FaithWorld

A U.S. court decision to dismiss a case alleging that AIG’s (AIG.N) sharia-compliant businesses promoted religious doctrine looks likely to boost confidence in the industry and lift sales of Islamic products in the longer term.

A Michigan district court rejected on Friday a claim filed by U.S. Marine veteran Kevin Murray in 2009 that the U.S. government violated the constitution by allowing funds from insurer American International Group’s $40 billion bailout to be used to fund its Islamic insurance businesses. (Photo: A logo of Malaysia’s Bank Islam in Putrajaya September 3, 2008/Bazuki Muhammad)

Lawyers say the case is significant for the industry in the United States, which has struggled with a backlash against Islam, and is looking for support from the courts and government to promote Islamic finance as a legitimate business.

Islamic finance has been plagued by criticism in the U.S. that it is a means of funneling funds to terrorists or a plot by Muslims to spread a system of Islamic principles known as sharia has plagued the industry in the U.S.

“The case helps the industry by putting the fringe element that is fearful of sharia in its place,” said Isam Salah, partner at King & Spalding in New York. “But I expect we’ll see more of these kinds of cases as we see a multi-pronged effort to combat all things Islamic in the U.S.”

Two of the Gulf’s top Islamic finance scholars spoke out against efforts to reduce the number of boards they and their peers are allowed to sit on, challenging industry attempts to improve corporate governance. Bankers in the emerging $1 trillion Islamic finance industry say the concentration of hundreds of board positions in the hands of a few sharia scholars leads to conflicts of interest and hampers appropriate supervision. (Photo: Islamic bank ATM machines in Dubai, January 28, 2008/Jumana El Heloueh)

Bahrain-based industry body AAOIFI is drafting rules to regulate scholars’ shareholdings and the number of sharia supervisory boards a single scholar can sit on. “There is no need to limit the number of boards,” Sheikh Nizam Yaquby, one of the most revered Islamic finance scholars in the Gulf Arab region, told a conference in Manama. He sits on several dozen sharia supervisory boards.

He said there was no similar criticism of other groups such as lawyers or accounting firms working for several banks: “Why should (sharia scholars) not be treated like other professionals in the field?”

From Australia to South Africa, governments are scrambling to change the law to accommodate the $1 trillion Islamic finance industry, whose avoidance of toxic debt has looked increasingly attractive since the global crisis. But in the Gulf Arab region, birthplace of Islam and cradle of Islamic finance, governments have taken a more passive approach, which experts say is slowing the industry’s growth. (Photo: A broker at the Karachi Stock Exchange July 5, 2010/Athar Hussain)

“Aside from Malaysia, Sudan and Iran, no government has really owned the Islamic finance project,” Humayon Dar, chief executive of London-based sharia advisory and structuring firm BMB Islamic, said.

In Malaysia, there is a national sharia council that sets rules for Islamic financial institutions. Rules are standardised under the central bank, which has made an active push towards supporting Islamic finance. In the first three quarters of 2010, the Malaysian government accounted for 62.5 percent of all Islamic bonds, or sukuk, issuances globally, valued at $18.4 billion, according to Thomson Reuters data. By comparison, not one sovereign sukuk came out of the Gulf Arab region during the same period.

Bankers in Islamic finance are increasingly outsourcing sharia supervision due to a lack of scholars in the industry, but critics say this is making the sector even less transparent and slowing its development.

The $1 trillion industry rode a five-year oil boom until the 2008 property crash in the Gulf Arab region raised complaints that many of its investment instruments can be seen as mere copy-cats of conventional banking products, threatening the sector’s future growth. (Photo: Dealers at the Amman Stock Exchange on October 11, 2010/Ali Jarekji)

Critics say growth and product innovation is being further stifled by the limited number of top scholars available to join the sharia boards of Islamic banks, some sitting on up to 80 boards.

(Photo: Islamic Financial Centre booth at Malaysia’s Central Bank – High Level Conference 2009 in Kuala Lumpur February 10, 2009/Zainal Abd Halim)

When Malaysian Aida Othman signed up for the new law programme at the International Islamic University in Kuala Lumpur, she did not expect to become one the few women with their hands on the levers of the world’s $1 trillion Islamic finance sector.

Rising global demand for scholars who can advise firms on compliance with Islamic legal principles called sharia is behind the quiet and almost accidental way in which women are growing into a small but powerful force in a male-dominated business.

“There are not many women involved my job,” Aida, who manages the sharia advisory practice at Malaysia’s biggest law firm, told Reuters. “I’m glad to be able to show to young graduates and young scholars in my field if you’re interested enough there is a way into sharia advisory,” the 41-year-old, who went on to study at Cambridge and Harvard, said.

The Islamic finance industry is not short of qualified sharia scholars to meet growing demand, but it relies too heavily on a handful of them, limiting growth potential and raising regulatory concerns, experts say.

Islamic finance experts have previously said the nearly $1 trillion industry is struggling to find scholars with the business acumen, technology and language skills necessary to help the sector evolve. (Photo: A trader at the Saudi Investment Bank in Riyadh, March 18, 2008/Fahad Shadeed)

But consultancy Funds@Work found that more than 300 scholars sit on the sharia boards of Islamic institutions. However, it said that just 20 of these scholars appear on 54 percent of such boards.

Islamic finance is toughening supervision of its powerful religious advisers as shareholders worldwide demand increasing accountability from directors, but key reforms may do little to boost independence and transparency.

Key to these challenges is the small number of scholars advising a growing number of banks on increasingly complex financing structures, raising issues such as transparency of rulings, independence of advisers and how to groom new scholars. (Photo: Dubai Islamic Bank in Dubai, September 28, 2010/Jumana El-Heloueh)

But varying sharia standards, different regulatory approaches and vast disparities in development across markets stand in the way of reforms to streamline and boost supervision, which are critical to growth.

With Islamic finance a $1 trillion industry globally and expected by ratings agency Moody’s to reach $5 trillion in time, students of sharia have more opportunities than ever before to take their skills beyond the mosque doors and into the boardroom.

Reflecting the change in times, many current scholars now prefer to call themselves sharia advisors or technicians to suggest that their duties are more professional rather than simply clerical. (Photo: Dubai Islamic Bank, January 28, 2008/Jumana El Heloueh)

Professionally, it can be a lucrative endeavor. Scholars working on Islamic finance deals are paid consulting fees, depending not only on the services provided but also the seniority and fame of the scholar.

A currency dealer counts Kenya shillings in Nairobi on October 23, 2008/Antony Njuguna

Africa’s Islamic finance industry needs to overcome negative perceptions among non-Muslims to successfully expand into predominantly Christian sub-Saharan Africa, an industry leader has said.

Northern Africa is largely Muslim and countries such as Egypt and Sudan have offered Islamic banking for decades.  Now some lenders are looking to expand into sub-Saharan nations, such as Uganda which is 80 per cent Christian.

The Islamic finance industry waited in vain for a sukuk issue from a Western sovereign in 2009. Will 2010 be any different?

Gilles Saint Marc, a member of the Islamic Committee at trade body Paris Europlace, said on Wednesday at the Reuters Islamic Banking and Finance Summit that there had to be some sukuk issuance in France in 2010 if it was to retain its reputation as being at the forefront of Islamic finance.

However, David Testa, former CEO of Gatehouse Bank, a sharia wholesale bank in the City of London, was sceptical any Western sovereign issuance would be forthcoming.