Sharia advisers may face legal suits over mistakes

Sharia advisers can be held accountable in court for lapses in their duty but it would be hard to make a case against them as their role involves views which differ across the industry, a top scholar said recently.

Sharia advisers are gatekeepers of the $1 trillion (Dh3.67 trillion) Islamic finance industry, applying Islamic and banking law to decide which financial practices and products comply with Sharia.

As the industry tries to reach wider markets and more products are developed, there has been debate on the role and accountability of Sharia advisers.

Mohammad Akram Laldin, executive director of the International Sharia Research Academy for Islamic Finance, said Sharia advisers have to answer for failures in their functions but not business decisions.

"Sharia advisers are not above the law. If they make a clear mistake in their decision, they should be accountable," said Akram, who also advises the Malaysian central bank, which oversees the world's largest Islamic bond market.

"When it comes to a matter related to Islamic finance and Islamic law, it is views and opinions. If it is related to different views, different interpretations, then you cannot say you are right because you take this view and you are wrong because you subscribe to a different view."

Different schools of thought interpret the Sharia differently, resulting in certain practices being accepted in some jurisdictions and rejected as un-Islamic in others. For example, the Hanafi school of thought does not allow debt to be sold to third parties, but some schools sanction it under certain conditions, including that the price must be paid on the spot and that the sale must not lead to interest.

Akram said Sharia advisers only rule on how products should be structured and banks ought to carry out audits. "Auditing will ensure that what is implemented is correct based on the decision made by the Sharia board."

Link: http://www.gulfnews.com/business/money/10354083.html

Shariah-compliant funds gain momentum in India

Mumbai: No investing in a company whose debt is at least one-fourth its assets. No investing in a company that makes or sells alcohol, pork or tobacco. No investing in a company that charges interest on the financial services it offers. No investing in a company whose interest income exceeds 3% of its total revenues.

These are a few of the tenets that a Shariah-compliant mutual fund follows. The Shariah is a code of Islamic law that regulates the conduct of human beings in their individual and collective lives, and Shariah-compliant mutual funds are fast gaining acceptance in India.

Rising demand for such funds has fund houses and even insurance companies lining up for a piece of the action. Case in point: Taurus Asset Management Co. Ltd,Benchmark Mutual Fundand Tata AIG Life Insurance Co. Ltd. Taurus Ethical Fund, which complies with the Shariah, collected at least Rs5 crore during its new fund offer period.

These funds are open to anyone who stands by the philosophy behind the Shariah, and follow the tenets of Islamic economic law. They don’t invest in companies involved in gambling and nightclub activities either.

More are joining the fray. Reliance Money Ltd has launched a Shariah-compliant portfolio management service. Standard and Poor’s has also launched two major indices in the Indian market—S&P CNX 500 Shariah and S&P CNX Nifty Shariah.

Experts say investors who are keen on investing based on their personal beliefs or want to make socially responsible investments are opting for these funds, especially because returns on investment don’t seem to be compromised despite the restrictions the Shariah imposes.

Mohit Mirchandani, equities head of Taurus, says: “We looked at how the Shariah index in India has done from February 2006 to December 2008. The broader indices lost about 35%, and the Shariah indices also lost about 35%. So these indices are moving together.”

The global size of this market is estimated at $1 trillion (around Rs50 trillion), and this segment is expected to grow at 10-15% annually. Experts are specially optimistic about the scope of this segment in the country, and expect more fund houses to develop their own Shariah-compliant funds over the short and medium terms.

Link: http://www.livemint.com/2009/04/14231005/Shariahcompliant-funds-gain-m.html

UK: Crossing over to Islamic banking

As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty.

The UK now has five fully Sharia-compliant banks and another 17 financial institutions have set up special branches or firms. They include the Qatar Islamic Bank (QIB), with its London-based European Finance House in Berkeley Square, and the Islamic Bank of Britain, which has headquarters in Birmingham.

Both have answered Gordon Brown’s call of two years ago for Britain to become the global centre for international Islamic banking; a report by the International Financial Services London even says that Britain’s Islamic banking sector is now bigger than that of Pakistan.

Islamic banks, says Steven Amos, the Islamic Bank of Britain’s head of marketing, are prospering. “Our core business will always be Muslims but the numbers of non-Muslims are really picking up. We’ve had massive interest — and that’s down to a number of reasons, all of which have kept us insulated from the credit crunch.”

He alludes to the nuances of Islamic banking — specifically that Islamic finance has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets — that money has no intrinsic value — might sound alien to the denizens of the City.

One British businessman believes that adopting Sharia principles might be just what the West needs.Roger Smee, a former professional footballer and now businessman, says the West has “lost the plot. All we have as a success guide is a number of rich lists. Instead of looking down on what we are quick to reject as cumbersome legal restrictions, we should take a page out of the Middle East’s book and use the principles of Sharia to begin building real and sustainable economies.”

Smee, who divides his time between the US, Europe and the Middle East on his real estate and office interiors business, realised six years ago that a financial time bomb was ticking. I was offered a controlling stake in a new US mortgage business. The company was involved in the refinancing of huge numbers of house mortgages, lending at 125 per cent of an already overinflated property value to people who obviously did not have the funds to maintain payments. As we now know, these loans were then packaged up and sold on, earning the mortgage business a 7 per cent fee on each transaction. But the underlying finances were totally flawed.”

Smee’s disenchantment with “watching the world of Western finance become a casino” led him to concentrate many of his activities in Doha, Qatar. There he found Sharia principles to be “based on a deep sense of partnership, with your bank or other investors”.

Two factors help to explain his enthusiasm. Under Sharia, the charging or paying of interest is prohibited, something that, he says, has left the Islamic banks and their customers largely unscathed by the credit crisis. “Islamic banks do not borrow or lend on money markets, so they are not experiencing any of the same liquidity problems besetting UK banks.”

Sharia also only allows investment or trade in a tangible, visible asset. Hamid Yunis, the head of the law firm Taylor Wessing’s Islamic finance practice, confirms that while Sharia can permit certain futures and options structures, such as the salaam [sale contract with a deferred delivery] and arboun [sale contract with a non refundable deposit], it prohibits convoluted derivative products. “An asset has to be visible. If you can’t see it, it’s unlikely to be Sharia-compliant.”

Neill Gibson, a partner in Trowers & Hamlins who works on many Islamic finance matters, sympathises with Smee’s belief that Sharia principles might have helped to insulate conventional markets from their current turmoil. “Sharia prohibits investment in anything that can be seen as speculative,” he says. “Because interest is also forbidden, clients can’t burden themselves with highly leveraged interest-bearing debt.” However, Sharia-compliant instruments, such as a murabaha [deferred sale financing], operate, in effect, as a loan.

Gibson says that Islamic finance wouldn’t have touched the sub-prime markets “but it won’t have been protected from other badly hit sectors, such as real estate”.

Hamid Yunis says there should be a return to “back to basics” banking across the board, rather than merely among Islamic banks. “Banks are much more risk averse in the current climate,” he says.

Perhaps it is this, as much as Sharia’s theological strictures, which banking needs. Or, as Elliot Caldwell, chief executive of Colliers Capital and an expert in property investment fund management, says: “If it was an unsustainable business in the first place, it doesn’t matter what means — conventional, Islamic or something altogether different — you used to invest. In the current climate, the chances are that you’d still be feeling pretty uncomfortable.”

(Times Online)