Islamic banking draft moots five-member Sharia board

MUSCAT: A five-member Sharia board, exclusive branches for window operation, clear cut segregation of conventional and Islamic banking with separate teams of people and accounts and a 12 per cent capital adequacy ratio are the main highlights of the Islamic Banking Draft Framework (IBRF) presented by the Central Bank of Oman before chief executives of banks in Oman.

CBO has organised a consultative meeting for top officials of banks on January 25 for presenting the draft Islamic banking rules, which the apex bank’s consultants Ernst & Young termed as a ‘unique model.’ The banking regulator is still working on the regulation, and may incorporate changes on the basis of feedbacks from banks, before announcing it. Ernst & Young has advised the CBO on fixing of lending limits, single borrower limit, writing of rule books, procedures for reporting structure for Islamic banks and formation of Sharia board.

Of the five-member Sharia board, three should be experienced Islamic scholars and two should be from relevant field, either a professional in Islamic law or Islamic accounting, chief executive officers of two leading banks, who attended the consultative meeting, told Times of Oman. CBO’s draft regulation also stipulates on separate branches for Islamic banking window operation of conventional banks.

“There needs to be a separate team of people for accounts, information technology, marketing and compliance for Islamic banking line of business. There is also a separate head for Islamic banking. However, the back office support can be common for conventional and Islamic banking.

The whole idea is to create a perception among general public that these are two distinctly different lines of business,” said a chief executive of a bank, who does not want to be named. The draft regulation also insists on a 12 per cent capital adequacy, with a minimum paid up capital of RO10 million for starting window operation.

Another major suggestion for window operation is that funds can be pumped into Islamic line of business by a conventional parent bank, but Islamic banking operation can not transfer money for using it in conventional banking. “This could create problems at the macro-level, at least initially.

For instance, if all banks put together transfer RO1 billion into Islamic banking initially and in case half of the total funds can not be deployed due to lack of demand for credit, then the money can not be transferred back to conventional line of business for effectively deploying in the financial system,” noted another CEO of a bank, who viewed it on a macro economic level.

Another major concern expressed by bankers is the lack of availability of Sharia scholars to become board members of Islamic banking. “Everybody is getting into Islamic banking now. We are talking about 30 Sharia scholars. It is difficult to get people with relevant experience and it is going to be a challenge.

Even the region does not have that many people. This is what we are discussing with the Central Bank of Oman,” noted the official. It is also not clear whether a Sharia scholar can be a member of two boards.

Bankers also expressed their concerns on segregating risk management for Islamic banking line of business from conventional banking. “At the end of the day, risk is the same whether it is Islamic banking line of business or conventional line of business. And therefore, it should be on the parent bank and not separate it for Islamic banking,” noted the banker.

Sources also noted that there will be severe competition, with the imminent entry of two Islamic banks.

Gulf Islamic finance eyes single Sharia board

The Islamic finance industry in the Gulf is moving towards a centralized Sharia board as scholars from leading countries join a common United Arab Emirates entity, a leading Islamic scholar said.

The United Sharia Board, which began drawing scholars from local Islamic institutions two years ago, now has two members from Saudi Arabia and one scholar each from Kuwait and Qatar, Scholar Hussein Hamid Hassan said at the launch of a policy briefing on corporate governance in Islamic finance.

“We have almost one united sharia board for the Gulf,” he said. “I think within five to 10 years we will have one sharia board for everyone.”

Sharia scholars serving the United Sharia Board also represent individual bank Sharia boards, thereby transferring the Islamic rulings, or fatwas, issued by the centralized board to their individual institutions across borders.

While progress has been made, there are still differences in interpretations of Islamic law that is preventing a quicker adoption of a centralized Gulf board.

A unified Gulf-wide entity would boost corporate governance within the growing industry, said Nassar Saidi, executive director of Hawkamah, which issued 55 recommendations to Islamic financial institutions in its policy paper.

Mr. Saidi added that creating a centralized board is a first step but would need support from regulators to give enforce its fatwas.

The policy report, which was based on a survey of 22 Islamic institutions across the Middle East and North Africa, also determined that more should be done to limit the number of the same Sharia scholars serving on multiple boards.

“You shouldn’t have multiplicity which can create a conflict of interest,” he told reporters. “If you have well recognized scholars on one central board, that would help.”