‘Crisis a blessing in disguise’

LONDON: The Shariah governance process is crucial to any Islamic financial transaction. Without a Shariah compliance sign-off, it is almost unthinkable that any Islamic financial transaction or deal would close. Shariah governance can also be seen as an extra tier of ethical compliance, albeit it is an extra cost for Islamic finance. Shariah advisories in recent times have come under much greater scrutiny especially relating to their fees; the differences in interpretation of Fiqh Al-Muamalat (Islamic Law relating to financial transactions); and whether they ought to be regulated or not. Here Mushtak Parker discusses with Sheikh Esam M. Ishaq, a board member of the Discover Islam Center in Bahrain and Shariah adviser to several Islamic financial institutions, current issues and future developments in Shariah governance in Islamic finance.

How effectively has the Islamic finance sector responded to the credit crunch and global financial crisis?

I think it varies from country to country and institution to institution. In a way the financial crisis is a blessing in disguise for Islamic banking, because Islamic banks unfortunately were far down the road in trying to mimic and replicate anything and everything that was there in the conventional banking sector. It is better that the crisis has happened now. If it had occurred later then a large number of Islamic banks would have been badly affected. The crisis has forced the Islamic banks to have a complete re-assessment of their policies and attitudes to not only whether they are merely Islamizing conventional products but also whether the financing is beneficial to the real economy of the countries and communities they serve. As such it is a question of re-assessing core values of Islamic finance.

But surely this does not mean risk-aversion because in Islamic finance products risk and risk-sharing is a core element?

You are right. Islamic banking is concerned with risk-sharing rather than risk transfer. You cannot structure or formulate your policies or your instruments at the micro-level such that you don’t bear risk or disproportionately transfer them to one side of the transaction at the expense of the other side.

How do you reconcile the moral ambivalence of the Muslim Sovereign Wealth Funds (SWFs) helping to bail out riba (interest-based) banks through recapitalization, while not investing in the Islamic financial sector at all?

It is a combination of policy and market education processes and sovereign decision-making and strategic investment policies. Islamic financial institutions on the whole are not operating in Islamically-friendly fiscal and legal regimes.

Use of proceeds of Islamic funds has been a contentious issue recently. Of the estimated global commodity Murabaha market of $1.2 trillion, for instance, some 60 percent of the proceeds leak into non-Shariah-compliant investments. Malaysia has introduced a law where the entire transaction including the use of proceeds must be Shariah-compliant. There are conventional banks issuing Sukuk to raise funds for recapitalization purposes. What is your view on this?

This is an issue of commitment and belief. Are we really committed to the core values of the system? Are we serious and honest of at least promoting it as a viable alternative? If there is commitment in adoption of the values of the system, then we should learn and observe the Malaysian experience and be prepared to admit if and when it succeeds and produces results, then we should also try it.

But when Shariah advisories engage with regulators, don’t you encourage them to adopt these policies?

Of course, but we can only do so much — advising and counseling. If they are Muslim regulators we do remind them that they cannot be ambivalent of the religious dimension of Islamic finance, which is faith-based.

What is the future direction of Shariah governance in Islamic finance?

The market is growing in tandem with the increasing awareness of the general public of Islamic finance per se and of the Shariah supervision process over the last decade or so. People are now more demanding and want proper regulation also of the Shariah boards.

So you are in favor of regulating Shariah boards or advisories like they do in Malaysia?

I am definitely in favor of this. But this process should be pragmatic. I agree that having the right education and skill sets to give Shariah advice relating to Fiqh Al-Muamalat are important aspects to this process. There should also be a limit to the number of Shariah boards any single advisory can sit on.