Scholars juggle faith, commerce as Sharia finance grows

Insight A small band of legal advisors must balance the requirements of Islamic law, and finance.

KUALA LUMPUR/MANAMA // Religion may be the bedrock of Islamic finance but influential Sharia adviser Mohd Daud Bakar says the bottom line drives the industry. "Commercial gains are very important," said Mr Daud, who is listed by consultants Funds@Work as among the world's most active scholars, sitting on 22 sharia boards. "We are not a charitable organisation. Shareholders are looking for ROE (return on equity) at the end of the day."

As Islamic banking tries to reach wider markets, Sharia scholars such as Mr Daud are weighing more than just Islamic tenets when they rule on the validity of financial instruments, reflecting commerce's growing role in the $1 trillion (Dh3.67tn) industry. The desire to win market share, the level of expertise of individual scholars and the scarcity of scholars may all shape Islamic financial rulings and the future of the sector.

Some Sharia advisers say it is not always easy to balance religion and business as they grapple with modern funding techniques that sometimes challenge Islam's basic beliefs. Once at odds with the Sharia's ban on gambling and excessive speculation, contentious conventional practices such as hedge funds, short-selling and derivatives are slowly finding a place in Islamic finance. Tasked with applying Islamic law and global financial practices, Sharia scholars are powerful gatekeepers, whose approvals are necessary before a product can be marketed as an Islamic instrument.

There are no official figures but some practitioners say there are around 200 Sharia scholars worldwide. Some Sharia advisers say the drive to grow the industry influences their decisions on whether certain products meet the Sharia's standards. Ahmad Hidayat Buang, who advises Islamic insurer Takaful Ikhlas, says Malaysian scholars try to meet companies' business needs, reflecting a popular view that the Southeast Asian country is more liberal in its Sharia interpretation than the Gulf.

"We see what happens, then we try to adopt the more flexible view of sharia in order that our product could be introduced," said Mr Hidayat. "It's not necessarily a question of Sharia. When you decide on the matter many aspects have to be taken into consideration." Sharia scholars are not formally accredited by a single authority so their qualifications can vary vastly, raising questions about the ability of some to understand complex financial structures, especially if they are pressed for time.

With newer financial firms, "they know that the Sharia board can be very powerful so they bring in very junior scholars and give them very little information or not enough information within a very limited period of time," said Megat Hizaini Hassan, a Kuala Lumpur-based Islamic banking lawyer. "So these scholars may be under pressure to give approvals or certifications." A select group of Sharia scholars are highly sought after as the bigger a scholar's name, the greater the drawing power of the product he approves. The industry's most influential figures can make or break markets with their decrees.

Bankers say Islamic bond issuance fell sharply last year after Sheikh Muhammad Taqi Usmani, chairman of the board of scholars at influential industry body AAOIFI, declared about 85 per cent of sukuk were un-Islamic. Among the most active scholars are Bahrain's Sheikh Nizam Mohammad Saleh Yacouby, who sits on 46 advisory boards, and Syria's Abdul Sattar Kareem Abu Ghuddah, who is on 45 boards, according to Funds@Work.

This has raised concerns about whether some scholars have enough time to thoroughly vet contracts, some of which consist of reams of documents detailing complex financial instruments. There are also concerns about the possibility of Islamic financial rulings being affected by conflicts of interest where a scholar sits on various boards. "Sharia board conflicts of interest are part of the practice of modern economic institutions," said Mousa Isa, a sharia adviser in Saudi Arabia. "There should be transparency."

Other contentious issues include giving scholars incentive-based payments linked to the success of products they approve. This echoes complaints about the hefty bonuses of some Wall Street bankers which analysts say fuelled excessive speculation and helped trigger the recent credit crisis. Ayashi Faddad, Sharia adviser at Islamic Development Bank, said scholars' fees should be approved directly by shareholders, not management, to reduce potential for conflicts of interest.

But scholars say some lines cannot be crossed. In cases where there is no room for Islam to accommodate a structure or product, Mr Daud said "the commercial must adjust to the Sharia". *Reuters