Category Archives: Sheikh Nizam Yaquby

Islamic Scholars will discuss Sharia’a Finance in London

Islamic Scholars will discuss Sharia’a Finance in London

Some of the world’s leading authorities on Islamic Finance will be meeting in London this week to discuss the launch of new Sharia’a-compliant products for the UK banking market, Islamic Bank of Britain reports.

The Islamic Bank of Britain’s (IBB) Sharia’a Supervisory Committee (SSC) will get together this Friday (25th January 2008). The agenda for the meeting will include a review of forthcoming Investment (Treasury) and Home Purchase products, as well as undertaking a Sharia’a review of the bank’s activity in 2007.

The Committee consists of Sheikh Dr. Abdul Sattar Abu Ghuddah (Committee Chairman), Sheikh Nizam Yaqoobi and (UK-based) Mufti Abdulkadir Barkatullah, and between them represent almost a century of Sharia’a-compliance experience. All three committee members are very much in demand by Islamic Financial institutions from around the world, and have chosen to utilise their expertise to further the cause of Islamic Finance in collaboration with IBB.

Mufti Barkatullah explained his commitment: “Islamic Bank of Britain is leading the way in promoting Islamic Finance in the UK, and I look forward to helping IBB with its pioneering role in the development of the industry.”

According to Islamic Bank of Britain “IBB is the first Islamic finance institution in the UK authorised and regulated by the FSA to operate as a bank. All Islamic Banks are overseen by a Committee of qualified and experienced Scholars, who are charged with ensuring that all products, services and processes comply with Islamic principles. In addition to Sharia’a reviews and approving the bank’s operations, the Committee also provides advice and guidance, based on their knowledge and experience within the Islamic Finance industry”.

As well as an external and independent review by the Scholars, IBB also has an internal Sharia’a Compliance Officer, who is responsible for continuously monitoring the day-to-day activities of the bank, and reports directly to the Sharia’a Supervisory Committee.

“The work of the Sharia’a Supervisory Committee is fundamental to the existence of IBB,” comments Shaher Abbas, the bank’s Sharia’a Compliance Officer. “Their approval is required before we launch any product, and they regularly review our business to ensure we are in compliance with the Sharia’a. This gives our customers complete peace of mind that we are operating in accordance with Islamic and ethical principles.”

IBB offers a number of products and services to it’s customers including Savings accounts, Treasury accounts, Personal Finance and Commercial Property Finance. The bank recently launched two new Commercial Centres for Islamic Finance – in London and Birmingham – to cater for the needs of its High Net-Worth and Business Banking customers.

As Islamic banks boom, scholars are hard to find

As Islamic banks boom, scholars are hard to find

The green-fronted Kuwait Finance House Auto mall on Bahrain’s main showroom highway is a bank that sells cars.

Here, the motorist can pick the model that takes his fancy and, at the same time, fix up the Islamic financing and Islamic insurance to buy it — a sign of the rate at which Islamic banking is growing.
Opened in June last year to meet rising demand in the oil-rich Gulf archipelago, the bank offers murabaha-based purchase plans, a method of Islamic financing that lets customers buy automobiles without taking an interest-based loan.
As traditional Western bankers count the cost of a reckless lending spree, Islamic banking — which complies with Islam’s law banning the receipt of interest — is surging. Estimated by some experts to be growing by about 15 percent a year, the sector has been forecast by management consultants McKinsey & Co to reach $1 trillion in assets by 2010.
Even as new bank branches pop up almost daily in Bahrain — a hub for banking in the Gulf and home to one of the sector’s most influential standards bodies — some bankers are worried.
Their concern is that the training of scholars essential for the Islamic banks’ supervision may not be able to keep pace.
A small group of usually robed and bearded Islamic scholars — experts in Islamic law, known as sharia — holds sway over the booming bank sector, and some in the industry wonder whether their expertise is being stretched too thin.
“There is lots of growing interest and we have many more sophisticated sharia scholars who are graduating now, (but) it’s not growing fast enough to meet demand,” Sheikh Nizam Yaquby, one of the world’s most respected sharia scholars, told Reuters. “This industry is growing phenomenally.”
Some sharia experts say it may take more than a decade to train more scholars and even the optimistic ones do not expect a new generation of scholars for at least five years.
“The industry can’t wait that long,” said David Pace, chief finance officer at Bahrain’s Unicorn Investment Bank. “Two to three years is about enough …
The lack of scholars does not mean the industry is paralysed but it slows down development.”
Established in 2004, his bank is one of several Islamic lenders set up to tap rising demand from the world’s 1.3 billion Muslims for financial services that comply with their beliefs.
Instead of interest, Islamic banks operate on the principle of sharing risk and reward among all parties in a business venture. Murabaha, for instance — the instrument on offer at the Auto mall — involves the bank buying a car and selling it to the customer for a stated profit, with payment deferred. Investment in sectors such as alcohol, pornography and gambling is prohibited.
Scholars are essential for the supervision of the industry, but a handful currently dominate the Islamic review boards at the world’s top banks and financial institutions.
There is a lack of consensus on what qualifications and experience are needed for the role, and some experts ask whether the shortage could lead to conflicts of interest and inadequate supervision.
“These bankers think the wombs of mothers are going to deliver graduated sharia scholars. I tell them you have to take steps,” Yaquby said.
Yaquby, who has been involved in Islamic teaching since 1976, estimated there were roughly 50 to 60 scholars in the world qualified to advise banks operating internationally on Islamic law. Ten times as many are required for the Middle East alone, he said.
Like most scholars, Yaquby divides his time among several banks. One of them, HSBC, lists advisory roles for him at Abu Dhabi Islamic Bank, BNP Paribas, Dow Jones, Lloyds TSB, Citi Bank, Standard Chartered and others.
He is also a board member of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, one of the world’s top Islamic finance standards bodies.
In Britain — the most active European market in the Islamic banking scene — the Financial Services Authority watchdog in November highlighted possible “significant” conflicts of interest in that concentration of expertise.
“The shortage of appropriately qualified scholars … raises concerns over the ability of sharia supervisory boards to provide enough rigorous challenge and oversight,” the FSA said in a report on the industry.
Last month the London-based Chartered Institute of
Management Accountants said the rapid growth of Islamic banking had fuelled a need for both Muslim and non-Muslim financial experts, and it hoped to set up both a diploma and perhaps a master’s degree in conjunction with a university.
However, being considered a scholar skilled enough to advise on deals sometimes worth billions of dollars is not easy.
Scholars must be expert in Islamic law and Islamic banking, but also have a thorough knowledge of conventional laws and banking systems, which requires a high standard of English.
Even then, a scholar will only be taken seriously after years of experience, according to many of the delegates at a Bahrain conference on Islamic banking in December.
“You can learn the technical aspects relatively quickly,” said Mansoor Ahmed, a sharia student. “But it’s not as easy as that. It does take 15 or 20 years. It requires a lot of experience … mere knowledge will mislead.”
Yasser Dahlawi of consulting firm the Shariyah Review Bureau, which advises companies on sharia compliance, said scholars need at least a doctorate and a decade’s experience.
Complicating matters is the lack of a globally accepted qualification as a sharia scholar, just as there are no globally accepted standards for sharia rules, which are to some extent open to interpretation.
Illustrating this, the head of sharia structuring at one of the world’s largest banks, who spoke on condition of anonymity, disagreed with Dahlawi on what it takes to be a scholar.
He said it was better for students to learn through apprenticeships with scholars who can trace their learning to Islam’s roots.

“I don’t care whether they have a PhD or not,” he said. “The way traditional Islamic teaching has been handed down is not through certificates or degrees. You need to trace your teaching back to the Prophet. It’s a lineage of understanding.”

Booming Islamic bond market embroiled in debate over religious compliance: Mufti Taqi Usmani’s criticism of contemporary sukuk issues

Booming Islamic bond market embroiled in debate over religious compliance: Mufti Taqi Usmani’s criticism of contemporary sukuk issues

The booming market for financial products that comply with Islamic law was thrown for a loop recently by criticism from a leading scholar, who has set off a debate about whether the industry has sacrificed religious principles for the sake of growth at a time of surging Mideast oil revenue.

Shariah, or Islamic law, prohibits charging or paying interest, so bankers and lawyers have developed a rapidly growing financial market by restructuring conventional products like bonds to make them compliant with Islam. Shariah-compliant products attempt to replicate the concept of interest through cost-plus transactions, leasing arrangements or by linking payments to returns on underlying assets. The process is normally blessed by a board of religious scholars affiliated with a bank.

However, one of the world’s leading Shariah finance scholars recently rattled the market by saying 85 percent of Islamic bonds, or sukuk, are not Shariah-compliant. Sheik Mohammed Taqi Usmani argued that, in essence, they were structured too much like conventional bonds.

Many industry participants say Shariah scholars knew the bonds had structural issues but approved them to jump-start market growth — raising questions about how the gatekeepers of the Islamic banking industry weigh potential profit versus religious principles.

Others downplay the controversy, saying debate was expected given the rapid evolution of the market and the nature of Islamic law, which encourages multiple viewpoints from different scholars.

The influential Shariah board headed by Usmani at the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, one of the leading groups trying to establish standards for the market, is scheduled to meet Jan. 15 with the hope of resolving the dispute and mitigating its impact on the industry.

Some say the race to grow the market has led to questionable religious rulings — a problem that is hard to police because of the lack of standardization across Shariah approval boards and the shortage of Islamic scholars well-versed in finance.

“Increasing the market in volume or numbers with false product that is against Islam is not a big success. It should be according to Shariah, that is the main thing,” said Sheik Saleh Abdullah Kamel, chairman of the Bahrain-based General Council for Islamic Banks and Financial Institutions, one of several organizations attempting to monitor the industry.

Islamic banking assets outside Iran totaled $400 billion to $450 billion in 2006 and are projected to rise to $1 trillion by 2010, according to a recent report by McKinsey & Co. Total assets, including those in Iran, totaled $750 billion in 2006, a small fraction of global financial assets, but one that is growing quickly.

Experts say growth has been driven by booming Persian Gulf oil revenue, Muslims’ growing preference for an expanding range of Shariah-compliant products and increasing acceptance of Islamic banking practices by financial regulators around the world.

The development of the sukuk market has been particularly important because previously there was a scarcity of Islamic products that could provide mid- to long-term investment and potentially be traded in the secondary market.

Sukuk issuance has grown almost 85 percent per year since 2001, with the total value of Islamic bonds issued in 2007 reaching $39 billion as of October, according to McKinsey.

“There has been this perception in the past that Islamic finance doesn’t lend itself to overly complicated structures, but sukuk rebuts that view,” said Nadim Khan, a Dubai-based lawyer who specializes in Islamic banking.

“It’s a real demonstration from the perspective of the Islamic financing industry that it is possible to structure widely acceptable, quite sophisticated Sharia compliance structures,” he added.

Islam prohibits interest based on the belief that money alone should not be used to generate profit and the returns are seen as riskless gain. So most sukuk are structured with a profit-sharing arrangement where returns are based on the value of the assets purchased with the initial investment.

However, many sukuk have been sold with a repurchase agreement, stipulating the borrower will pay back the face value at maturity, mirroring the structure of a conventional bond.

Usmani, the Shariah scholar, estimates 85 percent of sukuk have been sold with these repurchase agreements and believes the promise to pay back the capital runs counter to Islamic law.

“This is against the risk sharing principle of Shariah,” said Usmani.

Sheik Nizam Yaquby, another renowned scholar on the Shariah board chaired by Usmani, agreed that bonds with repurchase agreements should be made more Shariah-compliant.

“We need enhancement, improvement, innovation and we need more risk taking,” said Yaquby. “Many scholars have reluctantly approved such (sukuk) structures to take us away from the conventional bond market, but that stage has ended, so we should start creating more innovative structures.”

Kamel, who monitors the market, criticized this willingness to approve sukuk structures based on the assumption that they could be made more Shariah compliant once the market had grown, saying it was dangerous for the industry.

“The golden rule of Islamic banking is if you want a profit, you should accept the losses,” said Kamel. “If this rule is broken in any of the product, it is not according to Shariah.”

However, Afaq Khan, the head of Saadiq, Standard Chartered Bank’s Islamic banking arm, does not believe sukuk currently in the market can be considered counter to Shariah because they were blessed by their respective approval boards.

“Nobody comes to the sukuk market without a Shariah fatwa (religious ruling), so at least some Shariah scholars approved it,” said Khan.

Nevertheless, Khan said the current debate was productive. “Anytime a new industry evolves, it will try to test the boundaries,” he said.

“It is very healthy for the industry to take a breath, review and then move on,” said Khan. “Hopefully some consensus will evolve and it will be beneficial for the industry.”

Ensuring Shariah Compliance Challenge For Islamic Finance

Ensuring Shariah Compliance Challenge For Islamic Finance

The active product innovation in the area of Islamic finance has expanded to a wider investor base, and this has given the Muslim Ummah more choices of Syariah-compliant products.

One of the key challenges of such innovation, however, is the Syariah compliance issue. In the context of Brunei Darussalam, the Syariah Financial Supervisory Board through the Brunei International Financial Centre, for example, has recently approved 11 Syariah compliant products introduced by banks and financial institutions last year.

This observation was made by Dato Paduka Hj Ali bin Apong, the Permanent Secretary at the Ministry o f Finance, during a talk on Islamic finance matters at the Theatre Hall of the Ministry of Finance yesterday.

Two Islamic finance experts, Sheikh Nizam Yaquby of Bahrain and Dr Muhammad Daud Bakar of Malaysia, also shared their views on “Fiqh al-Muamalat” and modern financial markets particularly those related to Syariah.

He also talked about the investment strategy where a bulk of assets will be invested in Islamic fixed income securities like Sukuk, which will give a fixed income throughout the period.

The income plus capital invested will equal to the initial amount of capital at the end of the period of investment. The remaining capital will be invested in “Islamic Option” through the `Urbun’ mechanism to give investors the potential profit, he said.

Unlike Islamic mutual fund, Islamic private equity fund is invested in non-listed companies and more often that not, the investment is aimed at acquiring the invested companies.

As it leads to ownership of the invested companies by Islamic investors, some tolerance, which is given in screening public listed companies, are not granted in the case of Islamic private equity funds.

All activities such as ‘borrowing’ and ‘investment’ must be fully compliant (unless the scholars give a certain period of conversion). In current Islamic private equity fund, the investment is done as minority investors, which is less than 50 per cent of the total investment, Dr Muhammad said.

Meanwhile, Sheikh Nizam talked about the latest developments in Islamic finance. He sits on the Islamic supervisory boards of several Islamic financial institutions and is an active scholar in Islamic finance.

Sheikh Nizam also advises a number of banks and financial institutions including Abu Dhabi Islamic Bank, BNP Paribas, Dow Jones, Lyods TSB, Citi Islamic Investment Bank E C Bahrain and Standard Chartered.

Apart from keeping Syariah members updated on the latest developments in Islamic finance, yesterday’s talk was aimed at enhancing their knowledge on a number of Syariah issues, which are often raised regionally and globally.

The talk also gave Syariah members the opportunity to be updated on matters related to the Accounting and Auditing Organisation for Islamic Financial Institution (AAOIF).

Among those who attended the talk were Deputy State Mufti Pehin Orang Kaya Paduka Setia Raja Dato Paduka Seri Setia Hj Awang Suhaili bin Hj Awang Mohiddin, Syariah Court Judge Pehin Orang Kaya Paduka Setia Raja Dato Paduka Seri Setia Hj Awang Salim bin Hj Awang Besar, members of Syariah Supervisory Board of Brunei Darussalam, as well as officers from the Attorney General’s Chambers, Ministry of Religious Affairs, Ministry of Finance and financial institutions.

How conventional bank may initiate Islamic banking operations

Q: Many conventional banks and financial institutions are increasingly becoming interested in Islamic finance and investment. How can these conventional banks and institutions enter this market?

Answer by Sheikh Nizam Yaquby:


This write up is a modest contributory note that sets out the most important conditions to be fulfilled when conventional banks and financial institutions, their Articles of Association of which do not comply with the tenets of Islamic law (the Shariah), set up any Islamic bank, window, or fund. The importance of this issue cannot be overstated, particularly in view of the wide spread of this trend, over the past few years, and the oft-repeated claims by many parties that their transactions and dealings fully comply with the provisions of the Shariah when subjected to scrutiny and examination, this proves otherwise. Little or no research appears to have been conducted on this matter, and therefore this note is a beginning toward this end. It is hoped that specialist research and studies by scholars and academics will follow.

Forms of collaboration and their permissibility
Before delving into the details of these requirements, we have to note that cooperation and overlap between Islamic and conventional financial institutions in managing investments has taken several forms. These include the following:

1) An Islamic financial institution (IFI) offers an investment portfolio, backed by its Shariah expertise, but vests management of this portfolio in an external investment manager who undertakes to comply with the IFI’s conditions and applies the criteria and standards laid down by the IFI when managing investment.

This is permissible under the Shariah if the investment manager complies with the Islamic conditions and his or her success has been proven in more than one instance.

2) A conventional financial institution or bank sells and markets an Islamic product, introduced and planned by an IFI through its Shariah expertise. This is also sanctioned by the Shariah if it has been proved successful in more than one practical example.

3) Alternatively, a conventional financial institution or bank opens an “Islamic window” on its premises, introduces an investment product marketed as “Islamic,” such as a fund, or sets up a private Islamic bank or company. This is the subject of the present discussion.

Some scholars believe that this is not permissible, because conventional financial institutions do not comply, in the first place, with the Shariah in terms of their incorporation and statutes. If they do not comply with Islamic law in their basic charters, how can they claim to comply with it in their funds, branches, or windows?

In addition, the funds of these conventional financial institutions are drawn from prohibited earnings, so how can they invest unlawful funds in Islamic products? The rationale cited by scholars is that these financial institutions or banks are only intent on exploiting practicing Muslim investors and in so doing unfairly compete with Islamic financial institutions.

On the other hand, there is a group of contemporary scholars who permit this type of investment product as long as the Shariah conditions laid down for them are satisfied. They argue that dealing, in compliance with the teachings of the Shariah, in transactions and their Islamically sound contracts is not confined to a certain group of people. In this view, it is permissible-indeed incumbent-upon whomever can conduct dealings in accordance with the provisions of the Shariah to do so. If it is impossible to do so in all contracts, at least one should start with those that are possible. In response to the argument that the source of these funds is unlawful earnings, one may reply that there is nothing to prevent such funds from being purified, cleansed, and subsequently directed to lawful and permissible channels. Jurists say that it is permissible to deal with commingled (mixed) funds-funds that are not purely lawful funds, but rather are mixed, containing both lawful and unlawful money. This is as stated by Ibn Taymiyyah, in his Collection of Fatawa, and by other eminent scholars.

Moreover, the claim that traditional financial institutions desire to unfairly compete with Islamic financial institutions can be refuted by saying that competition is always in favour of the most suitable, efficient, and fittest. This kind of competition may prompt Islamic financial institutions to exercise more diligence and care to introduce better quality products and conduct their activities more efficiently. This is in fact evident in many nations in which competition exists.

On the other hand, conventional financial institutions may gradually convert into full-fledged IFIs if they find this viable and if they have acquired adequate practical experience and Shariah practices in this field. There are practical examples to substantiate this argument.

Among scholars and jurists who hold this view are Yusuf AI Qaradawi, Abdul-Sattar Abu Ghuddah, M. Taqi Usmani, Nazih Hammad, Abdullah Al Muslih, and Abdullah bin Sulaiman Al Manea. Economists who also espouse this view include M. Ali Elgari and Monzer Kahf. They all concur that the required conditions, outlined below, necessitate strict compliance.

Required conditions

The most important of these required conditions are: complete segregation of funds; existence of a Shariah supervisory board; management that is committed to Islamic financial concepts; safeguarding of Muslim investors’ funds from negligence, trespass, and fraud; and compliance with the standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

a) Complete Segregation of Funds

The funds of the Islamic investment product and those of the financial institution in which Shariah provisions are not observed must be completely segregated. The funds of investors who are very diligent and anxious to earn lawful income should not be commingled with those of conventional investors who are not observant of the Shariah. Therefore, there should be separate accounts, books, and computer programs evidencing this complete segregation of funds. This matter is not difficult or problematic in view of the availability of modern computer systems, assuming that intentions are sincere and the required expertise is available. This compliance should be enshrined and expressly stated in the statutes or the prospectus.

b) Shariah Supervisory Board

There should be a Shariah supervisory board for any institutional Islamic investment body, and that Board should consist of trustworthy scholars who are highly qualified to issue fatawa (religious rulings) on financial transactions. In addition, they ought to have considerable experience with knowledge of modern dealings and transactions. The Articles of Association, prospectuses, or statutes (depending on the type of activity) should provide for the existence of a Shariah board, whose fatawa and resolutions should be binding upon the financial institution’s management. It should be independent and free to give opinions on proposed contracts and transactions. The role of the Shariah supervisory board should be concurrent with that of the financial institution itself in the sense that it should be formed from the moment the financial institution is incorporated, and that it should provide continued supervision and permanent checking of contracts, transactions, and procedures. This should be expressly provided for in the Articles of Association or the prospectus.

c) Managerial Commitment

The financial institution’s management, which is undertaking such business activities, should be fully convinced of the concept and fully committed and dedicated to it. It should be anxious to implement it and comply with the teachings governing it. Unless the entire management is committed and convinced, the business activities and the enterprise will not be foul free or will not escape irregularities and deviation. Regardless of how strict and stringent fatawa and contracts are, this will not ensure sound practices if there is no one sufficiently sincere and committed to implement the principles. However, there is no harm in starting first with the executive senior management, which implement resolutions and subsequently trains the other members of the administrative team. The general manager himself should act as a springboard and set a good example for all in this respect.

d) Safeguarding Muslim Investors’ Funds

It is an established principle in Islamic law that the mudarib does not guarantee the mudaraba capital for the capital provider. Hence, investment accounts in Islamic financial institutions are not guaranteed by the mudarib. However, this does not prevent the laying down of a stipulation requiring that the parent conventional financial institution (the original company) guarantee Muslim investors’ funds against trespass, negligence, and fraud. Major financial institutions may sometimes shirk their responsibility in this connection by claiming that their Islamic windows, branches, or sections are privately incorporated, among other reasons and excuses. This is wholly unacceptable. Precautions should be taken to guard against this, and a similar policy should be expressly stated in the Articles of Association or the prospectus of the financial institution.

e) Compliance with AAOIFI Standards

The Accounting and Auditing Organization for Islamic Financial Institutions has issued and published a number of accounting and auditing standards that all Islamic financial institutions should comply with and implement. The AAOIFI’s activities are considered a fundamental groundwork that underpins Islamic banking activities by keeping them away from individual, personal reasoning. The collective personal reasoning (ijtihad) of the AAOIFI is highly important in this vital aspect of Islamic economic life. Therefore, these standards deserve strict adherence. A number of government authorities and central banks in certain countries have circulated these standards and obliged other financial institutions to comply with them. That is why any party wishing to incorporate or set up an Islamic financial institution should be required to conform to these standards in order to avoid confusion, misunderstanding, and ambiguity, and to seek clarity and sound business activities.


Islamic investment, with its governing Shariah rulings and provisions, is an open area for all those wishing to give it a try, provided that they approach it from its front door. They ought to comply with its provisions and honestly deal with people in their communications and transactions. For those who are intent on fraud, cheating, and misleading, all that can be said is that “he who cheats us is not one from us.”