when mobile network operators and Islamic banks have had longstanding relationships, this should not be a problem.

The question then is would the adoption of mobile financial service technology benefit Islamic Banks? The cost of providing mobile financial services is radically lower than that of operating traditional ‘brick and mortar’ branch sites. In Karachi, it is estimated a traditional ‘brick and mortar’ branch office costs around $28,000 to run per year. In contrast, the provision of mobile financial services in the same city costs the operator a mere $300 per year. While the adoption of mobile financial services may be a large investment initially, the sharp difference in operating costs enables a banks to quickly recoup their initial investment and soon generate significant, Shariah complaint, profit.

The adoption of mobile financial services will also enable Islamic banks to radically expand their depositor pool. The percentage of banked individuals in major Islamic nations, such as Egypt and Pakistan, is estimated to stand at 10-15%. In contrast, mobile phone ownership is many Islamic nations is extremely high; above 50% in Pakistan, and a staggering 120% in the UAE. The adoption of the full spectrum of mobile financial services by Islamic Banks will enable many of the currently unbaked to enjoy accessible, safe, and Shariah-compliant financial services for the first time. Increased deposits, a good in their own right, will also increase the pool of funds with which the banks can provide Shariah compliant finance to businesses, individuals, and even governments.

Finally, at a philosophic level, should Islamic Banks provide mobile financial services? One of the original focuses of the Islamic banking movement was the promotion of development throughout the Islamic world. While Islamic Banking has succeeded in enabling large project finance, it has had less success in promoting small scale, pro-poor growth. The general lack of access to basic financial services in Islamic majority nations has inhibited economic growth, especially amongst the poorest and most needy members of society. Mobile financial services will allow for Islamic banks to reach and assist those in need in their nations. Those same banks could consider the provision of mobile services to the poor at reduced, or no cost, in order to better help the population.

As Islamic banks adopt and innovate within the mobile financial services model, it is likely Islam specific applications will be developed. Future zakat may be provided to the needy electronically, via mobile technology, enabling continuous, secure provision of assistance to the needy of society. Future calls for assistance on specific projects, or for disaster or war stricken areas could go out electronically; giving would flow back across the same channels.

To their benefit, some Islamic Banks have begun to provide mobile financial services, primarily for those who already hold accounts. However, the banks should expand such services, tailoring the products offered to benefit both banked and previously unbanked members of society. Mobile financial service technology offers Islamic banks an unprecedented option to grow as business and to fulfill their social mandate. It is time they embraced the technology, and brought Islamic banking to a new level.


Islamic finance needs to diversify

Islamic finance needs to diversify

high waves

Estimates of the size of the industry seem to peak around $1,000bn although more conservative estimates indicate that the overall size of the industry is nearer $750bn.

Equally, the rate of growth of the industry is put at somewhere between 10% and 20% each year thereby making it one of the fastest growing areas of finance.

Even in mid-2009 industry experts are still bandying these same figures around when it is clear that the industry as a whole suffered the same kind of shrinkage as the rest of the financial world.

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Doctors of law needed to take Islamic finance forward

Doctors of law needed to take Islamic finance forward


With the global financial crisis exposing the limitations of traditional banking systems, there is now a big push in the banking sector worldwide to incorporate Islamic banking, the total assets of which are expected to reach $2 trillion (Dh7.34trn) in 2015, according to experts.

However, Islamic banking is not without its challenges, the most prominent of which is to find adequately qualified Islamic scholars for the Shariah governance boards of Islamic banks and financial institutions.

Two experts that Emirates Business spoke to said a PhD in Shariah law should be a mandatory requirement for any member of a governing board of an Islamic bank. They also proposed a system of issuing operating licences for the scholars after testing them to ensure they met all the required criteria.

Dr Mabid Al Jarhi, President of the International Association for Islamic Economics, Financial Expert and Head of Training at Emirates Islamic Bank, said Islamic banking faces a number of challenges that need to be closely considered to help increase reliability and authenticity. One of the most serious challenges is represented in the need for set standards and criteria for the governance of Shariah boards at Islamic banks, said Dr Al Jarhi.

The market demands the development of new innovative Shariah-compliant financial products. However, currently there seems to be a lack of adequate qualified practitioners to do so. "The market requires professionals who not only have excellent financial knowledge, but also a good understanding of Islamic law," Dr Al Jarhi said.

"Many members of governing Shariah boards are not qualified enough to study and generate Shariah-compliant products and this reduces the reliability of Islamic banking and finance," he said.

Central banks should intervene to issue a set of eligibility criteria for joining governance boards to help produce genuine Shariah-compliant products that have positive impacts, Dr Al Jarhi said. At the same time, there should be control over products that are listed as Shariah compliant but are not – such as "Tawarroq" – and products based on debt and risk trading. There is an urgent need for the members of Shariah governing boards to be holders of PhDs from recognised universities, such as Al Azhar of Egypt, University of Islamic Shariah in Syria and Umm Al Qura University in Saudi Arabia.

"Unfortunately, some Islamic banks appoint Muslim scholars who are not even holders of high degrees in Islamic Shariah," Dr Al Jarhi said. "The market is unable at this point to meet the demand for innovative financial products to meet all types of investment requirements." Economic advisors of these boards, too, should be holders of PhDs from recognised universities and the Shariah board should comprise an odd number to ensure a majority in voting.

Licencing Shariah personnel
Dr Abozaid also called for issuing licences to Shariah scholars engaged in Islamic banking, similar to the ones given to engineers or doctors before they are allowed to start their practice. An independent body should be set up to licence scholars for the membership of Shariah boards, he said. It should be made mandatory for scholars to clear a test in the Islamic law of transactions and the basics of Islamic finance in order to obtain the licence. A possible licencing body could the Bahrain-based General Council for Islamic Banks & Financial Institutions, he suggested.

"This is the core necessity for correcting the current anomalies in the Islamic banking and finance sphere," said Dr Abozaid.

In addition, scholars would also be required to have sufficient knowledge of the English language, as all contracts were in English, he said, and added that a non-profitable institution for training scholars should be set up to help increase their expertise.

It is also unprecedented in Islam that a scholar is paid by the party that seeks his opinion on Shariah laws, Dr Abozaid said.

"Currently, the scholar who is assigned to give an Islamic Shariah opinion, or ‘fatwa’, is paid by the bank – the party that seeks this legal opinion. This opens the door for violating and manipulating Islamic principles to favour the bank," he said.

In addition, it falls under the duties and responsibilities of the Shariah boards to arbitrate any dispute between the Islamic bank and its clients. It is unprecedented in the Shariah that an arbitrator or a judge takes his fees from one of the parties involved in a dispute. Such a practice is prohibited under Shariah, as it may open the door to malpractices that favour the party paying the fees.

To ensure that Islamic principles and teachings are implemented in banking transactions with honesty and integrity, scholars should not be paid by a party that needs a "fatwa" but rather by a third party, which could be the central banks, Dr Abozaid said. Central banks, in turn, may collect an amount from the allowances payable by Islamic banks to the Shariah boards members.

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Organized tawarruq is permissible: Sheikh Nizam Yaquby

Organized tawarruq is permissible: Sheikh Nizam Yaquby

The use of the organised tawarruq financing structure does not contradict Islamic law, prominent scholar Sheikh Nizam Yaquby said, disagreeing with a Saudi-based ruling to the contrary.

Tawarruq is a key financing structure of the $1 trillion Islamic finance industry.

But whether or not the way it is organised in modern banks contradicts sharia, or Islamic law, has triggered fiery debates between scholars as the industry is struggling with a decline in business during the global financial crisis.

The International Council of Fiqh Academy, a leading industry body based in Saudi Arabia, in April declared organised tawarruq "a deception" that carries elements of interest-based lending, prohibited under Islamic law.

"If proper procedures are implemented and checks and balances are put, then tawarruq is a useful tool and can be used," Yaquby told Reuters in an interview.

Widely used as a financing and liquidity management tool, tawarruq is an asset sale to a purchaser with deferred payment terms. The purchaser then sells the asset, such as a commodity, to a third party to get cash.

Under organised tawarruq, the transactions are organised through banks which are appointed as agents to sell off the asset, in what has been criticised as a mere paper trail circumventing Islamic law and blurring lines between the purchaser and the third party.

Yaquby said centuries-old Islamic finance tools needed to be reconciled with the procedures of the modern banking system.

"All these Islamic finance tools have certain amounts of organization and we must know that (given) modern contracts within the existing frameworks, legal structures, it is very difficult to do something which is not organized," he said.


Yaquby is globally recognized as one of the top Islamic scholars, and in particular wields influence in the Gulf Arab region, one of the industry’s most important regional centres.

He is listed by consultants Funds@Work as sitting on 46 sharia scholar boards, including at Islamic operations of BNP Paribas, HSBC and Standard Chartered.

Yaquby also said there were hardly any alternatives to tawarruq as a tool to satisfy legitimate financing needs, to which he gave more weight than how it is implemented.

He said the use of a bank in selling assets would help minimise the losses occurring from the additional transaction, which would be higher if the purchaser sold assets himself.

"How can sharia allow something which is burdensome on a person … and not allow something which is organised and well done, and this man who is in dire need for cash will not suffer a lot," he said.

He voiced support for the standards of Bahrain-based AAOIFI — the Accounting and Auditing Organization for Islamic Financial Institutions — which he said provided the necessary checks to prevent the abuse of tawarruq.