FaithWorld

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.”

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 defense in the British High Court that one of its wakala, or agency deals, wasn’t sharia compliant.

Read Shaheen Pasha’s full story here.

Follow FaithWorld on Twitter at RTRFaithWorld

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.

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.

Traders at the Saudi Investment Bank in Riyadh, 8 Oct 2008/Fahad Shadeed

It’s a myth to assume Islamic finance products are safer than conventional products and underlying risks should be studied more carefully, Qatar’s top regulator said at the Davos World Economic Forum meeting on Wednesday. Despite being billed as a safer alternative to traditional banking because assets must underpin deals, Islamic bondholders have found they may not have any more legal safeguards than conventional counterparts in the event of default.

Such issues were highlighted after sukuk — or Islamic bonds — had the first ever defaults last year.  Sukuk, one of the flagship products in the $1 trillion Islamic finance industry, are structured as profit-sharing or rental agreements and returns are derived from underlying assets because Islamic laws prohibits paying or earning interest.

“There is some assumption that some of it is cosmetically more comforting, but when so many Islamic instruments are now trying to mimic the effect of conventional products, you need to examine if they carry the same risk profile,” Philip Thorpe, chief executive of Qatar Financial Center Regulatory Authority, told Reuters.

Eager to attract Middle East investment but uneasy about linking faith and finance, the French parliament has opted for some legislative sleight-of-hand to pass a law allowing the issuance of interest-free Islamic “sukuk” bonds. The move is part of France’s two-year drive to create a new European hub for Islamic finance, whose value globally is estimated at $1 trillion. But instead of introducing a separate bill, which would attract attention to it, the governing UMP party tucked the proposed change of French trust law into a larger bill on financing reform for small and medium-sized companies. And it chose to do this by introducing it as an amendment in the second reading of the bill — the one that usually gets fewer headlines. (Photo: French National Assembly, 15 Sept 2009/Charles Platiau)

Sounds confusing? That seems to be exactly what the legislators wanted. As my colleague Tamora Vidaillet wrote here in an earlier post entitled “France courts Islamic finance, as long as it’s not too obvious,” bankers, politicians and goverment officials are clearly uneasy about promoting Islamic finance in France. “There is a clear sense of apprehension over how Islamic finance would fit into French society, where the policy of laïcité – the strict separation of church and state — tries to keep anything religious out of the public sphere as much as possible,” she wrote. “Many admit that French companies and banks may hesitate to do anything that uses the label Islamic as this could highlight sensitivities over social and cultural divides.”

The opposition Socialist Party opposed and attacked the change. “We are introducing Islamic law into the French legal framework. This deeply shocks us, it is unacceptable.” said Socialist MP Henri Emmanuelli. “When Muslims are rich, we try to attract them. When they’re poor, we expel them.”

Is diversity of opinion boon or bane for Islamic finance?

Market participants gathered for a conference at Thomson Reuters’ London headquarters earlier this week discussed the need for more convergence in the industry estimated to be worth $1 trillion.

Of particular focus was the role of sharia scholars who rule on whether investment products are in line with Islamic teachings.

“Sharia scholars who sit as advisers have a crucial role to play in retaining public confidence,” Rifaat Ahmed Abdel Karim, secretary general of the Islamic Financial Services Board, an international standards-setting body for the industry, told the forum.