Not that the issue is new. There have been calls for the registration of Shariah advisories for the last two decades — not by an industry Shariah body but by the regulators in the country in which they are based and in those countries in which they offer advisory services.

Market players have long been concerned by the small pool of experienced Shariah advisers serving the Islamic finance industry and that an elite few sit on as many as 89 boards per adviser. This they claim could lead to conflicts of interest and is simply not the best practice in terms of advisory.

True financial services clients do complain that many of their Shariah advisers are sometimes very difficult to get hold of simply because they have so much on their plate because of the number of boards on which they sit and some of them have teaching commitments at universities and colleges.

Not surprisingly, some of the top Shariah advisers have reportedly spoken out against any efforts to restrict their trade by restricting the number of boards on which they can sit on. With due respect to AAOIFI, its efforts will carry no weight, simply because they are not steeped in law and they only carry voluntary adoption — a feature which is not very established or strong in the Islamic finance culture and industry.

There is of course an eminent precedent in this issue — the case of Malaysia, where not only have all Shariah advisories got to be registered under section 377 of the Capital Markets and Services Act 2007 (CMSA) and the provisions of the Central Bank Act 2009. Similarly, in Malaysia an individual Shariah scholar can only sit on the board of one institution in a particular market segment — commercial bank, investment bank, Takaful operator etc.

This is the law of the land and any Shariah advisory that does not like it is free to leave and do business elsewhere. The above measures have not led to any exodus of Shariah scholars from Malaysia. On the contrary, it has given space for the emergence of the new generation of Shariah advisories for the growing Islamic finance market. Similarly, the UAE Insurance Authority has reportedly already introduced regulations that restrict Shariah advisories to sit on no more than two Shariah boards of UAE Takaful operators. Similarly the State Bank of Pakistan is also following the Malaysian example.

One senior executive at a major global financial consultancy stressed to Arab News on the basis of anonymity, “My gut feeling is that the Malaysians are right. The same argument can be applied to the global consultancies such as KPMG, PriceWaterhouseCoopers (PWC), Ernst & Young (E&Y) and Deloittes etc, but the difference is that they are now in a mature industry. I do not think that Islamic finance is necessarily a mature industry and, as such, may need external guidance. The other difference, of course, is that the Big Four accounting firms are regulated externally, something the scholars cannot claim to be. In addition, while the Big Four accounting firms are auditors to the banking majors such as Citigroup, HSBC, Deutsche, Standard Chartered Bank, BNP Paribas, Societe Generale, Credit Suisse, UBS etc, they have different partners involved on each account and Chinese Walls in place.”

Why is the registration of Shariah advisories and the restriction of the number of boards they can sit on potentially beneficial to the Islamic finance sector. The reasons are manifold.

According to Funds@Work, overall there are 1,141 Shariah advisory board positions available in 28 countries. The average board size is 3.33 scholars per board, across the entire universe. Perhaps more importantly, the top 10 scholars hold 450 out of 1,141 board positions that are available and represent 39.44 percent of the universe. Two Shariah advisories sit on a staggering 85 boards while another on 79 boards.

It does not require expertise in mathematics or quantum physics to ascertain that apart from conflict of interest, it is nigh physically impossible for a single scholar to service so many accounts. He or she would have to be a wonder scholar or a super advisory, arguably with magical powers. And no amount of hard work can mitigate this fact. It would be of course a different case if the scholars are organized as Shariah advisory companies but with more than one Shariah partner, in the same way the accounting, auditing and legal firms are structured.

This impacts on the quality of the Shariah advice and the efficiency of the process. This is important because the longer it takes for a Shariah advisory to advise because of pressure of work due to the number of accounts and less time, the more the cost of the Shariah advisory. This is inevitably passed on the hapless customer and is particularly so in the case of a new product or service.

The next logical step in Shariah advisory is for the eventual phasing out of individual scholars sitting on boards and being replaced by Shariah advisory firms or consultancies, which would have a pool of Shariah scholars with the same hierarchy in terms of expertise and management.

The registration requirement would also weed out the self-styled amateurs from the real experts, who in fact have more to gain from such a development. In Saudi Arabia, a few years ago there was a free-for-all when self-styled Shariah scholars were giving fatwas “legitimizing” the real estate investment offerings of a spate of companies, many of whom were not even registered by the Ministry of Commerce let alone the regulatory authorities. The result was that ordinary investors were exposed to potentially huge losses and only the intervention of the Ministry of Interior (not the Ministry of Finance, nor the Saudi Arabian Monetary Agency (SAMA) saved them from disaster.

Shariah scholars argue that registration requirement and restriction to one board would stint the growth of the global Islamic finance industry. This argument may have been valid in the past, but more universities especially in Malaysia, Jordan and Kuwait etc. are churning out the next generation of Shariah advisories, who are not only competent in Fiqh Al-Muamalat (Islamic Law relating to financial transaction) but also familiar with modern banking and finance.

Similarly, some Shariah scholars argue that in many countries there is no critical mass of scholars. This argument is self-defeating because with a pool of over 1,141 scholars there are enough to go around. Individual scholars too are not restricted to give advice to banks only in their home market. They can do so in other countries as long as it is for one institution per market segment.

However, the spectacular growth of the Islamic finance market may also turn out to be the end of days for Shariah advisory as we know it today. The market is getting sophisticated and bankers also are now much more familiar with the structures of Islamic financial products. A new generation of Islamic bankers are emerging who are conversant with both Islamic financial law and with banking and finance.

As such, Shariah advisories should realize that the more the sector develops the weaker their position becomes. In the halcyon days of Islamic finance, Shariah advisories were put on a pedestal partly because of the ignorance and unfamiliarity of the bankers with Fiqh Al-Muamalat. Today the situation is changed dramatically and scholars are now in a position of weakness.

In Malaysia, for instance, they are rigorously regulated. Even some of the top GCC scholars operating on Malaysian boards are registered with the Securities Commission Malaysia and are subject to the provisions of its act. So, if they already succumb to the Malaysian legal provisions, why not in their own countries.

Shariah advisories can complain as much as they wish to, but if their home regulators decide to adopt the Malaysian example, then they will be obliged to follow the provisions of any new laws governing the registration and regulation of such Shariah advisory in Islamic finance. They can of course take out legal action against their regulator perhaps under restrictive trade regulations (if they exist) or migrate to another jurisdiction where such laws are not yet in place.

In Malaysia, the law is very comprehensive and has provisions on criteria for registration, renewal of registration, fit and proper requirements, and even for foreign Shariah advisories operating in the local market.

Instead of resisting change, Shariah advisories should rise to the occasion to embrace change. Lest, individual Shariah advisories sitting on a cornucopia of Boards, are increasingly becoming an endangered species.

The White House has announced the appointment of 13 men and women to serve as White House Fellows. Atop the list in the release issued by the White House is an attorney named Samar Ali.

Ms. Ali specializes in advising clients on “Shariah-compliant” transactions and was a founding member of the first U.S. delegation to the World Islamic Economic Forum.

Long-time SFW readers may recall that it was at the World Islamic Economic Forum where key leaders declared Shariah Finance to be “dawa” (missionary) activity to promote Islam and Shariah.

Here is White House Fellow Samar Ali’s full biography:

Samar Ali, Waverly, TN. Samar Ali is an Associate with the firm Hogan Lovells US LLP. She is responsible for counseling clients on mergers & acquisitions, cross-border transactions, Shari’a compliant transactions, project finance, and international business matters. During her time with Hogan Lovells, she has been a founding member of the firm’s Abu Dhabi office. Prior to that, she clerked for The Honorable Gilbert S. Merritt of the U.S. Court of Appeals for the Sixth Circuit and for The Honorable Edwin Cameron, now of the Constitutional Court of South Africa, where she also worked extensively on editing his book Witness to AIDS. While in Nashville, Samar led the YMCA Israeli-Palestinian Modern Voices for Progress Program, and is currently the transatlantic liaison for the development of the Palestine Diabetes Institute. She is a founding member of the first U.S. Delegation to the World Islamic Economic Forum, and has served as an Advisory Board Member of the Vanderbilt Institute for Global Health. She is also a three-time Southeastern Tae Kwon Do Black Belt Champion. Samar received a J.D. from Vanderbilt Law School and a B.S. in Political Science with Honors from Vanderbilt, where she served as the first Arab-Muslim student body president.

Hat tip to Phil.

THE Rudd government is pressing ahead with plans to develop Islamic finance in Australia to help position the nation as a leading global financial services hub.

Assistant Treasurer Nick Sherry told funds managers yesterday he would travel to the United Arab Emirates, Qatar and Bahrain at the end of next month for talks on the regulation, promotion and export of Islamic finance, banking and insurance.

Estimated at $US729 billion at the end of 2007, the Islamic financial services sector has been growing rapidly, and the government sees it as an alternative source of capital for Australian business and consumers.

"Australia sits as one of the closest neighbours to Indonesia, a rapidly growing developing economy and the largest Muslim nation in the world," Mr Sherry said at a function hosted by the Investment and Financial Services Association and Deloitte.

"We have close and growing business ties to the Gulf region and beyond. We must do more."

Charging interest is prohibited in Islamic financial services, as is speculation, and financial transactions must be underpinned by a tangible asset and require both parties to share the risk.

The government-appointed Australian Financial Centre Forum has recommended equal access for such products be introduce by removing regulatory and tax barriers.

Mr Sherry said the government was also considering ways to improve the tax treatment of managed investment trusts to attract foreign investment.

"In 2008, we asked the Board of Taxation to review these tax arrangements, and now we are considering the board's final report," he said.

He said the government strongly supported foreign investment in Australia.

The Central Council of Muslims in Germany presented on the BAFIN Islamic Finance conference how mortgages for the Muslim community could look like, how large the market is and challenged the perception that there would be a need to change laws to avoid double real estate transfer tax; it shall rather work tax efficient with proper structuring and without changes. Hence, financial institutions are asked to provide equity and debt based mortgages for the Muslim market.

20091029 BAFIN Islamic Mortgages.pdf

The first template for over-the-counter Islamic derivative contract will be launched this year or early next, one of the institutions involved in its creation said on Wednesday.

There aren't too many options so far for those looking to manage risks in an Islamically acceptable manner since conventional hedging models don't lend themselves well to shariah-compatibility. It would be interesting to see how this derivative product is structured!

DUBAI // South Korean banking officials are in talks with local lenders to launch South Korea’s first sukuk as international demand for Islamic debt instruments grows.

The Islamic bond could be worth between Dh1.83 billion (US$500 million) and Dh3.67bn, and would be launched by the Korean government or a quasi-governmental organisation, bankers involved in the negotiations say.

Last few weeks were dominated by the news of Europeans looking to take advantage of the Islamic finance market; and now the Koreans are looking to come on board as well. While this growth in the uptake of Islamic finance is terrific, those of us in the field should remind ourselves often that this isn't necessarily because Islamic finance is finally understood by the world.

Far from it.

The interest in Islamic finance right now is for one reason alone: the Middle Eastern markets are awash with capital when the rest of the world is still struggling to come out of its credit crunch.

It is a good opportunity to tap the biggest parked credit resource in the world. It might also be a good opportunity to diversify. Can this also become a good opportunity for Islamic finance principles of risk sharing to influence how things work?

More work is needed on that front.

'We are seeing great interest from investors in Islamic countries, who want to invest their money in Germany according to sharia principles,' Bafin president Jochen Sanio said at a conference on Islamic finance in Frankfurt.

Germany seems to have the right idea when it comes to promotion of Islamic finance. As much as having a base of Muslims in the country is important and despite the high profile nature of Islamic banks in Europe, the real Islamic finance opportunity for Western countries lies in attracting Middle Eastern capital. This is what Germany did when two of its municipalities issued Sukuk in early 2000s -- and now again Germany looks to lead the way for other Western nations to follow.

Islamic banking is still a relatively under developed area with low market penetration rates. You see Islamic banks in strong markets like Malaysia and Saudi Arabia with market shares that are no higher than 12-14%. On the other hand, there is a lot of investor demand, especially when it comes to institutional investors, to find shariah compliant investment destinations.

The institutional investors have a very real need to diversify their Shariah compliant investments. The question now is whether governments in the Western countries can see that as an opportunity to bring investments into the country. If Germans and French can, others can too.

Dubai’s $2 billion sukuk, just placed on October 28, may have bought property company Nakheel some breathing room.  That said, Nakheel’s experience shows that risks and disclosure really do matter. 

One of the curiosities of the Middle Eastern sukuk is the lack of disclosure requirements. Prospectuses like Nakheel's clearly stated that the company will not produce any financial statements, will not get them audited, and will provide no guarantee that if financial statements were prepared they will match financial numbers disclosed elsewhere. What is more is that Nakheel, a subsidiary of Dubai World, offers no guarantees that the accounting will be done properly.

All these are indicators of poor oversight and excessive risk for investors. The Westlaw Business article quoted above would seem to suggest that the investors haven't yet learned their lessons.