Database of Islamic Finance Q&As

Sharia boards face scrutiny amid financial crisis

Sharia boards face increased scrutiny and criticism as high-profile corporate defaults and cautionary comments from respected scholars cast a harsh light on the fast growth of financial products touted as Islamic.

Experts say rapid growth in the industry, which some estimates value at $1 trillion, has put more pressure on scholars to sign off on increasingly complicated structures, wrapped in sharia packaging.

‘In areas that have to do with capital guarantees, fixed income and derivatives, about 40 to 50 per cent of what’s being sent out is form over substance,’ said Jawad Ali, managing partner at Dubai-based law firm King & Spalding.

Ali said while scholars have good intentions to produce sharia-compliant products, concerns arise when complicated structures like hedge funds and derivatives come into play – areas that mimic conventional products but are being touted as sharia financing by banks and attorneys.

‘Mistakes do happen when a sharia board focuses on the instrument being presented and there is little scrutiny on how the structures are being implemented,’ he said.

Influential scholar Sheikh Taqi Usmani rocked the industry last year when he said many structures presenting themselves as Islamic didn’t meet the definition of true sharia compliance, raising concerns in the industry that some deals could be deemed un-Islamic after investors had bought them.

Those concerns increased when Kuwait’s Investment Dar – which defaulted on a $100 million sukuk last May – presented a legal defence in the British High Court that one of its wakala, or agency deals, was not sharia compliant.

Such comments are tarnishing the reputation of sharia boards, said Mohd Daud Bakar, Islamic scholar and managing director of Amanie Islamic Finance Consultancy and Education.

‘If any company claims deals aren’t sharia compliant after they’ve already been approved by their own boards, it would be very painful for the industry,’ Bakar said, adding the relationship between a sharia board and business players structuring a deal had to be based on trust.

But Ali said there have been violations of that trust by eager bankers and lawyers, looking to cash in on the industry and push through a deal by any means necessary.

‘Sharia boards can’t be policemen,’ he said. ‘It’s completely unreasonable to expect a sharia board member to read every single page of a document. There has to be a level of trust with lawyers and bankers.’

Part of the problem is the scarcity of sharia scholars – particularly those with business acumen – available to oversee such transactions.

According to a study by consulting firm Funds At Work, in the GCC there are 755 sharia board positions in total. But 46 per cent of those positions are filled by the same 10 scholars.

The same few experienced scholars are stretched too thin, said Harris Irfan, head of Islamic products at Barclays Capital.

‘The scholars take their responsibilities seriously,’ he said. ‘But I have frequently come up against bankers and lawyers that have glossed over thorny issues that might cause a problem in sharia and hoped that scholars would just sign off.’

And when a deal comes into question, as in the case of Investment Dar which said a fixed return promised in its wakala deal ultimately constituted interest, it’s the sharia boards that get hit with criticism.

To prevent such happenings, sharia scholars must take responsibility, Bakar said, regardless of their many obligations, to pore over every page of a contract and thoroughly understand the terms of a deal before signing it off.-Reuters

Britain’s first sharia-compliant insurance firm launched

LONDON (AFP) — Britain’s first sharia-compliant insurance company was launched Monday, offering motoring policies in line with the Islamic legal code.

Salaam Halal insurance uses Takaful principles, whereby the risk is spread between all policy holders. In contrast, conventional insurance policies shift the risk from the policy holder to the insurance firm.

People taking out a policy with Salaam Halal pay contributions into a pool, with that money then put into sharia-compliant investments — avoiding companies that are involved in alcohol or pay interest.

Full Article

Shariah compliant credit cards

KARACHI: Multinational Standard Chartered Bank (Pakistan) is the first to introduce Islamic credit cards in Pakistan. Its Saadiq VISA Credit Card is the country’s first Shariah-compliant Riba free (interest free) credit card, approved by an independent Shariah Supervisory Committee.

The aim of introducing this Islamic card is to facilitate Muslims who would like to use credit card facilities according to the laws of Shariah as they avoid conventional credit cards due to religious preferences, say its promoters.

Also, the card aims to facilitate those customers who are not satisfied with paying interest for their usual cards. The Islamic card operates on ‘Ujrah’ (Islamic mode of finance) concept which is based on fee structure meaning that only a fixed fee will be charged to the customer. The card would not be imposed with any floating percentage fee dependent on the outstanding balance.

These cards were developed by an international team of professionals with Islamic financial expertise who ensured that these credit cards were within the guidelines on Islamic finance. Of the initial team, two international Shariah advisers cleared its authorisation namely Dr Sattar who holds the positions of Shariah adviser and director, Department of Financial Instruments at Al Baraka Investment Co of Saudi Arabia, and Sheikh Nizam Yaquby, who is an Islamic scholar from Bahrain.

Apart from what has been mentioned above the entire fee structure is based on fixed fee unlike conventional cards where fee is a percentage of the outstanding amount or transaction amount.

The customer would have the option to pay any amount less than the total outstanding balance (keeping the minimum payment at 5 percent of the balance, or a fixed amount, whichever is higher.) The remaining outstanding balance after the payment would be transferred to his Service Account which is a fixed monthly fee. —Faryal Najeeb

CIMA takes Islamic bank laws into account

ONE of the UK’s leading accountancy bodies will this week try to cash in on the growing popularity of Islamic banking with the launch of an Islamic finance qualification.

The Chartered Institute of Management Accountants (CIMA) will become the first accountancy body in the UK to train its members in Islamic financial law, which prohibits the receipt and payment of interest. Investments in industries such as alcohol and gambling are also banned.


Non-Muslims Favor Islamic Finance

Islamic finance, an industry picking up steam worldwide, is increasingly appealing to non-Muslims who find the Shari`ah -compliant service much fairer than traditional banking.
“The terms are better than on conventional loans,” David Ong-Yeoh, a Malaysian public relations executive, told the New York Times on Thursday, November 22.

Turkish Weekly 

Let’s Make a Halal Deal

Let’s Make a Halal Deal

A guide to the financial world’s Islamic advisers.