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. 

India, Middle East project finance & Indonesia's sovereign sukuk

A conference met on September 1 to discuss the necessary regulations needed to bring Islamic banking to India. Kuwait-based Bayt Al-Maal has expressed interest in opening an Islamic bank in India.

In the next decade, the Middle East will spend $1 trillion on large project finance projects and many will use Islamic finance.

Indonesia's planned issue of $1 billion in sovereign sukuk has been delayed by complications in the tax code relating to Islamic bonds.

Islamic Finance Experts Group, Takaful & sukuk

The group meeting to assess the feasibility of the U.K. government issuing a sovereign sukuk had its first meeting and the members of the group were announced.

Takaful Malaysia Bhd is planning to expand into the Middle East working with an unnamed financial firm in Dubai.

The government of Brunei issued new short-term sukuk, something which it began doing in April 2006 to raise its profile in the global Islamic finance industry.

It's not all about taxes

The head of the newly-established Asian Finance Bank (70% owned by Qatar Islamic Bank) describes the challenge facing the Malaysian Islamic financial industry: "It's not all just about tax [exemption]. The challenge is to define clearly the target segment, the products that we want to deliver and the capability in delivering them". Malaysia has reduced taxation on Islamic financial institutions to attract foreign financial institutions to the country and has reduced barriers to Islamic banking in foreign currencies.

A new S&P/Citigroup index will track Arab Shari'ah-compliant property companies.

70% of all sukuk are issued in Malaysia.