Latest from GIFC

Sunday, 27 January 2008

Questioning "Shari'ah Conversion Technology": Yusuf Talal Delorenzo


Innovation is a cornerstone of the financial markets. Without the development of securitization, derivatives, and other complex financial instruments it’s safe to argue that it would be impossible to fuel the growth of the global economy. Since the growing Islamic Finance industry exists as a subset of the global financial system there is always a steady stream of new ideas being proposed and tested by Islamic financial institutions. At the center of this process of testing new ideas are the Shari’ah (Islamic law) supervisors who advise Islamic finance institutions on the Shari’ah compliance of their products and investments.
Yusuf Talal DeLorenzo is currently Chief Shari’ah Officer and Board Member at Shari’ah Capital. He is a well-known and respected Shari’ah advisor and Islamic scholar whose career spans more than 30 years. He serves as a Shari’ah advisor to over 20 global financial entities, including index providers, banks, mutual funds, real estate funds, leasing funds, institutional investors, home finance providers, alternative asset managers and others.
Shaikh Yusuf is also author of the three volume “Compendium of Legal Opinions on the Operations of Islamic Banks”, the first English reference on the fatawa (religious ruling) issued by Shari’ah boards. Shaikh Yusuf is also a special consultant, appointed by the Asian Development Bank and the Islamic Development Bank in Jeddah to the International Financial Services Board (“IFSB”) on the subject of Sukuk.
He recently delivered a paper questioning the validity of a proposed structure whose purpose is to “wrap a non-Shari’ah compliant underlying into a Shari’ah compliant structure.” The paper is a bold attempt to correct some of the recent attempts to ostensibly make halal (lawful) what is clearly haram (unlawful) by calling for due consideration for both the letter and the spirit of the Shari’ah.
Following is part of the paper's introduction that lays out the issue [available for download here]:

"Recently, a financial stratagem known as "Shariah Conversion Technology" was developed, the purpose of which is to affect a total returns swap or to "Wrap a non-Shariah compliant underlying into a Shariah compliant structure."
In other words, the objective of the mechanism is to use non-compliant assets and their performance to bring returns into a so-called Shariah-compliant investment or investment portfolio. This point is key to the entire transaction, and for that reason it needs repeating. What the product proposes to accomplish is to bring to the Islamic investor returns from investments that are not compliant with Shariah principles and precepts.
In June of this year, 2007, a pioneering Islamic bank in the Gulf launched a principal protected note that was the first product using this "Shariah Conversion Technology' to be offered to the investing public. This was followed by another such product, also offered by a Gulf-based Islamic bank. Prior to this, the stratagem was used in structured products offered by multinational banks to institutional investors and the treasuries of Islamic banks and finance houses. All of these products have been approved and certified by Shariah supervisory boards. Not all of these products, however, bring to the Islamic investor returns from investments that are compliant with Shariah.
The questions that such a product immediately bring to mind are: How can Shariah boards approve such returns? Does the circumstance of direct or indirect delivery to the Islamic investor change the ruling? When the Shariah of Islam is understood to differ from other legal systems because it may be characterized as both positive law and morality, is it possible to ignore the moral aspect of a financial transaction like this?
The means of delivery, a wa'd or promise, is widely seen to comply with Shariah norms. Since it is compliant, at least to the letter of the law, some Shariah scholars have approved products that use a wa'd to deliver returns from non-compliant investments. By doing so, however, they have failed to consider the purpose of the transaction, they have failed to consider the movement of the cash and, most importantly, they have failed to consider the ramifications for the industry as a whole.
At a very fundamental level, the reason for these failings is that they have not discerned the difference between the use of LIBOR as a benchmark for pricing and the use of non-Shariah compliant assets as a determinant for returns."
--(DS)
---
Alfalah Consulting - KL: www.alfalahconsulting.com 
Islamic finance consultant: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

No comments:

Upcoming Events on Islamic Finance, Wealth Management, Business, Management, Motivational Alfalah Consulting, KL-Malaysia: www.alfalahconsulting.com

ISLAMIC FINANCE EVENTS KUALA LUMPUR MALAYSIA

ISLAMIC FINANCE EVENTS KUALA LUMPUR MALAYSIA
Register Online . Register Today

Islamic Financial Planning & Wealth Management by Ahmad Sanusi Husain