Mishre Business Blog

Nik Muhamad Hafiz Nik Hassan

Economists estimate that the Islamic finance sector, compatible with Syariah, is now worth between US$300 billion (RM1.05 trillion) and US$500 billion compared with US$200 billion just two years ago.

The number of Islamic retail banks and investment funds number in the hundreds and Western financial institutions are increasingly offering products that comply with Syariah.

These include Citigroup, Deutsche Bank, HSBC, Lloyds TSB and UBS.

During the first half of last year, the value of issued Islamic bonds, or sukuk, more than doubled to US$2.585 billion.

However, the speedy and robust development of Islamic finance has lead to a shortage of Syariah scholars who are well-versed in modern financial transactions.

A.T. Kearney, one of the world’s largest management consulting firms, reported that the current shortage of qualified people in the Islamic banking sector will be aggravated, with the industry requiring up to 30,000 new Islamic bankers in the Gulf States in the next decade.

The selection of Syariah board members followed as part of the marketing strategies for the Islamic financial institutions.

According to Rushi Siddiqui, director of Dow Jones Islamic Market Index (DJIM), for Western or conventional institutions wishing to enter Islamic finance, their initial credibility is only as good as the identity of their Syariah supervisory board.

The latest update of The Islamic Finance Syariah Supervisory Database provided by the Islamic Finance Information Service (IFIS) in London, shows that currently, there are 187 Syariah scholars supervising the total of 150 Islamic financial institutions worldwide.

The most sought after Islamic scholar is Sheikh Nizam Yaquby from Bahrain, who is supervising nearly 40 institutions, followed by Dr Abdul Sattar Abu Ghuddah from Syria, Sheikh Yusuf DeLorenzo from the United States, Dr Mohammed Ali El Gari from Saudi Arabia and Dr Mohd Daud Bakar from Malaysia, who are supervising 29, 25, 22 and 18 financial institutions respectively.

This database provides evidence that the top Syariah scholars monopolise the industry, because of their academic credibility and vast experience in the industry.

A conventional bank may have its legal adviser or business adviser, but these advisers are different from Islamic banks’ Syariah advisers.

The management of the conventional bank is not bound to take any advice given by its legal and business adviser; but Islamic banks’ management are obligated to adhere to the decision made by their Syariah advisers when the product proposed contradicts Syariah principles.

The board should consist of trustworthy scholars who are qualified to issue fatwa on financial transactions.

In addition, they ought to have considerable experience and knowledge of modern financial dealings and transactions.

The articles of association should provide for the existence of a Syariah board, whose fatwa and resolutions should be binding upon the financial institution’s management.

There are different practices in the way Syariah advisory boards are positioned and structured in the countries involved in Islamic finance.

In some cases, this is already becoming more developed and centralised, as in Malaysia; where a National Syariah Advisory Council has been established at Bank Negara, whose decisions are expected to be upheld by the Syariah committees of Islamic banks and takaful, or the Islamic window, within conventional banks and insurance companies.

At the same time, the Syariah Advisory Council of the Securities Commission oversees Syariah matters related to capital markets and the Syariah Advisory Council of the Labuan Offshore Financial Authority (Lofsa), whose members also consist of prominent Syariah scholars, advises offshore companies in Islamic financial businesses.

At the international level, Western banks have created independent Syariah advisory boards consisting of international Syariah scholars to offer advice.

Some Syariah scholars, such as Dr Ali Mohamed El Gari and particularly the late Dr Zaki Badawi from the United Kingdom, have opined that once a Syariah board was engaged directly by a bank, there was a conflict of interest, to avoid which Syariah scholars should be hired through a consultancy and not work directly with the institutions.

As a consequence of high demand and lack of supply, scholars well-versed in Islamic finance have led to rising consultation fees.

The fees charged for Syariah advice are closely guarded secrets and much of what is received is reportedly paid to charity.

However, some banks say they have paid up to US$500,000 for advice on large capital market transactions, a dramatic increase from the levels seen a few years ago. This provokes criticism from some observers who dub the industry “a cartel”.

However, Sheikh Hussein Hamid Hassan, who is a member of the Syariah Advisory Council of Lofsa, argues that the fees simply reflect a shortage of Islamic scholars who understand modern finance.

And the fees, not paid for the fatwa per se, but for the time needed to analyse financial documentation, which sometimes runs to hundreds of pages.

There is nothing contradictory here with the teachings of Quran that Islamic scholars should be excluded from compensation.

Because of the rapid changes and expansion of the Islamic financial sector, it is essential for the participant countries to have strong and continuous talent management and development.

Sheikh Muhammad Taqi Usmani, a Syariah scholar from Saudi Arabia, suggests that developing institutions should train scholars with knowledge of modern financial transactions and their relationship with Islamic jurisprudence, and are competent in both Arabic and Islamic jurisprudence.

This is to develop the necessary skills to analyse current economic skills and provide the Islamic alternative.

Recently, there have been several initiatives in regard to sustaining and improving the level of expertise in the industry through education and training.

Bank Negara’s efforts through the International Centre for Education in Islamic Finance has recently been granted university status by the Higher Education Ministry.

Malaysia is trying to position itself as a centre of Islamic finance under its project launched by Prime Minister Datuk Seri Abdullah Ahmad Badawi in August last year.

The country plans to invest heavily in human capital development and create a pool of scholars and Islamic finance experts.

Islamic finance is no longer viewed as an exotic niche, as mentioned recently by Bank Negara governor Tan Sri Zeti Akhtar Aziz, but will move into the mainstream of banking.

Eventually the financial products will be so widely accepted that people won’t even notice or know. Islamic finance is also changing the stereotyped view many Westerners have of Islam.

Even though Western banks entered the field to make money, the thing about money is that it has no view on religion. It is blind.

So chasing money can also bring people together; it can unite. In this regard, the role of the ministry of scholars is greatly enhanced in serving the world community by spreading the teaching of Islam through finance.

The writer is a senior executive in the Islamic Financial Services Unit, Labuan Offshore Financial Services Authority (Lofsa). The views expressed are his own.

This entry was posted on Monday, January 29th, 2007 at 11:25 am and is filed under Business & Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.