Sunday, 15 September 2013

Islamic scholars propose new sharia board model

A group of Islamic scholars is proposing a fresh solution to charges that banks' sharia boards are open to conflicts of interest: create partnerships between the boards and Muslim depositors, to insulate the boards from pressure exerted by bank managements.

Sharia boards, composed of experts in Islamic financial law, supervise Islamic banks' activities and products to make sure they conform to religious principles, such as bans on interest and pure monetary speculation.

Traditionally, banks appoint prestigious scholars to their sharia boards and pay them handsome fees and retainers. This has left the system vulnerable to charges of conflict of interest: the scholars are being paid by the institutions which they are supposed to be supervising impartially.

A group of scholars in South Africa, led by Durban-based Ebrahim Desai, a senior figure in the city's Muslim community, proposes that Muslim depositors in each bank fund a sharia compliance body that would be created separately from the bank.

The body would then hire a sharia board to supervise the bank. In this way, the scholars on the board would not be appointed by or report to the bank's management, and would not have a direct financial relationship with the bank.

"We seek a neutral and balanced position," Desai said by telephone, adding that freed of subjection to bank managements, sharia boards would be able to play more strategic and powerful roles in governance.

"This would be in line with the larger interest of the Muslim community in upholding sharia law by maintaining the ultra-independence of the sharia supervisory board."

Emraan Vawda, a colleague of Desai, argued that by their nature, banks were ill-suited to policing their own Islamic activities. "Commercial concerns in the overwhelming majority of Islamic banks far outweigh genuine commitment to Islamic values and precepts," he said.


The proposal is likely to meet with considerable scepticism in the Islamic finance industry. Desai said many institutions had approached him to discuss his proposal but he declined to name them, saying the talks needed to be kept confidential.

One potential issue is whether depositors would be willing to fund the sharia compliance bodies; to compensate for this expense, they might demand higher returns on their money placed with the bank, which the bank might not be willing to provide.

Banks themselves might be reluctant to give authority over their activities to a separate body, while highly paid Islamic scholars might prefer to continue working for bank managements rather than being subject to groups of depositors who could prove more awkward and demanding.

One sharia board member in Dubai, who declined to be named because of the sensitivity of the issue, said the scholars in the South African group were not experienced in the financial world and were instead mostly community-based.

Such scholars can command great influence within their communities and give products informal endorsements to win mass appeal, but they cannot necessarily rule on the finer points of financial contracts, he said.

Desai and Vawda said they had served eight years on the sharia board of South Africa's First National Bank (FNB), the retail arm of South Africa's second-biggest bank FirstRand , where they provided their services at no cost to FNB.

By avoiding financial remuneration, the scholars hoped their decisions would be free of influence, and they rejected several offers to be on FNB's payroll, Desai said. "We were not dictated by money but dictated by principle."

However, working for free is unlikely to become a new model for the mass of Islamic scholars, given the lucrative fees available in the industry.

Desai, Vawda and the rest of FNB's sharia board resigned in July, complaining that the bank had failed to consult with the board on several occasions, and hired a new head of its Islamic finance business without input from the board.

FNB said it aimed to appoint a new sharia board by the end of this year and would draft clear rules and roles for the board, which would not include approving appointments of senior personnel. It said the previous head of its Islamic finance business resigned after the bank conducted an investigation into "internal processes and practices of the businesses aligned to internal governance practice".
(Reuters / 13 Sep 2012)
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Tuesday, 3 September 2013

Islamic Finance: London Eyes Becoming Western Capital of Sharia-Compliant Banking

London is vying to be the capital of Islamic finance outside of the Muslim world, says the city's Deputy Mayor Sir Edward Lister.
A task force on building the UK's Islamic finance industry has been at work since early 2013 and London will host the World Islamic Economic Forum in October.
"The task force has just started and its aim is to make it easier for banks in London to have Islamic products, which is still quite a new concept to any of them," Lister told a press conference, reported Reuters.
"Only now people are beginning to understand what the products actually mean and how they comply ... What you will see is a lot of companies introducing those products."
Globally, the Islamic finance industry is forecast to be worth $2.6tn (€1.9bn, £1.6bn) by 2017. It has grown by around 30% each year since the millennium and consultancy firm Oliver Wyman predicts that there will need to be at least 150 Islamic finance institutions by 2020 to meet the ever-growing demand.
There are more than 20 UK banks offering Sharia-compliant products, such as HSBC and RBS. There are also three Sharia-only institutions, including the Islamic Bank of Britain (IBB).
By increasing the number of Sharia-compliant financial services in London it will be easier to facilitate investment in the UK from Islamic investors.
What is Islamic banking?
According to IBB's website: "Islamic banking operates without interest which is not permitted in Islam, as money in itself is not considered to have intrinsic value.
"As interest is income generated from money, it is seen as effortless return. Instead money must be used in a productive way and wealth can only be generated through legitimate trade and investment, which involves an element of risk.
"Islamic banking therefore uses various principles recognised as Sharia compliant such as Ijara (leasing), Musharaka (partnership) and Wakala (agency agreement). Islamic banks use these principles to develop Sharia compliant financial products, such as savings accounts and home finance, which allow Muslims to conduct their finances in an Islamic way."

(International Business Times / 19 Sept 2013)

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