Obtaining Shariah approval of new products is indeed often time consuming, but it is important that Shariah boards have the time to undertake their work thoroughly and that when approval is given, their consciences are clear. Often there is a dialogue between the Shariah board and the law firm involved in drawing up the contracts, with the scholars suggesting modifications that the lawyers have to respond to, which again takes time.
It is important to get the right outcome, rather than trying to rush the process, make errors, and possibly even launch products that could damage the reputation of the financial institution and its Shariah advisors.
Time could nevertheless be saved by involving the Shariah scholars from the initial stages of product development, rather than drafting the contracts and then consulting the scholars. Where institutions anticipate many new product launches, it might be worthwhile scheduling Shariah board meetings more frequently. This might be easier to achieve where the scholars involved are not serving on too many Shariah boards.
PROFESSOR RODNEY WILSON
It is true that the documentation of Islamic finance products has the reputation of being a lengthy and unwieldy process. This reputation is justified to some degree, but needs to be understood in context. It does take time to develop products being deployed in a jurisdiction for the first time. An Istisnah/Ijarah structure which we used successfully in a project in Qatar required modification when deployed in Oman, and further modification when used in Saudi Arabia.
However, as the use of certain products increases, the documentation should become increasingly commoditized. A good example of this can be seen in Saudi Arabia, where subsequent project financings have efficiently replicated the Islamic financing structure developed for the Saudi Aramco Rabigh project. However, legal and financial advisors could still improve the efficiency of product development and approval. In particular, we need to pay closer attention to supporting the Shariah approval process.
Products are often being deployed in complex projects – we could do more to support the Shariah committee (or its representative) in understanding the underlying project and the aims of the Islamic product being developed.
Co-head of the Islamic Finance Unit, White & Case
As new markets develop, there is always a propensity to build inefficiency into the system. This stems from: (a) trailblazers who guard their developments for competitive advantage – so there is resistance to standardization; (b) the lack of critical mass in the market as it is building size; (c) too many players jumping into the game as the promise of the market begins to get broader recognition; (d) industry-wide bodies take time to set up and gain complete credibility and establish broad-based scope to enable standardization and commoditization; and (e) constant innovation which keeps the standardization processes many steps behind.
This, coupled with the fact that the basis of the development of Islamic finance rests in jurisprudence and legalese, and that it has become focused on “screening/controls/audit” type focus, makes for an intensely “paper-oriented” detailed process. All told, this translates to the development of overcapacity and inefficiency in the system, which will rationalize itself over time through standardization, and through the survival of fewer players.
Accordingly, as the industry matures and provisions/products become more standardized, get broad recognition and are commoditized, the process should get more efficient. In fact, the development of Islamic finance has been unusually efficient in this regard, as the industry has sought to address all these matters at a very early stage. Some more movement towards establishing independent Shariah boards with access to all would speed up the standardization/commoditization process, but may take some flexibility and potential competitive advantages away from large and innovative players, and may actually bureaucratize the industry – thereby stifling innovation.
All in all, these are growing pains that the Islamic finance industry seems to be managing quite well.
Executive Director, Princeton Advisory Group LLC
Idon’t agree. We here at Encore are actually right now in the final stages of creating the world’s first GCC-oriented Sukuk fund. The fund is being developed to be sold worldwide (except in the USA and the UK, which will come later). It will be sold to clients of Swiss banks, for example, as well as treasurers of both Islamic and conventional banks in dozens of countries. However, despite what is obviously a long and wide reach – with all the regulatory implications that has – we are not experiencing any more difficulties with this Islamic fund than one would have with a conventional fund. The actual amount of work is essentially the same. Yes, of course there’s a bit more work engaging the services of a professional fatwa provider, but that has not proven more difficult than engaging an auditor or custodian bank, for example.
All investment products are by nature complicated to originate, whether they are Islamic or not. The more appropriate question is: are the people involved experienced enough as professionals to do this highly specialized work? The question of religion doesn’t enter the dialogue at all.
JOHN A. SANDWICK
Managing Director, Encore Management SA
In the same way that the ISDA (International Swaps Derivatives Association) has helped to standardize derivative documents, a credible and global body is needed that represents all interests (economic and theological) and works towards this goal. It will bring more liquidity and transparency.
VP – Middle Eastern and Islamic Structured Finance, Moody’s Investors Service
Lengthy documentation and consultation/negotiation is common practice throughout the Anglo-Saxon legal world, and this also applies for conventional contracts. It is based upon the notion of freedom to contract for parties and legislation that allows particular or tailor-made solutions, rather than “public order” regulations.
For Islamic products these can be a bit more elaborate since the industry is still young and finding its way (e.g. there is not much in the way of standard contracts available yet) and also there is often diversity (and almost always an international composition) in the contracting parties and their personal laws.
Time will measure down the cost of redaction and the length of the contract itself when more internationally accepted Islamic standards have developed sufficiently. Better schooling and knowledge of the legal practitioners and the Shariah boards will lead the way.
Of Counsel, Bener Law Office
Ibelieve that documenting is going to become lengthier and lengthier as different requirements arise. The challenge is toning it down so that it does not become excessive.
The problems, including the ownership of metals and Shariah approvals, should be easily cut down after some time, as other trade activities should be used as real economic change.
OSAMA KHALIFA AHMED KHALFAN
Islamic Treasury Development Manager, Ahli United Bank
TThere are several basic challenges to be addressed in documenting Islamic financial products – the challenge of achieving Islamic finance development; securing long-term and sustainable acceptance by the market and industry; promoting good governance and transparency; strengthening the Shariah process and transactions; and fostering a unique Islamic identity while maintaining international uniformity.
The “uniformity” of Islamic documents must be done according to Shariah and should be robust and transparent for Islamic financial institutions to develop. It must identify key thrusts which must be undertaken before the realization of “uniform” documents, which will be painstakingly time-consuming and challenging, but which all must accept if success is to be achieved. But, this is only a framework, it remains for the management, stakeholders and practitioners of Islamic financial institutions to adopt it and make it a reality.
IJLAL A. ALVI
Chief Executive Officer, International Islamic Financial Market