Category Archives: Sheikh Yusuf Talal DeLorenzo

A Shariah scholar’s place on the board: Interview with top Shariah scholars

Gulf News: A Shariah scholar’s place on the board: Interview with top Shariah scholars

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Funds-at-Work, a research-based strategy consultancy focusing on the investment industry, recently released "Shariah Scholars – A Network Analytic Perspective," which links Sharia scholars to board positions. It is a more comprehensive study than previous Sharia scholar reports. Rushdi Siddiqui puts some challenging questions to four international Sharia scholars to get their view points:

  • Dr Hussain Hamid Hassan (HHH), eminent scholar and chairman of many Islamic financial institutions
  • Dr Mohammad Daud Bakar (MDB), international scholar and founder and managing director of Amanie Islamic Finance Consultancy and Education;
  • Yousuf Talal DeLorenzo (YTD), leading US scholar; and
  • Dr Mohammad Akram Laldin (MAL), Executive Director, ISRA, Malaysia.

Research is an important area in Islamic finance and you are well aware of the Funds-at-Work study, linking scholars to Sharia boards. What is your impression of the study?

HHH: The Islamic finance industry is young but growing. It needs specialists, not just in Sharia, but in law, accounting and feasibility studies.

There are very few scholars who combine the qualifications and experience needed for this field.

Therefore, it is only natural that they would carry a heavy load, for the industry is in need of development and the invention of new products which should be compliant with the Sharia, valid in civil law, and commercially viable.

There just aren’t a sufficient number of specialists in these areas in light of the rapid growth and remarkable development of this industry.

In time, the young will gain experience, and people will then seek them out, after the generation that preceded them has passed away; and they, in turn, will be succeeded by another generation of young practitioners. That’s the way of the world.

Furthermore, this study was lacking in precision, for it ignored a great number of up-and-coming scholars who are working as members of these same Sharia boards along with their teachers, in order to learn from them. Why didn’t the study focus on them?

It focused instead on the first generation, whose careers developed apace with the growth of the Islamic finance industry and the Islamic banking movement.

The number of these [young scholars] far exceeds the number of senior scholars, who are now well over 60 years of age.

How can the study demand that the new Islamic finance industry be led by the young to the exclusion of those with long experience, who are considered the fathers and theorists of the Islamic finance industry (IFI)?

MDB: What is lacking in this research is the clear hypothesis of the research and in what way the readers could actually benefit from the research, as the data presented is quite extensive (although not necessarily accurate), but the data analysis needs to be improved.

YTD: The goal of research is knowledge and its application. There are very likely a great deal of practical applications for the Funds-at-Work study and this is welcomed.

Networking aside, there are far more important considerations, or there should be, in evaluating Sharia scholars and their work: Published work? Academic background? Affiliation with one juristic school?

Experience and exposure to various financial products and instruments? Relationships with international legal firms? Ability to function effectively as team members and meet deadlines? Ability to represent, if necessary, IFIs in international or regional forums or even in informal situations?

All of these are factors that may have varying degrees of importance for IFIs.

MAL: I believe it is a good move to provide the market players with the information about their involvements.

It will definitely assist the market player to engage the suitable Sharia advisor so as not to hinder their progress. I also strongly believe that we are not in shortage of Sharia advisors in the market. We do have competent people but not many are given the chance to serve on Sharia boards as some market players prefer to have certain scholars on their board. As a result you can find that some scholars sit on many boards.

There is increasing conversation about scholars serving on multiple boards and how this might present a conflict of interest. Are you in agreement?

HHH: It has never happened in the history of the Islamic finance industry that the members of any Sharia board divulged secrets that damaged an Islamic bank or an Islamic financial institution.

They are the people most worthy of confidence and trust, for they are leaders and role models.

History has not conveyed to us a single report of a scholar who issued a fatwa that was a secret which only the mustafti (questioner) was privy to, such that the mufti could not issue the same fatwa to someone else.

This criticism is the result of ignorance about the nature of the duty of Sharia board members.

They explain the rule of Allah in the issues presented to them, and their fatwas are not considered the property of the mustafti who asks them, such that the rule of Allah cannot be given to someone else.

We would like to ask: How many times in the history of Islamic banking — which is more than 30 years old — has an Islamic bank complained about a member of a Sharia board that he gave the same fatwa to another bank which he had already given to the first bank?

Indeed, the rule of Allah does not change just because the person asking about it has changed.

It is a principle of the Sharia that a scholar is not allowed to conceal knowledge; rather, he has to bestow it upon whoever wants it, based on Allah’s statement: "You shall make it clear to people and not conceal it" (3:187).

MDB: Conflict of interest is a term, albeit a technical one, which should be used in specific cases is often misunderstood.

For all intents and purposes it disallows a person to be in a position whereby his decision (of doing or not doing) may be influenced by his own interest.

Could a scholar sitting in various Sharia boards be perceived to be in that position? If established, then this practice should be avoided.

What is the interest that is applicable to a scholar when issuing a fatwa?

Perhaps, many understand that Sharia advisors are equal, or should be treated similar to board of directors, hence, the perception of conflict of interest. Scholars are essentially not in the position of serving as the board of director of a bank, for example.

They are similar to other professionals such as lawyers, accountants, auditors, and actuaries.

YTD: The problem I see is not a conflict of interest but one of capacity, in terms of both quantity and quality.

A scholar who serves on multiple boards in addition to a fulltime teaching position at a university, for example, will have to be careful to balance his schedule so as to allot ample time for each of his responsibilities.

That’s a matter of quantity; and each individual will have to make up his own mind as to what constitutes a reasonable workload. Some people simply have more energy than others. We have examples in our industry of scholars at advanced ages who serve on many boards; and continue to contribute in a positive manner. We also have examples of scholars who have cut back their commitments, or who have limited them to no more than a certain number.

Insofar as quality is concerned, I think the industry is beginning to demand a greater degree of specialisation, even from its Sharia scholars.

Thus, the concerns of equity fund supervision, of bank supervision, of takaful, leasing, real estate, infrastructure, private equity, home finance, commodity trading… all of these are different and require more than an introductory understanding, hence, the future will be toward specialisation because greater attention to detail will be required of scholars.

MAL: Yes there are many who sit on multiple boards and I have no objection to this provided that the respected scholars are able to discharge their duties in efficient manner. As for the conflict of interest, I do not see any issue for individual scholars sitting on different boards.

However, at present we see a number of scholars are operating Sharia advisory companies and if the person operates the company and at the same time provide advisory services, there might be some question regarding serving the interest of the company and providing independent Sharia views.

This conflict of interest may rise to Sharia compliance risk as not enough time to review all documents, hence, a real risk management issue for IFIs. Are you in agreement?

HHH: The Sharia boards undertake their duties regarding the transactions presented to them, based on their belief that all this is a religious duty which cannot be approached on the basis of whims. Rather, it requires penetrating and rigorous academic research.

Their conscience and sense of duty prevent them from deliberately issuing a fatwa opposed to the Sharia; as for mistakes, they do occur.

If one of them happens to make a mistake, he will be corrected by the other members of his own Sharia board or by another board altogether. At any rate, the Prophet Mohammad (Peace Be Upon Him) said that if someone makes ijtihad and is wrong he gets a single reward, and if he’s right he gets a double reward.

And where are these risks that the Islamic banks have faced due to hasty or erroneous fatwas?

Are they issued by the senior members rather than the junior members?

The claim that Islamic banks are facing dangers due to the inability of the members of their Sharia boards to properly carry out their duties is a claim that is not based on reality or evidence.

MDB: If this perception is established, it must not be restated as conflict of interest term, as its misleading.

The issue of quality of works by advisors is the issue of the performance and not of the policy of having scholar on various boards.

This issue should be addressed administratively and not from a policy and regulation perspective, unless the bad performance is rather a phenomenon in modern Islamic finance industry.

YTD: If scholars do not have enough time to review documents, or if they require months to review documents and then need to schedule and reschedule before they can meet and take decisions, then something is clearly wrong.

But the fault is not necessarily that of the scholars. When establishing a Sharia board, an IFI must be cognizant of the scholars’ other responsibilities.

Even the matter of time zones should be taken into consideration. And the IFI will need to be diligent and proactive in its management of the Sharia board’s affairs so that meetings are scheduled well in advance of deadlines and time is managed effectively.

Many problems can be avoided by making a realistic and practical selection of scholars for the IFI’s Sharia board.

MAL: I agree that if a person sits on too many boards, he might not be able to scrutinise all the details of the transactions, documents etc and it will lead to what is termed as "Sharia compliant risk" for the market player. On this issue, I am not blaming the scholars solely. The market practitioners are equally responsible as they are the ones who approach the scholars and appoint them.

With only a handful of scholars on so many boards, is there a risk to IF, especially looking at issues of age, health, and the travel demands of scholars?

HHH: This is not correct, for at this time we have specialised leadership in the Islamic finance industry and we have hundreds of young people who are members of Sharia boards. Therefore, the task is not limited to a handful of scholars.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has a Sharia Council comprised of 18 members. There is also the Islamic Fiqh Academy that is part of the Muslim World League and the International Islamic Fiqh Academy of the Organization of the Islamic Conference (OIC).

Between them they have hundreds of scholars to whom issues of Islamic economics, Islamic finance and newly developed products are presented, and they issue fatwas and resolutions. So it is not true that those who undertake the issuing of fatwas in Islamic banks and institutions are a small handful of persons.

I totally disagree that those who are leading the Islamic finance industry and its institutions, including banks, takaful companies, and financing and investment institutions, are a small number.

MDB: The meaning of risk in this context is not clear. The risk is and should not be confined to the issues of age, health and travel commitments as these also apply to other sectors in life, be it financial or non-financial.

YTD: Key man risk is always a problem in business. It is no different in our industry. Yet, at the same time, we all know that we need to do more to develop scholars for service in the Islamic financial services industry.

MAL: This is a real issue and if we look at present there are gap between the senior and junior scholars. Many senior scholars are ageing and there are no replacements.

There is a need to put a governance process to regulate the Sharia advisory services. In Malaysia we have started this process since 2005 when the Central Bank issues the guideline on Sharia Advisory services.

One scholar is only allowed to sit on one board as to allow the grooming of new generation of scholars. As a result, we now have more than 100 scholars on our list and the number is increasing especially with many young graduates who are interested in pursuing this career.

Should this type of study in IF be expanded to include law firms? Accounting/management consulting firms?

HHH: Yes. It will soon become clear that specialised expertise in Islamic banking is less expensive than that of firms that offer diversified services to hundreds if not thousands of clients.

Nor should we forget that our Arab and Islamic educational institutions have yet to concentrate on turning out graduates with qualifications and specialisations for careers in Islamic finance.

MDB: On one hand, the research should not be extended to other sectors unless the hypothesis and the benefits of doing this research are made vividly clear. Otherwise, this research may lose [credibility and] respect. Other hand, for comparative purposes, the investigation and examination should also be conducted on other similar services such as law firms, auditing firms, and actuaries, for example, so the industry will be getting a more comprehensive view on this perceived conflict of interest issue.

YTD: Yes.

MAL: Yes it is needed so as to give the information to the market players.

To address shortage of scholars, should scholars be compelled to have a junior (local) scholar (not well known) on the board so as to encourage apprenticeship and expand the supply of scholars?

HHH: This is the actual situation. A large number of up-and-coming scholars work on the Sharia boards along with their teachers. This process is due to the initiative of the elder scholars, who search for those with outstanding abilities in the new generation and nominate them.

However, we must emphasise one point: the danger of nominating an unqualified candidate. It is not appropriate, in the name of expansion, to appoint unqualified persons, for that will cause harm to the industry itself.

Graduating from a Sharia college is not enough by itself, for there are thousands of graduates. It requires experience, personal ability and the combination of knowledge of the Sharia, civil law and accounting.

MDB: In any industry, the practice of compulsion is not a healthy one. It is always about being passionate.

As much as the junior scholars are encouraged to be part of the service, they must demonstrate the minimum capabilities and professionalism required to undertake this task. The task of the scholar and consultant is different from other tasks, such as being an academic as it requires a bit of everything: research, original thinking, understanding of the current market, and it is time consuming.

YTD: I don’t think that compulsion is the solution. But I do think that IFIs should be encouraged to do so. And I also think that the junior scholar solution is a good one.

I have also recommended a rotating scholar solution for SSBs such that one seat may given to a new scholar after the previous scholar has served a term of one or two years.

MAL: Actually, it is not the scholars who should be compelled to do so, but the market player.

This is because the market players determine who sits on the Sharia board and it is their responsibility to ensure that there is mixed of senior and junior scholars in their board.

We have done this in Malaysia and it works as pointed earlier.

In a recent event in Malaysia, Dr Mohammad Elgari presented a paper on Sharia governance. Is this the need of the hour?

HHH: Governance, in the perfect sense of that term, does not exist outside of the Islamic financial system which is based on divine revelation as expressed in the Book (the Quran) and the Sunnah.

No one in the industry can ignore that, or the [AAOIFI] Sharia standards. In addition, there is a further guaranteed level of governance and that is the presence of the Sharia supervisory board itself, made up of three, five or even seven scholars who perform their duties and opine collectively rather than as individuals.

Beyond that, Islamic financial institutions adhere to their own standards, the fatwas issued by fiqh academies, and the teachings and rulings of the classical jurists.

And then there is the academic community that monitors the work of our Islamic banks such that if ever a fatwa is issued which contradicts an Islamic teaching or principle, as a result of faulty reasoning or legal process, our academics will raise a hue and cry until the matter is corrected.

MDB: This is a welcomed paper to address the quality of Sharia advisory services, applicable to both the scholars and the stakeholders of Islamic finance.

The Sharia governance, as presented in the paper, argues for more transparency of the fatwa process and deliberations.

As a matter of fact, this (the detailed process of fatwa issuance and its argument) should be the focus of research of modern researchers instead of the perceived conflict of interest by multiple board membership.

The superiority of any Sharia board is the quality of arguments that lead to a strong and defendable fatwa by the board.

YTD: His was a very important paper and it addresses a pressing need.

As the industry matures, it becomes more and more important to have systems in place that ensure greater transparency and accountability.

Such systems will play an increasingly important role of the future development of this industry and they must be promoted.

MAL: I am one of the commentators on his paper and in many forums I have express my views that it is very important to have a comprehensive Sharia governance framework for Islamic finance.

This shall be spearheaded preferably by the regulator. In Malaysia, ISRA have initiated the establishment of Association of Sharia Advisors (ASA) in order to regulate the Sharia advisory services.

We are in the process of setting up this association and its function will be similar to other professional bodies such as the Bar Council and Medical Association that regulate the practices of its members.

ASA will be the body that regulates the conduct and lays down the ethical code of the Sharia advisors and we will get the body to be the sole body that accredits Sharia advisors for them to practise in the market.

ASA will also provide licence for the scholars to practise in the market.

Funds-at-Work research is welcomed as it shows the landscape of scholars and boards, but needs expansion to include scholars’ total activities and work. And the study should be enlarged to include other stakeholders in the Islamic finance consulting role. Finally, Islamic institutions have not knowingly contributed to over-reliance on name-brand scholars, but must now actively contribute to governance and involve junior scholars to manage Sharia compliance risk, for expansion beyond natural borders.

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

Scholars and bankers invited at George Washington University to discuss nuances of Islamic finance

The event featured five distinguished scholars and experts in the field of Islamic finance. They included Prof. Frank Vogel, senior fellow and head of Muslim World Law and Islamic Finance, Institution Quraysh for Law and Policy and Umar Moghul, Partner at Murtha Cullina LLP and co-chair of the firm’s Islamic Finance and Investments Group.

Yusuf Talal deLorenzo, chief Shariah officer at Shariah Capital, Aamir Rehman, managing director at Fajr Capital Limited and Ibrahim Warde, adjunct professor of International Business at the Fletcher School of Law and Diplomacy, Tufts University, were the others.

The panelists addressed a several hundred attendees on the various aspects of contemporary Islamic finance such as its historical legacy, the compatibility of Shariah-compliant institutions with US law, derivative instruments and the development of sukuk in the Gulf, Shariah financial regulation and practice in the GCC (Gulf Cooperation Council) and Islamic finance in the light of the recent financial crisis.

It also addressed Shariah financial regulation, how the rise of Gulf capital is affecting financial markets and how it should be regulated, as well as the compatibility of Shariah institutions with US law and regulation and the objections of Shariah scholars challenging the permissibility of derivatives under Islamic Law.

The discussions were moderated by Jean-Francois Seznec, visiting associate professor at Georgetown University’s Center for Contemporary Arab Studies.

Regarding the question of sukuk in the Gulf, DeLorenzo said ownership is an important issue for Shariah scholars to understand.

“Ownership is always a sticky subject and it is not always a failure of the Shariah advisers when ownership and sukuk is questioned,” he said.

DeLorenzo, wrote the introduction to Islamic bonds, a book that introduced sukuk to the world’s Islamic capital markets as well as a three volume Compendium of Legal Opinions on the operations of Islamic banks, the first English/Arabic reference on fatwas issued by Shariah boards.

One clear lesson, he said, “is the need for more and more diligence on the business side.”

Questioned on whether sukuk is a sound investment, he said there are serious Shariah issues that need to be addressed. “There are tensions between GCC investors and Malaysian investors who have different philosophies in the jurisprudence.”

He said that sukuk need to have a viable trading market.

“We need to confront these issues. The tensions need to be resolved before real trading can take place.

“Sukuk are hybrids, some look like equity, others like debt. They need to be traded and exchanged, and unless everyone understands the rules there will be a lot of confusion in the marketplace and people will leave. There is a need to deal with this sooner than later.”

DeLorenzo’s 30-year career as a scholar of Islamic Transactional Law was a front-page story in the Wall Street Journal in 2007.

“It’s a rules-based business; people need to understand that, whether they’re in Hong Kong or Chicago, and the way to do this is through an exchange of information,” he said.

“Many of the high profile sukuk defaults have taken place as the result of poor business decisions, not Shariah.”

He said the problem was that the “press picks up on a sukuk default and then blames it on Shariah. We need to explain it better.”

The expert said a new generation of sukuk coming to the market also needs to be closely examined.

“My feeling is that the issuers need to be more transparent to investors, and feel the same way about Shariah boards. We need to be careful about managing perceptions.”

Read the rest …

Islam’s approach to ethical investment

Islam’s approach to ethical investment

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Given that many ethical funds have similar characteristics as Islamic funds, it is important for ethical investors attracted by the appeal of Islamic principles as well as the performance of Islamic investments to understand that there are additional prohibitions that must be applied on the products offered.

These restrictions which are essentially self-imposed based on belief and conviction act a moral compass; the monitoring of the prohibitions by a Religious (Shari’ah) Supervisory Board may have prevented Islamic financial institutions to deviate from a faith-based system and absorb the shocks within the conventional financial system.

The important principles for Islamic financial instruments for participation and investments that require strict adherence, while providing good returns, are:

*Investments must be free of interest, speculation and gambling, all are considered as forms of exploitation

*Investments are made in permissible activities

*Investments must be separately approved by an independent Shari’ah supervisory board to ensure Shari’ah principles are strictly adhered to and deviations and wayward business practice penalised, for example in Islamic finance requires penalties to be paid to charity

“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper Osservatore Romano said in an article its latest March 2009 issue.

Shariah authenticity

Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product’s authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah.

Shari’ah supervisory board (Religious Board)

Islamic financial institutions must adhere to the best practices of corporate governance however they have one extra layer of supervision in the form of religious boards. The religious boards have both supervisory and consultative functions. Since the Shari’h scholars on the religious boards carry great responsibility, it is important that only high calibre scholars are appointed to the religious boards.

Islamic financial institutions that offer products and services conforming to Islamic principles must, therefore, be governed by a religious board that acts as an independent Shari’ah Supervisory Board comprising of at least three Shari’ah scholars with specialised knowledge of the Islamic laws for transacting, fiqh al mu‘amalat, in addition to knowledge of modern business, finance and economics.

They are responsible primarily to give approval that banking and other financial products and services offered comply with the Shari’ah and subsequent verification that of the operations and activities of the financial institutions have complied with the Shari’ah principles (a form of post Shari’ah audit). The Shari’ah Supervisory Board is required to issue independently a certificate of Shari’ah compliance.

The day-to-day application of Shari’ah by the Shari’ah Supervisory Boards is two-fold. First, in the increasingly complex and sophisticated world of modern finance they endeavours to answer the question on whether or not proposals for new transactions or products conform to the Shari’ah. Second, they act to a large extent in an investigatory role in reviewing the operations of the financial institution to ensure that they comply with the Shari’ah.

The concept of collective decision-making, in other words, decisions made by more than one scholar, is especially important. Shari’ah Supervisory Boards function is to ensure that decisions are not unilateral, and that difficult issues of finance receive adequate consideration by a number of qualified people.

Source: Institute of Islamic Banking and Insurance (IIBI)

Islamic home finance offers new solutions in this economy: Yusuf Talal DeLorenzo

Islamic home finance offers new solutions in this economy: Yusuf Talal DeLorenzo

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The business model and growth of the Islamic finance sector – the only financial system in the world today that is based on the teachings of a major religion – may present new opportunities for American households – Muslims and non-Muslims alike.

The Islamic home financing sector is active in nearly 40 states in the United States. While operating on an interest-free business model, Islamic home financial institutions are compatible in every way with modern capitalism, just like conventional financial institutions.

There are differences, however.

Read the rest …

Don’t fear the riba: Sheikh Yusuf Talal DeLorenzo criticizes the Wa’d scheme promoted by Dr. Hussein Hamid Hassan

Don’t fear the riba: Sheikh Yusuf Talal DeLorenzo criticizes the Wa’d scheme promoted by Dr. Hussein Hamid Hassan

There has always been room for disagreement within Islamic finance, but one issue has caused particular controversy in the past months.

At the recent Islamic Funds World conference held in Dubai, two top industry figures put forward opposing views on the wa’ad swap – the promise agreement with which returns from one basket of assets are swapped with returns from another. Increasingly, this mechanism is being used to give Shariah compliant investors exposure to returns from haram, or non-Shariah compliant, assets.

Supporters of the technique say that it is no different to issuing a sukuk, for example, against the LIBOR (London Inter-Bank Offered Rate) benchmark, which is widely used in pricing Islamic bonds even though it is an interest rate.

Shaykh Yusuf Talal DeLorenzo, chief Shariah officer and board member, Shariah Capital, is a staunch opponent of the wa’ad swap with haram returns.

“The purpose of this swap is to bring returns that are not compliant to Shariah investors – and everyone knows it,” he told the audience.

“It is a mistake to say that the haram basket is no more than a benchmark. All that happens is the non-Shariah basket of assets sets a benchmark and it’s no different from LIBOR – wrong.”

He said that the comparison with LIBOR was inappropriate, since the interest itself, rather than the benchmark rate, is the forbidden part.

“As a mere benchmark it has nothing to do with the transaction,” DeLorenzo said. “In a wa’ad swap it is what creates the returns, and that is the problem.

“LIBOR for ijara is totally unrelated to the ijara transaction. With the haram basket of assets, its performance is directly related to the return. The funding, whether it’s direct or indirect, is there.”

He pointed out that LIBOR has been approved by Shariah boards for use as a benchmark for Islamic returns.

“There is no participation by Muslim investors in LIBOR – it’s the business of the London banks,” he added.

DeLorenzo argued that a Muslim investor taking part in a wa’ad swap is implicated in every investment decision the bank subsequently takes with his funds.

“When you accept this investment product, you accept the whole series, whether you know it or not,” he said. “As the money moves, its character changes.”

DeLorenzo concluded by saying: “If you’re going to swap returns of one basket of performing assets for another, then you must insist that the assets in both baskets are halal.

“Only then can you be sure of receiving returns that are halal.”

Taking a slightly different view was Dr Hussein Hassan, director of Islamic finance structuring for Deutsche Bank UAE, which has pioneered Shariah compliant products that give Islamic investors exposure to non-Shariah returns.

Dr Hassan told the assembled delegates that Deutsche Bank keeps Islamic investors’ assets isolated from haram assets, something that is demonstrated in the regular Shariah audits carried out on the bank.

In the specific mechanism outlined in the white paper issued by Deutsche Bank last year, the wa’ad swap is an agreement between the bank and the investor to swap the returns from two baskets of performing assets, which are kept entirely separate and do not interfere with each other. When the assets are deposited with the bank, it agrees with the investor to hand over the return from the basket of haram assets at the due date, in return for the return from the basket of Shariah compliant assets. The Islamic investor therefore takes the risk that the Shariah compliant assets he deposited with the bank could outperform the haram returns he will receive when the swap is conducted. For this reason, two agreements need to be signed to ensure that both sides carry out their obligations on the due date.

Deutsche Bank is confident that the transactions it conducts are entirely compliant with Shariah law, regardless of what assets make up the haram side of the swap.

“We had discussions with Shariah scholars to discuss if we need to change anything we do,” said Dr Hassan. “They explained we don’t need to resort to blocking the means.”

He said that he expected a greater range of benchmarks to be available to the Islamic finance industry in future, making it easier to create Shariah compliant investment products that are linked to other assets.

Alka Banerjee, chairperson of Standard & Poor’s index committee, also argued that more Islamic benchmarks were necessary to develop the industry.

“Commodities is one that’s really crying out for indices,” she said. “That’s a no-brainer. They are a big source of revenue for most Islamic countries and we do not have a commodities index right now. All commodities indices are based on futures pricing and futures are not Shariah complaint, so until the scholars come up with an acceptable form of pricing that index, it’s waiting to happen.”

Banerjee added: “We are working with Islamic scholars to find a way, but we don’t have anything yet.”

She predicted that Islamic ETFs (exchange traded funds) would take off in the next two years, and called for more breadth and depth in the Islamic funds industry, something that was echoed by other participants.

Mohammad Shoaib, CEO of Al Meezan Investment Management in Pakistan said that the high levels of liquidity in the region meant that there was not necessarily an incentive for the industry to come up with innovative types of funds.

“There is lots of liquidity in the system, so it is very easy to come up with plain vanilla products and bring in a lot of money,” he said.

Syed Tariq Husain, CEO of Pakistan’s Emirates Global Islamic Bank, agreed. “We’re growing rapidly, but in terms of value rather than product diversification,” he told the audience. “We probably need to do more in terms of funds and Islamic investment opportunities available.

“In the GCC we have an excessive amount of liquidity chasing too few assets. The rate at which liquidity is coming into the system is so great that assets can’t keep up with it.”

He said that, having used negative screening to rule out assets that are not Shariah compliant, there may now be a case for fund managers to apply positive Shariah screening to assets.

However, other participants argued that product innovation should not come at the cost of customer relations.

Umer Majid, director, Halal Investment Bank in the UK, said that British Muslim investors were becoming distrustful of Shariah compliant investment products. “They feel they’re being conned,” he said. “They feel they are being given conventional products with Islamic labels.”

He added: “There was one sukuk fund very well promoted as halal by certain investment funds, but if you looked closely at the small print it promised a guaranteed return and that is haram,” said Majid.

“This has created a lot of mistrust and what I’m worried about is that the Islamic finance experiment might fail before it’s begun because people are trying to mimic conventional products.

“There needs to be something done about the legal documentation – it needs to be standardised.”

Majid called for an Islamic ombudsman which could authenticate even Islamic investment products that had already been approved by a Shariah board, and which could handle complaints from the public.

Generally, though, the outlook for the Islamic funds industry seemed to be bright, as long as the supply of new products is able to keep up with demand from a huge Muslim investor base.

Oliver Agha, global head of Islamic finance, DLA Piper Middle East, gave some perspective of the Shariah compliant investment opportunities that will be available. “There are $690 bn of projects expected in KSA in the next decade, most of which will be Islamically financed,” he told delegates.

Rationale for the Prohibition of Riba: Answered by Sheikh Yusuf Talal DeLorenzo

Rationale for the Prohibition of Riba: Answered by Sheikh Yusuf Talal DeLorenzo

Question: While I understand that the shariah is strongly opposed to riba in all its forms, I was considering what the rationale for this is. The Quranic text and prophetic tradition are clear in prohibiting it but I haven’t yet seen a clear explanation of why it is problematic. I also fail to see WHY asset-backed ownership is the only permissible type in Islam and exactly what the problem is with other purely financial instruments. Are there any other readings you could recommend to help answer these questions?

Answer: Please keep in mind that the prohibition is very much a moral issue, and that it is closely related to the concept of khilafah or stewardship. The Islamic concept of monotheism views the Almighty as the Fashioner and Possessor of all creation.

His is all that is in the heavens and on earth. Everything submits to Him (2:116).

When the earth and everything in it belong to the Almighty, the role of humankind is no more thanthat of caretakers. Even so, humankind has been granted an awesome responsibility, one which, in the poetic language of the Qur’an, even the mountains dared not accept.

The terms of this stewardship are that the Almighty allows humankind the use of the physical universe, hopefully for good (though possibly for evil, because humans have the ability to choose), and in return humankind agrees to be accountable for how the physical universe is used.

This agreement is the foundation of all worldly justice, and this leads to the Shariah orreligious law which includes guidelines for using the Almighty’s property for profit and acceptable gain. Unjust enrichment, according to the Shariah, may take many forms; but the most iniquitous of all is enrichment at the expense of others, and this includes lending for profit.

Money lending and financing belong to two entirely different spheres; one is charity, pure and simple, and the other is business. The repercussions of this bifurcation range far and wide, and shape much of what is unique about Islamic notions concerning economy and society.

Equity investing offers Muslims the opportunity to profit, not by lending at a guaranteed rate of return, but by sharing in ownership, and thus commiting to share in the risks associated with ownership. Such a commitment is clearly in consonance with the concept of stewardship, and this, more than anything else, explains how the Islamic prohibition against interest is as much a moral matter as it is a legal one.

Investing in the Financial Sector: Answered by Sheikh Yusuf Talal DeLorenzo

Investing in the Financial Sector: Answered by Sheikh Yusuf Talal DeLorenzo

Question: I was particularly interested to know what kinds of sectors islamic investors should avoid, like the financial sector. I assume that some smaller banks generate more revenue from profits arising investment returns on deposits received.

Does it make sense to say that in a scenario where 80% of the bank’s revenue is generated from investment returns (from financing development projects), then from whatever returns I might make as a Muslim investor in this bank, I would have to cleanse 20%?

I know that I am oversimplifying the scenario for most banks am not taking into account the fact that halaal investment projects in the bank might constitute only a small part of the bank’s overall profit. But assuming a direct relationship (each % of halaal investment by the bank contributes 1% of profit to the banks bottom line), is my reasoning correct.

I am also wondering to what extent my assumptions about the ratio of halaal to haram (investment vs loan financing) business dealings in a typical bank are sound.

Answer: The financial sector in general, and banks and insurance companies in particular, represent dangerous ground for Muslim investors owing to their involvement, in a very fundamental way, with riba. As a result, the entire sector has been declared “off limits” by most Shari`ah boards. The Dow Jones Islamic Market Indexes, for example, include no banking or insurance securities.

If, however, you are considering an investment in a bank that transacts with a minimum of riba, your answer is at least theoretically correct. However, the real problem is determining the amount of the income the bank actually earns from riba and this, in practical terms, is nearly impossible.

Therefore, my advice would be to stay away from such an investment. In addition, several of our most respected Shariah scholars have given the opinion that it is unlawful to deposit in riba-based banks (if an Islamic alternative is available) because to do so encourages and supports the riba-based system of finance. Then, when this is their opinion on deposits, their opinion in regard to investing in such banks is that to do so is clearly unlawful.

And Allah knows best.