Accreditation, rules on Shari'ah scholar conflict of interest begins to gain traction

The move to formalize the requirements for Shari'ah scholars in terms of training (through an accreditation program) and managing potential conflicts of interest is moving forward as the International Shari'ah Research Academy, based in Malaysia, was working with its counterparts in the Middle East on a set of guidelines.  These counterparts include the Islamic Research & Training Institute (part of the Islamic Development Bank group).

The move follows a Malaysian initiative announced back in August to provide an accreditation program for Shari'ah scholars in that country, which was led by Aznan Hasan, the president of the Association of Shari'ah Advisors in Islamic Finance (ASAS), who is also a prominent Shari'ah scholar. 

The regulation and accreditation of Shari'ah scholars is one of the more important areas of standardization in Islamic finance.  If the participation of a Shari'ah scholar on multiple boards is limited, it could result in a more prominent role for junior scholars who sit on boards, but are only slowly gaining name recognition on their own, rather than by virtue of the senior scholars they have trained with. 

Increasing the number of scholars with name recognition has the potential to lower the Shari'ah fees for certifying deals because their fees are likely to be lower than for senior scholars.  However, I think there is a potential for fees on the senior scholars to increase if they are limited to serving on a more limited number of boards, and are likely to see their fees bid up, potentially to the exclusion of smaller Islamic financial institutions. 

However, this might not be a significant problem.  If the senior scholars with the greatest international name recognition shift their focus towards global financial institutions, it will open up more board seats for junior scholars on smaller, more locally-focused Islamic financial institution that will tend to rely more on their Shari'ah board's domestic name recognition, to demonstrate their Shari'ah-compliance to the local market.

Other aspects of the discussions are around Shari'ah board potential conflicts of interest, like owning stock in the institutions on whose boards they sit, and issues around limiting scholars from advising multiple Islamic financial institutions in the same sector or geography who compete against one another.  In Malaysia, for example, Bloomberg describes how Bank Negara regulations do not allow Shari'ah scholars to "sit on more than one board involved in the same business". 

This is likely to be only the first step down a long road of providing more formal oversight of Shari'ah scholars to ensure that the Islamic finance industry has the Shari'ah board capacity that can scale with it.  In addition, more stringent rules on accreditation and managing potential conflicts of interest can avoid problems down the road by mitigating or eliminating these conflicts and potential conflicts of interest. 

Islamic finance and financial stability

The Islamic Financial Services Board meeting recently saw the launch of the IFSB-IRTI-IsDB report on financial stability in the Islamic finance industry. I have not had a chance yet to read the report, but my initial impression of their effort is supportive. It recognizes that the global financial crisis did impact the Islamic financial system and can provide lessons as institutions grow larger. There have been many times, most recently a couple weeks ago where I question whether too big to fail is not a problem that could afflict Islamic finance. I argued (and still maintain) that because the industry is concentrated in small countries in the Gulf, a big institution (like the planned Islamic mega bank or institutions like Dubai World, which is not an Islamic financial institution, but has received significant Shari'ah-compliant funding) could endanger the financial stability of the country it is based in. This problem is heightened because there are no Shari'ah-compliant options for 'lender of last resort', the role the US Federal Reserve played to keep healthy banks from being destroyed as global liquidity dried up. The potential problem does not end there. There is inter-bank funding occurring (although not generally overnight funding which caused virtual runs on conventional institutions) and so one bank's trouble spills over to other banks with exposure to the troubled bank. If a few large lslamic banks became insolvent, it is likely that their debt would be held on other banks' balance sheets and the writedown of the insolvent bank's debts held by other banks could put stress on the solvency of the other banks. This could be heightened if this caused retail banking customers to withdraw their money, which could cause a liquidity squeeze that would put the previously healthy banks at risk of insolvency. With that rather gloomy (although relatively unlikely) prospect in mind, I think it is a good thing for the establishment of an Islamic Financial Stability Forum, which was recommended in the report.

Other News

• Rushdi Siddiqui, the global head of Islamic finance for Thomson Reuters, argues in a column in GulfNews that there should be more linkages between the halal industry and Islamic finance.
  
• Dar Al-Arkan made a periodic coupon distribution on one of its sukuk.
  
• To broaden its investments, Kuwait Finance House signed an agreement to invest $450 million in Canadian real estate working with Killiam Properties.
  
• The first takaful policy for a space satellite was announced recently.
  
• The Investment Dar is fighting over the buyback option on shares in Boubyan Bank it lost.
  
• Asharq Alawsat's columnist Lahem al-Nasser says that Shari'ah boards should be treated like external auditors and should be liable for their decisions.
  
• Pakistan will sell domestic sukuk within the next three months. The central bank is also considering ways to provide short-term sukuk for Islamic banks' liquidity management.
  

IsDB Poverty Reduction Fund, Islamic financial innovation & Canadian Islamic finance

Shaikh Mohamed bin Jassem Al Thani, the Chairman of CORECAP, which launched an Islamic private equity fund yesterday, estimated that the Islamic financial industry is currently at $800 billion in size and growing 15-20 percent per year.

The Islamic Development Bank fund for development (the 'Islamic Solidarity Fund for Development') will be launched at the annual meeting in Dakar, Senegal on May 29-30.

• This conference is listed on the IHI conference listing page.

Soud Ba'alawy, Executive Chairman of Dubai Group, speaking in a panel on Islamic finanace in the World Economic Forum at the Dead Sea, Jordan, said that Islamic finance needs to see further development of new innovative products in order to become mainstream. He described that innovation could be achieved by converting conventional structures to Shari'ah-compliant products.

At the launch of the "Regulation and Supervision of Islamic Banks" course, the development of Islamic finance in Brunei is described. The new course is jointly offered by the Islamic Research & Training Institute and the South East Asian Central Banks (SEACEN) Research & Training Centre.

• September 29, 1991: First Islamic financial institute opened, the Perbadanan Tabung Amanah Islam Brunei (TAIM) or Brunei Islamic Trust Fund

• January 13, 1993: International Bank of Brunei Berhad converted into an Islamic bank and renamed the Islamic Bank of Brunei Berhad

• July 2000: Another government bank, the Development Bank of Brunei is converted into the Islamic Development Bank of Brunei Berhad

• 2006: Two banks merge to become the Bank Islam Brunei Darussalam (BIBD)

• 2006: Brunei begins issuing 91-day sukuk al-ijarah. Six have been issued with a cumulative size of $730 million.

• January 17, 2006: Syariah Financial Supervisory Board Order launched

Ittihad Capital is hosting a dinner before the Islamic Finance World North America to try and attract more Islamic financial firms to the country.

RHB to sell shares of RHB Capital, KFH expands to Asia, Zeti: Japan should play a role in Islamic financial industry, Other news

Rashid Hussain to sell stake in RHB Capital

The sale of RHB Capital will allow highly-indebted Rashid Hussain Bhd (RHB) to repay some of its debt. It is widely expected to increase the chance that Kuwait Finance House will end up with control of RHB and RHB Capital. However, EON Capital still has a chance at winning control of RHB, as noted by Loke See Ooi of PacificMas Asset Management in Kuala Lumpur, "EON Capital's offer is quite attractive, so you never know [the outcome for sure]."

KFH expand into Asian healthcare market

Kuwait Finance House, one of the largest Islamic banks in the Gulf Region which recently opened Asian operations based in Malaysia, will team up with Singapore-based Pacific Healthcare Pte Ltd. to invest in new healthcare centers across Asia.

BNM governor urges Japanese involvement in Islamic financial industry

The governor of Bank Negara Malaysia, the Malaysian central bank, Zeti Akhtar Aziz,wants Japanese businesses to become more involved in the Islamic financial industry. Zeti believes that it "could be an important channel for strengthening ties between Asia and other parts of the world, especially the Middle East".

Conference on Micro- and Medium-sized Enterprises (MMEs) in Brunei

The conference is sponsored by the Universiti Brunei Darussalam and the Islamic Research and Training Institute and will occur from April 17-19, 2007 in Brunei. The conference will focus on increasing the availability of Islamic financial services for the Micro- and Medium-sized Enterprises. It is these areas in which many people, including myself, believe there is the greatest opportunity for the Islamic financial industry to have a significant positive societal impact, primarily through the reduction of poverty by enabling MMEs to grow through bank financing.

The conference is listed on the Institute of Halal Investing Conference calendar.

Pakistan issues Islamic Treasury Bills

According to the Financial Times, Pakistan will issue a Shari'ah-compliant form of Treasury bills (it has issued over Rs. 1 trillion [$17 billion] on conventional bonds to date). Neither the article nor the State Bank of Pakistan provide details on the structure of the bills except that they will be called 'bait-ul-maal' certificates.

Kuwait National Bank begins Money Market Fund

Kuwait National Bank announced a new Watani KD Money Market Fund, which will be liquid on a weekly basis and Shari'ah-compliant. No details are provided about what investments it makes except that they will be "short and medium term money market instruments in compliance with the principles of the Islamic Sharia".

British Islamic mortgage company Alburaq reaches £100 million in approved mortgages

Alburaq, the British Islamic mortgage firm, has reached £100 million ($195 million) in approved Shari'ah-compliant home financing and expects this number to reach £1 billion ($1.95 billion) by 2009. The company opened in 2004.