Special « (I)slamic (B)anking & (F)inance (N)etwork

Raising Knowledge: An Islamic Finance Opportunity

The Islamic banking and finance industry has grown at a tremendous pace, but this growth has also led to certain concerns. Ehab Heyassat considers some of the issues that are being hotly debated in the industry.

Islamic banking has witnessed tremendous developments during the last 10 years. Not only did the number of institutions offering Shari’ah-compliant products and services nearly double between 2005 and 2007, but we’ve also seen more sophistication come into play in the industry.

Islamic banks and conventional banks with Islamic windows have constantly innovated to offer products that are of the same, or better, calibre than the traditional products available. In Bahrain and Malaysia, there has been considerable advancement in terms of standardising accounting and fatwa procedures across the Islamic markets, while there is now a whole new securities market in the Dubai Financial Market (DFM) that has converted into an Islamic platform.
In the Arab world, some of the biggest transactions in the recent past have been Islamic. In Saudi Arabia, more than 50 per cent of all transactions taking place today are in the domain of Islamic banking.

Hurdles
The rapid pace of growth – 35 per cent, according to some estimates – has brought about its own problems including a lack of professionally-trained Islamic bankers and Shari’ah scholars. According to Saleh Kamil, one of the pioneers of Islamic banking, 85 per cent of the more than 300,000 employees working with Islamic banks and financial institutions today are not well versed in the knowledge of Shari’ah. This issue needs to be addressed quickly, he adds.

The other big impediment is the extreme shortage of Shari’ah scholars to support the industry. It is very common to see the same set of Shari’ah scholars sitting across the boards of rival banks and institutions. In fact, there is almost an unuttered rule in the industry that banks and institutions that are able to pay the fee will get these scholars on their Shari’ah boards, while competition will not ask questions. The reason they will not ask questions is obvious; if they do, they may not have a Shari’ah board at all. Such is the extent of the industry’s shortage.

Dr. Hussein Hamid Hassan is among the most popular of Shari’ah scholars. Dr. Hassan sits as the chairman of many Shari’ah boards from institutions such as Dubai Islamic Bank (DIB), Emirates Islamic Bank (EIB), National Bonds, Amlak, the Dubai Financial Market (DFM) and Ajman Bank.

Another sought-after scholar is Dr. Abdul Sattar Abu Ghuddeh. He is the chairman of Shari’ah boards at Abu Dhabi Islamic Bank, Al Hilal Bank and HSBC Amanah. He is also a member of the EIB, Noor Islamic Bank and DFM Shari’ah boards.

A spokesperson of Noor Islamic Bank admits that some conflict could arise from having the same set of Islamic scholars across rival banks, but quickly adds that there is some value to it as well.

“It does create some conflict of interest. However, having common names in the board of rival banks will, in fact, bring us to a better set of unified rules and regulations that can be applied to all Islamic banks in the region. In addition, it helps in avoiding past mistakes, while also enhancing the knowledge of these scholars,” the spokesperson justifies.
Scholar revenues

The thin spread of Shari’ah scholars has raised questions about the independence and quality of their work. With the newly-set-up, Bahrain-based Islamic International Rating Agency now beginning to rate the quality of Islamic products and institutions, the pressure on the industry to comply more stringently is increasing.

In fact, it is said that the fast pace of growth in Islamic banking has brought in a bounty for Shari’ah scholars. While there is no information available to the public regarding how much Shari’ah scholars earn sitting on the Shari’ah boards of Islamic institutions, a parallel can be drawn with the earnings of the star preachers in the region.

In March 2008, Forbes Arabia published a list of preachers called Da’awa Stars, or Star Preachers. In that list, Amr Khalid, Tariq Sowaidan and Aaidh Al-Qarni were at the top with annual incomes of US$2.5 million, US$1 million and US$533,000 respectively for 2007. The preachers generated these incomes from TV programmes broadcast on several satellite channels in the Arab world, as well as from religious CDs and books.

Market sources confirm that setting up a typical Shari’ah board can cost anywhere from US$80,000-100,000. A quarterly fee of between US$10,000 and US$25,000 is also charged to provide fatwa and audits for products and services.
The DIB, which is at the forefront of Islamic banking and finance, set up a separate subsidiary last July to offer consultancy for Islamic financing and investment transactions to cater to the industry’s rising opportunities.
Although DIB’s Shari’ah consultancy is one of the pioneers in the field, there are others that are planning to come to the market soon to take advantage of the business prospects in Islamic finance.

A controversy
It is important to note that many muftis and scholars are not sure whether taking a fee for issuing a fatwa is the right approach. The majority of scholars are actually of the view that a mufti should deliver a fatwa without taking any fees. Even among those who allow taking a fee for issuing a fatwa, there are differences of opinion as to the circumstances under which such fees can be charged.

The Hanafi, Shafi and Hanabila Sunni schools of thought are against any fees for issuing fatwas. According to the Hanabila school of thought, however, a mufti is allowed to take a fee, but only if he is in need of it. Among the four Sunni schools of thought, only the Maliki allows for charging a fee for issuing fatwas.

However, scholars and industry experts argue that the Shari’ah boards of the banks and financial institutions do much more than issue fatwas. Additionally, there is a host of administrative, processing and servicing work entailed in the contract. This work involves time and effort, so one argument is that the fees charged are legitimate and do not allow for any controversy.

The future
Kamil points out that the tremendous progress of Islamic banking also carries with it a lot of challenges. “We know that humans, the makers of progress and success, are also behind failures and collapses,” he says, emphasising the urgent need for the industry to focus more on education and training in Islamic finance.

The spokesperson at Noor Islamic Bank agrees that Islamic banking education should be applied in all universities of business and banking in the UAE and the Middle East. Both the government and the private sector should encourage the use of Islamic banks and provide attractive job opportunities to people interested in Islamic banking and Shari’ah advising, he says.

The spokesperson adds that another solution would be to set up research institutions to conduct specialised training in Islamic banking

The consensus in the industry is that the only way forward is to cultivate more knowledgeable people and graduates, especially in Islamic Commercial Law. It is also important to create unified Shari’ah standards – for example, the standards set by the Accounting & Auditing Organisation of the Islamic Financial Institution – so that there is more cohesion and efficiency within the industry.

Once these changes take place, many issues that still remain in the grey area should be automatically sorted out. If and when that happens, the Islamic finance industry will be well on its way to the next level of development and growth.

A selection of Shari’ah boards in the UAE finance sector

DFM	DIB	EIB	National Bonds	NIB	SIB	Tamweel
Dr. Hussein Hamid Hassan (Chairman)	Dr. Hussein Hamid Hassan (Chairman)	Dr. Hussein Hamid Hassan (Chairman)	Dr. Hussein Hamid Hassan (Chairman)	Sheikh Dr. Mohamed Ali Elgari (Chairman)	Dr. Hussein Hamid Hassan (Chairman)	Dr. Hussein Hamid Hassan (Chairman)
Dr. Abdul Sattar Abu Ghuddah	Dr. Ojeil Jassim AlNashmi	Dr. Ojeil Jassim AlNashmi	Dr. Ijail Jasim Al Nashmi	Dr. Abdul Sattar Abu Ghuddah	Dr. Abdul Sattar Abu Ghuddeh	Dr. Mohammad Abdul Razak El Sadeek
Dr. Mohammed Daud Bakar	Dr. Ali Al-Qurra Daghi	Dr. Ali Al-Qurra Daghi	Dr. Mohammad Qasim	Dr. Mohammed Daud Bakar	Dr. Ijail Jasim Al Nashmi	Dr. Mohammad Abdul Hakeem Zuar
Dr. Ijail Jasim Al Nashmi	Dr. Mohammad Abdul Razak El Sadeek
Dr. Mohammad Qasim	Dr. Mohammad Abdul Hakeem Zuar
Dr. Muabed Al Jarehi