Experts Call To Set Up Islamic Finance Regulatory Framework

That is the view of BBK investment banking arm Capinnova Investment Bank chief executive officer Jamal  Hijres. “An important effort towards achieving international consistency was the creation of two multilateral institutions, the Accounting and Auditing Organisation for Islamic Financial Institutions and the Islamic Financial Services Board.

Experts Call To Set Up Islamic Finance Regulatory Framework

Experts Call To Set Up Islamic Finance Regulatory Framework

“The growth of such institutions will definitely improve and propel the industry at a faster pace. “The Islamic banking industry is a fast growing sector that offers an array of opportunities yet to be exploited,” he said.

“Although the Middle East still represents the biggest share of the total Islamic banking sector, Western  countries are gearing towards this new trend that presents a unique opportunity to diversify.

“With a growing market share and a considerable growth rate recorded over the past decade, it is essential for a unified global Islamic banking authority to be established.

“This authority can be entrusted with standardising Islamic banking operations and facilitating communication between the different entities, leading to the full exploitation of the sector’s potential.

“One of the most important challenges faced by the Islamic banking sector is the unavailability of  experts in both banking and Islamic issues.

“An Islamic banker must possess a profound knowledge of Sharia rules and principles, in addition to finance.

“The shortage in experienced and qualified scholars is forcing them to field positions on multiple Sharia
boards, which in turn increases the risk of a conflict of interest.””Even though the financial crisis did not affect the Islamic banking industry in particular, the drop in Gulf real estate and oil prices had repercussions on the industry,” he said.

“However, now with oil prices back in the normal range it has definitely brought confidence back to the industry.”While Islamic finance is one of the big success stories in finance today, it is worth looking at the  current credit crunch in conventional finance to see how easily one problem can spiral out of control.

“This is something that Islamic finance practitioners need to take on board and make sure they are  prepared to expect the unexpected. “Rigid corporate governance programmes, transparency on compliance, learning from conventional banking  successes and failures and achieving greater market penetration are all goals that will help sustain this area of Islamic finance.”

Are Shariah advisories becoming an endangered species?

Not that the issue is new. There have been calls for the registration of Shariah advisories for the last two decades — not by an industry Shariah body but by the regulators in the country in which they are based and in those countries in which they offer advisory services.Market players have long been concerned by the small pool of experienced Shariah advisers serving the Islamic finance industry and that an elite few sit on as many as 89 boards per adviser. This they claim could lead to conflicts of interest and is simply not the best practice in terms of advisory.

Are Shariah advisories becoming an endangered species?

Are Shariah advisories becoming an endangered species?

True financial services clients do complain that many of their Shariah advisers are sometimes very difficult to get hold of simply because they have so much on their plate because of the number of boards on which they sit and some of them have teaching commitments at universities and colleges.

Not surprisingly, some of the top Shariah advisers have reportedly spoken out against any efforts to restrict their trade by restricting the number of boards on which they can sit on. With due respect to AAOIFI, its efforts will carry no weight, simply because they are not steeped in law and they only carry voluntary adoption — a feature which is not very established or strong in the Islamic finance culture and industry.

There is of course an eminent precedent in this issue — the case of Malaysia, where not only have all Shariah advisories got to be registered under section 377 of the Capital Markets and Services Act 2007 (CMSA) and the provisions of the Central Bank Act 2009. Similarly, in Malaysia an individual Shariah scholar can only sit on the board of one institution in a particular market segment — commercial bank, investment bank, Takaful operator etc.

This is the law of the land and any Shariah advisory that does not like it is free to leave and do business elsewhere. The above measures have not led to any exodus of Shariah scholars from Malaysia. On the contrary, it has given space for the emergence of the new generation of Shariah advisories for the growing Islamic finance market. Similarly, the UAE Insurance Authority has reportedly already introduced regulations that restrict Shariah advisories to sit on no more than two Shariah boards of UAE Takaful operators. Similarly the State Bank of Pakistan is also following the Malaysian example.

One senior executive at a major global financial consultancy stressed to Arab News on the basis of anonymity, “My gut feeling is that the Malaysians are right. The same argument can be applied to the global consultancies such as KPMG, PriceWaterhouseCoopers (PWC), Ernst & Young (E&Y) and Deloittes etc, but the difference is that they are now in a mature industry. I do not think that Islamic finance is necessarily a mature industry and, as such, may need external guidance. The other difference, of course, is that the Big Four accounting firms are regulated externally, something the scholars cannot claim to be. In addition, while the Big Four accounting firms are auditors to the banking majors such as Citigroup, HSBC, Deutsche, Standard Chartered Bank, BNP Paribas, Societe Generale, Credit Suisse, UBS etc, they have different partners involved on each account and Chinese Walls in place.”

Why is the registration of Shariah advisories and the restriction of the number of boards they can sit on potentially beneficial to the Islamic finance sector. The reasons are manifold.

According to [email protected], overall there are 1,141 Shariah advisory board positions available in 28 countries. The average board size is 3.33 scholars per board, across the entire universe. Perhaps more importantly, the top 10 scholars hold 450 out of 1,141 board positions that are available and represent 39.44 percent of the universe. Two Shariah advisories sit on a staggering 85 boards while another on 79 boards.

It does not require expertise in mathematics or quantum physics to ascertain that apart from conflict of interest, it is nigh physically impossible for a single scholar to service so many accounts. He or she would have to be a wonder scholar or a super advisory, arguably with magical powers. And no amount of hard work can mitigate this fact. It would be of course a different case if the scholars are organized as Shariah advisory companies but with more than one Shariah partner, in the same way the accounting, auditing and legal firms are structured.

This impacts on the quality of the Shariah advice and the efficiency of the process. This is important because the longer it takes for a Shariah advisory to advise because of pressure of work due to the number of accounts and less time, the more the cost of the Shariah advisory. This is inevitably passed on the hapless customer and is particularly so in the case of a new product or service.

The next logical step in Shariah advisory is for the eventual phasing out of individual scholars sitting on boards and being replaced by Shariah advisory firms or consultancies, which would have a pool of Shariah scholars with the same hierarchy in terms of expertise and management.

The registration requirement would also weed out the self-styled amateurs from the real experts, who in fact have more to gain from such a development. In Saudi Arabia, a few years ago there was a free-for-all when self-styled Shariah scholars were giving fatwas “legitimizing” the real estate investment offerings of a spate of companies, many of whom were not even registered by the Ministry of Commerce let alone the regulatory authorities. The result was that ordinary investors were exposed to potentially huge losses and only the intervention of the Ministry of Interior (not the Ministry of Finance, nor the Saudi Arabian Monetary Agency (SAMA) saved them from disaster.

Shariah scholars argue that registration requirement and restriction to one board would stint the growth of the global Islamic finance industry. This argument may have been valid in the past, but more universities especially in Malaysia, Jordan and Kuwait etc. are churning out the next generation of Shariah advisories, who are not only competent in Fiqh Al-Muamalat (Islamic Law relating to financial transaction) but also familiar with modern banking and finance.

Similarly, some Shariah scholars argue that in many countries there is no critical mass of scholars. This argument is self-defeating because with a pool of over 1,141 scholars there are enough to go around. Individual scholars too are not restricted to give advice to banks only in their home market. They can do so in other countries as long as it is for one institution per market segment.

However, the spectacular growth of the Islamic finance market may also turn out to be the end of days for Shariah advisory as we know it today. The market is getting sophisticated and bankers also are now much more familiar with the structures of Islamic financial products. A new generation of Islamic bankers are emerging who are conversant with both Islamic financial law and with banking and finance.

As such, Shariah advisories should realize that the more the sector develops the weaker their position becomes. In the halcyon days of Islamic finance, Shariah advisories were put on a pedestal partly because of the ignorance and unfamiliarity of the bankers with Fiqh Al-Muamalat. Today the situation is changed dramatically and scholars are now in a position of weakness.

In Malaysia, for instance, they are rigorously regulated. Even some of the top GCC scholars operating on Malaysian boards are registered with the Securities Commission Malaysia and are subject to the provisions of its act. So, if they already succumb to the Malaysian legal provisions, why not in their own countries.

Shariah advisories can complain as much as they wish to, but if their home regulators decide to adopt the Malaysian example, then they will be obliged to follow the provisions of any new laws governing the registration and regulation of such Shariah advisory in Islamic finance. They can of course take out legal action against their regulator perhaps under restrictive trade regulations (if they exist) or migrate to another jurisdiction where such laws are not yet in place.

In Malaysia, the law is very comprehensive and has provisions on criteria for registration, renewal of registration, fit and proper requirements, and even for foreign Shariah advisories operating in the local market.

Instead of resisting change, Shariah advisories should rise to the occasion to embrace change. Lest, individual Shariah advisories sitting on a cornucopia of Boards, are increasingly becoming an endangered species.

Islamic Finance in Russia – Developments in 2010

It has been a year since the first conference on Islamic finance in December 2009. Over the year there have been quite a number of significant events taking place, all of which will influence the development of Islamic finance in Russia. Among these, the major milestones are the establishment of the Russian Association of Experts in Islamic Finance; the first Halal Expo Exhibition; publication of an authorized translation of the Accounting and Auditing Organization for Islamic Financial Institutions’ Standards of Islamic Finance Transactions; and the first Islamic finance deals on the Russian market.

Islamic Finance in Russia – Developments in 2010

Islamic Finance in Russia – Developments in 2010

As part of the wider growth process of specialists focusing on Islamic finance, the Association of Experts of Islamic Finance was established in early 2010. At present it has 76 members and 11 candidates from seven Russian regions. To become a member, candidates should demonstrate an adequate level of knowledge and obtain recommendations from two existing members of the association.

The first Halal Expo Exhibition took place in June 2010. This was a three-day event, which gathered more than 60 producers of halal goods and services from 10 countries. Companies demonstrated the advantages of their products to the several thousand visitors that attended. The event was supplemented with a seminar on Islamic finance that attracted the participation of representatives of one of the largest Islamic banks Al-Baraka and of the Malaysian Central Bank.

The first publication in Russian of the authorized Accounting and Auditing Organization for Islamic Financial Institutions, or Aaoifi, standards was one of the year’s important events. Assisted by Pepeliaev Group, the Russia Council of Mufties in association with the RAEIF translated and published such standards as “murabaha” (sale on credit), “sukuk” (securitization) and “takaful” (Islamic insurance).

The presentation of these published standards took place in Moscow in October 2010, with the participation of Aaoifi head Dr. Mohamad Nedal Alchaar.

One of the most important developments was investment by a Malaysian fund in facilities related to production and distribution of halal foodstuffs in Tatarstan.

Despite numerous complaints with respect to the tax and legal obstacles to implementing Islamic finance in Russia, it was possible to find adequate solutions for investment that were compliant with both Russian legislation and sharia principles. Russian lawyers, in cooperation with Malaysian colleagues, provided all the necessary support in respect of services required for this investment.

2010 saw issues of several sukuks in Europe, in particular in the field of aviation, i.e. the leasing of aircraft. Although transactions did not involve Russian companies, there are no major obstacles to conducting similar financing projects in Russia. We expect the first Russian sukuk to be issued in 2011, as the market is recovering and Russia appears to be attracting the interest of foreign investors, also from the Middle East and North Africa.

At present, the Russian legal and tax environment is able to accommodate most of the classical Islamic finance transactions, and there is growing number of experts who know the field, and so executing Islamic finance projects in Russia is rather more a matter of selecting the appropriate investment projects than issues relating to tax and legal support surrounding implementation. For the latter, there are appropriate solutions under existing laws.–developments-in-2010/426233.html