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Monday, 1 September 2008

Islamic finance-The missing link…

by: contributor


There is a need to establish an infrastructure institution for Islamic finance, according to Sayd Farook, something that will provide much needed transparency in the processes utilised by Shari’ah scholars to come up with Fatwas

In the span of one decade, we have seen a number of infrastructure institutions being churned out, from prudential standard setters like the IFSB to market makers like the LMC and capital market standard setters such as the IIFM. What we have not seen come up in this decade is a central infrastructure institution to co-ordinate Islamic Finance Shari’ah scholars and their activities. While just about everyone in the industry is keen to point out the need for uniformity in Fiqh rulings, no one has even remotely provided a solution. Surely this is a need that cannot be suppressed for long.
We investigate the need for and the complexities associated with creating such an institution, in addition to the pre-requisites for the legitimacy of such an institution. We also look at the potential solutions such an institution could offer for the benefit of the rapidly expanding Islamic Finance industry.
Talk to any Islamic banker or professional and they will inevitably raise the divergence in interpretations of Fiqh, or Islamic commercial jurisprudence, between Shari’ah scholars. They say that one Shari’ah scholar may accept a product, while another may vet it. Both could possibly be from the same school of Islamic thought.
The banks have one way of solving this problem: hire the biggest and the best. So banks go and hire the biggest names in the industry, arguably increasing their reputation capital and getting the best scholars from a wide range of schools to vet their products.
What does that lead to? It leads to one scholar serving on 60 boards and up to six scholars serving on more than 20 boards. In turn, what does that lead to? Potentially poor oversight and review. Why does it take so long to groom the next generation of scholars and why are these new scholars not being invited to enter into the prominent Shari’ah boards to gain from the insights of the others scholars? These are the kinds of questions that are being asked in Islamic Finance events across the world.
A problem with Islamic jurisprudence?
At this stage, one might ask, is there a fundamental problem with the way Fatwas are promulgated? Yes and no. The contemporary practice of deriving Fatwas is a highly fluid system that allows for a diversity of opinions based on high level research on the foundational elements of jurisprudence.
In fact, it is this fluid system that allows for the Islamic Shari’ah to evolve based on the environmental circumstances, so long as foundation elements are not violated. However, there is a crucial fact missing here. There is not one single authority that provides Fatwas on contemporary areas of interest such as Islamic Finance. There are certain bodies which do have substantial influence and which provide joint rulings.
The Islamic Fiqh Academic, or Majma al Fiqh Al-Islami, which operates under the auspices of the Organisation of Islamic Conference (OIC) and is comprised of a representation of scholars from all schools of thought, has provided several rulings on contemporary issues.
There are other industry specific bodies such as the AAOIFI Shari’ah Board which has done a tremendous job of providing standardised rulings on a number of Islamic Financial instruments and transactions. In addition to this, there are several important forums which provide a means through which scholars come together to discuss pertinent and controversial topics in Islamic Finance.
Does this mean that Islamic jurisprudence is somewhat of a codified law?
Well, that is the problem. It is not. With all the numerous forums and joint fatwa, Islamic Finance is still constantly challenged by eager bankers who want to come out with the most innovative structured transaction or product. Hence, there is so much that is still not covered by the peak bodies and forums discussed above.
Does that mean Islamic Jurisprudence is more like common law with a set of precedents?
Well, that is again the problem. It is not. Scholars may utilise previous scholars’ opinions in coming to conclusions, yet are free to refer to the original sources, with which they may legitimately decide on their Fatwa. The fact of the matter is that Islamic jurisprudence has not developed either as a codified body of law that can be directly referred to, neither has it developed based on a set of precedents based on authoritative statements by judicial bodies, leaving it sitting somewhere in the middle.
So what does this mean for uniformity? This implies that Islamic juristic uniformity, that is all the rage in all Islamic finance forums, is like wishing upon a star. It’s not going to happen so easily nor should it happen. What can be done, however, is providing the infrastructure to scholars to encourage such uniformity through a greater use of systems and processes, at least in the arena of Islamic Finance.
A problem with the education system?
A symptom of the problem described above is the lack of new scholars being allowed into the fold of Shari’ah boards. Why is this a problem in itself, you might ask? Well, the present generation of senior and prominent Shari’ah scholars are already overstretched in their duties serving on a number of boards.
Some of these highly respected figures are in their 60s or 70s. What this means is that within 10 years time, a number of these senior scholars may retire leaving a mass vacuum which has to be filled by experienced scholars able to lead the next generation of innovation in Islamic Finance.
But there is hope. A number of institutions are pumping out doctorates in Islamic commercial jurisprudence and Islamic economics. Other non-institutional systems are also providing a steady flow of Shari’ah knowledge enriched individuals.
The question is, how does one become a recognised Shari’ah scholar? Do you have to do several years of articleship? Do you have to do a Doctorate, or is a Masters enough? Are non-institutional forms of education also recognised? The problem is that there is no straight answer to this question and hence it is increasingly difficult for up and coming Shari’ah talent to make their mark on the Islamic finance stage, although they may be as dynamic as existing scholars, albeit with less experience. What is nevertheless recognised is that applied Shari’ah experience and/or knowledge of financial systems and instruments are considered as key requisites for entering the fold.
Essentially, the problems for the Islamic finance industry are therefore twofold:
• How do you achieve uniform and consistent Fatwa?
• What progression planning are we doing to assist the growth of this industry?
One piece that is glaringly missing in the puzzle is the lack of a unified Shari’ah infrastructure institution for the Islamic financial industry. Some would say that the AAOIFI performs this role. True, the AAOIFI issues Shari’ah standards and therefore also encourages consistency. However, the AAOIFI is far from covering the latest innovations in Islamic finance and only legislates on topics that have become common market practice.
It is also worth nothing that the IFSB is also working on Shari’ah governance standards, the exposure draft of which will be available early 2009. However, these only provide temporary solutions and the progression planning and juristic issues are not likely to be resolved in the long run. What is required however is a central body that attends to the needs of the Shari’ah aspects of Islamic finance. This body could potential undertake the following important activities:
• Provide a publicly available searchable database that can provide the specific Fatwa for a particular context, with appropriate original and secondary references, for instance from senior Shari’ah scholars. This database will be real time and will be updated with Fatwa from all financial institutions in which the Shari’ah scholar members are active. The indirect effect of this database would be to create a form of precedence based legal system, where junior Shari’ah scholars refer to the senior Shari’ah scholars Fatwa to provide new Fatwa;
• Provide a standardised and objective criterion of education and experience by which an individual can be recognised as a legitimate Shari’ah scholar, regardless of where the qualifications are attained from;
• Look after the concerns of Shari’ah advisors and scholars;
• Assist up and coming Shari’ah advisors in their career progression;
• Provide a disciplinary framework for the methodology in the method of issuing Fatwa;
• Facilitate the articleship of fresh graduates to Shari’ah scholar positions;
• Accredit institutions to train Shari’ah scholars particularly for Islamic Finance.
Surely more than will power is required?
While the case for such a body is self-evident, establishing such a body will require that a number of sensitive issues are addressed. These issues are given below:
• Legitimacy and membership of senior Shari’ah scholars;
• Legitimacy and membership of financial institutions.
Attracting and convincing senior Shari’ah scholars that establishing such an institution will be beneficial for the future of Islamic finance will be the most difficult challenge for any body that wants to sponsor the development of such an institution.
Shari’ah scholars will be legitimately concerned about the removal of independence that may arise out of the move to create a central Shari’ah institution. Independence has been a hallmark of Shari’ah scholars since time immemorial and allows Islamic laws to develop independent of the potentially ulterior agendas of government bodies.
However, independence can be guaranteed in this framework if the constitution of the body affords certain rights to Shari’ah scholars and maintains these rights regardless of lobby group pressures.
Further, it must also be stressed that the objective of this body is not so much as to regulate Shari’ah scholars as it is to assist Shari’ah scholars in the development of a coherent and fluid body of Islamic jurisprudence.
A number of other infrastructure institutions could spearhead this agenda. These include the AAOIFI or the Islamic Development Bank, both of which command multilateral respect within the community of Islamic financial institutions and scholars. However, the methods utilised to gain the legitimacy and support of Shari’ah scholars and financial institutions need to be sensitive to the rights of these parties.
The potential spin-off effects of such an institution
The creation of such an institution will definitely have positive ripple effects on the Islamic financial industry. For one, it will provide much needed transparency in the process utilised by Shari’ah scholars to come up with Fatwa. This will in turn make the Shari’ah approval process much more efficient, since product developers and structurers will have a better idea of how to design instruments or products. Second, by creating a career management process for up and coming Shari’ah scholars or advisors, it will enable the industry to grow without the limits imposed on its growth as a result of a lack of suitable scholarly talent.
Sayd Farook is research and development manager at the Center for Islamic Finance at BIBF


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Alfalah Consulting - Malaysia: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
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