FaithWorld

Islamic finance outsources scholars’ supervision to grow

finance ammanBankers 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.

finance amman 2“In banking you can lose a deal in one day,” said John Sandwick, a Geneva-based Islamic wealth and asset manager. “If the scholars are not responsive, and we know it is literally impossible for one man to provide so much work, then everyone suffers,” he said. (Photo: An Islamic bank in Amman July 8, 2010/Ali Jarekji)

Instead of maintaining their own costly sharia boards with prominent scholars, bankers are increasingly using consultancy firms that directly deal with the scholars.

Islamic finance relies on too few of its scholars

saudi traderThe 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.

Sharia boards face scrutiny amid financial crisis

bank sharia

A teller at Bank Syariah Mandiri in Jakarta February 17, 2010/Supri

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 around $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 … 40 to 50 percent of what’s being sent out is form over substance,” said Jawad Ali, managing partner at Dubai-based law firm King & Spalding.  “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.”

from Summit Notebook:

Fatwa shopping? Not for Barclays

The limited number of Sharia scholars has meant the same
group of men are on various advisory boards which has led to criticism
that people can go "fatwa shopping" and that scholars are in it for the money.

Not so, says Harris Irfan, head of Islamic products at
Barclays Capital.

"We're not out fatwa shopping," he said at the Reuters
Islamic Banking and Finance Summit. "We want to work with the
scholar who's willing to say 'no' (to non-Sharia products)"

A study last year by Funds at Work, a consultant for the
fund industry, looked at scholars' engagement by financial firms
in the Gulf Arab region. It found the top 10 scholars hold about
46 percent of all available positions in the region.