Category Archives: Shariah standards and regulation

Shariah Experts Push for Scholar Certificates

Shariah Experts Push for Scholar Certificates

certification

Leading Islamic finance scholars are preparing the first global certification for Shariah experts, seeking to bolster the industry’s reputation and make it easier for banks to find qualified advisers.

The International Shariah Research Academy for Islamic Finance in Kuala Lumpur will pick a board of regulators by year- end to issue permits for scholars qualified to sit on Shariah boards, said Aznan Hasan, the president of the oversight committee. The scholars decide whether financial products meet the religion’s precepts, including a ban on interest payments.

“We are worried that people who aren’t qualified to be Shariah scholars may enter and become members of the advisory boards as the market flourishes,” Hasan said in an Aug. 30 interview in Kuala Lumpur. “Banks try to search for competent advisers, sometimes they get the right person, sometimes they get the wrong person.”

Attempts to set up an organization with a code of ethics to certify Islamic scholars have been frustrated by differing interpretations of Shariah law across the Muslim world, Madzlan Mohamad Hussain, a partner at Zaid Ibrahim & Co., Malaysia’s largest law firm, said in an interview on Aug. 30. Scholars are now required to have recognized university degrees before they can act as advisers to banks and companies.

The council of scholars at the academy includes Sheikh Nizam Yaquby of Bahrain, Mohammad Daud Bakar of Malaysia and Abdul Sattar Abu Ghuddah of Syria, who were all ranked among the top-10 experts in a 2008 report by Chicago-based Failaka Advisors LLC, an advisory company that monitors and publishes data on Islamic funds.

‘Strengthen Confidence’

Yaquby serves on the Islamic boards of 52 institutions including New York-based Citigroup Inc. and London-based HSBC Holdings Plc. Bakar advises firms such as Paris-based BNP Paribas SA, according to the data.

“The whole idea is to further strengthen confidence by making Shariah scholars truly professional,” Madzlan said, adding that the majority of experts also have full-time careers. “The plan will materialize because there’s a need for it.”

A shortage of scholars versed in Shariah law means they tend to sit on a number of advisory boards simultaneously, which increases the risk of conflicts of interest, according to the Bahrain-based Accounting & Auditing Organization for Islamic Financial Institutions, also known as AAOIFI.

‘Common Platform’

“We desperately need an institution that could certify and standardize different Islamic products in the market,” Kaleem Iqbal, a senior executive vice president at Al Baraka Islamic, a unit of Bahrain-based Albaraka Banking Group, said in an interview yesterday from Islamabad. “The banking community will certainly welcome a common platform with a global mandate.”

Shariah-compliant bonds returned 10 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 12.5 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows. The Islamic notes rose 1.3 percent in August after a 2.6 percent increase a month earlier.

The spread between the average yield for emerging-market sukuk and the London interbank offered rate narrowed 16 basis points, or 0.16 percentage point, to 385 last month, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.

Global sales of sukuk dropped 13 percent to $10.1 billion so far this year, compared with the same period in 2009, according to data compiled by Bloomberg.

The yield on Malaysia’s 3.928 percent government Islamic note was little changed at 2.72 percent today and dropped 21 basis points from the end of July, according to prices from Royal Bank of Scotland Group Plc. It reached a record-low of 2.63 percent on Aug. 24.

Global Standards

The Islamic finance industry, with $1 trillion in assets, is facing a challenge to develop global standards to attract funds from the world’s 1.6 billion Muslims.

AAOIFI, whose standards have been adopted in countries including the United Arab Emirates and Qatar, is proposing rules for scholars to reduce the risk of conflicts of interest, Mohamad Nedal Alchaar, the secretary-general of the organization, said in an interview on Aug. 5 in Kuala Lumpur.

The guidelines by AAOIFI may address whether Shariah scholars can own shares in the institutions they serve and how many advisory boards they can join, he said.

A centralized regulator for scholars will help increase investment because banks would save time in choosing experts to ensure products meet religious principles, said the academy’s Hasan, who also serves on the Shariah board of Malaysia’s central bank. The institution doesn’t plan to restrict scholars on the number of advisory panels they can join, he said.

“Global regulation is beneficial, be that through a test of fit and proper criteria as to what makes one qualify as a scholar,” Omar Shaikh, a board member of the Glasgow-based Islamic Finance Council U.K., said in an e-mail yesterday. “The challenge will be on the operational execution of this and the acceptance, use by global regulatory bodies.”

Source: http://www.businessweek.com/news/2010-08-31/shariah-experts-push-for-scholar-certificates-islamic-finance.html

–With assistance from Haris Anwar and Dana El Baltaji in Dubai. Editor: Simon Harvey, Shanthy Nambiar.

To contact the reporter on this story: Khalid Qayum in Singapore kqayum@bloomberg.net; Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net

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

Sheikh Nizam Yaquby opposes proposed restrictions on Shariah scholars

Sheikh Nizam Yaquby opposes proposed restrictions on Shariah scholars

Restricting the number of boards religious scholars are involved in would curb growth in the $1 trillion Islamic finance market, says a Bahraini scholar who advises Citigroup Inc. and HSBC Holdings Plc.

The Accounting & Auditing Organization for Islamic Financial Institutions, a Manama-based agency, said in August it’s considering guidelines on scholars owning shares in the institutions they serve and the number of advisory boards they can join, to reduce the risk of conflicts of interest. The top 20 scholars serve on 621 boards globally, said Zawya and Funds@Work AG, a Dubai-based research company.

“Capping the number of boards will be devastating to the industry’s growth,” Sheikh Nizam Yaquby, who was born in 1959, said in an interview in Beirut on Nov. 4. “Sometimes people ask me, are you Superman? How can you sit on so many boards? I tell them it’s hard work.”

Yaquby and Syria’s Abdul Sattar Abu Ghuddah ranked first among the top 20 experts, each serving on 85 boards of Islamic financial institutions, according to Zawya’s report. Yaquby is listed as serving on more than 50 boards, according to data compiled by Bloomberg.

The Islamic finance industry, with assets the Kuala Lumpur- based Islamic Financial Services Board will almost triple to $2.8 trillion by 2015, is struggling to develop global standards and a centralized regulator for scholars. Banks and companies can’t find enough experts to meet demand for new Shariah- compliant products, creating a “bottleneck,” said Khalid Howladar, Dubai-based senior credit officer at Moody’s Investors Service, in an e-mailed response yesterday.

Fragmented Industry

“One scholar advising so many companies doesn’t help make an Islamic product universal,” Kaleem Iqbal, a senior executive vice president at the Pakistani unit of Bahrain-based Albaraka Banking Group said in a telephone interview yesterday from Islamabad. “Unless we adopt a more standardized model, the industry will remain fragmented.”

Islamic institutions typically have their own panels of scholars who pass rulings, or fatwas, to determine that products comply with Shariah principles. Shariah scholars need to be experts on the Koran, commercial law and finance. Yaquby has a degree in economics and comparative religion from McGill University in Montreal.

Mohamad Nedal Alchaar, secretary-general of AAOIFI, said in August that a shortage of experts means they tend to sit on several advisory boards simultaneously. The Bahrain-based agency also plans to address concerns that these scholars’ private companies receive preferential treatment from banks they advise.

‘Conflict of Interest’

“There’s a potential case for conflict of interest, and a case of information leakage or perhaps competition impact,” Alchaar said. “We wanted to address the concerns in an unbiased manner.”

AAOIFI, which has more than 200 members, sets accounting and auditing standards that are used in Bahrain, the Dubai International Financial Centre, Jordan, Lebanon and Qatar, according to its website. The agency said its guidelines have also been used to help frame policy in Indonesia, Malaysia, Pakistan, Saudi Arabia and South Africa.

“What’s key is to create a robust framework in which the industry can thrive and grow,” said Yavar Moini, senior adviser of global capital markets at Morgan Stanley, in an interview in Dubai yesterday. “Clearly scholars’ expertise and representation on Shariah boards are an integral part of such a framework. Placing limitations in this regard will hinder the industry’s growth potential.”

Declining Bond Sales

Global sales of Islamic bonds fell 29 percent to $13.7 billion this year from the same period in 2009, according to data compiled by Bloomberg. Islamic law restricts investors to transactions based on the exchange of assets rather than money alone because interest payments are banned.

Sukuk returned 11.7 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, compared with a 14.5 percent gain in developing markets, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

Pakistan’s central bank requires Islamic banks to appoint one scholar as a “Shariah adviser,” who is barred from serving at other financial institutions in the country, Karachi-based Saleem Ullah, director of the Islamic banking department at the State Bank of Pakistan, said in an e-mailed response yesterday.

“The restriction is aimed at addressing the issue of conflict of interest and giving comfort to the banks regarding confidentiality of their business policies and product structures,” he said. The scholar can advise Islamic banks outside the country.

No Restrictions

Some Islamic banks also have Shariah boards and committees which have between three and seven scholars, Saleem Ullah said. There are no restrictions on how many boards scholars can serve on, he said.

“If a country wants to put a limitation, it is up to them,” said Yaquby. “Countries have to question if there are enough scholars to put such limitations.”

Chicago-based Failaka Advisors LLC, an advisory company which monitors and publishes data on Islamic funds, lists 253 practicing scholars worldwide in its 2008 report. There are now an estimated 600 scholars, said Yaquby. Among the top 10 are Mohammad Daud Bakar of Malaysia and Saudi Arabia’s Mohammed Elgari, according to the report by Zawya and Funds@Work.

The difference between the average yield for emerging market sukuk and the London interbank offered rate was little changed at 341 basis points yesterday, having narrowed 32 basis points since Sept. 30, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. A basis point is 0.01 percentage point.

The yield on Malaysia’s 3.928 percent Islamic note due in June 2015 rose two basis points to 2.71 percent today, according to prices provided by Royal Bank of Scotland Group. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed 9 basis points to 384.8, according to data compiled by Bloomberg.

Islamic financial institutions “want scholars who understand finance and banking, and can speak languages,” Yaquby said. “This is not a popularity contest. This is a multi-disciplinary specialization, which is rare to find.”

Controlling Fatwa would harm Islamic Finance (Reuters)

Controlling Fatwa would harm Islamic Finance (Reuters) — Straightway Ethical Advisory Blog

 

 

Recent developments in the Islamic finance market prompted the industry to rethink the role of Shariah scholars.

Most Islamic financial institutions appoint a supervisory board or committee of religious scholars who are tasked with reviewing their transactions in order to ensure that they comply with the principles of Islamic Shariah in their business and financial dealings.

A Shariah supervisory board or committee approves or rejects a transaction through the issuance of a fatwa (an opinion or proclamation about the Shariah compliance of such a transaction).

The question of the day in the Islamic finance industry is whether Shariah scholars should be subject to some sort of supervision themselves.
In our opinion, the answer to this question depends on what is meant by ‘supervision’.

Industry practitioners should oppose supervision if it means that Shariah scholars would have to adhere to strict criteria or methodology before issuing a fatwa. Such supervision would in our opinion curtail innovation and transform the industry, prematurely, to a commoditised industry, since Shariah scholars would in their attempt to check all the boxes and stay within the accepted norms, refrain from covering new ground and developing new structures that would allow new transactions and thus the development of the industry.

The industry should not lose sight of the fact that Shariah scholars are our current day mujtahid (jurist). Throughout the history of Islamic jurisprudence, the use of human reasoning (ra’y) has played an important part in the development of Islamic Shariah.

When issuing fatwa, Shariah scholars are practising ijtihad and they should enjoy complete freedom in their practice of ijtihad; their guidance and limitations should only come from the five sources of Islamic Shariah being: the Qur’an; Sunna (the practice and traditions of the Prophet Muhammad (peace be upon him); Qiyas (a comparison, used to make a judgement on issues which have no clear-cut ruling in the Qur’an or the Sunna, by consideration of similar issues which do have clear ruling); Ijtehad (the diligent judgement of the scholars through reasoning and logic); and Ijmaa (a consensus or agreement used for issues which require Ijtehad).

Therefore, in our opinion, Shariah scholars should not be restricted or limited in their practice of ijtihad by any regulator. Such regulation would neither benefit the Shariah -compliance of the industry nor its further development.

However, we would support supervision of Shariah scholars such as the new proposed rules of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) to reduce the risks of conflicts of interest or improper disclosure.

This type of supervision may lead to more transparency and benefit the authenticity and credibility of both the industry and the Shariah scholars. Organisations such as the AAOIFI should run training and continuing education programs for would-be Shariah scholars. Such programmes should aim to provide Shariah scholars with an understanding of various financial and business transactions and the legal framework in which such transactions are being consummated.

Most importantly, these training and continuing education courses should train Shariah scholars to be inquisitorial of the intention (niyya’) behind the transaction.

Two new AAOIFI accounting standards issues

Two new AAOIFI accounting standards issues

aaoifi

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has issued two new accounting standards and one new accounting guidance note.

Issuance of the new accounting standards and guidance note was approved by AAOIFI Accounting and Auditing Standards Board at its meeting in Dubai.

The meeting was hosted by Dubai Financial Services Authority, the regulatory authority for financial services in Dubai International Financial Centre.

The new accounting standards are on conceptual framework for financial reporting by Islamic financial institutions and investments in sukuk, shares and similar instruments while the new accounting guidance note is on first-time adoption of AAOIFI accounting standards.

Apart from laying down principles of financial reporting for Islamic financial institutions and providing the basis for AAOIFI accounting standards, the new conceptual framework also gives updated guidance on accounting treatment for investment accounts.

It introduces the concept of authority over investment decisions to guide financial reporting for investment accounts, which are funds received by Islamic financial institutions from their investors on mudaraba or investment management arrangement.

Under the new accounting standard on investments in sukuk, shares and similar instruments, Islamic financial institutions are required to segregate their investments between debt-type and equity-type instruments.

The segregation depends on characteristics of the investment instruments and purposes of the investments.

Accounting treatments and disclosures that Islamic financial institutions have to carry out are to be based on this segregation.

The new accounting guidance note on first-time adoption of AAOIFI Accounting Standards provides Islamic financial institutions with the starting point for preparing financial accounting records and reports based on AAOIFI standards.

Islamic financial institutions that are adopting AAOIFI accounting standards for the first time are required to follow rules set out in the guidance note.

The new accounting standards and guidance note were developed in consultation with more than 200 AAOIFI institutional members from over 45 countries as well as other key industry stakeholders," said AAOIFI secretary-general Dr Mohamad Nedal Alchaar.

"AAOIFI accounting standards ensure that Islamic financial institutions are transparent with their financial performances and consequently enhance the credibility of the international Islamic finance industry," he added.

AAOIFI is currently developing revised accounting standards on investments in real estate, equity of investment account holders and takaful.

In addition, it is also formulating a new standard on governance for Sharia supervisory board that will regulate the conduct of Sharia scholars serving on Islamic financial institutions” Sharia supervisory boards.

The new governance standard will address concerns including on the number of Sharia supervisory boards that a Sharia scholar can effectively serve, whether Sharia scholars can have shareholdings in Islamic financial institutions that they serve, and potential governance issues relating to Sharia advisory services given to Islamic financial institutions by commercial entities that are owned by Sharia scholars.

AAOIFI May Limit Shariah scholars’ role

Business Week: AAOIFI May Limit Shariah scholars’ role

regulation

A Bahrain-based agency is proposing new rules for religious scholars involved in the $1 trillion Islamic finance market, aiming to reduce the risk of conflicts of interest or improper disclosure.

The guidelines may address whether Shariah scholars can own shares in the institutions they serve and how many advisory boards they join, said Mohamad Nedal Alchaar, secretary-general of the Accounting & Auditing Organization for Islamic Financial Institutions, whose standards have been adopted in countries including the United Arab Emirates and Qatar.

“There’s a potential case for conflict of interest, and a case of information leakage or perhaps competition impact,” Alchaar said in an Aug. 5 telephone interview in Kuala Lumpur. “We wanted to address the concerns in an unbiased manner. When the guideline is published it will be a bold move and it may cause a stir.”

The proposals underline concern that Islamic financial products, designed to comply with Shariah law to be acceptable to devout Muslims, may be overseen by scholars who have a financial interest in their issuance. Global standards are still developing in the industry, whose assets are forecast by the Kuala Lumpur-based Islamic Financial Services Board to almost triple to $2.8 trillion by 2015.

AAOIFI, which has 200 members, sets accounting and auditing standards that are used in Bahrain, the Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria, according to its website. The agency said its guidelines have also been used to help frame policy in Australia, Indonesia, Malaysia, Pakistan, Saudi Arabia and South Africa.

Financial Fatwas

Fatwas, the judgment of a scholar based on his interpretation of Shariah law, are essential for products to be vetted and offered by financial institutions to Muslims. Islamic law restricts investors to transactions based on the exchange of assets rather than money alone because interest payments are banned.

Chicago-based Failaka Advisors LLC, an advisory company which monitors and publishes data on Islamic funds, lists 253 practicing scholars worldwide in its 2008 report. The top 10 include Sheikh Nizam Yaquby of Bahrain, Mohammad Daud Bakar of Malaysia, Pakistan’s Muhammad Taqi Usmani, Abdul Sattar Abu Ghuddah of Syria, and Saudi Arabia’s Mohammed Elgari, it said.

Yaquby serves on the Islamic boards of 52 institutions including New York-based Citigroup Inc. and London-based HSBC Holdings Plc. Bakar advises firms such as Paris-based BNP Paribas SA, according to the data. Credit Suisse Group AG of Zurich and Standard & Poor’s are among 31 firms that seek advice from Elgari, the report shows. Yaquby didn’t respond to an e- mail request for an interview and Mohammad Daud Bakar said he couldn’t respond to questions immediately.

Scholar Shortage

The Bahrain-based agency also plans to address concerns that scholars’ private companies receive preferential treatment from banks they advise, Alchaar said.

The Islamic finance industry is “increasingly scrutinizing the role of scholars, and questioning what the best practice should be,” Omar Shaikh, a board member of the Glasgow-based Islamic Finance Council U.K., said in May. “As the industry is beginning to work toward critical mass, scholars may need to tweak their roles at financial institutions.”

Financial institutions can’t find enough scholars to accommodate the demand for new Shariah-compliant products, Khalid Howladar, a Dubai-based senior analyst at Moody’s Investors Service, wrote in a report in May.

“The shortage of top Islamic finance scholars means that a small group of reputable individuals are a key factor in the Shariah compliance process,” he wrote. “This concentration creates a bottleneck when demand is high, and puts them and their offices under considerable pressure to deliver their approvals quickly.”

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