In the first instance, cross-border inter-banks clean and secured (Shariah compliant substitute for repo) should be initiated. These transactions could initiate cross-border financing transactions to facilitate global financing needs. Accordingly, inter-banks clean and secured (Shariah compliant substitute for repo) may be initiated based on any of the following modes:
1. Restricted Mudarabah.
2. Restricted Musharakah.
3. Wakalah.
4. Back-to-back Wakalah.
Standardization for the transaction documentation should not be an issue, because now there are Shariah advisors who possess the Shariah board membership across the globe and can easily solve this issue. The significant hurdle is to resolve the issue of taxation on such transactions, because executing inter-banks clean and secured (Shariah compliant substitute for repo) within the same country or state is a different ball game all together as compared to cross-border inter-banks clean and secured (Shariah compliant substitute for repo) transactions.
Accordingly, once the taxation issue is addressed, Shariah compliant cross-border inter-banks clean and secured (Shariah compliant substitute for repo) transactions can lead to the execution of cross-border financing transactions to serve the financing needs of banking customers globally.
MOHAMMAD MUJEEB BEIG
Senior vice-president and the head of product development and research, MCB Bank
Standardization in the Islamic finance industry compares very badly with the conventional finance industry.
For example, in the conventional bank lending market the Loan Market Association publishes extensive pro forma documentation on its website (www.lma.eu.com/documents.aspx). While many commercial terms still need to be negotiated between the principals, the existence of a standard documentation which the lawyers acting for both parties will use as their starting point significantly reduces the cost of creating ‘big-ticket’ conventional bank lending. There is nothing equivalent in the Islamic finance industry.
While the work of AAOIFI has been very helpful in standardizing Shariah interpretation, there is still significant scope for disagreement between the Shariah advisors acting for the provider of finance and those acting for the recipient. Much more needs to be done in promulgating further AAOIFI Shariah standards.
Also, it would greatly assist Shariah standardization if the practice developed of publishing the full text of Shariah opinions (Fatwas) given in Islamic finance. (Some reduction might be required to avoid disclosure of commercially sensitive pricing information.) At present there is great reluctance to publish the full text of Shariah opinions on the grounds that the client has played a significant amount of money to obtain the opinion and it is regarded as containing valuable intellectual property which the client wishes to keep secret.
While this may appear attractive to the client in the short-run, it is a significant impediment to the growth of cross-border Islamic finance that could occur with greater Shariah standardization.
MOHAMMED AMIN
Islamic finance consultant and former UK head of Islamic finance at PwC
Cross-border financing that involves commodity Murabahah (which is still often used for syndicated financing) needs to be assessed on two fronts – one is the Murabahah aspect, the other is financing. Commodity Murabahah is used often enough that it presents no significant legal, operational, financial or Shariah (at the moment) risk.
On the financing front, documents tend to broadly follow the Loan Market Association guidelines, which are widely used for cross-border transactions. There appears to be little scope to significantly improve standardization for this type of financing.
For more structured finance, where specific assets are used or referred to, for example aviation, shipping, projects — financiers require clarity with regards to jurisdiction of the assets; and need to assess to what extent they actually own (legally, beneficially, or otherwise) any underlying assets, and the extent of any recourse, if any. This may not be very transparent in many jurisdictions.
Standardized documentation is an issue in structured finance, because each kind of asset will have different requirements for the buying, selling, leasing, etc and it is difficult to standardize this aspect, as opposed to commodity Murabahah which lends itself much more strongly to standardization. For Sukuk, the same points apply to the underlying assets. This highlights one the several difficult situations we put ourselves in — investors would prefer recourse to underlying assets to strengthen their position, however do not really want full asset exposure in case the asset falls in value. Hence separate assets are used as security, as opposed to the underlying assets that are bought, leased sold etc., which may actually serve this purpose better.
Finally, Shariah approval, as always, presents some difficulties. Coordination between the Shariah approval process for financiers (so that they can obtain the approval to provide the financing) and the Shariah approval process for the transaction itself (so the arrangers and obligor/issuer go to market with a structure and documentation that has already been approved by a selected Shariah board) is a cumbersome process.
The sooner this process is formalized, rather than always being treated as ad hoc, the sooner the industry can improve efficiency and development in many areas. Lack of meaningful coordination on cross-border Shariah standards only serves to perpetuate this issue.
SAFDAR ALAM
CEO, Siyam Capital
The industry is continuing to find ways of standardization, however the biggest problem to overcome is standardization of and cross jurisdictional acceptance of Fatwa. In this regard to facilitate cross-border business the interim solution has to be driven by regulators who should prescribe mandatory disclosure rules pertaining to the Fatwa and specifically require disclosure of core information relating to the Fatwa to be disclosed, for example the rationale, Ijtihad, Ijma and such behind a Fatwa. Then this enables a product approved in one country to be marketed and offered into another jurisdiction based on the detailed disclosure of the underlying Fatwa. This means that the end customer has the final say in terms of whether they are comfortable with the product and the Shariah basis of it. A similar approach was taken with the Mutual Recognition Model between the DIFC and Malaysia — mandating greater disclosure of the Fatwa enables customers to make informed decisions about the product rather than trying to standardize the Fatwa issuance amongst the scholars.
The industry may thus benefit from trying to promote greater awareness and provide greater access to information to the end consumers to enable them to make the choice.
HARI BHAMBRA
Senior partner, Praesidium
Although cross-border Islamic finance contracts should, and usually do, specify the jurisdiction in which disputes should be resolved, enforcement is often problematic. This increases uncertainty and may result in counter parties charging more for their services to reflect the perceived risk.
Harmonization of legal and regulatory standards for Islamic finance between different jurisdictions is difficult to attain. Nevertheless, the industry can benefit if when countries sign agreements in this sphere, these include clauses which enable court rulings made in one of the jurisdictions to be enforced in the other. If agreements such as that signed in 2007 between the Securities Commission Malaysia and the Dubai International Financial Centre are to generate Shariah compliant fund management business, such issues need to be addressed.
RODNEY WILSON
Emeritus Professor, Durham University, UK