Islamic finance debate: Prospects and problems of Shariah-compliant finance

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MNA, AAOIFI Islamic finance – meaning instruments deemed sufficiently Shariah-compliant by some group of Shariah scholars – has been around for quite a while now. How successfully is it developing – are we talking about a niche market or a mainstream market?

KH, CBB A mainstream market has established practice, diversity of product, defined laws and regulations and a critical mass of players. Defined like this, Islamic finance is still a niche market. There are too many loopholes in terms of the practice, in terms of the laws and regulations and in terms of critical mass – so far the largest tickets have been through Islamic windows, not Islamic banks. We are not yet a mainstream market.

AAK, GBCorp I would say that Islamic banking is evolving at a very steady pace, and as in any evolutionary process it is also subject to great challenges. Due to its interest rate neutral characteristic, the current stressed market has catalysed this growth process so it will have a much bigger global presence and we will see Islamic finance tapping into newer sectors in the industry. But the greatest challenge to Islamic banking comes not from outside market influences but from within.

MNA, AAOIFI Nik, how do your investors react to Islamic instruments or Shariah-compliant instruments?

NNT, DIFC The key things that I come across in meeting various investors – especially those who are new to Islamic finance or Islamic financial institutions – are simply the elements that are unfamiliar in non-Islamic transactions. So the avoidance of usury, avoidance of gharar (excessive speculative risk), avoidance of unbundled risk such as gambling (maysir), and the illegal sectors (haraam) activities. The mixing of moral issues, social justice and financing creates the structures and these structures are complex and unfamiliar to new investors. For example, there must be underlying assets for transactions, an idea primarily driven by the rationale in Islamic law that borrowers do not over-borrow.

These principles are the kinds of things that tend to be discussed more when I talk to various investors who are interested in Islamic finance, and it is important because of what it basically does – it links finance with the productive flows of the economy. That message has gone across very well but the source of unfamiliarity is how products are structured to meet these objectives.

MNA, AAOIFI So do you feel that one attraction of Islamic financing is this notion of more ethical financing structures?

AAK, GBCorp I would say that ethical financing in relation to Islamic finance is not just notional but fundamental. The ethical financial structure is what differentiates Islamic banking from conventional banking. Ethical banking does not just mean that we do not participate in transactions that are deemed ‘non-Sharia compliant’, such as dealing in alcohol, gambling, drugs, etc, but it goes beyond that to encompass a structure that is fair in its transparency, risk mitigation and asset-backed transactions. This is evident in Islamic banking’s approach towards profit sharing, taking into account the client, the market and the sector.

The challenge

ND, Trowers & Hamlins I think one of the questions we probably ought to be asking is whether we think that goal or that principle is genuinely being pursued through the Islamic finance market, or the Shariah-compliance market, whichever terminology we wish to use.

The challenge is to put in place a system of financing that is in compliance with the Shariah and in compliance with relevant laws and regulatory constraints but which also produces a return. Islamic banks have shareholders and while, in theory, those shareholders accept the notion that their capital should be more at risk than the capital of the investors and shareholders in their conventional counterparts, I am not sure if that is genuinely the case if you look at how the market has developed.

People are beginning to scrutinize Shariah compliance more carefully. Obviously the AAOIFI pronouncements in January and the discussions that took place in January and other more general continuing debates are trying to bring people back to what is at the core of this industry. Yes, it is to provide movement of capital, it is to provide finance, but should it be providing finance for homes, for hospitals, for schools, for universities, or should it be providing finance for institutional funds that are free then to do whatever they like with the funds.

So it strikes me that one of the fundamental challenges is in complying with Shariah goals, while at the same time operating within what has thus far inevitably been a conventional wrapper that has potentially constrained market growth.

AK, Standard Chartered I don’t completely agree. If you look at the liability side of the Islamic banks’ balance sheets, the profits that they declare on their liabilities to the region’s customers are generally speaking higher, which is proof that they are sharing the rewards.

MNA, AAOIFI Some people say that a sizeable share of the profit had been generated by real estate investments.

AK, Standard Chartered But the fact remains that the profits are being shared.

MNA, AAOIFI I am going to play the devil’s advocate here, so whatever I say may not represent my own beliefs and convictions. From what you are saying, it can be argued that Islamic banks’ customers are exposed to the economic and business cycles. Returns that customers get depend on the performance of the Islamic banks’ investment portfolio, which in turn are directly affected by the economic and business cycles. It depends on the skills of Islamic banks in managing their investment portfolios to ensure that their customers benefit fully from favourable economic conditions and that they are not hugely adversely affected from unfavourable economic conditions.

AAK, GBCorp Market fluctuation is an accepted fact of the economic cycle. First of all, if we define the wave you are talking about we can say that the markets are sometimes high and at other times low. In conventional banking the wave is created by speculation, where when the market is high it is over-speculated, making it unreal, and then going back to reality as it falls. However, in Islamic banking it is not as pronounced because it is asset-backed, tangible and almost capital protective, creating a certain cushion to it. Islamic banking does not expose the investor to the speculative trail and even when the market is high or low it is based on real price fluctuation.

IAA, IIFM Absolutely. I don’t think just because you have shared in the higher profit you will share in the higher loss. That depends on the portfolio you have created, ie, risk versus reward, ie, the higher the risk, the more reward. As Islamic finance is an equity-based system that should support a real economic activity.

MNA, AAOIFI Ijlal, how do you see the market?

IAA, IIFM I agree with Khalid that it is still a niche market. We don’t have a wide range of products to the extent that it is hard, in some cases, to manage liquidity by Islamic institutions due to the absence of a wide range of liquidity management products.

In terms of Shariah compliance, generally the scholars are in agreement with most of the basic principles and there is no difference of opinion; however, in certain cases there is difference of opinion in interpretation, which is the beauty of Shariah as it encourages innovation.

The crisis

MNA, AAOIFI Some commentators have suggested that because of its structural differences from the conventional banking system, Islamic banking systems are immune to the current crisis. What truth is there in this statement?

AAK, GBCorp The entire financial system is cyclical and to assume that Islamic banking is immune to the effects of any crisis would necessarily mean that Islamic banking works outside these economic parameters, which is not true. Islamic banking is immune to certain interest rate risks but not to economic risk, and due to the market being intertwined, interest-rate risk transcends to economic risk, creating a certain level of exposure.

But Islamic banking enjoys an advantage in the sense that strict compliance to Shariah guidelines offers Islamic banks an inherent safety net. The market has taught us how to structure our debt and weigh our investment and debt exposure.

IAA, IIFM I don’t think there is total immunity. First, the crisis affects confidence, and confidence is important regardless of the system. Second, the performance of the Islamic banks through the crisis will depend on their exposures, such as real estate. However, Islamic institutions are not confronted with the issues such as overvaluation or speculation, which are the main cause of problems for conventional finance, and their business activities are based on real economics, be it real estate or trade finance.

AK, Standard Chartered To the extent that the Islamic finance industry and the players in the Islamic finance industry are part and parcel of the real economy, it is naive to think that we will completely escape the cycles of the real economy. To the extent that Islamic banks have not been active in the sub-prime ABS market, because they could not for Shariah reasons, they are immune.

Ultimately, though, the question goes to the heart of what target market you have selected for yourself as an Islamic bank. What customers within that industry have you selected for yourself? How good a mudarib (partner) have we actually been? That is what could differentiate the banks that do better compared with others.

Benchmarks

ND, Trowers & Hamlins One of the other areas where we have seen it affecting our client base is that I think it is an accepted evil, or a necessary evil, that most transactions into which Islamic banks enter are still ultimately referenced to Libor, or one of the other prevalent market benchmarks for interest rates.

Those costs, as we know, have been rising inexorably. We also know that there are a number of banks that cannot fund themselves or obtain funding at Libor, and in fact their costs are considerably in excess of Libor. That creates a greater problem in an Islamic context because it is not always the case that you are able to, or your institution will allow you to, pass those additional costs on to your customer in the way in which the conventional banks will routinely do through market disruption clauses. So that is a market problem that is affecting the banks, and it is not necessarily soluble in the same way that the conventional banks will solve that problem.

NNT, DIFC Islamic financial institutions clearly avoided structured mortgage products and this is because of adherence to the fundamental principles in Islamic finance – the avoidance of riba (surcharge, rent or fee), gharar, maysir and haraam activities. Sub-prime mortgage financing and the subsequent structuring of such financing into CDOs would not have passed any one of the fundamental principles in Islamic finance. However, we are not immune to this crisis or to any other credit events that may occur in future. There are several reasons for this. The first is, whether you are conventional or Islamic, there is always the danger of over-exposure to any one particular sector of financing. In Islamic finance, however, this can be more acute as there is insufficient supply of investment products resulting in bias towards certain sectors, such as property, resource and energy.

Secondly, there are still differing standards between jurisdictions, and so if and when damage occurs, you can’t really tell how far the damage will go because of the different standards in practice now. For example, there isn’t one universal accounting standard adopted by all Islamic banks operating in different jurisdictions.

Thirdly, many Islamic financial institutions, as well as products, have not seen a full economic cycle. There are still a number of new Islamic financial institutions out there. Sukuk has never been tested in a court of law in terms of ownership issues for example.

Fourthly, Islamic finance is still connected to the wider financial system, so I would expect that in this crisis there would likely be an impact on profitability for Islamic financial institutions because we are part of the wider financial system. However, I don’t think there would be an adverse impact effect on capital. Solvency would not be the problem but there is the likelihood that the crisis will hit Islamic banks’ bottom line.

ND, Trowers & Hamlins I am not sure that an inability or a prohibition on investing in a particular type of product, or being involved in a particular type of activity, is necessarily the same as good risk management or compliance.

The fact that Islamic banks, for example, haven’t been able to take positions in the sub-prime market because those exposures have largely been assumed through derivative product – that’s accident rather than design. They haven’t been allowed to invest in those products. That is different from actively choosing not to do so. I think the point that you made and what we are saying is that there are still inherent risks flowing from the asset classes or the areas of investment into which they have put their capital as an alternative – for example, real estate. Those asset classes, as we are now beginning to see, are themselves likely to be subject to a downturn. I think as regards Islamic banks it may actually take a little longer to see whether they are going to be suffering in the same way that their conventional counterparts are suffering because of exposure of a different type, but ultimately to the same underlying asset.

KH, CBB I think the issue needs to be argued from two perspectives: concept and practice. If you look from a conceptual point of view, I don’t see – I mean, maybe what we should say is that there is a relative immunity. This relative immunity stems from the fact that if you fully comply with Shariah and if you are subject to proper regulations and that you employ good business practices, then you can get relative immunity. But from a practical point of view, an Islamic bank is, as Nik mentioned, part and parcel of the whole finance framework. I think what has made the impact, significantly less on the Islamic finance players is basically two aspects. One is that they are not allowed to trade debts and they are not allowed to basically be involved in direct finance, but have to be asset-based or asset-backed finance.

IAA, IIFM And on the investor side there are safeguards too. As a homeowner I cannot re-finance my asset simply based on a revaluation of that asset to extract equity from it.

MNA, AAOIFI Let me throw a provocative statement in here that does not represent my own or AAOIFI’s views. Shariah-compliance issues have restricted the creation of derivative products whereas these products have deep and liquid markets in conventional finance. Without derivative products, it may be difficult for Islamic finance to bring about financial deepening to its market. So, in the absence of all the tools that Islamic finance prohibits, you are going to have a thin market, and thin markets are very sensitive and volatile and subject to economic shocks. Any shock that comes into the economy, which could be natural, just in the course of the business cycle, will have an augmented effect on the real economy because the market is so thin. How do you respond to that? Khalid?

KH, CBB It’s a very difficult question to address, I have to admit, but let’s go back to the late 1980s when there was nothing but the murabaha, musharaka in Islamic finance. I remember one bank at that time in Bahrain took the lead and invited scholars and bankers from outside Bahrain to try to develop an Islamic version of the inter-bank market. That meeting took less than five minutes and they concluded that there is no way to develop an Islamic inter-bank market. Now look at what is happening. You have a huge amount of money being traded between the banks through commodity murabaha. That is in itself a development. Look also at sukuk. Back in the 1980s, we barely heard of sukuk insurance, but now we hear of really very complex sukuk structures.

IAA, IIFM I agree, but it will be a very tough path but essential. We need certain standards for broader market usage from Islamic standard-setting, each have specific mandates, as bilateral solutions do not work for all the industry’s requirements.

AK, Standard Chartered I think we are developing fast. Today, you can do Islamic derivatives for hedging purposes, for risk management purposes. It is allowed across geographies. We are leading the way at Standard Chartered in profit and currency swaps, for example.

MNA, AAOIFI But they are controversial, Afaq. They haven’t been endorsed by Shariah scholars – very few.

AK, Standard Chartered You would be surprised. There is a lot of commentary but we have done transactions in Malaysia, in Saudi Arabia, in Abu Dhabi. For a speculator, of course, Shariah does not allow their use, but if Islamic institutions are to prosper they need a certain number of key tools. They are available today and a deepening of the market has to take place.

ND, Trowers & Hamlins I actually think developments have been pretty rapid. Obviously it is still a relatively nascent market but, for example, I think that the sukuk is actually going to prove to be, or hopefully prove to be, a much more important instrument than commodity murabaha. Commodity murabaha really just addresses the short-term liquidity among the banks.

I am also interested that you say that it is not possible to package instruments up and distribute or move capital through such methods. There is no Shariah prohibition relating to securitization or packaging. The problem is, rather, an inherent legal problem in terms of achieving what lawyers would call a true sale. That has been the historical driver behind securitization in the conventional banking and debt capital markets – genuinely to get assets/liabilities off your balance sheet. Certainly from a Shariah perspective, you can do Islamic securitization. Sukuk also has the potential to become a much more important instrument than commodity murabaha in terms of asset/liability management.

Differences

MNA, AAOIFI So, after all this development and inclusion of derivative products, how would Islamic finance differ from the conventional market? Will Islamic finance be able to preserve the Shariah requirement relating to gharar, jualah (fixed payment) and maysir, which are at the core of the definition of uncertainty that is prohibited in Islamic finance?

AK, Standard Chartered Islamic banks would still be different because they would be concerned only with the real economy and would encourage saving and discourage speculation. So this is how, done correctly, Islamic banking will fundamentally differentiate itself from the current capitalistic system. I will give you an example.

The approval from the Shariah board for derivatives is to match trade by trade 60% of your last three years’ imports, 50% of your last five years’ exports or on a transaction-by-transaction basis.

ND, Trowers & Hamlins The differential must be ideology, because once the range of products is the same or broadly comparable, once the returns are the same or broadly comparable, then what must be the defining characteristic in terms of whether you invest in a Shariah-compliant manner or whether you invest in or buy conventional banking products must be your faith, your ideology – but I am not a Muslim, so I am perhaps not the best person to ask.

When I give my money to a bank, I don’t really care what they do with it. That’s the difference. They say they will pay me X, and I say: ‘Well, fine, you pay me X’. When you put your money in a bank, you want to know what they are doing with it, how they are managing it, how they propose to produce the return that they have promised you.

AAK, GBCorp The key difference is fundamental in nature. The Islamic economic model has been developed over time, based on the rulings of Shariah on commercial and financial transactions. In this excerpt that I read recently by Dr Iraj Toutounchian, a professor of economics at the Az-Zehra University in Tehran, he mentions that interest is rewards to money and profits are rewards to capital investment. So the main difference between conventional banking and Islamic banking is that one is interest-based and the other profit-based.

Islamic commercial jurisprudence consists of principles and rules that must be observed for transactions to be acceptable in Islam; and the Islamic law of contracts is at the heart of this. One important principle is contractual certainty. Under this body of law, uncertainties or ambiguities that can lead to disputes may render a contract void under Shariah.

NNT, DIFC For me, I actually see it as a fairly simple objective. Islamic finance should reflect the genuine demand of the mass market that regardless of religious belief it is a financial system that takes into account ethics and responsible financing because that affects us all. It is a universal value that anyone can appreciate, an issue of substance over form. Creating wealth is not a problem but doing so in an unbridled manner leads to various problems. The challenge is putting together these sets of objectives into a workable system – Islamic finance is an industry still in that process.

Sukuk market developments

MNA, AAOIFI How do you see the future of sukuk in light of some of the turbulence taking place in the financial market and in our own Islamic market in terms of fatwahs regarding sukuk? What is your timeframe and your estimates for a real secondary market to exist for sukuk?

KH, CBB I think sukuk will continue to grow, but of course the timing now is not right for any issue of sukuk because of the liquidity concerns in the market as a result of the crises. But I see a brighter future for sukuk.

AAK, GBCorp Today, the Islamic financial industry is worth $700 billion of assets. The market for sukuk alone accounts for $100 billion. According to a recent report from Moody’s, sukuk structures are evolving rapidly, with an important degree of innovation. The market is increasingly moving away from the lease and lease-back sukuk structures of the first generation and towards structured sukuk. Underlying assets eligible for sukuk schemes have witnessed increasing diversification. The number of issuers has also grown, both within the Muslim world and beyond its natural borders. I see sukuk growing due to its ability to cater to market needs.

IAA, IIFM The future is definitely bright, but we have to look at the role of sovereigns. For example, in the case of sukuk the sovereign issuance is less than 10% of the entire sukuk issuance and to keep the market growing – and to create benchmark issues on which to build a secondary market as well as a yield curve – we need much more sovereign issues than what we have at the moment. We also need continued help from all the Islamic infrastructure institutions such as IIFM, AAOIFI, IFSB to make the Islamic finance system more robust. And at the same time scholars can further review the product, document it, etc, and make further improvements if required.

MNA, AAOIFI But it is still the case that these sukuk are not traded?

AK, Standard Chartered They are not traded because you don’t have enough instruments and you don’t have the market depth. Who are most of the buyers? It is basically either Islamic institutions or the majority of them have been in the conventional market that wanted to have the security. I think in the secondary market you need repeat issuances as well by the same issuer so you have established shirkah (sharing), so I can continue to have exposure to you either at the short end or the long end. This is one fundamental problem.

Two, when you do a sukuk, the primary takers of the sukuk are Islamic banks that are liability surplus and asset deficient. There is no motivation to sell an earning asset at any price, so they will hold it. As policy in Standard Chartered, any issue that we bring to market will make a market for it. The issue of making the market is that we must have stock to make a tight price, so if the issue size is small and if I can’t source the issue from the market, and I get a very small allocation, so I keep it for price tightening right after the issue when I release, after that if I can’t take a paper from the market then the bid-offer spread widens. So it needs repeat issuances by the same issuers for different tenors. It needs more counterparties to trade starting now.

ND, Trowers & Hamlins Yes. There are very few market makers. There are few willing sellers. And as Afaq has mentioned, Islamic banks are obviously snapping these sukuk up to address their asset liability mismatch. It gives them a nice three-, five-, seven-year asset earning them a good return that they can arbitrage against the shorter-term returns that they are paying out.

It will also be interesting to see what is going to happen to the market following the AAOIFI pronouncement because that is obviously excellent news from a Shariah-compliance standpoint, but it introduces an element of risk that the conventional marketplace and the conventional buyers of the instrument have hitherto not had to face because they knew that, in a default, they get a full pay-out.

With the prohibition of that full pay-out, and with the termination instead being tied to market or fair value or an agreed value, you are introducing an element of equity risk to what has hitherto been regarded as a fixed-income product, and the conventional market will be very wary of that and not particularly receptive to it. This is a problem for the market because they have been the big buyers of the headline issues and they are not going to want to buy a product that is becoming more of what it should be, which is more of an equity instrument than a debt instrument.

AK, Standard Chartered A slightly different take. The ijara (lease-to-own) sukuks will be used for treasury risk management, money market. The musharaka (partnership) and the mudarabah sukuk will go in the investment portfolio.

MNA, AAOIFI Let me explain the recent AAOIFI pronouncements. Our Shariah Board – which is acknowledged as the foremost authority in Shariah for Islamic finance – was concerned over Shariah compliance for a sizeable portion of the non-ijarah sukuk market. For the ijarah sukuk market, which is the predominant part of the overall sukuk market, there was no concern though.

We deliberated the issues regarding the non-ijarah sukuk with more than 40 Islamic finance practitioners, representing some of the leading investment banks, legal firms, and accounting and auditing firms, together with members of our Shariah Board. As a result of the deliberations and extensive consultations, we published our pronouncement, which gives additional guidance on sukuk issuance, particularly on the application of purchase undertaking, the application of fair value principles, and the roles of Shariah supervisory boards in sukuk transactions. The pronouncement also reiterated the stipulations contained in our existing Shariah standard on sukuk.

NNT, DIFC Sukuk has a good future for as long as the credit quality is maintained by market participants. Notwithstanding the current crisis, we would still see growth when the dust settles. It is very clear that demand exceeds supply by far.

What I would like to see is more initiatives that encourage trading. There ought to be a regulatory framework for trading – not just trading domestically but trading across borders as well. If a treasury in Hong Kong wants to buy a sukuk issued in Brunei, it should be able to do it immediately.

And there also ought to be better sharing of information on trading. Real-time information on prices, and there has to be clear benchmarking, which means more prime rated issuance is required.

ND, Trowers & Hamlins I’d just like to add the point that because sukuk can be on balance sheet that people get a little ahead of themselves when talking about the sukuk market as a driver for securitization. For a true securitization market to develop I think we need legal change, because the problem that we have in this region at the moment is the difficulty of achieving true sale – the lack of distinction between legal ownership of an asset and equitable ownership of an asset.

Need for standardization

MNA, AAOIFI One key observation is the lack of homogeneity in Islamic finance products and practices. This is partly due to the diversity in Shariah interpretation across and within the different regions throughout the world. How would you respond to that?

AAK, GBCorp As I mentioned earlier, Islamic banking is evolving and these are some of the challenges that Islamic banking faces as it goes global. Shariah scholars’ interpretations and understanding of the law can and do differ between Shariah scholars. Certain contractual terms deemed to be valid under Shariah by the scholars of one school of fiqh (Islamic jurisprudence) may not be acceptable to scholars from another school. This has had significant implications for the development of Islamic finance. But with the willingness to have standardized practices and products in the Middle East, Islamic finance will certainly evolve and continue to establish a global presence.

NNT, DIFC It is a big issue. But it boils down to the effectiveness of those who are driving consensus. Now, the only way you can actually do that is through collaborative efforts between regulatory bodies, the marketplace and standard-setting bodies such as AAOIFI and IFM. So we need collaboration, less repetition of work and more transparency. At a practical level, standardization would ensure scholars and market players avoid having to go through an approval process for products that are already widely used in the market. Because that process is costly, takes time and takes away valuable resources such as scholars’ availability – less time spent on repetitive process would allow more time spent in developing products and infrastructure that would further enhance the industry.

ND, Trowers & Hamlins I always wonder if this issue is actually overplayed. I think that the core products and the key issues surrounding the implementation of those products are fairly settled now. There will be differences of opinion on more esoteric products, in terms of product development, and I think that will always be the case.

But in terms of what Nik was saying, I guess that the primary purpose as the originator of the product – as the bank or the institution – of standardization, is reduction of cost via commoditization. So I cannot be continually thinking: ‘Is the Shariah scholar going to argue about this? Is the bank going to have a problem with that?’ But I think that that issue is exaggerated.

MNA, AAOIFI Nevertheless, some observers say you can still walk into a bank and you see a mudarabah tool or a murabaha product and walk into another bank on the same street and they give you completely different characteristics and parameters of the same product with the same label.

AK, Standard Chartered I absolutely agree on that. Standardization reduces my costs, it improves my turnaround times, it reduces my legal and reputational risk, so I am all for standardization. But there is a case to be made for innovation.

ND, Trowers & Hamlins And remember, decisions change in the conventional legal system as well. Old decisions are overturned and of course there are significant differences in the legal systems of the countries in Europe – some being based on common law principles and others having civil or code-based systems.

IAA, IIFM Standardization is clearly very important, but in order to continue the process of innovation and growth you should not standardize each and every product or document or process – you have to prioritize and see what the market requirements are. Certain products will remain tailored between a few institutions, ie bilateral, and that is how innovation happens.

AAK, GBCorp Standardization is a critical issue. But it is also important to understand that in trying to stay ahead of innovation, regulation should not get so stringent that it stifles innovation.

KH, CBB In the short-term perspective we see that there is now a need to complete standardization in three areas: accounting, regulation and contracts documentation. In accounting, we wish to see AAOIFI standards to widely used. In regulation, we need an international standard along the lines of a Basle committee with standards on several regulatory tools and approaches. Last but not least, we need to also see minimum standards on master agreements in Islamic products.

I agree that we should not over-impose standardization as it will kill creativity and we should give the market an opportunity to differentiate in terms of product. As you know, in Islam as long as your scholar says yes, then he is responsible for that answer.

MNA, AAOIFI But the public will be affected too.

KH, CBB Well, of course, but if he says yes, then effectively he is the one who is taking the risk. Basically you are placing this decision on his fatwah because that is the relationship between him and God.

Now you will continue to see different fatwahs in the market but over time you will see master documentation being developed that will be used widely and will embody the standard structure.

MNA, AAOIFI So you don’t need a scholar? You wouldn’t need a scholar to give you fatwah?

KH, CBB I think we will continue to need scholars. Ten years ago this product was not permitted, now it is permitted. It also depends on the way you present the structure and the documentation to your scholars. If you present them well, then you get a good chance of a review, but if you don’t present it well, you might get a different answer.

AAK, GBCorp Let me clarify. You do not need a Shariah scholar to create a fatwah but what you do need is a Shariah board to create the parameters of functioning in an Islamic bank. It is important to realize that realism and theory can be sometimes detached, therefore creating the need for regulating Shariah scholars to allow them to think in a banking perspective rather than a scholarly perspective.

Islamic finance institutions rely on Shariah committees of scholars for advice and instruction on their services and, as the number of institutions increase, the relatively small number of scholars is being stretched, and there is pressure to ensure that a new generation is being groomed to handle the increasing demand. Nevertheless, despite the advances in Islamic finance, scholars with the ability to integrate both systems, conventional and Islamic, are needed and there is clearly scope for more education and training. On the positive side, there is a huge wave of interest in Islamic finance and people are studying more about the industry, it is a sign that Islamic banking and finance is evolving.