Category Archives: Mufti Taqi Usmani

Unity in diversity? Shariah scholars and Islamic finance

Unity in diversity? Shariah scholars and Islamic finance


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.’“


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.”


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.”


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.


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.

Ethica Trains 100 American Imams in Islamic Finance

Ethica Trains 100 American Imams in Islamic Finance

Two Months of Rigorous, First Ever Islamic Finance Training Successfully Completed



What does it take to bring 7 million American Muslims Islamic finance? Maybe training only 100 prominent religious leaders as a small first step. That is what the founding members of the American Islamic Finance (AIF) Project have now successfully accomplished. Jointly founded by Ethica Institute of Islamic Finance, Guidance Financial, and the Islamic Society of North America, the AIF Project seeks to promote standards-based Islamic finance among Muslim communities in North America.

The training program began with an inaugural address by Mufti Taqi Usmani, chairman of AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), the world’s leading standard-setting body. Ethica’s spokesperson said, “Muslims in America rely on their imams for all kinds of information. By giving these community leaders direct training in the practical application of Islamic finance, Ethica now equips them with an understanding of global standards.”

Ethica’s two-month imam training program looks to become an annual event. The program was successfully completed this month after Ethica delivered a rigorous blend of e-learning, including case studies, exercises, and exams, in addition to intensive classroom instruction. With fewer banks and universities opting for face-to-face training, and more institutions adopting the increasingly popular e-learning option, Islamic finance is set to become more accessible to countries outside of the Gulf.

Ethica Institute of Islamic Finance

With over 20,000 paid users in more than 40 countries in 2011, Ethica ( is the world’s leading accredited Islamic finance training and certification institute, with more learners than any other Islamic finance organization in the world. Ethica remains the only institute in the world to deliver standardized certification based entirely on the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the leading standard-setting body in the industry.

Guidance Residential

Guidance is the leading US provider of Sharia-compliant home financing with over $2 billion in home financings. It is a subsidiary of Guidance Financial Group, an international company dedicated to serving the market for Sharia-compliant financial products and services. Guidance Financial Group offers unique investment products to institutional investors and financial intermediaries worldwide, and provides financial services to its retail customer base in the United States.

Islamic Society of North America

ISNA is an association of Muslim organizations and individuals that provides a common platform for presenting Islam, supporting Muslim communities, developing educational, social and outreach programs and fostering good relations with other religious communities, and civic and service organizations.

For more information about this article, or to schedule an interview with Ethica Institute of Islamic Finance, please

Sheikh Taqi Usmani | Revisiting Sharia’a matters: Deloitte Islamic finance page

Sheikh Taqi Usmani | Revisiting Sharia’a matters: Deloitte Islamic finance page

Deloitte’s Islamic finance team revisits Sharia’a issues with Sheikh Taqi Usmani as an opportunity to deepen the understanding of some key issues he has previously raised. Mufti Taqi Usmani gives his views on commonly discussed topics such as Tawarruq and application of Islamic Finance in the post financial crisis era.

Access here

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.

Read the rest here:

Sukuk: Issues and the Way Forward

Video: Mufti Taqi Usmani on the global financial crisis

Video: Mufti Taqi Usmani on the global financial crisis


Mufti Taqi Usmani gives a lecture on the global financial crisis:

Part 1:

Part 2:

Part 3:

Part 4:

Part 5:

An Introduction to Islamic Finance – Mufti Taqi Usmani

An Introduction to Islamic Finance – Mufti Taqi Usmani


An Introduction to Islamic Finance, by Mufti Taqi Usmani. Read online HERE. Topics covered:

  1. Musharakah.
  2. Mudarabah.
  3. Combination of Musharakah and Mudarabah.
  4. Some objection on Musharakah Financing.
  5. Diminishing Musharakah.
  6. Murabahah.
  7. Some Issues involved in Murabahah.
  8. Ijarah.
  9. Salam and Istina.
  10. Principles of Shari’ah, Governing Islamic Investment Funds.
  11. The principle of Limited Liability.

AAOIFI Shariah Council’s proposals for amendments in contemporary Sukuk issues

AAOIFI Shariah Council’s proposals for amendments in contemporary Sukuk issues

The global Islamic capital market, of which the Sukuk sector is the most important, is still reverberating from the recommendations of the Shariah Committee of the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) relating to current Sukuk structures and their issuance. One scholar reportedly said that 80% of current Sukuk structures are not Islamic, a statement which has unfortunately made the headlines the world over.

The developments stem from a meeting of the Shariah Committee of AAOIFI held in Bahrain in February 2008 which issued new recommendations regarding Sukuk structures and issuance especially relating to the ownership of underlying assets in a Sukuk transaction and the guarantee of the principal investment to Sukuk certificate holders. The immediate reaction of some bankers has been that the recommendations may put a dampener on the issuance of future Sukuk because of these extra ‘constraints’ and thus affect their future tradability.

The Sukuk market has been flourishing for the last decade or so, albeit it has gained momentum only in the last three or four years. The total outstanding issues in the global Islamic capital markets, including the Malaysian corporate and government issuances, is estimated at just under US$200 billion.

Sovereign issuances were spearheaded by the Malaysian Global Sukuk in 2002, the first sovereign issuance. Since then the sector has seen a number of sovereign issuances by Qatar, Bahrain and Pakistan; several from quasi-sovereign entities; some from international agencies including the Islamic Development Bank, the World Bank and its private sector funding arm, the International Finance Corporation; publicly-listed corporates; privately-owned corporates; and even the odd social Sukuk by religious councils such as the Singapore Islamic Religious Council (MUIS) securitising Waqf properties.

Thus far sukuk structures have comprised Sukuk Al-Salam; Sukuk Al-Ijara; Sukuk Al-Musharaka; Sukuk Al-Mudarabah; Sukuk Al-Intifa’a; Sukuk Al-Istisna and Sukuk Al-Murabaha. The majority of Sukuk structures are based on Sukuk Al-Ijara involving a sale-and-leaseback arrangement done through a special purpose vehicle (SPV). Musharaka Sukuk is also gaining in popularity although there has been some controversy relating to certain equity and risk-sharing arrangements.

The recommendations of AAOIFI’s Shariah Committee, headed by its President Sheikh Taqi Usmani, in a series of meetings in 2007 and the latest one in Bahrain on 13 and 14 February, 2008, are quite emphatic.
These are:

  • Tradable Sukuk must represent ownership for Sukuk holders, with all of the rights and obligations that accompany ownership, in real assets, whether tangible or usufructs or services, that may be possessed and disposed of legally and in accordance with the Shariah. The manager of a Sukuk issuance must establish the transfer of ownership of such assets in its books, and must not retain them as its own assets.
  • It is not permissible for tradable Sukuk to represent either revenue streams or debt except in the case of a trading or financial entity that is selling all of its assets, or a portfolio which includes a standing financial obligation such that debt was incurred indirectly, incidental to a physical asset or a usufruct.
  • It is not permissible for the manager of Sukuk, regardless of whether the manager acts as an investment manager, or a partner, or an investment agent, to undertake to offer loans to Sukuk holders when actual earnings fall short of expected earnings. It is permissible, however, to establish a reserve for the purpose of covering such shortfalls to the extent possible, on condition that the same be mentioned in the prospectus.
  • It is not permissible for the investment manager, partner, or investment agent to agree to purchase assets from Sukuk holders or from whoever represents them for a nominal value of those assets at the time the Sukuk are extinguished at the end of their tenors. It is permissible, however, to agree to purchase the assets for their net value, or market value, or fair market value, or for a price agreed to at the time of their purchase, in accordance with Shariah rules of Partnership and modern partnerships, and on the subject of Guarantees.
  • It is permissible for the lessee in a Sukuk Al-Ijarah to agree to purchase the leased assets when the Sukuk are extinguished for their nominal value, as long as the lessee is not also an investment partner, investment manager, or agent.
  • Shariah supervisory boards must not consider their responsibility to be over when they issue a fatwa on the structure of Sukuk. Rather, they must review all contracts and documentation related to the actual transaction, and then oversee the ways that these are implemented in order to be certain that the operation complies at every stage with Shariah guidelines.

Reports pointed out that there is an implicit rebuke to Shariah scholars in the AAOIFI recommendations that the Shariah governance process does not end with the issuing of a fatwa but must continue for the entire tenor of the transaction or the issuance, when the Sukuk issuances to date okayed for Shariah compliance were given the go-ahead by some of the very members of the AAOIFI Shariah Committee and wider membership.

The Sukuk debate once again raises questions about the very nature of Shariah governance in the Islamic finance sector. In too many markets, the Shariah advisory process is still ad hoc with hardly any control over who offers such advice. A registered and regulated Shariah advisory market as in Malaysia surely would lessen the propensity for such a free-for-all as we have seen in some markets.

On the other hand, some countries are following the Malaysian example of a National Shariah Council at the central bank, including Pakistan and more recently, the UAE.