Standardization a must for universal acceptance; Sukuk – a Shariah perspective

Standardization a must for universal acceptance; Sukuk – a Shariah perspective

By: El Waleed M. Ahmed is a Legal Consultant and Head of Foreign Affair Department, Kuwaiti Lawyer Firm (Yaqoub Al-Munayae and Aisha Al-Shaiji Law Firm), Al-Jabriya — Kuwait. LL.M Degree “Master of Laws” From Temple University School of Law-Philadelphia-PA USA. E-mail: elwaleed@kuwaitilawyer.com http://version2.arabtimesonline.com/client/faqdetails.asp?faid=316&faqid=9 Shariah law is open to interpretation and religious boards frequently hold different views on key Shariah issues. Furthermore, Islamic jurisdiction is not bound by precedent and legal opinions may deviate from previous decisions made by other Shariah scholars. Thus, a Shariah board has considerable discretion in the interpretation of Islamic law and may choose any school of thought to inform its decision-making process. Shariah boards in the Middle East and elsewhere that approve Islamic Sukuk for sale to Muslims hold slightly different interpretations about what is acceptable, making Islamic investor nervous about buying Islamic bonds from outside their own jurisdiction. Complex Sukuk structures involve challenging procedures and require extensive and costly advice — both legal and religious — in addition to diverse sets of skill and resources to make them work. Therefore, corporations and banks often shy away from such structures due the legal risks and the potential costs of pioneering such instruments. Notwithstanding this, Shariah is dynamic and, like all jurisprudence, open to various interpretations. The Achilles’ heel in the global acceptance and growth of Islamic finance is the level of standardization of Shariah boards’ rulings. There is yet to emerge a consistent ruling of Islamic law on the religious compliance of certain assets and transaction structures in terms of Shariah law. Shariah boards from different Islamic financial institutions may have different interpretations and advise differently because, in Islam, there is no generally accepted codification of the jurisprudence. In a conventional sense, that can lead to uncertainty and confusion. In this article I will highlighted, the necessity for a unified Shariah board at a national and international level, and mention the recommendations regarding the role of the Shariah board in the harmonization and configuration of various Shariah board rulings across the globe to develop new Islamic finance instruments. Functions and role Broadly speaking, the three key functions of Shariah boards are: * to provide advice to Islamic financial institutions; * to supervise and audit transactional procedures of Islamic financial institutions; and * to supervise and actively participate in the creation of innovative Shariah compliant investment and financing products and services. The effects of non-standardized Shariah rulings: Uncertainty and confusion The absence of a universally accepted central religious authority is largely a result of the lack of uniformity in religious principles applied in different Islamic countries across the world. Shariah boards at individual banks have their own way of defining what is and is not Islamic banking. This results in different transactions being interpreted differently, hence leading to a single identical financial transaction having various interpretations across different Shariah boards. This causes uncertainty about what is the acceptable way to do business in the Islamic banking and finance system. Further, the assessment of risk for both the financial institution and the customer can become complicated. The way Shariah advisory boards of Islamic financial institutions function thus remains a source of confusion. Not replicable The difference in interpretations of Shariah laws means that one Islamic bank may not be able to “copy” another Islamic bank’s products, and this can stifle the growth and integration of Islamic finance at both national and international levels. Sluggish market The lack of standardization is a contributory factor to the sluggish trading level on the Sukuk market. This prevents investors from knowing what risks they are assuming when they invest and increases the costs associated with Sukuk issuance. Standardization needs Conformity or similarity among the Shariah supervisory boards of Islamic financial institutions is urgently required to extend the possibilities in concept and application in the industry. Establishing Shariah boards at a global and Central Bank level is required to expedite and develop some standard guidelines in the conduct of Islamic financial transactions. Standardization is necessary to circumvent any contradictions and inconsistencies between different Fatwa rulings and their application by these institutions with a view to activating the role of the Shariah supervisory boards of Islamic financial institution. There is also the important factor of mutual recognition of financial standards and products across jurisdictions. The progressive harmonization of Shariah, in this respect, needs to be viewed as an attribute towards greater international financial integration. Moreover, supervision and regulation at the national and regional levels are necessary safeguards against potential improper practices. Such improper practices can cast a doubt on the credibility of all participants. Shariah scholars from around the world should contribute towards greater understanding and international convergence. Such convergence and harmonization can only happen with greater engagement among the regulators, practitioners and scholars in Islamic finance in the international community. The existence of a unified Shariah board via a council representing different Islamic school of thought, nationally and internationally, is necessary. This would facilitate the conformity of different types of financial services to Islamic law and in addition would define cohesive rules to expedite the process of introducing new products. The early engagement of a Shariah supervisory board in an Islamic financial institution, together with other financial personnel, in the creation of a new Sukuk is of utmost importance so as to build a solid Islamic foundation for the new product. It also paves the way for speedier creation of the Sukuk. Furthermore, it is crucial that the Shariah board actively participates in the creation of Sukuk, in addition to their supervisory role. Necessary steps In order to promote a global standard for Islamic finance instruments, there are a couple of key steps that must be taken. Adoption of AAOIFI standards The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has taken the lead by preparing Shariah standards. These have been adopted by a number of government authorities and Central Banks, which will form an avenue for Shariah compliance and also product innovation. Cooperation and collaboration Collective effort with international collaboration between major Islamic financial regulatory bodies such as the Islamic Financial Services Board (IFSB), AAOIFI and Central Banks in Islamic countries is important in strengthening the fabric of Islamic finance. Recommendations: Islamic finance instruments, particularly Sukuk, are becoming an increasingly important consideration — for both Muslims and non-Muslims — from the perspective of investment and product innovation. The issuance of Sukuk is a vital mechanism for raising money in the capital markets. Sukuk have unique characteristics and offer significant benefits, unlike other Islamic banking vehicles. At the same time, a few recommendations are essential for continuous improvement of the functions of Shariah boards and for achieving a global standard for Sukuk. These are as follows: (1) Training in economics, investments and legal issues related to investments and product innovation. The lack of knowledge about modern economic and legal issues can weigh down the ability of Shariah scholars to issue well-informed rulings on financial products and investment activities. (2) Placing specialized Shariah scholars onto separate Shariah boards for different projects to work more efficiently on projects best suited to their particular areas of expertise. This process will ensure that the right scholars in the right numbers develop, certify and supervise the financial products and services endorsed by Islamic financial institutions. (3) Shariah boards should be independent from financial institutions to ensure transparency and efficiency when giving opinions on the proposed contracts and transactions. (4) Working closely with financial institutions and lawyers so as to develop new Islamic financial instruments. (5) There is a nagging concern about the availability of suitably qualified Shariah advisors. Their numbers need to be increased in order to avoid stretching the current advisors. This will allow more Shariah compliant transactional procedures and more time to be spent with economists and investment practitioners to develop new Islamic financial products. (6) Financial institutions need to develop operating procedures to ensure that no form of investment or business activity is undertaken that has not been approved in advance by the religious board. (7) From the outset of the Sukuk structure, Shariah advisors should make an inspection to ensure the product concept and its process flow is fully implemented according to the Shariah. Shariah advisors and lawyers should work hand in hand to thoroughly review the terms and conditions of the Sukuk contract. Conclusion Flexibility is a major strength of Islamic finance. This implies that a broad variety of products can be tailored to each client’s needs. The difference in opinion between rulings of different Shariah boards is in a way advantageous, as it brings about more innovation and creates new room for Sukuk structures and Islamic finance instruments. In the process of providing remedies, the principles of Shariah are not to be compromised as they are essential in dynamic markets like the current Islamic financial market.