Tag Archives: Islamic finance

Unity in diversity? Shariah scholars and Islamic finance

Unity in diversity? Shariah scholars and Islamic finance
Source: http://www.themalaysianinsider.com/business/article/rock-star-scholars-a-risk-for-islamic-finance/

Islamicfinance1

Decades of parsing turgid legal documents have not dampened the enthusiasm of octogenarian Islamic scholar Sheikh Hussein Hamed Hassan. He gets agitated as he searches for a paper among piles of documents strewn across his posh Dubai office.

Wearing a dark grey suit with no tie, the Egyptian-born academic talks to a visitor for almost two hours about Islamic banking, which he has been instrumental in developing over half a century of writing and lecturing.

“Listen to me. You have to understand the basics of sharia, what’s allowed and not allowed in Islam. If you get it, then you’ll write it. And the whole world will understand,” he says.

Sheikh Hussein is one of the world’s most sought-after scholars in applying sharia or Islamic law to finance, chairing no fewer than 22 of the boards which rule on whether products and practices in the industry obey religious principles.

One position in particular stands out. As chairman of the sharia advisory board of London- and Dubai-based consultants Dar Al Istithmar, he is having to answer some searching questions on behalf of one of its most high-profile clients, US investment bank Goldman Sachs.

Last October Goldman announced it would issue as much as US$2 billion (RM6 billion) in sukuk or Islamic bonds, making it one of the first top Western banks to raise money in that way. But the plan has run into controversy among potential investors over whether it follows Islamic principles, as Dar Al Istithmar insists it does. There is also controversy over the fact that Goldman publicly named at least three Islamic scholars as potential advisers on the sukuk even though they had not even seen the prospectus.

“A copy of the Goldman Sachs sukuk prospectus was sent to these scholars for consultation but they never responded back,” Sheikh Hussein told Reuters. “They could be busy or did not approve the structure, but we didn’t hear from them. Their approval is not necessary anyway.”

The controversy over the Goldman sukuk illustrates some of the weaknesses of the Islamic finance industry. These are leading to growing pressure for reform of the scholar system, though the power of entrenched interests, and the difficulty of coordinating policy in an industry where authority is spread across the Middle East and Southeast Asia, may slow any change.

Scholars such as Sheikh Hussein command great influence but their opinions, lacking definitive legal sanction, are often challenged, creating an uncertain regulatory environment. And some scholars sit on scores of boards, leaving them open to charges of conflict of interest and making it hard for them to keep up with all areas of their work.

“The big problem is that there just aren’t enough of them,” said one Dubai-based banker in the industry, who declined to be named because of the sensitivity of the issue. “It’s a bit like being a rock star. They are disproportionately recognised, with people saying: ‘I want that name in Malaysia, I want that name in Bahrain.’“

Capacity

Islamic finance, based on principles such as bans on interest and pure monetary speculation, has grown rapidly over the last several years because it draws on pools of investment money in the oil-rich Gulf and Asia that have been relatively untouched by the global financial crisis.

The industry’s global assets are expected to rise 33 per cent from 2010 levels to US$1.1 trillion by the end of 2012, according to consultants Ernst & Young. Islamic finance will remain far smaller than conventional finance, with its tens of trillions of dollars, but the gap may continue narrowing; Ernst & Young expects Islamic banking in the Middle East and North Africa to expand over the next five years at a compound annual rate of 20 per cent, versus less than nine per cent for conventional banks.

Sharia scholars, with expertise in both religious and conventional law, are key to this growth. Investors will not buy instruments without believing they are religiously acceptable, so most wholly Islamic financial firms have their own board of sharia scholars which certifies products and monitors the firm’s business. “Independent” sharia boards also exist, offering their services to financial firms for a price.

There are over 400 sharia scholars worldwide but only around 15 to 20 prominent and experienced ones, which creates demand for scholars to sit on multiple boards. The top 20 scholars hold 14 to 85 positions each, occupying a total of around 620 board positions or 55 per cent of the industry, data compiled by investment research firm Funds@Work show.

The shortage of scholars is a capacity constraint for the industry, said Sheikh Muddassir Siddiqui, a sharia scholar and Harvard-trained attorney at law firm SNR Denton. He is a member of the sharia standards committee of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), a Bahrain-based body setting standards for the industry.

“If you engage a lawyer or a doctor you would naturally want someone with a big name and reputable,” said Siddiqui.

“But unlike a rock star who can entertain thousands of people at once, a sharia scholar’s role should be viewed more like a doctor’s — it is natural to ask how many surgeries a doctor can perform in one day. It is a question of capacity.”

The capacity problem is worsened by the fact there is no single, universally accepted interpretation of religious principles. So firms seek out the scholars who they think will carry the most weight with investors; in effect, a scholar’s reputation becomes a currency used in completing a deal.

“The reason the Islamic finance industry is still emerging is that governance standards are not as well established as in other industries,” said Murat Ünal, CEO of Funds@Work.

“It’s like a social network. People and their relationships play a very important role. If you have a prominent scholar on board, this increases trust and makes up for the lack of governance standards. Institutions sell their products via the reputation of the scholars, so you better make sure you have accepted scholars on board.”

And this leads to sky-high fees paid to the top scholars. A senior banker at an Islamic lender said some scholars could be paid US$1,000 to US$1,500 per hour of consultation — in addition to an annual bonus of between US$10,000 and US$20,000 per board seat.

Sheikh Hussein and other scholars strongly reject the idea that there is anything improper in the fee system.

“What’s wrong with getting paid for issuing a fatwa or reviewing the sharia compliancy of a financial instrument?” Sheikh Hussein said. “We’re just like auditors, lawyers. Each one of us has years and years of experience in sharia law. We do our job and get paid for it. Nobody is allowed to question our honour, integrity and truthfulness.”

Frustrations

Nevertheless, the system is open to accusations of conflict of interest because scholars head or sit on the boards of the industry’s standard-setting bodies, such as AAOIFI, at the same time as they are being paid handsomely by the firms which are being regulated.

In some ways the situation is similar to that of credit rating agencies in conventional financial markets. The agencies are paid by the companies they rate, which may have made them slow to downgrade debt before the global financial crisis, allowing imbalances to build up that triggered the crisis.

“Certainly there is a need for improvement in the way sharia supervisory boards play their role,” said Sheikh Siddiqui.

“There needs to be some sort of enforcement body that stipulates who is qualified, how to protect against the conflict of interest, and other reasonable conditions for the conduct of a sharia board.”

Sheikh Siddiqui also advocates separating some of the duties of sharia boards so that scholars, who may now effectively act simultaneously as lawyers, product developers and auditors for instruments, do not end up “judging their own work.”

The impact of individual scholars on the Islamic finance industry can be huge. In late 2007 and early 2008, sukuk issuance slowed after Sheikh Muhammad Taqi Usmani, chairman of the board of scholars at AAOIFI, suggested that about 85 per cent of sukuk might not comply with Islamic law.

Haissam Arabi, chief executive of Gulfmena Investments, a Dubai-based asset management firm, says he has personally experienced the pitfalls of the scholar system: products have been approved for investment by his firm’s sharia board, only for their sale to be delayed by the boards of other firms.

“Here is a crack in the system which needs to be remedied,” he said. “When you can’t sell or distribute because your board is different from my board, you end up not being able to achieve scale and you’re left with a very expensive product. That’s what’s hindered the development of sharia asset management.”

Another area of frustration in the industry is the lack of transparency in the way that sharia boards reach their findings and communicate them, industry participants say.

“Sharia scholars’ opinions are not published and in some cases not even circulated,” said Oliver Agha, partner of Agha & Co, a sharia-compliant law firm in Dubai.

Mohammed Akram Laldin, executive director of Malaysia’s International Sharia Research Academy for Islamic Finance, said few boards disclosed their methodology. This is dangerous, he said, since as the industry grows and products become complex, investors need to be sure scholars understand the markets.

“Scholars are no doubt well-versed in Islamic law,” he said. “But sometimes they might not be as well-versed on the market side.” In other cases, he added, scholars may not even be fully informed of the ultimate purpose of a product — an important issue for them to consider when forming a judgment.

“They only see a half-cooked structure… Something is not being disclosed to the scholar, and some who have more disclosure might ask more questions.”

Reforms

There are signs that the industry is moving towards reform of the scholar system. The Goldman case is one impetus for reform, because it underlines the large amounts of new business that could be generated in the industry if Western financial institutions become heavily involved; they are likely to demand a more transparent and predictable environment.

The shortage of experienced scholars is unlikely to be remedied quickly, but proposals within the industry include setting minimum quotas for the number of young scholars on sharia boards, and introducing apprenticeships to give young scholars more experience. Some companies may begin adopting these measures even if the industry’s standards-setting bodies do not decide to recommend them universally.

“We do need more trained sharia scholars, but it’s beginning to happen because of demand pressures,” said Jasseem Ahmed, secretary-general of the Malaysia-based Islamic Financial Services Board (IFSB), another industry body.

Scholars are likely to face stricter guidelines for their behaviour from bodies such as AAOIFI. The organisation’s assistant secretary-general Khairul Nizam said it was discussing internally proposed new standards for scholars; they are expected to be issued by the end of this year as part of a strategic review of AAOIFI standards, he said. A draft is likely to be distributed to the industry at mid-year for consultation.

The new standards will try to give more guidance on scholars’ responsibilities, their relationship with banks, the issue of confidentiality, and the terms of reference of sharia boards, which should be similar to those that govern bank boards in conventional finance, Nizam said.

Regulations imposed by Malaysia’s central bank could provide one model for the AAOIFI reforms. Among other rules, scholars in Malaysia cannot sit on the board of more than one bank; sharia board members must attend at least three-quarters of the board’s meetings each year, and two-thirds of a board’s members must be present for the board to meet.

Pressure is also growing for action to reduce the differences of opinion and conflicting judgments between the sharia boards at individual companies.

The central bank governor of the United Arab Emirates, Sultan Nasser al-Suweidi, is among those who have suggested the creation of a global body that would provide legal guidance to boards around the world.

“The solution here may lie in the establishment of a supervisory or a control body that would issue fatwas or rulings on the general policy of Islamic banking,” he told Reuters.

Once again, Malaysia could be a model; a Shariah Advisory Council (SAC) established by that country’s central bank acts as “the apex authority for the determination of Islamic law,” helping to resolve differences of interpretation between scholars or companies.

Obstacles

Globally, however, the Islamic finance industry is unlikely to achieve the strictness and consistency of regulation seen in Malaysia any time soon.

A source familiar with AAOIFI’s review of standards, who declined to be named, told Reuters that the review would probably not look at restricting the number of board positions that scholars could hold, or at setting up a global version of Malaysia’s SAC to iron out legal disputes.

“Such steps are years away,” the source said.

The industry is so diverse that without the intervention of central banks and governments, it may be unable to agree on strict regulation of itself. And outside Malaysia, most central banks and governments have hesitated to take on the responsibility of setting standards for the industry.

Many in the industry are wary of inviting official intervention, arguing that it could curb their freedom to innovate and slow the market’s growth.

“If you have a central sharia board the government will be more involved, and as we know bureaucracy kills growth,” said Mohamed Elgari, a prominent scholar. “Centralised government entities should be concerned about risks but should refrain from sharia issues.”

Others believe that an industry based on the interpretation of religious principles is never going to achieve the same consistency and predictability as conventional finance.

“On the whole there is some convergence that has taken place, but we can never aim at 100 per cent. It is just the nature of Islam — people have different approaches,” said the IFSB’s Ahmed.

Pakistan’s Meezan Bank launches ‘Laptop Financing’

Pakistan’s Meezan Bank launches ‘Laptop Financing

 

 

Meezan Bank has launched a new consumer financing product that will allow customers to purchase laptops on easy installments. The new product called Laptop Ease is being offered for repayment periods ranging from 3 months to 24 months. The bank will not charge any profit or return for customers who opt for the 3 month or 6 month installment plan. The product has been launched in collaboration with M/s. New Horizon and is available for only HP laptops. M/s. New Horizon will provide two years warranty with parts along with nationwide after sales services at the customers’ doorsteps.

 “Meezan Laptop Ease” through which customers can purchase Hewlett-Packard (HP) laptops, equipped with the latest features under a Halal financing scheme, is another step towards achieving Meezan Bank’s Vision of making Islamic banking the banking of first choice. Through this Riba-free facility, customers will be able to acquire laptops at easy installments for periods ranging from 3 to 24 months.

Laptop Finance is based on the concept of Musawamah which is a general and regular kind of sale in which price of the commodity to be traded is bargained between seller and the buyer without any reference to the price paid or cost incurred by the former. Thus, it is different from Murabaha in respect of pricing formula. Unlike Murabaha, seller in Musawamah is not obliged to reveal his cost. Both the parties negotiate on the price. All other conditions relevant to Murabaha are valid for Musawamah as well.

An MoU for this arrangement was signed between Meezan Bank and New Horizon at Meezan Bank’s Head Office.  Mr. Mohammad Raza, Head of Consumer Banking of Meezan Bank and Mr. Rahim Eqbal, COO of New Horizon signed the MoU.

 Speaking at the occasion, Mr. Raza said that Meezan Bank has an active focus on developing customer-friendly, Islamic alternatives to conventional banking products, in line with its Mission to offer a one-stop shop for innovative value-added products and services to the customers within the bounds of Shariah.

Ethica Trains 100 American Imams in Islamic Finance

Ethica Trains 100 American Imams in Islamic Finance

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

 

 

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

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

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

Ethica Institute of Islamic Finance

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

Guidance Residential

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

Islamic Society of North America

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

For more information about this article, or to schedule an interview with Ethica Institute of Islamic Finance, please e-mailcontact@EthicaInstitute.com.

KPMG nets Miller as Global Head of Islamic Finance

KPMG nets Miller as Global Head of Islamic Finance

 

 

 

KPMG has hired Neil Miller as global head of Islamic finance. Miller joins from Norton Rose where he led their global Islamic finance practice and will continue to be based in Dubai, where he has been since 2009.

According to KPMG, ‘Neil has specialised in Islamic finance since he moved to Bahrain in 1995. He then returned to London in 2000 to set up Norton Rose’s Islamic finance group which went on to win numerous industry awards under his leadership, with Neil becoming a highly regarded industry figure internationally.

Miller said, “KPMG’s global reach, vast client relationships and deep industry insights will provide me with an opportunity to identify services and products tailored to the Islamic Finance Industry. This, and the commitment of the senior partners in the firm to the development of Islamic finance, was an important factor in my decision to join KPMG. To prosper and grow, the Islamic financial industry needs to be served by firms that can deliver well researched and designed tools that are Shariah compliant and commercially viable, but also comprehensively consider taxation, audit and accounting perspectives. KPMG already has a strong Islamic finance offering and I look forward to developing this further through its international network.”

KPMG’s announcement comes shortly after Deloitte lost its head of Islamic finance, David Vicary, to Islamic finance education house INCEIF.

Source: http://www.theislamicglobe.com/index.php?option=com_content&view=article&id=530:kmpg-nets-miller&catid=15:article&Itemid=38

Dr. Hussein Hamid Hassan calls for supreme Shari’ah board

Dr. Hussein Hamid Hassan calls for supreme Shari’ah board

 

The call to institute a supreme Shari’ah board in the GCC has been taken up Dr. Hussein Hamid Hassan, a leading Shari’ah scholar.

Hassan made the call at a briefing session organized by Dubai’s Hawkamah Institute for Corporate Governance to publicize its launch of a policy brief on the corporate governance of Islamic financial institutions operating in Dubai.

Hassan said that he believed the industry needed a collaborative body encompassing the leading Shari’ah scholars from across the GCC, in order to streamline the process of issuing Fatwas and help speed up the development of products.

When Hassan was asked by The Islamic Globe, how he judges the Qatar Central Bank’s move to separate Islamic and conventional banking, he answered that this was: “A step in the right direction for more transparency,” as regulators should not be treating Islamic banks like conventional banks. Hassan also telegraphed that an Islamic Banking Academy was on the verge of being set up “in the near future” in Dubai.

Source: http://www.theislamicglobe.com/index.php?option=com_content&view=article&id=484:leading-scholar-calls-for-supreme-shariah-board&catid=16:article&Itemid=38

Centre for Islamic finance planned at Durham University

Centre for Islamic finance planned at Durham University

 

 

 

DURHAM University will build on its role as a leading UK centre for teaching Islamic finance and business with a new doctoral training centre.

The Durham Centre for Islamic Economics and Finance is a collaboration between the University’s Durham Business School and the School of Government and International Affairs.

Durham has been a centre for research in Islamic finance for over 25 years, with a significant history of PhD study which will enter a new era with the launch of the centre in the autumn. The new centre will build on this success and the international popularity of the Durham Islamic Finance Summer School, which began yesterday.

Professor Rob Dixon, dean of Durham Business School, said: “Due to such exciting and dynamic developments in the Islamic financial and banking sector, it is important that financiers and bankers who are working in the field, or who wish to enter the Islamic financial market, are aware of the principles, operations, techniques and mechanism of Islamic finance and financial products as well as the dynamics of Islamic financial and capital markets.”

Dr Mehmet Asutay, the director of the summer school and a senior member of the new centre, said: “The centre will provide exclusive facilities for research students who have chosen to specialise in Islamic finance, which will enhance Durham University’s long-standing efforts to contribute to the development of academic and intellectual discourse and the practice of Islamic finance.

“It will also support the international reputation and recognition of Durham University.”

Source: http://www.nebusiness.co.uk/business-news/latest-business-news/2011/07/05/centre-for-islamic-finance-planned-at-durham-university-51140-28995315/

Islamic banking ideal to boost ‘green finance’, CEO Doha Bank

Islamic banking ideal to boost ‘green finance’, CEO Doha Bank

 

 

 

 

“Islamic Banking is the right platform to boost ‘green financing’ as it is based on the concept of promoting good practices and values,” said R Seetharaman, Chief Executive Officer of Doha Bank, delivering the inaugural address at a seminar on Islamic economics, organised by the Indian Islamic Association – Qatar (IIAQ), under the title “Towards an Alternative Economy” at Omar Bin Al Khattab Preparatory School for Boys in Doha on Friday.

Seetharaman said Islamic banking is not just a financial system but it is part of a total value-based social system that seeks to enhance the general welfare of society as a whole.

“Sustainable environment development, developing water resources, facing global warming, ensuring women’s participation and promotion of small-scale enterprises are all part of green financing. This is clearly an area where Islamic Banking can play a pivotal role,” he said.

Seetharaman, however, noted that Islamic Banking is currently in its infancy and faces several challenges. Young people should be encouraged to take up these challenges to ensure that this significant economic system carries through and plays a leading role in the current global financial stage.

He added that Islamic Banking is growing in popularity as Japan has just issued five Sukook Ijara (Islamic leasing bonds) and many other countries including Italy, Canada and Spain are showing great interest in such products and services of Islamic banking. In the UK, there is a full-fledged Islamic bank, called the Islamic Bank of Britain, and there are 22 counters at conventional banks that offer Islamic banking services and products.

Seetharaman noted that infrastructure development projects in India can attract foreign investment if the country opens up its banking sector to Islamic banking. India’s 11th Planning Commission has earmarked $542bn for this sector, but hardly any money comes from the Gulf-based financiers as they are reluctant to deposit in an interest-based system.

P P Abdur Rasheed, former Head of Economics Dept at Government College, Malappuram, India, and K Abdullah Hassan, Head of Research at Islamic University, Santapuram, India, also delivered speeches on ‘Fundamentals of Islamic Economics’ and ‘Basic Principles of the Zakah System in Islam’.
Nizar Kocheri, lawyer and noted humanitarian activist, delivered a felicitation speech and Abdul Wahid Nadvi, Acting President of Indian Islamic Association, Qatar, presided over the ceremony. V T Faisal, General Secretary of IIAQ, welcomed the guests and Taj Aluva proposed a vote of thanks.

Source: http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=444799&version=1&template_id=36&parent_id=16