Moderator:
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Abdulkader ThomasPresident and CEO, SHAPE Financial Corporation
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Panelist:
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Andrew WhiteAssociate professor of law, Singapore Management University
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Rod RingrowSenior executive officer, State Street Corporation MENA
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Rafael DalmauDirector emerging markets and Islamic investments, Fischer Francis Trees & Watts, BNP Paribas Investment Partners
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Hooman Sabeti-RahmatiCounsel, Allen & Overy
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Jeroen P M M ThijsChief risk officer, Bank Islam Malaysia
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White, from
Singapore Management University, drew attention to the fact that while risk management has a focus on the micro management level involving transactions, products, overall system and interest rates, there are still a lot of unanswered questions on legal risks.
He stressed that as Islamic products become more complicated in the process of cross border transactions, there is a pressing need for judges and lawyers to have a greater understanding in dealing with the inevitable disputes which have to be decided in courts.
In looking at the risk management aspect, Ringrow of State Street MENA pointed out that the risk should not be left to fate but choice and if managed well, it can be eliminated altogether. He surmised that in looking at risk, there is a need to look at it on the enterprise level and not just at the products.
On documentation in Islamic finance, Hooman of
Allen & Overy pointed out that by and large they are fairly new and uncontested. This is unlike the documentation available in conventional banking which has a legal history dating back several centuries. For instance, an indenture document on conventional banking dating from the 17th century still has the same words and terminology as the modern one.
Legal documents on Islamic finance, on the other hand, like the global
Sukuk issued seven years ago, have yet to be litigated.
Thijs of
Bank Islam Malaysia opined that one reason why Islamic finance had not been affected as badly was because leverage was not allowed in the system. To him, rating agencies were not reliable when they stated that the probability of ‘AAA’
Sukuk going into default was zero. This, he insisted, is inaccurate because these
Sukuk structures have yet to reach maturity.
Dalmau chipped in to say that the problem with rating agencies is that they had become victims of their own methodology. One issue that needs to be looked into is the analysis of a fund on a longer term basis instead of confining forecasting to the next few months.
Hooman suggested that for Islamic finance to be placed on a firm footing, there is a need to look at the whole system as a separate entity from the conventional and build new models based on this new-found realization.
This, he pointed out, would remove arguments as to whether a product is
Shariah based or not because a lot of the Islamic structures now are built based on conventional ones.
While Hooman saw this as a time consuming process, Ringrow on the other hand felt that it need not be so. “There is no need to reinvent the wheel. For one, we are not dealing with the branding issue but the ethical principles. Even if the risk management aspect, for example, is based on the conventional, the idea is to learn from past mistakes,” he said.
One moral lesson that has to be learnt is to have a keener ear for the advice of risk managers which everyone, including company directors, should not ignore.
“When things are going well, risk managers are seen as pests but when things go wrong, they take all the blame,” he pointed out.
On the issue of protection for these companies, this will relate to the DNA of the firm in question, on the level of ethical and social responsibility it upheld. As such, Hooman stressed that it is crucial to go back to the roots during the structuring of the transaction where the documentation has to be done properly.
“It must have the certainty of outcome and this means choosing the right governance laws, and this can go wrong if the lawyer does not have sufficient knowledge of these laws,” he concluded.