Monday, June 22, 2009

Tawarruq, commodity murabaha, corporate governance, Shari'ah scholar licensing

Zawya has a good article describing the potential impact of the International Council of Fiqh Academy of the OIC on organized and reverse tawarruq which condemns the practice as a 'deception'. I discussed the rationale for the decision on my Zawya blog back in early May. The primary issue that is raised in the new article is whether the condemnation of organized tawarruq applies to commodity murabaha, which is akin to the permissible classical tawarruq. If commodity murabaha were prohibited as well, there would be a significant impact on the industry because, at least in the short run, commodity murabaha can fairly easily replace tawarruq. If commodity murabaha is also prohibited, there could be signficant turnmoil in the industry despite the non-binding nature of the OIC Fiqh Academy ruling. One interesting note from the article was a quote indirectly attributed to Sh. Mohamed Elgari. "In Bahrain in May 2009, the senior Saudi Shariah advisory, Mohamed Elgari, appealed for a more scientific approach to issuing resolutions by Shariah scholars and organizations relating to Fiqh Al-Muamalat and suggested a rigorous peer review process and market consultation before any resolution is adopted."

Another positive development in the Islamic finance industry besides Sh. Elgari's suggestion for peer review and market consultation of significant fatawa like the one on tawarruq is on corporate governance issues. Specifically, the suggestion by several scholars that the central bank (or another institution independent of the Islamic financial institutions) should be responsible for paying scholars instead of their being compensated by the companies whose products they are supposed to regulate.

Dubai World has hired AlixPartners, a restructuring firm based in New York that recently helped General Motors with its bankruptcy filing. One of the most important issues to deal with is how to pay the $3.52 billion Nakheel sukuk that matures in December. I wrote a summary of the Nakheel sukuk on my Zawya blog.

Although much of the talk about the shortage of Shari'ah scholars abated as the market for Islamic finance and especially sukuk slowed during the last year, there is still a shortage. There is also talk in the article of imposing licensing standards to ensure that all members of any Shari'ah boards are adequately qualified which should paradoxically increase the number of Shari'ah scholars because it will provide a way for lesser known but equally qualified Shari'ah scholars to take seats on boards that would otherwise be reserved for the best known scholars who sit on dozens of Shari'ah boards each.

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