Shariah Compliance by 2IY3h22


        Dubai June 1-3 , 2008
Dubai International Financial Center

 As most of you are aware any Islamic financial initiative without
    Shariah compliance is a non-starter. The Scholars do an admirable
    job considering the demand on time and the pressure to deal with
    more and more complex and innovative structures.
    A Scholar is expected to be a banker, accountant and lawyer besides
    his expert knowledge of Fiqh al Muamulat.
   Shariah sources:
-   Primary: the Holy Quran; the Hadith (the sayings of the Prophet
    Muhammed pbuh); and the Sunnah (the practices and traditions of
    the Prophet Mohammed pbuh).
-   Secondary sources are Qiyas (analytical deductions and reasoning);
    Ijma (consensus of Shariah Scholars); and Ijtihad (legal reasoning).
-   Differences of interpretation between Shariah Scholars can create
    confusion, but fortunately these differences are narrowing.

Compliance Options
 In house Shariah Board or Out sourced
 Contracted Scholars or Advisory Firm
 The benefits of a Shariah Compliance consultancy are many fold and
  have been welcomed by the institutions’ compliance departments,
  these include
  -     institutions deal with one entity,
  -     they have one contract and liaise with one point of
  -    professional service
  -    timely delivery
  -    coordinated response
  -    coverage of different regional mindsets and attitudes
  -    knowledge of the market
  -     Eminent, experienced and respected group of

Product Range
 To a large degree, most of the products in use until very recently,
  were pre-Islamic and the development has been an adaptation of
  existing conventional products. The market, however, now demands
  that more innovative, relevant and even exotic products be made
  available. This is where Shariah compliance will come into its’ own.
 Different asset classes and terms are covered by variations of the
  Ijara, such as Ijara Mawsufa F’il Dhimma; Ijara wa Iqtina (Lease to
  Purchase) this term refers to a mode of financing with an
  undertaking from the client to purchase the equipment or the facility,
  Ijara wa istisna (funding in stages at agreed levels of completion of
  the work in progress) etc.
 A variety of tried and tested structures have been available in the
  Islamic financial market place and the documentation has evolved in
  acceptable form in many jurisdictions

Product Range
 Now there are structured products, capital protected
  and even attempts at hedge funds, but with the
  confidence battering after the sub prime crisis and
  issues regarding Sukuks there is a form of stock
  taking going on.

 Nevertheless, development is on going and we are
  witnessing the introduction of ETFs, private equity funds, etc., which
  are a conservative and equitable form of products for the
  Islamic investor.

 The investors look to see who comprises the Shariah Board of the
  initiative being offered. Younger Scholars must be encouraged and
  mentored by the principal Scholars active in the industry and we at
  Yasaar are putting that into practice by seeking and adding young
  and upcoming Scholars.

 Taking into account the principles of supply and demand alone we
  know that the number of Scholars effective in this market is a

 The institutions must realize that besides a shortage of Scholars with
  the requisite knowledge of finance, banking and fiqh al muamulat ,
  the Scholars are their marketing tools for the success of any

Conflicts of interest
 The formation of an independent Shariah compliance consultancy
  helps in overcoming the prevailing perception of a conflict of
  interest; namely, the ability of a Scholar to provide an impartial
  opinion when employed and retained by a bank or financial
  institution. In the case of Yasaar, the institution contracts with a
  compliance services company that provides experienced and
  renowned Scholars who cover the different market mindsets and
  sensibilities. Therefore, an approved Shariah compliant structure is
  provided with a view of the major markets in which the product is
  likely to be launched

Future of Shariah Compliance
 Regional and International Developments
  There is a gathering momentum and awareness in Islamic finance
  and the availability of alternatives is driving the market where more
  and more Shariah compliant products are being demanded and
  provided. This demand is driven by both the Muslim communities in
  the West, as well as the customers in the Islamic regions themselves.
  Liquidity from the oil price boom is forcing the local banks to locate
  opportunities that are Shariah compliant. However, the international
  banks have capabilities that the regional banks do not always possess
  and these banks are not willing to give up their customers, they are
  therefore making moves into setting up Islamic banking operations
  of their own and making these options available to their clients.

• Many financial centers are vying to become Islamic finance hubs.

Secondary Market
• The secondary market is ripe for the regional banks to concentrate
  and focus on and, to make concerted efforts to develop. There are
  very few products and too much liquidity and so offerings are being
  held rather than being traded, hence all the enormous over-
  subscription of most initiatives. Here, there is a twofold advantage
  for the regional banks; first, to be able to maintain an involvement in
  the process and secondly, earn fees from trading.

• The success of Islamic finance depends on the development and
  standardization of a secondary market and for its global acceptance,
  but this in turn relies on grass roots spread and a critical mass. For
  that we need awareness programs to educate the target markets.

• Could sub prime have happened in Islamic finance, this is a question
  asked over and over. The chances are slim as high debt ratios and
  debt trading is not permitted.

Retail Banking
 The retail sector is the future as a broad based clientele is essential
  and this exists in the Islamic regions. Here also, the distribution
  capabilities of the regional banks outstrip the reach of large western
  banks. This is a perfect match for the two arms of Islamic banking to
  be working together and, in time, there will be a balance reached
  with the development of expertise and credibility of the local
  regional institutions. The regional banks are smaller compared with
  the Western giants but provide a much needed capability and here the
  perception held of the Western banks will, in due course, be

 The clientele is growing as more institutions start to offer more
  products. Also the Muslim communities in Europe are demanding
  these products and this demand is driving the institutions to respond.
  France and Germany both have large and growing Muslim

Regulatory Authorities requirements
 The demands and constraints of the regulatory authorities have to be
  taken into account in all the different jurisdictions. Here the Shariah
  Scholars have to work closely with the law firms to define the
  product’s acceptability in the legal context of the jurisdictions in
  which the product is to be marketed, as well as the Shariah
  compliance aspect.

 Recently it was highlighted that some jurisdictions are placing
  hurdles in the field of Shariah compliance by demanding that
  Scholars should not advise more than one client in any given
  jurisdiction, with conflict of interest being cited. Can you imagine if
  these rules applied to Banks, lawyers and accountants. As it is there
  is a shortage of Scholars with the all the requisite expertise necessary
  to operate in the field of Islamic banking and finance.

Proposed Initiatives
 If any one is planning on launching an Islamic finance initiative of
  any kind then they should ensure that they acquire good advice and
  by that I mean what I feel are the essentials for a successful and
  competitive product. Lawyers, Bankers and predominantly Shariah
  Scholars, all of whom must be competently familiar with Islamic

 The drafting of the documentation based on the Shariah Scholars’
  approved structure is very important and it must be recognized in the
  jurisdiction in which it is to be marketed, subject to the relevant and
  applicable laws. This is where the lawyers and Shariah Scholars have
  to work closely so that the local laws are integral to the structure as
  well as being compliant with the strictures of Shariah.

Next Steps
 The appointment of a Shariah Board as early as possible in the
  initiative is highly recommended.

 It cannot be impressed strongly enough how much a recognized and
  experienced Shariah Board comprising of at least three Scholars as
  per AAOIFI and other regulators requirements is essential to the
  success of the products acceptance.

 The customers are going to look for Shariah Scholars of repute and
  standing in the market place who have established their expertise
  from many years of learning and acquisition of knowledge of Fiqh al
  Maumulat , Shariah law relating to financial transactions. Once the
  product has been developed with the Shariah Scholars, the Fatwa (or
  legal opinion) is then signed.

Next Steps cont.
• The documentation and marketing materials must also be reviewed
  to ensure that they are Shariah compliant. Then only can the product
  be launched. The Scholars need to monitor the on-going Shariah
  compliance of the product by random review of the application of the
  terms agreed with the financial institution.
• Matters such as early repayment, default, repossession etc, are all
  incorporated within the documentation but a random review would
  be required for an annual Shariah audit sign off stating that Shariah
  compliance has been maintained with the product over the preceding

• Distribution capabilities are essential to the success of any product.
  These need to be backed up by through understanding of the target
  market. The target market here is predominantly Muslim customers,
  but also ethical ones. In Malaysia the take up of Islamic financial
  products is more or less even between Muslims and non- Muslims.

 In conclusion, I would like to again state that you must ensure that
  you get a good Shariah Board with the experience and knowledge of
  Financial products along with Lawyers and Bankers who are familiar
  with Islamic Finance. The market is growing rapidly and needs a
  commitment from financial institutional entrants with relevant

  Majid Dawood
  Yasaar Limited
DIFC Gate Building
  P.O. Box 121208
     Level 12
   Dubai, U.A.E.


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