All too often law firms draft most, if not all, of the contractual documentation before Shariah scholars are consulted. Sometimes different forms of wording are suggested for particular points, and the scholars are asked for their views on what is most appropriate. These procedures are quite acceptable, but they add to legal costs, as law firms naturally charge for the time involved, and if much of the initial drafting is rejected by the Shariah scholars, then legal expenses will have been needlessly incurred. It would be cheaper to involve the Shariah scholars from the start of the drafting, although this would involve additional time commitments from the scholars, increasing compliance costs. Where Shariah scholars are overwhelmed with work, as many increasingly are, it might be more practical to use the internal Shariah auditing staff within the financial institution to give their advice, although this will not guarantee acceptance by the Shariah board. Using law firms with much experience of Shariah compliance may also be cheaper, as even if they charge more for their time, they may be able to put it to better use than a firm charging less per hour, but having to spend many more hours on redrafting.
PROFESSOR RODNEY WILSON
Idon’t think it should be for the lawyers and scholars to resolve. Lawyers are trying to put the substance of the borrower’s demands (guided by the bankers) into contractual form. I think the bankers (who propose the substance of a financing structure) and the scholars (who review the structure for compliance) need to become fluent in each other’s goals and methods. KHALID HOWLADER Moody’s Investors Service
The first – cynical – observation is that no one paid by the hour has any interest in “simpler” or, still less, “cheaper” solutions: rather the reverse. In the absence of a change in the enterprise model of the legal profession to embrace Islamic values, then a global network, or forum, of individuals active in the field and open to clerics, academics and professionals alike appears to me desirable. Such an entity could certainly assist in defining, raising and maintaining standards and thereby facilitate speedier and cheaper conclusions. CHRIS COOK Principal, Partnerships Consulting
The process is in two stages, the structuring team has to get the Shariah supervisory board (SSB) approval on the structure, and then the legal documentation needs to be drafted. During this process the team might need to go back and forth between the SSB and Legal to ensure that no legally suggested clauses might have changed the Shariah approval. A speedy mechanism would be to have both simultaneously sitting when the structuring team is presenting the proposal and explore together the completion of the documentation. JAMIL AK JAROUDI CEO, Sokouk Exchange Centre Bank-TADAWUL
Presumably, the growing implementation of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB) standards, as well as the International Islamic Financial Market (IIFM) initiatives for standardized documents, will result in more closely aligned legal and Shariah advisory communication. This standardization will generally enhance speed and reduce costs. But keep in mind that most law firms and Shariah scholars enjoy good working relationships. Therefore, the rate of the industry’s growth and the continuous experimentation within a number of jurisdictions that do not formally accommodate Islamic finance means that many deal problems are not solved quickly or cheaply. ABDULKADER THOMAS President and CEO, Shape Financial
While quality Shariah advice is only as costly as quality conventional legal advice, it is not uncommon to see institutions being more accepting of paying fees to the latter than to the former. This is perhaps attributable to a lack of familiarity and an undermining of the role that Shariah scholars actually play in the industry. While strongly opposed to these views, I have felt that the cumulative costs of legal and Shariah advice can often act as an impediment to the further advancement of this industry. It was with this thought in mind that, in a previous capacity, I helped to pioneer a Shariah advisory intermediary process that enabled institutions to develop Shariah compliant products by procuring the services of the industry’s leading scholars on a consultative basis. In such a scenario the Shariah advisory process is managed by the intermediary firm, ensuring timely and cost-efficient delivery of Shariah advice. Such an approach also allows the institution to adopt a disaggregated, unbundled approach with regard to its requirements, allowing it to be selective, only paying for its immediate concerns, and thus allowing for effective budgeting and cost considerations. While the initial results have resulted in a growing global trend that promises to be both efficient and cost effective in the delivery of Shariah advice, it has been discouraging to note recently that some Shariah intermediary firms have begun quoting fees substantially higher than the costs of running an embedded Shariah board. Inevitably what began as an initiative to serve the industry has been interpreted by some as a commercial niche opportunity. This is where I feel that firms like BMB Islamic offer a different perspective, with Shariah consciousness being implemented top-down within the firm and, with institutional independence, it has been able to offer a truly committed industry developing approach. BMB Islamic has its own Shariah supervisory board and team of in-house Shariah technicians, and is thus able to work directly with law firms to produce legal documentation as well as to provide Shariah structuring for financial institutions. It seeks to set an industry benchmark as well as being a pioneer in charging nothing for Shariah compliancy, which it absorbs through an innovative mechanism of profit sharing. Thus its clients incur no up-front costs at all, something BMB Islamic sees as being synonymous with a more edifying spirit. By not charging their clients, irrespective of their return, BMB Islamic seeks to earn its profits on a justifiable basis, by having first earned profits for its clients. Because of this, BMB Islamic does not charge separately for Shariah compliancy. This absorption of Shariah costs also pertains to its Shariah monitoring of various investment vehicles, designed and manufactured by it and used by its clients. This to me serves as a perfect example of making Shariah advisory services seem “business as usual.” It also provides perhaps the most Shariah conscious way of providing Shariah advice, allowing the Shariah advisory process to enter into the equation as a value addition and not as a costly burden. DR HUMAYON DAR Chief Executive Officer, BMB Islamic
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